What is a cross rate or cross currency triangulation?
A cross rate, which is also known as cross currency triangulation, is when you use you calculate an exchange rate between two currencies that are both valued against another currency. For example, in the US, you would value other currencies against the US Dollar.
As you can see in the visual below, currency A (US Dollar) would have published exchange rates with currency B (Euro) and currency C (Wakandan dollar). However, what if you want to exchange currency B and currency C? The issue is that an exchange rate is not published between these two currencies.
For example, what if one Euro (Currency B) would buy $1.48 USD (Currency A) and one Wakandan dollar (Currency C) would buy $2.06 USD (Currency A). How would you get the cross rate of Euro’s (Currency B) to Wakandan dollars (Currency C)? This would be the red X in the visual above.
Using the ABC method, you would assign the common (or base) currency as A, and the base currency will always have a value of $1. Currency B will always be the first currency in the cross rate (i.e. Euro’s to Wakandan dollars). Currency C will be the 2nd currency in the cross rate (i.e. Euro’s to Wakandan dollars).
Then you just divide Currency C by Currency B, so you would take $2.06 and divide by $1.48. That means the cross rate of Euro’s to Wakandan dollars is $1.39.
In reality, to convert from Euro’s to Wakandan dollars, you would still have to convert from Euro’s to USD and then USD to Wakandan dollars.
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