When executing a foreign exchange transaction between the major currencies , the process is usually swift. However, when the trade involves currencies that are less common, the transaction is not always easy.
This is because the rates are not always quoted hence are not readily available. Hence, it becomes cumbersome to trade with less common currencies without having to establish an appropriate rate of exchange. This rate is called the cross currency rate.
Thus, it requires one to know how to calculate cross currency rates. A cross rate calculator may be employed in this regard. A cross exchange rate is mostly used when the currency pair at hand does not involve the US Dollar.
The reason behind it is that conventionally if one wanted to convert a non-USD currency into another non-USD currency, the process entailed converting it first to USD then converting the USD into the currency of preference. This process was tedious hence cross exchange rates were deduced to enable direct exchanges without having to convert the respective currencies into USD.
Some people preferred a cross rate calculator to ease the process of calculating cross exchange rates. With this background, we can now go to the calculation of the cross exchange rate. However, this is not always necessary as some rates are usually quoted on various forex platforms.
Some websites also have a cross rate calculator which can be of great utility. However, a cross rate calculator is not sufficient if one does not understand the process of deducing a cross exchange rate. In order to understand the process of calculating cross exchange rates, you have to know about currency pairing conventions in addition to the cross rate calculator.
This involves quoting conventions for currency pairs, especially in the spot forex market. For every currency pair, there is the base currency on the left and the quote currency on the right. Conventionally, the bigger of the two currencies was assumed as the base currency. The Euro and the British Pound are always considered as the base currencies in all pairs that they are part of except where the Euro has been paired with the British pound. The following is a list of the order of priorities for base currency:.
To calculate the cross exchange rate, you need the bid prices of both currencies involved when paired with the USD. You just have to multiply the two bid prices with your cross rate calculator to get the cross rate.
At times, the USD might be the base or quote currency of both pairings. When this is the case, reciprocal paring is done where one of the currencies is flipped. In conclusion, the above-mentioned way is the simplest way to calculate cross currency rates when dealing with non-USD currencies.
A cross calculator will be of great utility when calculating the cross exchange rate as much as understanding how to calculate cross currency rates is essential. Contact Us Search Login. By Market Traders Institute.
Learn the simplest way to calculate cross currency rates when dealing with non-USD currencies. About Market Traders Institute. What is a Pip? September 3, - by Market Traders Institute. December 20, - by Market Traders Institute.More...