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What is a Cross Rate?

A cross rate compares the exchange rate between two foreign currencies.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 22 November 2014
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Cross rates are the current exchange rates between two currencies. The cross rate differs from a currency pair in that a true cross rate must involve two currencies that are not the standard for the country where the evaluation of the exchange rate takes place. By contrast, a currency pair would involve the comparison of the current rate of exchange between the home currency and that of another nation.

A cross rate in the United States would not involve the comparison of the current rate of exchange with any other national currency. Instead, it would involve the comparison of two currencies that are not native to the USA. An example of a cross rate conducted in the United States would be a comparison of the rate of exchange between the British pound and the Japanese yen.

In like manner, a cross rate comparison conducted in the United Kingdom would exclude the British pound, but could involve comparing the rate of exchange between the Euro and the yen. Essentially, a cross rate can involve any two national currencies, as long as the home currency is not used in the comparison.

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Investors who engage in currency trading often use the cross trade as a tool in buying and selling activity. Comparing the current value of one foreign currency to the value of a different foreign currency can be an indicator that an exchange would be in the best interests of the investor. While the cross trade would not be the only criterion that the investor would employ in order to evaluate the trade, the use of this tool can often identify potential exchanges that are worth further investigation.

While serving as an indicator of a potentially lucrative currency exchange for the investor, financial analysts can also make use of a cross trade. By comparing the current rates of exchange between two foreign currencies, it is possible to track the impact of various events on the value of the currencies involved. Analysts can use this data to predict future performance of the currencies on the open market, assuming that the events continue to impact the performance of the currencies under consideration.

While the cross rate is usually a real-time comparison, it is possible to use historical data to make the rise and decline of the cross rate between two currencies. Employing this method can also help to provide additional data that may be helpful to the investor when making a decision about a given currency trade.

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irontoenail
Post 2

@umbra21 - I don't think I completely understand exchange rates and why they change from day to day. I especially don't understand how people can manage to use that change to make money.

But, I work online and often get paid in foreign currencies, so I'm usually checking the rates and trying to guess when they are going to go up or down.

It always turns out that I changed my money over too soon or too late, but oh well. Still, I agree, being able to check cross rates online is a godsend.

umbra21
Post 1

I usually check cross rates online. There are some really great websites that offer currency exchange rates.

I guess they count as cross rates, rather than paired rates, as the website I check is hosted in another country from the one I live in, and I'm guessing it's usually a different country to the currency I'm checking.

It's not completely accurate, since the banks here will no doubt have a slightly different rate, but it's good for getting an indication of what to expect if you need to exchange money.

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