A cross rate is an exchange rate between two currencies that is not directly quoted but calculated indirectly through a third currency, usually the US dollar. In foreign trade, when the home currencies or settlement currencies of the trading parties are not major international currencies, banks or companies first obtain the exchange rates of these two currencies against the US dollar, and then derive the direct exchange rate between them. Use cases include: quotation, settlement, hedging, and foreign exchange risk management. Notes: cross rates can amplify costs due to the bid-ask spread of the intermediate currency, and different banks may have different calculated cross rates, so comparison and selection are necessary; in addition, if the intermediate currency has poor liquidity, the cross rate may deviate from the true market level. The difference from a direct rate is that a direct rate is the direct exchange ratio between two currencies, while a cross rate is derived indirectly; unlike an arbitrage rate, a cross rate is mainly used for pricing and settlement, while an arbitrage rate focuses on risk-free arbitrage. Foreign trade practitioners should pay attention to real-time fluctuations in cross rates and specify the exchange rate calculation method in contracts to avoid exchange losses.
📝 Examples
1. Our company exports to European customers, and they pay in euros, but our cost accounting requires RMB, so the finance department converts using the cross rate of EUR/USD and USD/RMB to obtain the break-even price per product. (Note: Used for cost accounting, deriving the EUR to RMB rate through the US dollar.)
2. Due to large fluctuations in the US dollar, we locked in the cross rate of GBP/JPY with the bank to fix the profit from importing raw materials from the UK and re-exporting to Japan. (Note: Used for foreign exchange locking to avoid exchange rate risk from the US dollar as an intermediate currency.)
💡 Foreign Trade Tips
Foreign trade terms are the foundation of international business communication
Trade practices may vary slightly by country; pay attention when using them
When using terms in contracts, specify the applicable version (e.g., Incoterms 2020)
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