An in-depth look at cross rates, which are exchange rates between two currencies based on their relationship with a third currency, commonly the US dollar.
A cross rate is an exchange rate between two currencies that is derived from their individual exchange rates with a third, often more commonly traded currency, such as the US dollar. For example, to find the exchange rate between the Euro (EUR) and the Japanese Yen (JPY), one might first look at their respective rates with the US dollar (USD).
Understanding cross rates is crucial for international businesses, investors, and currency traders, as it helps them make informed decisions in forex trading, hedging risks, and managing international transactions.
To compute a cross rate, we use the following formula:
This calculation assumes that we know the exchange rates of EUR to USD and JPY to USD.
Suppose we have:
The cross rate EUR/JPY can be calculated as:
Thus, 1 Euro is equivalent to 132 Japanese Yen.