Let's have a look again at some foreign exchange conventions. There are a number of different types of currency quotes out there. First one is a direct currency quote. A direct currency quote is a currency pair in which the domestic currency is the same as the quoted currency. So for example, if we're in Canada, the USD slash CAD quote is a direct quote. An indirect quote is the opposite. So if we're in Canada, again, the CAD slash USD quote is an indirect quote.

A cross rate is an exchange rate between two currencies when neither is the domestic currency. It can also refer to any quote that doesn't involve the US dollar. A good way to think about cross rates is to think if two currencies are not directly traded against each other, we might have to compare those two currencies to the same third currency. So how are cross rates priced? Well, we're looking here at the Euro Japanese yen. Well say we can't find that quote in the market, but we know that the Euro US dollar and the Japanese yen, US dollars are commonly traded currency pairs. So therefore, we would price the Euro, Japanese yen offer those two common pairs. So with a cross pair, you're selling one currency first for the US dollar, and then you're using that US dollar to buy the other currency. So a cross pair is essentially two transactions.