Cross rate is the exchange rate between two currencies derived from their exchange rate with a common third currency.
Consider the following exchange rates:
|Spot rate||Expected spot rate|
Determine the following:
Expected spot rate: CHF/EUR=CHF/USD*USD/EUR=0.9020*1.3457=1.2138
2.Spot rate: GBP/EUR=GBP/USD*USD/EUR=(1/1.5160)1.3690=0.9030
Expected spot rate: GBP/EUR=GBP/USDUSD/EUR=(1/1.5100)1.3457=0.8912
3.Spot rate: CHF/GBP=CHF/USDUSD/GBP=0.9164*1.5160=1.3893
Expected spot rate: CHF/GBP=CHF/USD*USD/GBP=0.9020*1.5100=1.3620
As the quoted rate for CHF/EUR drops from 1.2546 to 1.2138, the EUR depreciates relative to CHF.
Percentage depreciation in EUR relative to CHF = (1.2138/1.2546 — 1) = -3.25\%
From the change in quoted exchange rates we can see that USD strengthens relative to both EUR and GBP.
Whereas USD depreciates relative to CHF.
Hence, the strongest currency is CHF.