A:

The forex market allows individuals to trade on nearly all of the currencies in the world. However, most of the trading is done on a group of currencies called the "majors", which include the U.S. dollar, the euro, the British pound, the Japanese yen and the Canadian dollar.

Currencies are traded against one another and are subsequently quoted in pairs. An example of a currency pair is the EUR/USD, which is one of the most widely traded currency pairs. Because the U.S. dollar is one of the most traded currencies, it is included in the majority of the pairs that are traded. However, other widely traded pairs that do not include the U.S. dollar, such as the GBP/JPY currency pair, are called cross currencies.

Most American forex investors will deposit U.S. dollars into their margin accounts. However, just because they have U.S. dollars doesn't mean that they are limited to trading currency pairs that include the U.S. dollar. American investors are still able to trade on cross currencies, they just have to make two trades instead of one.

For example, assume that an investor with an account denominated in U.S. dollars wants to buy the Japanese yen against the British pound. To do this, he or she would have to trade the GBP/JPY currency pair by purchasing British pounds with U.S. dollars. Once this trade is complete, the investor can then use the British pound to complete the trade on the GBP/JPY currency pair. Because two trades need to be completed, the broker calculates a margin for both trades and adds them together. To avoid having to do this, brokers will often accept margin deposits in foreign currencies such as the British pound. Usually investors who have currency available in foreign bank accounts are able to use this option.

To learn more, see A Primer On The Forex Market, Getting Started in Forex and Wading Into The Currency Market.

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RELATED TERMS
  1. Currency Pair

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  5. Cross Currency

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  6. Base Currency

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