Understanding Cross Rate


Cross rate is a forex market quote between two currencies (not involving the US dollar) and both are valued as a third currency. When used as the base currency, the US dollar is considered to be worth one. Currency trading has actually evolved over the years following the breakup of the gold standard, making the USD the primary reserve currency. Over time, the USD has become the most flexible currency that is the basis for all foreign exchange pairs.


EUR, JPY, GBP, AUD, CAD and CHF are the currencies traded against USD. Major currency crosses such as EUR/JPY or EUR/GBP provide traders with strong trading liquidity.

Cross Rate

 

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Understanding Pairing Cross Rate is as follows:


To understand how cross rates are calculated, the first thing is to understand the commonly used cross rate pairs. When two foreign currencies are valued against each other, they are a cross rate pair. The currency pair is then compared to the base currency (e.g., the US dollar).


Below are popular cross rates used without using USD.:


  • EUR/JPY 

  • EUR/GBP 

  • AUD/NZD 

  • EUR/SEK

How to Calculate Cross Rate


As mentioned earlier, cross rates involve the exchange market prices quoted in two foreign currencies which are then valued in a third currency. In this process, two transactions are being calculated.


The first is an individual trading one specific currency such as GBP, JYP, EUR for the same value in US dollars. Once the dollars are received, then another exchange occurs as the US dollars are traded for the second specific foreign currency.


Essentially, when you trade a currency pair, you are selling one currency for US dollars and using that to buy another foreign currency, so you are effectively making two transactions. This will form the basis of the equation that we will use, helping you understand why the currency pairs must be in a certain order for the equation to work.


To determine the cross rate, you must first have the bid price for both currencies involved when paired with the US dollar. This is easier when the USD is the base currency for another currency pair. Such as in the case of calculating the GBP/CHF currency pair which requires bid prices for both GBP/USD and USD/CHF. All you need to do is multiply the two prices to get the cross rate as shown in the example below:


GBP (poundsterling) / USD (dolar AS) = 1.5700

USD (dolar AS) / CHF (Swiss) = 0.9300 


Then both are multiplied into GBP (pound sterling) / USD (US dollar) (1.5700) x USD (US dollar) / CHF (Swiss) (0.9300) = 1.4601 for the result of GBP/CHF.


Indirect Quotation


An Indirect Quote is a currency quote used to express the amount of base currency needed to purchase a quoted currency. It is also used to calculate cross rates.


For example, let's say the two currency pairs used are USD/EUR and USD/JPY, and we want to calculate the EUR/JPY cross rate.


Direct Quotations (Kutipan Langsung)


A direct quote is a currency quote that is used to express how much of the quoted currency is needed to buy a base currency. For example, similar to the last example, we need two currency pairs and their respective bid/offer values ​​to perform the calculation. In this case, we will use NZD/USD (0.7253-0.7256) and AUD/USD (0.7701-0.7719) to determine the NZD/AUD cross rate. In this case, NZD is the base currency, so it must be in the numerator.

Above is daily information on gold prices on January 11, 2023. Continue to update the latest information through the GIC journal which will be announced every day. You can also trade on the GICTrade application with its latest feature, an ECN account, enjoy the advantages of the latest features with the lowest spread starting from 0 and get a 30% welcome bonus to maximize your fund resilience when trading forex!