Updated on July 18, 2023
A cross rate refers to the exchange rate between two currencies that are not the official currencies of the country where the exchange rate is quoted. A cross rate is determined by referencing the respective quotations of the two currencies in a third currency. In simple words, it represents the relative value of one currency in terms of another currency, bypassing the need to convert through a common base currency. For example, if a trader in India wants to know the exchange rate between the British pound and the Japanese yen, they would look at the cross rate between GBP/JPY.
What is the use of cross rate?
The use of cross rates is essential for traders as it provides them with flexibility and access to a broader range of trading opportunities. It allows them to directly trade or speculate on currency pairs that do not involve the Indian rupee. This is particularly important when trading exotic currency pairs or engaging in international markets where the domestic currency is not involved. Changes in cross rates can indicate shifts in market sentiment, economic conditions, or geopolitical factors affecting the currencies involved.