 # Cross Exchange Rate – Simple Understanding

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# 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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