Cross rate — Definition Explained Simply | Examples & Role

Cross rate is an exchange rate that defines the relationship between two foreign currencies without involving the national currency of the country where the calculation is made. As a rule, it is calculated through a third currency — most often the US dollar, which serves as the world’s settlement unit.

For example, if the EUR/USD and USD/JPY rates are known, the EUR/JPY cross rate can be determined as the ratio of these two quotations. Thus, cross rates make it possible to establish relationships between currencies that do not have a direct quotation on the market.

Features of cross rates

• Do not include the national currency of the country where the calculation is made.
• Most often used in international trade and on the Forex market.
• Help investors and traders operate with currencies that are rarely quoted directly.
• Are based on a “third currency” (e.g., USD as a universal base for settlements).

Example of cross rate calculation

Suppose: EUR/USD = 1.10 and USD/JPY = 150.00. To calculate the cross rate EUR/JPY, multiply these quotations:

EUR/JPY = EUR/USD × USD/JPY = 1.10 × 150 = 165.

This means that 1 euro equals 165 Japanese yen.

Cross rates and the global economy

Cross rates are especially important in trade between countries whose national currencies are not directly quoted against each other. They simplify settlements and allow market participants to work with a wide range of currency pairs. On Forex, cross rates are actively used for speculation and risk diversification.

Examples of cross rates

• The EUR/JPY rate is calculated via EUR/USD and USD/JPY.
• The GBP/CHF rate is determined via GBP/USD and USD/CHF.
• The AUD/CAD rate is calculated via AUD/USD and USD/CAD.