CROSS RATE FOR A CURRENCY

The cross rate for a currency is the exchange rate based on the exchange rate of two other currencies. The exchange rate between two currencies calculated on the basis of the rate of these two currencies in terms of a third currency is known as a cross rate. For example, an American trader gives the following quotations in New York: $0.99/Euro and $1.80/£, then the cross rates Euro/£ or £/Euro may be ascertained as follows:

Euro/£ = ( Euro / $ ) x ( $ / £)

= (1 / 0.99) x 1.80
= Euro 1.818 / £

Similarly, £ / Euro = ( £ / $ ) x ( $ / Euro )

= (1 / 1.80) x 0.99
= £ 0.555 / Euro

The forward rate is a price quotation to deliver the currency in future. The exchange rate is determined at the time of concluding the contract, but payment and delivery are not required till maturity. Foreign exchange dealers and banks give the forward rate quotations for delivery in future according to the requirements if their clients. Generally, the forward quotations are given for delivery in 30 days, 90 days, and 180 days. But, the quotations may be given up to 2 years. Sometimes, forward contracts with maturities exceeding two years are also arranged by the dealers to meet specific requirements of their clients. Quotations are normally given for major currencies, but dealers also provide forward quotations for other currencies on the specific request of their clients.

The forward rate for a currency may be higher of lower than the spot rate. Forward rate may be higher than the spot rate if the market participants expect the currency to apprecuate vis-a-vis the other currency, say USD. The currency, in such case is called trading at a forward premium. If the forward rate is lower than the spot rate, the participants expect the currency to depreciate vis-a-vis the USD. The currency in this case is said to be 'trading at forward discount'.