Cross Rate

By: EconomyWatch   Date: 23 November 2010

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A cross rate is the currency exchange rate expressed by a currency pair in which none of the currencies involved is the official currency of the country in which this quotation is made. For example, if the currency exchange rate between a Japanese yen and a British pound is quoted in a United States newspaper, this would be called a cross rate since none of the currencies of this pair is the US dollar. However, if the same rate is quoted in a Japanese newspaper, it would not be a cross rate, since Japan’s official currency is involved in this pair.

At a more general level, the exchange rates expressed by any currency pair that does not involve the US dollar are called cross rates. Thus, this broader definition implies that the exchange rate of the currency pair GBP/JPY would be a cross rate, regardless of the country in which this quotation is being made.

How Does A Cross Rate Work?

A cross rate is often used as a tool in currency trading by investors. The comparison of the current value of one foreign currency to the value of another foreign currency is considered as an extremely important indicator for currency trades. This indicator provides investors a helpful method of tracking the impact of various events on the value of the currencies that are being traded.

This data is thus used for predictions of the future performance of currencies in the open market. Of course, it is assumed in such cases that the said events continue to impact the performance of the currencies that are under consideration.

Benefits of A Cross Rate

Cross rate trading has become popular among investors since it provides them an opportunity to hedge against currency risk. Speculators also find cross rates useful since they can make profits from interest rate plays and exchange rate movements.

Risks of A Cross Rate

Since the value of a currency changes very rapidly, cross rate trading needs constant monitoring. Also, cross rate trading is nearer to speculation and is, hence, extremely risky.


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