Cross rates are often used during the operations in the world market. What is it?
Cross rate is the exchange rate between two currencies which results from their rate in relation to the rate of a third currency. As a rule, cross rates with the US dollar as the third currency are used in the world market. The reason is that the American dollar is not only the major reserve currency but also the currency of transaction in most foreign exchange operations. Cross rates include CHF/JPY, GBP/CHF, EUR/GBP, EUR/CHF, and EUR/JPY.
The calculations on the GBP/JPY, GBP/CHF, EUR/CHF, and EUR/JPY crosses are based on multiplication:
GBP/JPY = GBP/USD x USD/JPY
GBP/CHF = GBP/USD x USD/CHF
EUR/CHF = EUR/USD x USD/CHF
EUR/JPY = EUR/USD x USD/JPY.
For example, if the EUR/USD rate is 1.0100 and the USD/JPY rate is 123.50, then EUR/JPY will correspond to 1.0100 x 123.50 = 124.73.
The calculations on the EUR/GBP and CHF/JPY crosses are determined by division: EUR/GBP = EUR/USD / GBP/USD
CHF/JPY = USD/CHF / USD/JPY.
For example, if the EUR/USD rate is 1.0100 and the GBP/USD rate is 1.5720, then the EUR/GBP rate will correspond to 1.0100 / 1.5720 = 0.6425.
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