Cross rate is the term used in the context of foreign exchange market, it refers to a concept where one can calculate exchange rate of two currencies by using exchange rates of other currencies. Given below is the process or way to calculate cross rates of currencies –

First step involves determining the currencies for which one wants to calculate cross rate, suppose we want to calculate cross rate between Euro and Indian currency but since we do not have any available exchange rate we will proceed to calculate exchange rate through cross rate mechanism.

For example take a scenario where we have USD and Indian currency exchange rate and Euro and USD currency rate available and USD/Rs exchange rate is 45 that is 1 US dollar is worth 45 Rupees and Euro/ USD exchange rate is 2 which imply that 1 Euro is worth 2 US dollars. Now in order to find Euro and Indian currency exchange rate we will use above rates that is USD/Rs * Euro/USD, putting exchange rates in this equation we get 45*2 = 90 Rs hence Euro/Rs exchange rate would be 90, or in simple words one can buy 90 Rupees with 1 Euro.

As one can see from the above example that cross rate mechanism is quite important and it is widely used by players in the foreign exchange market and one can calculate the exchange rate between two currencies easily by using the technique of cross rate.

0 comments… add one