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Define Cross Rate. Identify the most common cross-currency pairs.

Cross rate

Cross rate is the exchange of two currencies with a third currency; in the globe, there are more than two hundred sovereign states that have their own currency. Each currency rate is different from one another. The currency of all states does not have an exchange rate with all the states due to this, some international currencies like USD, euro, and AUD. For example, A cross rate is an exchange rate of two currencies expressed in a third different currency, such as the exchange rate between the USD and the AUD expressed in Indian rupee(Griffin and René, 2001 ).

The US dollar is an international currency, and in all important cross-currency, USD is common.

There are seven most commonly used cross-currency pairs in which the US is on one side and on the other hand. After the USD, the European Union common currency, the Euro is most commonly used in cross-currency pairs (Baba, Naohiko, Frank Packer, and Teppei Nagano. 2008).

The most common cross-currency pairs are:

  1. US dollar (USD) VS Euro Zone (EUR)
  2. US dollar (USD) VS Japan (JYP)
  3. US dollar (USD) VS UK (GBP)
  4. US dollar (USD) VS Canada (CAD)
  5. US dollar (USD) VS Switzerland (CHF)
  6. US dollar (USD) VS Australia (AUD)
  7. US dollar (USD) VS New Zealand (NZD)

The USD vs. Euro is one of the most traded pairs which have nearly almost 30% of the whole FX market.

These are some of the most common use cross currency pairs that are used between the two internal trading partners. All the states were not using their local or national currencies in the bilateral trade. They used international cross-rate currency for their trade.

References

Baba, Naohiko, Frank Packer, and Teppei Nagano. “The spillover of money market turbulence to FX swap and cross-currency swap markets.” (2008).

Griffin, John M., and René M. Stulz. “International competition and exchange rate shocks: a cross-country industry analysis of stock returns.” The review of Financial Studies 14.1 (2001): 215-241.

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