In this video, we will discuss how to calculate the cross (exchange) rate with bid-ask spreads. Please refer to the basics of “Foreign Exchange” first. This video requires Flash 8 or above. If it does not start, click the play button to start.

To find the cross rate, it can be very easy provided you can keep track of the bid-ask spread and the direction of the exchange. Let’s try this example:

We are given:

Currency A per B is 2.3400-20

Currency A per C is 0.8900-30

What is Currency B per C?

First, you recognize these are direct quote with Currency A as domestic currency and the numbers given are bid-ask spreads against currency B and currency C.

The answer is simple:

Currency B per C (bid) = Currency B per A (bid) x Currency A per C (bid) = 1/(2.3420) x 0.8900 = 0.3800

Currency B per C (ask) = Currency B per A (ask) x Currency A per C (ask) = 1/ (2.3400) x 0.8930 = 0.3816

Therefore, Currency B per C = 0.3800 – 16.

Why is that? You have to understand that Currency B per C (bid) means the exchange rate at which the dealer in country B is willing to buy C (they are bidding C using B). Therefore, for a customer, they are selling C to get B. So, besides dealing with the dealer in country B, the customer can also sell C to the dealer in country A (using A per C bid) to get A and then sell A to the dealer in country B to get B (using B per A bid). That’s how we have the first equation. Please see the video for more explanations and the trick to fast calculation!