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Currency exchange rates are an essential part of international finance. A cross rate helps determine the exchange value between two currencies that are not paired directly but are each quoted against a third common currency, usually the US Dollar (USD).
A cross rate is the exchange rate calculated between two currencies by using a third currency, typically the USD, as a benchmark. This method is applied when there is no direct exchange rate available between the two currencies.
For instance, to determine the exchange rate of the British Pound (GBP) and the Japanese Yen (JPY) when only their rates against the USD are available, you can compute the cross rate using the USD as a reference.
Cross rates are significant in various scenarios:
International trade and travel involving currencies without a direct quote
Forex trading strategies involving non-USD pairs
Corporate hedging and treasury management in multinational businesses
Arbitrage opportunities in global financial markets
Here’s how the calculation for cross rate works:
Cross Rate (A/B) = Rate of A/USD ÷ Rate of B/USD
Where:
A = First currency (numerator)
B = Second currency (denominator)
Both A and B have a direct quote with USD
You want to find the GBP/JPY rate.
Given:
1 GBP = 1.25 USD
1 USD = 140 JPY
Step 1: Convert GBP to USD = 1.25
Step 2: Convert USD to JPY = 140
Cross Rate (GBP/JPY) = 1.25 × 140 = 175
So, 1 GBP = 175 JPY
This is a simplified example. In real trading, bid-ask spreads and inverse rates may affect the calculation.
Market Volatility – Rapid currency fluctuations can make calculated rates outdated quickly.
Lack of Rate Uniformity – Different sources may quote varying rates for the same currency pair.
Regulatory and Operational Differences – Rules and practices vary across countries and institutions, affecting calculations.
Forex traders use cross rates to:
Trade currency pairs without USD
Hedge positions involving non-USD currencies
Spot arbitrage opportunities between different markets
Create synthetic pairs for complex strategies
These pairs may also offer more volatility or trading opportunities compared to USD pairs.
EUR/GBP
GBP/JPY
EUR/JPY
AUD/NZD
CHF/JPY
Several market factors influence the behaviour of currency cross rates, including:
Factor |
Influence |
|---|---|
Interest Rate Differentials |
Drives demand for high-yielding currency in pair |
Economic Data |
GDP, inflation, and unemployment affect currency strength |
Geopolitical Events |
Uncertainty leads to volatility in cross rates |
Central Bank Policies |
Rate decisions and interventions can influence cross pairs |
USD Movements |
Even if not directly in the pair, changes in USD affect cross calculations |
Arbitrage involves exploiting pricing inefficiencies between direct and cross currency rates across different markets.
USD/INR = 83
USD/GBP = 0.80
Calculated Cross Rate (INR/GBP) = 83 × 0.80 = ₹66.40
If the market quote is ₹67 for GBP/INR, a trader may buy at ₹66.40 and sell at ₹67 to earn a small profit.
Such opportunities are rare and disappear quickly in liquid markets.
While cross rate trading is a common practice, it comes with specific risks:
Liquidity risk in less traded currency pairs
Spread costs can be higher than major USD pairs
Currency correlation might behave unexpectedly
Exchange rate volatility may amplify losses
Traders should always check real-time bid-ask spreads and market conditions before executing cross pair trades.
For businesses and travellers dealing with exotic currencies:
Banks and currency exchanges use cross rates to provide conversion
International invoices and receipts may require cross currency settlement
Remittances sent or received in non-USD currency pairs involve cross rate calculations
A cross rate allows conversion between two currencies without a direct market quote. It’s essential for forex traders, businesses, and anyone handling foreign exchange to understand cross rate calculations to ensure accuracy and avoid losses. While useful, cross rates come with risks and require careful handling.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
An exchange rate is a direct quote between two currencies, while a cross rate is derived through a third currency like the USD.
Yes. Any rate between two non-INR currencies (like EUR/JPY or GBP/AUD) is considered a cross rate in India.
Yes, some brokers offer cross currency pairs on their forex trading platforms. However, liquidity and spreads should be considered.
Yes. If a currency conversion is not directly supported, the remittance will be processed via cross rate calculations.
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