What is a Cross rate
A formula cross currency pairs or cross exchange rate formula is one of the main market tools that tells us how many units of quoted currency need to be paid for one unit of base currency. Quotes are determined based on the exchange rate of each currency in a pair with respect to the third currency. The third currency in such calculations is always the American dollar.
Cross rate Formula for Beginners
To understand what a cross rate is, let us turn to specific examples. Previously, if you wanted to exchange one currency for another, you would first have to convert the existing currency, say British pounds, into US dollars. And only after that, you could get the right currency for these dollars. Today, there is no need to do such complex multi-way manipulations, thanks to currency cross rates. Conversions can now be carried out bypassing the intermediate link, and quietly transfer Swiss pounds to yen, euros to pounds sterling and so on in any order.
The need to create a cross rate arose due to the fact that the volume of direct exchange transactions between some currency pairs is insignificant; therefore, compiling fairly representative direct quotes is quite problematic. But, even if there are reliable direct quotes, a calculation using the above formula can give a slightly different rate.
How Cross rate are Calculated
Today, many brokerage platforms can calculate for you the cross-rate of any currency pair. Such a table with quotes of pairs is on Forex, cross-rates of currencies there are constantly recalculated, updated, so it is possible to focus on them. In addition, many services offer online converters.
Also, the quotes of pairs can be calculated independently by the currency broker on the basis of actual direct dollar rates. But curiosity cannot be satisfied with ready-made solutions, it is always better to at least remote to understand how cross-rate calculation works and what logic it obeys.
So, in this algorithm there are two main values: the price of the offer (purchase) and the price requested (sale price). As a currency pair we will take forint and euro. To find out the offer value for this pair, you need to take the following steps:
- You need to determine the requested price for the Forint/USD pair and for the USD/Forint pair;
- To find out the bid price for Forint/USD, simply multiply the bid price for Forint/USD and USD/Euro.
If the dollar is the base of quotes only for one and currency from your pair, you need to multiply the dollar rates of both currencies. If you use a good calculator, you will easily understand how to calculate the cross exchange rate.
What else you Need to know about Cross rates Calculation
There are several nuances to which it is necessary to pay attention to beginners. First, do not confuse the cross-rates that Forex traders use with the exchange rates that they offer to their clients. Both processes, of course, have much in common, but this is only a speculative similarity. Secondly, the cross rate can be calculated for the exchange of any currency pairs, provided that none of them is an American dollar. That is, the cross-rate formula cannot be applied to a currency pair in which there is an American dollar.
How to use Cross rate Calculation in Trade
The economy of all leading countries, one way or another, is tied to the dollar, and most trading operations are directly dependent on the positions of this currency. To expand your capabilities, it is better to use quotes that are independent of the dollar. As long as everyone is tied to only one speculative idea (for or against the dollar), you will have much more opportunities and freedom when trading cross rates. Although it should be noted that the cross rate is still a secondary indicator, and somehow the fluctuations of the dollar affect it.
In this case, trading the exchange rate difference gives us a lot of opportunities for earning, especially if it is not tied to the 7 most liquid and popular currency pairs that depend on the American dollar (pounds sterling, yen, euro, swiss francs). By analyzing the behavior of currencies, and buying different currency pairs on the basis of their analytical calculations, you can make good money by catching a good spread, while the rest are tied to the US dollar. In a sense, operations with currency pairs are not just a promising direction, but also a way to stand out among the masses of those who go along the beaten path and only bet on raising or falling the US dollar.