Trading Currency Cross Rates is an interesting book that focuses on a type of foreign currency exchange transaction called a cross rate. The term “cross rate” may be unfamiliar to some people, but it has been around for many years. Using cross rates as a hedging strategy has become an increasingly popular activity for foreign currency exchange market traders, so it is well worth taking the time to read and understand about the practice. Trading Currency Cross Rates is an excellent resource for accomplishing just that.
An overview of main topics
There are a number of main topics covered quite thoroughly in Trading Currency Cross Rates, all of which integrate very nicely to create a comprehensive and well rounded discussion of how, why, and when to consider cross rates as a viable foreign currency trading choice. Although this book was written in 1993 and the foreign currency exchange markets have changed dramatically since that time, it still contains a wealth of fundamental information about the FOREX market that is just as valid today as it was when the book first came on the scene.
A sampling of these excellent topics includes the following:
- Defining cross rates – A cross rate is nothing more than a trading of currency options where the two currencies being traded are from countries other than the one where the trader resides. So for instance, if a trader lives in the UK and executes a foreign currency options trade that involves the U.S. dollar and the Japanese yen that is a cross rate trade. The book goes well beyond this basic definition, however, delving into the intricacies and complexities of cross rate foreign currency options trading.
- Foreign currency trading markets – There are two main types of foreign currency trading markets, the interbank market (also known as the over the counter market) and the exchange traded market. Both of these trading markets are appropriate for cross rate transactions, but it is important to understand the advantages and disadvantages of each so you can make the best decision about which one to use.
- Types and varieties of cross rates – This section goes into very nice detail in its discussion of the three main currency blocks – the U.S. dollar, the Euro, and the yen. These remain some of the underlying fundamentals of the foreign currency exchange market even today.
- Fundamental and technical analysis – When this book was written the field of technical analysis was in its infancy and many foreign currency exchange traders viewed it as a flawed approach to trading. Despite this negative climate in place at the time, the book contains some excellent background, information, and guidance about using fundamental analysis and technical analysis to identify foreign currency trading opportunities.
- Tactics and strategies for successful cross rate trading – This is the heart and soul of the book, bringing together the information and discussions to this point and integrating them into real, practical tactics and strategies for cross rate trading. Specific strategies and tactics discussed include fixed rate systems, currency ranking models, realignments, triangular trading, and exotics.
- Fast forward into the future – This final section is not as useful now as it was when the book was first published because of course many things have changed in the 15+ years since that time. However, it is well worth reading this section because the author was right on target in many ways about how the foreign currency exchange markets would grow and evolve in the future.
This is just a brief look at some of the key topics covered in Trading Currency Cross Rates; for a more detailed look we’ll discuss the actual table of contents in the next section.
Table of contents and specifics
The table of contents of any book is revealing, and this holds true for Trading Currency Cross Rates as well. Let’s take a look:
- Chapter 1 – Introducing Cross Rates and the Interbank Market
- What is a Cross Rate?
- Popularity
- The Other Side of the Trade
- Derivatives
- Chapter 2 – Exchange traded versus Interbank Markets
- Foreign Exchange and the Futures Markets
- Exchange Traded Cross Rates
- Options
- Trading Cross Rates Using the Futures Market
- The Interbank Market: An Overview
- Crossing Over to the Interbank Market
- The Future Development of Interbank and Exchange Traded Markets
- Chapter 3 – Varieties of Cross Rates
- Currency Blocks of the World
- Types of Cross Rates
- Trading Partners
- The ERM and Other Exchange Rate Agreements
- Playing the Yields
- The Exotics
- Chapter 4 – Fundamentals of Foreign Exchange
- Introduction
- Economic Factors
- Confidence Factors
- Building a Workable Cross Rates Model
- Long Term Economic Indicators
- Medium Term Economic Indicators
- Sources for Fundamental Data
- Chapter 5 – Technical and Intermarket Analysis of Cross Rates
- What’s So Different?
- The Indicators
- Analyzing Fixed Exchange Rate Systems
- Intermarket Analysis
- Applying Your System to the Cash Market
- Chapter 6 – Bringing it All Together: Specific Strategies and Tactics
- Trading Fixed Rate Systems
- Trading Realignments
- Currency Ranking Models
- Investing in the Exotics: Another Look
- Triangular Trading
- Adding Cross Rates to a System
- Chapter 7 – What to Expect in the Future
More about Trading Currency Cross Rates
The target audience for Trading Currency Cross Rates is not the novice or inexperienced foreign currency exchange market trader, but rather the trader with more experience in this volatile marketplace. The information in the book is also very appropriate for corporate treasurers, portfolio managers, and financial executives who are looking for solid guidance and strategies for managing corporate currency risks.
In terms of structure, format, and layout, Trading Currency Cross Rates does an excellent job of using charts, tables, graphs, and illustrations to highlight key concepts and show real world examples to the reader. Some books use too few charts and graphs while others use far too many, but the authors have found just the right balance in this book. There is enough visual information to add value to the written text content without distracting from the readability or general flow of the book. The book also discusses the relative advantages and disadvantages of trading on a principal basis or on an agency basis, plus tips and guidelines on avoiding common counterparty failures.
One of the most useful aspects of Trading Currency Cross Rates is the amount of detail and specific information it provides on how to take nearly any trading system you might currently be using and adapt it for use in the potentially very profitable markets of foreign currency exchange using cross rates. This is a particularly helpful component because it allows the reader to use existing systems with which they are already comfortable and revise them for use in a new way rather than having to create and test an entirely new trading system from scratch.
Final thoughts
Although Trading Currency Cross Rates was published 15+ years ago, it is still a valuable resource guide for trading cross rates in the foreign currency exchange markets. The fundamental information it contains is still valid in the modern marketplace and the older information is also useful as an historical perspective on the markets and their development. The authors, Gary Klopfenstein and Jon Stein, have the depth of expertise and knowledge that is often difficult to find, and their style of writing makes it easy to understand and apply the concepts and strategies discussed.
If you are an experienced trader or a corporate treasurer, portfolio manager, or financial executive, Trading Currency Cross Rates in one of the “must have” resources to include in your library. It remains a solid source of fundamental information as well as historical background and perspective, giving the reader even more advantages when engaging in cross rates trading on the foreign currency exchange market.