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Chapter 22, Part II. Crosses – Continuation of Discussion... Page 6

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 22, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Commander in Pips: Also do not forget about bid/ask spread, since the difference could be significant if the position value will be really big.

    Another application of synthetic pair is arbitrage trades, but they are not reachable for us due to bid/ask spreads that we have to pay on both legs of cross. In our example legs are USD/DKK and USD/SGD. But in general, if you see that synthetic rate of DKK/SGD is different from common spot DKK/SGD, you can make some action:

    1. IF synthetic rate > spot rate – “Sell Synthetic and buy Spot.

    Buy USD/DKK + Sell USD/SGD + Buy DKK/USD;

    2. IF synthetic rate < spot rate – “Buy Synthetic and Sell Spot.

    Sell USD/DKK + Buy USD/SGD + Sell DKK/USD;

    These will be arbitrage or risk-free trades, since it makes money on market mispricing. You have no risk, since you buy and sell the same pair. Unfortunately such kind of transactions are possible mostly by electronic trading systems (as trading robots – special programs, that track the market for such mispricing and make trades) and for those who pays no bid/ask spread, or this spread very tight. Usually this is big banks and institutional investors.

    Another disadvantage with trading synthetic pairs is greater expenditures. Since you will have two legs you will have to pay double bid/ask spread, second – you will need approximately two times greater initial margin.

    So, dealing just with cross pair will be cheaper and easier. Once you see that this cross is trading with your broker – better to deal with cross. Leave synthetic pairs till the moment when you will become a real whale of Forex.

    P.S. This lesson was written by Sive Morten, who has been working for a large European Bank since April of 2000, and is currently a supervisor of the bank's risk assessment department. Sive's knowledge of forex market and banking industry is vast and quite complete. If you have any specific questions about forex, banking industry, or any other financial instruments, please post them on the next page and Sive should answer soon.

    Note: FPA ranks are earned in the battles against scam, not in the classroom.
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