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.
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.
