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In this short post, we’ll be looking at calculating currency cross rates. If you understand how to do these calculations, this will give you easy points in your CFA exam.
This is the 3 steps process to calculate currency cross rates:
- Set up the equation.
- Divide by 1 to switch the numerator and denominator of a spot rate you do not have.
- Multiply the spot rates.
Example
Let’s say you are given:
- EUR/GBP = 0.78
- CAD/GBP = 0.54
- USD/CAD = 1.28
What is the USD/EUR spot rate?
First, we need to set up the equation:
USD/CAD x CAD/GBP x GBP/EUR
= USD/
CADxCAD/GBPxGBP/EUR = USD/EUR
But we don’t have GBP/EUR, so we will have to divide the spot rate by 1.
GBP/EUR = 1/EUR/GPB = 1/0.78 = 1.28
Then, when we have every spot rate, we simply multiply everything:
USD/CAD x CAD/GBP x GBP/EUR
- USD/CAD = 1.28
- CAD/GBP = 0.54
- GBP/EUR = 1.28
USD/EUR = 1.28 x 0.54 x 1.28 = 0.88
If you would like to practice questions on this topic, consider our CFA Level 1 Question Bank.
Simon
simon.royal@analystprep.com
Photo by Maria Imelda on Unsplash
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