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What does the cross exchange rate calculator do?
The calculator takes the exchange rates of currency pairs A/C and B/C and returns the exchange rate of currency pair A/B. In other words, the calculator calculates the exchange rate of two currencies through a third currency.
What is a currency pair?
Currency pair is an alternative term for exchange rates, that is, the value of one currency expressed in another. This means that when we talk about the euro-US dollar pair, we are talking about the euro-dollar exchange rate or the purchase price of a European currency for an American currency.
Accordingly, the designation of the pair shows that we are talking about the exchange rate of the base currency relative to the quoted one, that is, the entry EUR/USD = 1.1607 means that the current euro exchange rate is 1.1607 US dollars.
The main currency pairs for trading include those made up of the national currencies of the leading countries in the world economy. This list includes:
- US dollar (USD);
- euro (EUR);
- British pound (GBP);
- Swiss franc (CHF);
- Japanese yen (JPY);
- Canadian dollar (CAD);
- Australian dollar (AUD);
- New Zealand dollar (NZD).
Traditionally, not all pairs made up of the listed currencies are considered major, but only those where the national currencies of other countries are traded in pairs with the US dollar. Thus, there are only 7 main pairs:
- EUR/USD – euro/US dollar;
- GBP/USD – British pound/US dollar;
- USD/JPY – US dollar/Japanese yen;
- USD/CHF – US dollar/Swiss franc;
- USD/CAD – US dollar/Canadian dollar;
- AUD/USD – Australian dollar/US dollar;
- NZD/USD – New Zealand dollar/US dollar.
What is a cross exchange course?
A cross rate is a relationship between two currencies, which is determined based on the exchange rate of each of them in relation to some third currency.
To calculate the cross rate of currencies, their quotes are used in relation to a third (widespread) monetary unit - for example, the American dollar.
So, the cross rate is the relationship between two currencies, which is calculated based on the rates of each of these currencies to a third currency (usually the US dollar). To simplify this definition, a cross rate can be defined as all currency pairs that do not include the US dollar. For example, you have Japanese yen and you decide to sell it and buy Swiss franc.
1. You can sell the yen yourself and first buy US dollars and then immediately exchange them for Swiss franc. But this is an action in 2 steps, and even in a short time, the rate of any of the currencies may not move in the direction you want.
2. Or you can use the purchase of currency through a cross rate. In this case, the bank will first calculate the ratio of each currency to the dollar, calculate the final exchange rate, and then conduct two transactions simultaneously to avoid exchange rate differences.
It is worth noting that the cross rate is almost always equal to the exchange rate (if such a currency pair is traded on an exchange, because not every currency can be exchanged for any currency in the world directly). However, if you need to buy or sell a large amount of currency, it is better to first calculate both options and find the most profitable one.
Methods and examples of cross rate calculation
The most common are three methods for calculating cross rates for average exchange rates. The cross rate can be calculated in three main ways.
1. In the first case, the calculation is made based on inverse quotes against the US dollar. Here, for both monetary units, the American currency acts as the base one.
For example, the task is to calculate the cross rate of the British pound to the Swiss franc GBP/CHF. In this case, the calculation will be made using the following formula:
GBP/CHF = GBP/USD : CHF/USD = 1.55 : 0.75 = 2.06
All that is required for the calculation is to divide the dollar rates of each of the currencies used, namely the British pound and the Swiss franc.
2. Let's calculate cross rates provided there are direct quotes against the US dollar. At the same time, for both monetary units, USD is the base currency.
You can take an example with the same pairs, but on the contrary – USD/GBP, USD/CHF. In this case, the formula will be as follows:
GBP/CHF = USD/GBP : USD/CHF = 0.64 : 0.94 = 0.68.
Thus, the cross rate for the GBP/CHF pair is 0.68.
3. In the third case, the task becomes more complicated. It is necessary to calculate the cross rate for monetary units with different quotes (direct and reverse) in relation to USD.
Again, we take the same GBP/CHF pair, but now the fraction will contain GBP/USD (reverse quote) and USD/CHF (direct quote).
GBP/CHF = USD/CHF * GBP/USD = 0.94*1.55 = 1.45.
The cross rate for this pair is calculated to be 1.45.
In what situations is it necessary to calculate cross rates?
Calculation of cross-currency rates may be required in various situations, for example:
1. When trading on Forex.
2. In international trade transactions: When companies enter into international contracts and settle in different currencies, they may need to calculate cross rates to determine the exact amount of payment.
3. When Traveling: When people travel to a country where they do not have local currency, they will have to exchange their currency with the local currency and there is no direct exchange rate. Calculating the cross rate will help determine how much local currency they will need at a given exchange rate.
4. When investing in international assets: It may be important for investors to calculate cross-currency rates to determine the value and return of their investments.
5. For internal company accounting: If a company maintains accounting records in different currencies, it may need to calculate cross rates to translate its financial statements.
