Pricing Models - Pricing Crosses

Currency pairs in each model are configured as either Drivers, Direct Crosses or Triangulated Crosses.

• A Driver is a pair in which there is primary liquidity eg EURUSD, USDJPY or EURRON.
• A Direct Cross in one in which the tiers and spreads have been explicitly set. Spreads and volumes are setup in the same way that a driver pair is, however the system will triangulate market data from market sources at the start of the process
• A Triangulated Cross is one which has been left to be composed from the spreads of the drivers, triangulation in this type of formation occurs towards the end of the process. Note that triangulated crosses can be crudely tightened/widened by a factor (e.g. 80%), which is usually enough to avoid the need to price as a Direct Cross.
  

Pricing as Direct Cross vs Triangulated Cross

Typically we’d let most crosses fall into the triangulated category - this minimises configuration, calibration, etc as their spreads are derived from triangulating the drivers (for directly-priced instruments we require full calibration data for volatility, HFPs, standard interbank spreads and various other parameters). Additionally it ensures maximal price sources are available to the model - a lot of crosses aren’t traded on ECNs/etc so if we were only to price them directly we would be reliant upon a smaller number of bank LPs. Finally, it reduces the load on the model as less calculations have to take place and reduces market data subscriptions and hence GC load/bandwidth requirements.

In order to triangulate pricing for a cross, we require the rates from its 2/3 driver pairs. The cross’s settlement date is the latest of the driver settlement dates. If not all driver settlement dates line up then forward points are necessary to bring the driver settlement dates forward. Usually the contribution of forward points is zero as most crosses usually line up with their drivers (with some exceptions e.g. CAD crosses). Even then (or with holidays) the difference is not normally more than 1 business day (the obvious exception being JPY crosses during golden week).

direct cross:

Has it's own spread profile which allows edits of spread values and tiers:

MarketData is still triangulated from the driver pairs GBPUSD and NZDUSD

Triangulated Cross:

Spreads are produced through triangulation of the driver pairs, only the priced tiers are configurable:

See Pricing Models - How are Cross Spreads Triangulated? for more information on how cross spreads are calculated.