BEC MCQ – Calculating Cross Rates Between Two Currencies
One euro will buy U.S. $1.48, and a British pound will buy U.S. $2.06. What is the cross rate of euros per pound?
1.39 is correct. So in this question, exchange rates are published for the Euro to US dollar and the British pound to US dollar. However, there is not a published rate between the British pound and the Euro, so traders would calculate the cross rate. The visual below illustrates how both the Euro and Pound are valued against the US Dollar, which is the base currency.
We’ll use the ABC method to calculate the cross rate of euros to pounds. The base currency will always be A will always have a value of 1. The other two currencies will be based off their exchange rate with the base currency. Since we’re going from euros to pounds, euros will be “B”, and pounds will be “C”.
To calculate the cross rate from euros to pounds, just divide C by B. So take $2.06 divided by $1.48, and you get a cross rate of $1.39.
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