CFA Level IEconomicsHard
A currency trader observes the following spot exchange rates: EUR/USD = 1.1000 and GBP/USD = 1.3000. What is the implied GBP/EUR cross rate?
- A1.1818
- B0.8462
- C1.1000
- D1.4300
Show answer & explanationAnswer & explanation
Correct answer: A. 1.1818
GBP/EUR = (GBP/USD) / (EUR/USD) = 1.3000 / 1.1000 = 1.1818, meaning 1 GBP is worth 1.1818 EUR.
Why the other options are wrong
- B. This is the reciprocal (EUR/GBP), not GBP/EUR.
- C. Simply restates the EUR/USD rate without cross-rate adjustment.
- D. Incorrectly multiplies rather than divides the two rates.
FX Cross Rate Calculation
A cross rate is an exchange rate between two currencies derived from their common relationship to a third currency (often USD).
- Cross rate = (quote/base for currency A) ÷ (quote/base for currency B) when both are quoted vs same currency
- Ensure consistent quotation convention before dividing
- Reciprocal of a cross rate reverses the currency pair
Memory trick: Cancel the common currency like canceling units in a fraction.