Your Guide to Cross: What it is, How it Works and Types

Summary:

Cross is being used as a valuable tool in the financial markets to perform transactions and trade. Stocks can be volatile and prices tend to change all the time. Cross can be useful in predicting possible changes in the market dynamics in the future. 

Cross is refers to different things bed on the financial markets and instruments involved. Typically, it refers to a transaction between two parties to exchange financial instruments or assets like stocks, bonds, and currencies. Cross is also used when brokers execute a transaction on a trading floor/exchange. In technical analysis, there is something called as a golden cross and a death cross, which are used commonly used to confirm trend direction. In this blog, we will explore the different types of crosses and how they are used in the space of finance.

An overview of cross

In the field of finance, there are three primary ways in which cross is categorized – 

Let’s understand each of the essential terms mentioned above:

Opening cross

Opening cross is the process that sets the opening price for a security when the stock market starts trading. It occurs shortly before the official market opens. In an opening cross, buy and sell orders placed by the market participants are matched and executed at a fixed price. This price is considered to be the opening price for the security. An opening cross enables traders and investors to react to new or events immediately after they occur, prior to the market opens. 

Closing cross

As the name suggests, this process determines the closing price of a security at the end of the trading day right before the market shuts down. Here, buy and sell orders are matched and completed at a single price during the closing cross. This price becomes the official closing price for the security. Closing cross is essential for various reasons such as setting reference prices for after-hours trading, marking end-of-day valuations for portfolios and measuring index values. 

Golden cross

A golden cross occurs when a short term laps over a long-term moving average on a price chart. It reflects a bullish trend suggesting that the asset’s price may potentially enter an uptrend. Traders typically interpret this as a buy signal as it indicates that the current price movements are stronger than long-term trend. 

Death cross

A death cross occurs when a short-term moving average crosses below a long-term moving average on a price chart. This is seen as bearish signal indicating that the price may be entering a downtrend. In this case, investors perceive this as a sell signal as it suggests that recent price movements are weaker compared to long-term trend. 

Delving into different types of crosses

Now that we have gained a better idea of the primary crosses, let’s explore more types of crosses used in a financial transaction or strategy. 

Currency cross – They are bifurcated into major crosses and minor crosses. Major crosses include currency pairs that do not involve the U.S. dollars (EUR/JPY, EUR/GBP). Minor crosses also exclude U.S. dollars however cover major currencies (EUR/AUD, GBP/JPY). 

Stock cross – It consists of two different transactions where one entity agrees to purchase a stock from the other at the same price that the second entity agrees to sell it. This helps facilitate larger block trades without having a major impact on the market price.

Cross currency swap – It is a deal between two parties to exchange interest payments and principal amounts in different currencies. Multinational corporations often use it to hedge against currency risk.

Cross hedge – Cross hedging involves using a financial instrument that is not perfectly aligned with the asset being hedged. It is done when a direct hedging instrument is unavailable. 

Cross rate – It is the exchange rate between two currencies that are not the official currencies of the country where the exchange rate quote is given. They are often used in international finance. 

Cross trade – It is a transaction wherein a broker simultaneously matches a buy and a sell order from different clients, without the order being exposed to the open market. This can be used if brokers want to maintain confidentiality. 

Cross asset – It refers to trading or investing in multiple asset classes like bonds, currencies, stocks, and commodities in order to diversify risks and potentially improve returns. 

Cross correlation – It is a quantitative measure used to assess the relation between two or more financial assets or variables. It helps gauge how related or independent these assets are. 

Cross margining – It is a risk management strategy used in derivatives trading where offsetting positions are used to limit the amount of collateral needed to cover margin requirements. 

To sum it up

Crosses are very important as they offer traders new opportunities to trade currencies without the influence of the US dollar. This allows you to experiment with more diversified trading strategies. You can us these pairs to speculate on relative strengths and weaknesses of one currency against another, all the while minimizing the impact of fluctuations in the US dollar. 

If you are interested in cross trade transactions, click here.