# Cross Exchange Rate – Simple Understanding

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# Cross Exchange Rate – Simple Understanding

Cross Exchange RateÂ

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 (Â£) and exchange rate of Pound Sterling (Â£) 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 (Â£) is Rs.284.76 = 1 Â£ (Rs./Â£ )

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

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

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

Rs.284.76 = 1 Â£

1 Â£ = \$ 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 (Â£) is 1 Rs. = Â£ 0.00351 (Rs. / Â£).

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

We shall cross Â£ Rs./ Â£ and Â£ / \$ 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. = Â£ 0.00351

1 Â£ = \$ 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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