As the name suggests, this calculator is meant to help people compute the foreign exchange rates of different currencies. With this simple tool, you will be able to calculate cross rates (also known as the cross exchange rates) in no time. So, what can you learn from this article?
First, you will learn what the cross rates are and why it matters. Then you can learn how to calculate it yourself using the formula for cross currency conversion. We will also explain how to use our cross rate calculation and see how it works.
The exchange rate can be thought of as a measure that shows how much one unit (currency) will cost you in the other (foreign) country. This is very helpful for traders since cross exchange rates are usually associated with stock markets. It is also useful for those who frequently travel abroad, as it can help them calculate the gas expense of their trips and decide how much of a tip they should leave.
Definition of Cross Exchange Rate: What Are Currency Pairs and Exchange Rates?
Cross exchange rate is the price of goods in one country’s currency when it is exchanged for goods in another country’s currency. In other words, the cross exchange rate is the value of one currency in terms of other currencies. It can also be defined as the price of one currency in terms of another. It is usually quoted as the number of units of one currency per unit of another.
Cross rates are usually quoted with respect to a base currency, usually the US dollar, and called parities or ratios. It is important to note that the exchange rates are determined by different economic factors. For example, they tend to change with time.
Exchange rates are determined by supply and demand for different currencies, as well as interest rates set by central banks and inflation expectations for each country’s economy. In fact, exchange rates are the value of one currency unit in terms of another.
Currency pairs are the rate of one currency against another. The value of a currency is expressed in terms of another currency. This is usually referred to as the base currency, which is the first listed in a currency pair.
A currency pair is aimed at comparing relative value. Note that the value of one unit of the base currency will be equivalent to that many units of the other currency. For instance, USD/EUR is a commonly used currency pair. If USD/EUR is 0.9000, this means you can exchange 1 United States dollar for 0.9 Euro. If USD/TRY = 2.25, this means that $1 will buy 2.25 Turkish Lira (TRY).
Cross Exchange Rate Formula: How Does Cross Currency Conversion Work?
As said before, it is essential to calculate the cross rate to discover the exchange rate when comparing two currencies. You are supposed to know the exchange rates not only between these two currencies but also the 3rd common currency. Most economists use the following formula:
Rate A/B = First Currency Pair * Second Currency Pair
For example, if the exchange rate A/C (first currency pair) is 1.1, while the exchange rate C/B (second currency pair) is also 1.1, then the calculation will be as follows:
Rate A/B = First Currency Pair * Second Currency Pair
Rate A/B = 1.1 * 1.1
Rate A/B = 1.21
Why would you bother to compute the cross rate? In most cases, people calculate it due to their current situation, as it’s harder for them to exchange money directly than to exchange it twice. Whether they travel, trade on Forex, or visit their local exchange office, there are currency combinations that are seldom traded directly and challenging to find.
There could be two cases when calculating the cross exchange rate. Let’s check them out!
- Two foreign exchange quotes with the same order of the currencies, meaning the common currency will be the denominator in both quotes when calculating the cross exchange rate. For instance, we will take quotes for GBP/EUR and USD/EUR. In order to find out the GBP/USD cross rate, divide the 1st rate by the 2nd one: GBP/EUR ÷ USD/EUR = GBP/USD.
- Quotes that feature different orders of currencies. In our example, we will have EUR/GBP and USD/EUR quotes this time. In both quotes, the denominator (or the common currency) is EUR. When flipping the first currency pair, our quote will be 1 ÷ GBP/EUR = EUR/GBP. Then the quotes should be lined up this way: GBP/EUR ÷ USD/EUR = GBP/USD.
This calculation can be a bit complicated, which is especially true in the second case, so it’s best to use our calculator when calculating the cross exchange rate. It will save you time and make sure the result is correct.
A, B, and C letters symbolize different currencies. For instance, A could represent USD (dollar), B – EUR (euro), and C – GBP (British pound). All you need to do is enter your quotations and the calculator will get the job done for you. You can rest assured that the cross rates will always be calculated quickly and properly.
FAQs
What Are Foreign Exchange Cross Rates?
Foreign exchange rates are the rates at which one currency can be exchanged for another. They are published by a number of financial institutions and they are used to calculate the cost of one currency in terms of another.
The foreign exchange market is the largest financial market in the world, with an average daily turnover of US$5 trillion. It is also one of the most liquid markets in the world, with an average bid-ask spread measured in just pips (0.0001).
Why Are Cross Rates Important?
The currency exchange rate plays an important role in determining the economic health of a country. As we have said earlier, these rates are determined by supply and demand for different currencies, as well as interest rates set by central banks and inflation expectations for each country’s economy.
Cross rates are the rates at which one currency is exchanged for another. They are typically used to convert between two currencies that are not each other’s primary trading partners. The most common cross rate is the EUR/USD, which is the conversion of Euros to US Dollars. It measures how many US Dollars you can buy with one Euro.