Cross Currency Rates

A cross rate is the currency exchange rate between two currencies when neither are the official currencies of the country in which the exchange rate quote is given. Foreign exchange traders often use the term to refer to currency quotes that do not involve the U.S. dollar, regardless of what country the quote is provided in.

An exchange rate between the euro and the Japanese yen is considered to be a cross rate in the market sense because it does not include the U.S. dollar. In the pure sense of the definition, it is considered a cross rate if it is referenced by a speaker or writer who is not in Japan or one of the countries that uses the euro. While the pure definition of a cross rate requires it be referenced in a place where neither currency is used, the term is primarily used to reference a trade or quote that does not include the U.S. dollar.

How to Calculate Cross Currency Rates (With and Without a Cross Rate Calculator)

With this background, we can now go to the calculation of the cross exchange rate. This will involve deriving it from the exchange rate of the non-USD currency and the USD. However, this is not always necessary as some rates are usually quoted on various forex platforms. A classic example is of the GBP/JPY.

Cross rate calculators can be a great tool but before you start using it you should understand the process involved in calculating it. In order to understand the process you first have to know about currency pairing conventions. This involves quoting conventions for currency pairs, especially in the spot forex market. For every currency pair, there is the base currency (on the left) and the quote currency (on the right).

Traditionally, the bigger of the two currencies was assumed as the base currency. The Euro and the British Pound are always considered as the base currencies in all pairs that they are part of except where the Euro has been paired with the British pound. The following is a list of the order of priorities for base currency:

• Euro-EUR
• British Pound GBP
• Australian Dollar-AUD
• New Zealand Dollar-NZD
• US Dollar-USD
• Canadian Dollar-CAD
• Canadian Dollar-CHF
• Japanese Yen-JPY

To calculate the cross exchange rate, you need the bid prices of both currencies involved when paired with the USD. It’s quite easy when the USD is the base currency in one pairing and the quote currency in the other pairings. You just have to multiply the two bid prices with your cross rate calculator to get the cross rate.

For example: In the case of the GBP/CHF. The bid prices are as follows: GBP/USD=1.5700, USD/CHF=0.9300.

Thus the cross rate (GBP/CHF) will be 1.5700*0.9300=1.4601.

At times, the USD might be the base or quote currency of both pairings. When this is the case, reciprocal paring is done where one of the currencies is flipped.

For example: When the bid price for EUR-GBP is 1.2440, and the bid price for USD-GBP is 1.8146, to get the cross rate we simply multiply with our cross rate calculator, the EUR-USD rate and the USD- GBP rate, that is, 1/1.2440*1.8146=1.4587

In conclusion, the above-mentioned way is the simplest way to calculate cross currency rates when dealing with non-USD currencies.