A cross-rate is the exchange rate between two currencies, each of which is quoted against a common third currency-most often the U.S. dollar (USD).
In practice, it refers to the exchange rate between two currencies that are not the official currency of the country where the quote is provided, and typically neither currency is USD.
How a Cross-Rate Works:
- The cross-rate is calculated by using the exchange rates of both currencies against a third, common currency (usually USD).
- For example, if you want to determine the exchange rate between the euro (EUR) and the Japanese yen (JPY), but only have EUR/USD and USD/JPY rates, you can calculate the EUR/JPY cross-rate by combining these two rates.
- This is especially useful when direct exchange rates between two less commonly paired currencies are not readily quoted in the market.
Example:
Suppose you have:
- USD/JPY = 110
- USD/GBP = 0.75
To find the cross-rate between JPY and GBP:
- Take the inverse of USD/JPY (1/110) and multiply by USD/GBP
- JPY/GBP cross-rate = 1/110×0.75 = 0.00682
- There you have your JPY/GBP cross-rate of 0.00682
- You'd follow the same procedure for other currency pairs
Common cross-rate pairs include EUR/GBP EUR/JPY, AUD/NZD.
