Cross rates are used to calculate the exchange rate for a currency pair whose exchange rate is not commonly quoted.
What Is a Cross Rate: An Overview?
A cross rate is a foreign currency exchange transaction between two currencies valued against a third currency. In the foreign currency exchange markets, the U.S. dollar is the currency that is usually used to establish the values of the pair being exchanged.
As the base currency, the U.S. dollar always has a value of one.
Understanding the Cross Rate
In the transaction described above, the U.S. dollar is used to establish the value of each of the two currencies being traded.
For example, if you were calculating the cross rate of the British pound versus the euro, you would first determine that the British pound, as of Dec. 18, 2020, was valued at 0.74 to one U.S. dollar, while the euro was valued at 0.82 to one U.S. dollar.
For example, EUR/GBP, CHF/JPY, or AUD/NZD.
This process is known as a cross rate because the exchange rate is calculated by comparing the value of each currency in the pair against a third (central) currency, usually the U.S. dollar.
For example, if you know the AUD/USD and NZD/USD exchange rates, you can cross these to calculate the AUD/NZD exchange rate.
The term "cross rate" can also refer to any currency pairs that do not include the U.S. dollar.
The base currency always has a value of one and is the reference currency for the currency pair's exchange rate.
When a cross-currency pair is traded, two transactions are involved.3 The trader first trades one currency for its equivalent in U.S. dollars. The U.S. dollars are then exchanged for another money.