Can I lose money on a Forex cross currency trade even if the currency pair goes up in value?
Can I lose money on a Forex cross currency trade even if the currency pair goes up in value?
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davidbaguetta · External communityPost link
External question — Personal Finance Stack Exchange
Author: davidbaguetta
Original post: https://money.stackexchange.com/questions/140044
License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/
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My question applies only to cross currency pairs. As an example, imagine my home currency (the currency I am buying with) is USD, and I intend to buy 5 units of the EUR/GBP currency pair. To keep the example simple, let's also assume zero-spread trade and no commissions whatsoever.
In order to do this, I have to first convert my USD to GBP using its exchange rate. Let's say, at the moment the order takes place, the GBP/USD exchange rate is 1.39853 and the EUR/GBP exchange rate is 0.86063.
5.00000 EUR -> 4.30315 GBP -> 6.01808 USD
I need to spend 6.01808 USD to buy 5.0000 EUR.
A day passes by and I decide I want to sell back the 5 units of EUR/GBP I previously bought. The EUR/GBP rate has gone up by 2 pips at the time the sell order is put, landing at 0.86083, but the GBP/USD rate has gone down by 15 pips, landing at 1.39703. Using the new rates, the conversions look like this now:
5.00000 EUR -> 4.30415 GBP -> 6.01303 USD
As seen, even though I made a profit from the cross currency pair, as I got back more GBP than I initially spent on the trade, I actually ended up at a loss because the GBP/USD rate went down much more than the EUR/GBP went up, leading to a 0.00505 USD loss.
I would like to know if my example makes sense and if this is a real issue when has to take into account when doing cross currency trading.
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0xFEE1DEAD · External communityPost link
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Author: 0xFEE1DEAD
Original post: https://money.stackexchange.com/a/140057
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Yes, as you're exposed to two currency pairs: USD/EUR and EUR/GBP. Absent any trading costs/arbitrage opportunities, this is the same as trading USD/GBP directly.
While EUR/GBP can go up or down, you'll still need to convert your P&L into your reporting currency, which is USD. This really isn't any different from using USD and buying FTSE shares in GBP or DAX shares in EUR.
Unless you assume the EUR/USD exchange rate is fixed or somehow lock it in, you can lose from those fluctuations as well.
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nanoman · External communityPost link
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Author: nanoman
Original post: https://money.stackexchange.com/a/140059
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In the scenario described, you are not actually trading the EUR/GBP pair. You're simply
long EUR
; this is implicitly with respect to your home currency, USD. (GBP plays no role in your trade other than a redundant and wasteful intermediate currency conversion.) To trade the EUR/GBP pair, you should also be
short GBP
(hold a negative GBP balance, i.e., borrow in GBP).
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Quoted from Forex.com.bd-Editorial External question — Personal Finance Stack Exchange Author: davidbaguetta Source score (net votes, not local likes): 0 Original post: https://money.stackexchange.com/questions/140044 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. My question applies only to cross currency pairs. As an example, imagine my home currency (the currency I am buying with) is USD, and I intend to buy 5 units of the EUR/GBP currency pair. To keep the example simple, let's also assume zero-spread trade and no commissions whatsoever. In order to do this, I have to first convert my USD to GBP using its exchange rate. Let's say, at the moment the order takes place, the GBP/USD exchange rate is 1.39853 and the EUR/GBP exchange rate is 0.86063. 5.00000 EUR -> 4.30315 GBP -> 6.01808 USD I need to spend 6.01808 USD to buy 5.0000 EUR. A day passes by and I decide I want to sell back the 5 units of EUR/GBP I previously bought. The EUR/GBP rate has gone up by 2 pips at the time the sell order is put, landing at 0.86083, but the GBP/USD rate has gone down by 15 pips, landing at 1.39703. Using the new rates, the conversions look like this now: 5.00000 EUR -> 4.30415 GBP -> 6.01303 USD As seen, even though I made a profit from the cross currency pair, as I got back more GBP than I initially spent on the trade, I actually ended up at a loss because the GBP/USD rate went down much more than the EUR/GBP went up, leading to a 0.00505 USD loss. I would like to know if my example makes sense and if this is a real issue when has to take into account when doing cross currency trading.
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