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CROSS RATES

CROSS RATES

Discuss CROSS RATES within the Financial Management ( FM ) forums, part of the Resolve Your Query - Get Help and discuss Projects category; We know that US dollar being the currency of intervention only US dollar/rupee exchange rate is available in the Indian ...

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CROSS RATES
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Sunanda K. Chavan
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sunandaC
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CROSS RATES - October 8th, 2010

We know that US dollar being the currency of intervention only US dollar/rupee exchange rate is available in the Indian Forex market and exchange rates of rupee with all other foreign currencies are derived from this rate through crosses.


If we want to remit French from India, exchange rate of French franc/rupee has to be arrived at. What we have to do is the first buy US dollar against rupee and by selling US dollar so bought, say in London market, we buy French franc.

Let us understand by an example…

If exchange rates in Mumbai interbank market and London market are as follows:

Interbank market Mumbai

US $ 1 = Rs. 41.2550-41.2650

London Market

US $ 1 = FRF 6.0500-6.0550

The transaction will proceed like, interbank market takes rupees 41.2650 and gives US $ 1.

This US $ is taken to the London market for conversion in the FRF. The London market takes US $ 1 and gives FRF 6.0500.

So we can calculate the direct rate between FRF and INR.

FRF 6.0500 = US $1 And US $ 1 = RS. 41.2650 Therefore, FRF 6.0500 = US $ 1 = RS. 41.2650

So, FRF 1 = RS.41.2650/6.0500 = RS. 6.8206

In this way, banks can calculate exchange rate between any two currencies.
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