CROSS RATES OR CHAIN RULE

When rate between two currencies is not directly available, it has to be calculated through a 3rd currency which is called cross rate. This is done by using chain rule.

For example, US $ 1 = Rs.50.00 and US $ 1 =Euro 0.7500. Euro 1 =50 / 0.75 = Rs.66.67
A bank is offered to purchase an export bill of Pound 100000 and the inter-bank rates are US $ 1 = Rs.50.00/10 and Pound 1 = US $ 1.5000/10.

In this case, the bank will purchase pounds at given US $ rate of Rs.50 and deliver rupees to exporter. Bank will sell pounds in London in inter-bank market at US $ 1.50. The amount will be worked with chain rule. Pound 1 = 1.50 x 50 = Rs.75.