Cross Exchange Rate – Simple Understanding

 

Cross Exchange Rate 

Cross Exchange Rate is an exchange rate between two foreign currencies which is computed with the reference of

third currency normally in terms of US $. The base currency US$ always has value of 1$.

If for example, we know the exchange rate between Rupees (Rs.) and Pound Sterling (£) and exchange rate of Pound Sterling (£) and US ($), but we do not know the exchange rate between Rupees (Rs.) and US ($), we can calculate this by using cross rate calculations.

Example: Using Direct Quote

The spot rate of Rupees (Rs.) to and Pound Sterling (£) is Rs.284.76 = 1 £ (Rs./£ )

The spot rate of Pound Sterling (£) to US ($) is 1 £ = $ 1.24 (£ / $)

We shall cross £ Rs./ £ and £ / $ and we have Rs. / $.

The spot rate between Rs. and $ can be calculated using cross rate is as:

Rs.284.76 = 1 £

1 £ = $ 1.24

Therefore, Rs.284.76 / $ 1.24 = Rs.229.65

1$ = Rs.229.65

Example: Using Indirect Quote

The spot rate of Rupees (Rs.) to and Pound Sterling (£) is 1 Rs. = £ 0.00351 (Rs. / £).

The spot rate of Pound Sterling (£) to US ($) is 1 £ = $ 1.24 (£ / $)

We shall cross £ Rs./ £ and £ / $ and we have Rs. / $ but in the indirect quote we shall multiply both rates.

Therefore, the spot rate between Rs. and $ can be calculated using cross rate is as:

1 Rs. = £ 0.00351

1 £ = $ 1.24

Therefore, 1 Rs. = 0.00351 x 1.24 = $ 0.004354

To check, if we divide $1 by 0.004354 we get Rs.229.65 which is same as direct quote cross rate.

 

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