Did you know that, historically, the American dollar (USD) plays an instrumental role in currency cross rates? As any experienced forex trader understands, the rates are exchange rates between two different currencies. To arrive at a fair amount, you would need both currencies to be converted into a (chosen) base currency.
Moreover, if you convert a currency to another currency, it means that you would have to first convert both currencies to USD separately. To skip further transactions, and to avoid creating more room for potential error, a direct exchange of currency rates – one without the involvement of the USD – was proposed.
Four Useful Facts about Currency Cross Rates:
1) The term “currency cross rates”, in their context, also describes quotes for currencies. The reference excludes the USD for the same aforementioned reasons: to skip further transactions and to avoid more room for potential error.
For instance, if exchange rates between the British pound (GBP) and the Swiss franc (CHF) were quoted in a US newspaper, the mention would be termed currency cross rates, since neither the GBP nor the CHF is the standard US currency. On a similar instance, if the newspaper feature was about the GBP and the USD, there would be no currency cross rates, since the standard US currency was involved.
2) Handling currency cross rates means handling two separate transactions and yielding one amount. During each transaction, first, you will sell one currency in the rate of the USD. Then, you will use the result of the initial step to buy the other currency.
3) The formula for calculation of currency cross rates requires determining the exchange rates of all the currencies involved: Currency 1, Currency 2, and the USD. First, you’d have to divide Currency 1 by the USD, and divide the USD by Currency 2. Next, you’d have to multiply the quotients of the earlier equations.
Currency 1 / Currency 2 = (Currency 1 / USD) x (USD / Currency 2)
4) Although there are readily available currency cross rates calculators online, it’s advantageous to know how to calculate currency cross rates on your own. For one, calculating exchange rates is simple; for another, some calculation tools are unreliable. Additionally, since rates change often, the ability to calculate the figure without turning to the Internet would come in handy especially if you’re in the business of trading major currency pairs.
Expert opinions shared by Roman from MTrading Egypt - Forex broker.
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