What is Cross Rate?
Cross rates, also known as cross currency rates, are exchange rates between two different currencies, where neither currency is the United States Dollar (USD). These rates help determine the value of one currency in terms of another currency directly, without involving the USD as an intermediary.
Understanding Cross Rates
In the foreign exchange (forex) market, most currency exchange rates are quoted against the US Dollar, which serves as the world's primary reserve currency. However, cross rates become essential when traders or investors want to exchange one foreign currency directly for another foreign currency without converting it to USD first.
The calculation of cross rates involves using the exchange rates of the two currencies involved with the USD as an intermediary step. For instance, if a trader wants to know the exchange rate between the Euro (EUR) and the Japanese Yen (JPY), and only the EUR/USD and USD/JPY rates are available, they can calculate the EUR/JPY cross rate by multiplying the EUR/USD rate by the USD/JPY rate.
How to Calculate Cross Rates?
To find the cross rate between two currencies (Currency A and Currency B) when both are quoted against a common third currency (usually USD), use the following formula:
Cross Rate = (Exchange Rate of Currency A / Exchange Rate of Common Currency) * Exchange Rate of Currency B
Example
Let's assume INR (Indian Rupee) as one of the currencies and calculate the cross rate between EUR (Euro) and INR using the USD as the common currency.
Assume the exchange rates are as follows:
EUR/USD = 1.1500 (Euro to US Dollar)
USD/INR = 75.00 (US Dollar to Indian Rupee)
To find the EUR/INR cross rate, we'll use the formula:
EUR/INR = (EUR/USD / USD/INR)
First, let's calculate the value inside the parentheses:
EUR/USD = 1.1500
USD/INR = 75.00
EUR/INR = (1.1500 / 75.00)
EUR/INR ≈ 0.0153333
So, the cross rate between EUR and INR is approximately 0.0153333.
This means that 1 Euro is approximately equal to 0.0153333 Indian Rupees. Keep in mind that exchange rates can fluctuate, so it's always essential to check for the latest rates when making actual currency conversions.
Significance of Cross Rates
Cross rates are essential for:
1. International Transactions: When doing business across different countries, cross rates help with direct currency conversions without involving USD, simplifying transactions.
2. Investments: Cross rates are used by investors to evaluate potential returns and risks when investing in foreign currencies and assets.
3. Currency Risk Management: Businesses use cross rates to manage currency risk, especially when dealing with various currencies in their operations.
4. Arbitrage Opportunities: Traders can take advantage of price discrepancies in cross rates to make risk-free profits.
Cross rates are crucial in the forex market, enabling direct currency conversions between different foreign currencies. They simplify international transactions, aid investors in decision-making, and provide opportunities for traders to profit from currency price differences.
FAQs
The cross rate should equal the ratio of the two corresponding pairs; therefore, EUR/GBP = EUR/USD divided by GBP/USD, just like GBP/CHF = GBP/USD × USD/CHF.
What is meant by cross rate? ›
The exchange rate between two currencies that are not both the base currency in the pair is called a cross rate. By analysing the exchange rates of the two currencies against a common third currency, the cross rate is found. The cross rate between EUR/GBP, for example, is calculated by dividing EUR/USD by GBP/USD.
How do you calculate the forward rate of cross currency? ›
To calculate the forward rate, multiply the spot rate by the ratio of interest rates and adjust for the time until expiration. Forward rate = Spot rate x (1 + foreign interest rate) / (1 + domestic interest rate). As an example, assume the current U.S. dollar to euro exchange rate is $1.1365.
What is the difference between spot rate and cross rate? ›
Spot & forward rates are settlement prices of spot & forward contracts; cross rates are the exchange rate between two unofficial currencies.
How do you calculate cross over rate? ›
When calculating the crossover rate, you can use a formula:NPV = [year 1 cash flow ÷ (1 + r)^1] + [year n cash flow ÷ (1 + r)^n] - (initial investment)Where: NPV is the net present value of both projects and represents the crossover rate as a percentage. The initial investment is the value you invest in a project.
How do you calculate cross value? ›
Using the example values of 89% and 35%, solve for the cross-price elasticity:Cross price elasticity (XED) = (% change in demand of product A) / (% change of price of product B) = (89%) / (35%) = 2.54. This is a positive value greater than zero, which indicates products A and B are substitutes of one another.
What is the cross rate of USD to CAD? ›
1 USD = 1.35965 CAD Sep 14, 2024 00:05 UTC
Check the currency rates against all the world currencies here.
How are exchange rates determined? ›
The exchange rate between any two currencies is commonly determined by interest rates, economic activity, gross domestic product, and the unemployment rate in each of the countries. An exchange rate is commonly quoted using an acronym for the national currency it represents. USD represents the U.S. dollar.
What are ready rates based on cross rates? ›
Ready rates based on cross rates refer to the exchange rates between two currencies that are not commonly traded in the foreign exchange market. Cross rates are calculated by using the exchange rates of two widely traded currencies to determine the exchange rate between the less commonly traded currencies.
What does calculating a currency cross rate involve? ›
How are Cross Rates Calculated? As mentioned previously, a cross rate involves the exchange market price made in two currencies which are then valued to a third currency. During this process, two transactions are being computed. The first being the individual trading their one specific currency (EUR, JPY, GBP, etc.)
The Omani Rial, which is tied to the US dollar, is the third most valuable currency in the world.
How to calculate the forward rate? ›
The basic formula to calculate the forward exchange rate is: Forward rate = Spot rate x (1 + Interest rate of base currency) / (1 + Interest rate of quote currency) The base currency is the first currency in the pair, and the quote currency is the second.
What do you mean by cross rate? ›
The cross rate refers to the exchange rate between two currencies, each of which has an exchange rate quote against a common currency. A cross rate is an exchange rate of two currencies expressed in a third different currency, such as the exchange rate between the euro and the yuan expressed in yen.
What does cross currency mean? ›
Simply put, a cross-currency pair consists of any two currencies traded on forex, excluding the US Dollar. For example, a EUR/GBP pair would be considered a cross-currency pair. Namely, there are two types of cross-currency pairs known in the forex trading world: minor currency pairs and exotic currency pairs.
Why do most cross currency rates use the U.S. dollar as the base currency? ›
Due to its status as the world's primary reserve currency, the United States dollar (USD) is used as a benchmark currency in the foreign exchange market. Several currency pairs are regularly quoted against the USD, such as the EUR/USD and GBP/USD.
How do you calculate cross-sell rate? ›
To calculate your product cross-sell rate, divide the number of customers who purchase multiple products by the total number of customers. The result is a percentage that you can track over different time frames, such as a week, month, or quarter.
How do you calculate cross price? ›
The formula is as follows: CROSS PRICE ELASTICITY OF DEMAND = % change in quantity demanded for Product A / % change in price of product B.
How do you calculate cross flow rate? ›
CFV is then calculated by dividing the volumetric flow rate in the flow channel by the reduced cross sectional area of the channel. Adding feed spacers to the flow channel further reduces the channel cross sectional area.
How do you calculate crossover rate in genetics? ›
Answer and Explanation: Crossover frequency can be determined by dividing the number of progeny resulting from crossover gametes by the total number of progeny. The crossover progeny are produced when linked genes are inherited separately rather than as a unit.
