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Key Financial Market Concepts, 2nd Edition by Bob Steiner

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Cross-rate

Definition

A cross-rate is an exchange rate derived from two or more other exchange rates. (Historically, it was an exchange rate between any two currencies, neither of which is the US doller.

How is it used?

An exchange rate can be quoted between any pair of currencies. In practice, however, many pairs are not regularly traded. Rather, banks run trading books in exchange rates against major currencies – in particular, rates against the US dollar and against the euro. Because there is a commercial need for very many currency pairs, as well as a wish to speculate in them, banks need to be able to construct such pairs from the ones which they normally trade.

Suppose, for example, that a bank needs to quote to a counterparty a spot ...

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