In FOREX markets, currencies are always traded in pairs. The numerator, or base currency, is always equal to one. The denominator, or quote currency, represents how many units of the quote currency can be purchased for one unit of the base currency. All exchange rates are relative; there is no absolute standard like gold by which to gauge a currency's value. In this example, we wish to know the exchange rate of British pounds (GBP) for Indian rupees (INR), but the only rupee price to which we have access is versus the U.S. dollar (USD).
Video of the Day
Find the USD/INR exchange rate. There are numerous online sites that can provide this rate, for example see Reference 1. In our example, we find the rate is 1 USD buys 45 INR, as of Dec. 31, 2010. The price of the INR in terms of dollars is 1 divided by 45, or 0.0222.
Find the GBP/USD exchange rate. Since both of the currencies are considered majors, the rate can be found on any site featuring current exchange rates. For our example, the rate 1 GBP buys 1.54 USD, for a price of 1 divided by 1.54, or 0.6494.
Cross-multiply the two currency pairs. Through cancellation, we are left with the currency rate we seek. In our example, USD/INR times GBP/USD gives GBP/INR, the pair in which we are interested. Substituting numbers to get the price, we get 1/45 times 1/54, or 0.0144. Dividing this price into 1, we get the ratio of 1 GBP buys 69.5 INR.