Which of the following is true :
Cross rate is the rate of exchange of two currencies on the basis of exchange quotes of other pairs of currencies.
The statement about the cross rate is the correct one — option 3.
What a cross rate is. It is the rate between two currencies worked out from each one’s quotation against a third — usually the US dollar. If the rupee and the yen are each quoted against the dollar, the rupee-yen rate follows by arithmetic without either currency being quoted directly against the other :
\(\dfrac{\text{INR}}{\text{JPY}}=\dfrac{\text{INR/USD}}{\text{JPY/USD}}\)
Cross rates matter because most currency pairs are not actively traded against each other; the dollar acts as the vehicle currency. If a directly quoted rate ever diverged from the calculated cross rate, dealers would exploit the gap through triangular arbitrage, and that activity keeps the two in line.
Why each of the other three is false.
| Statement | Why it is wrong |
|---|---|
| 1. The central bank’s role is commercial | It is regulatory. The RBI manages the exchange rate, holds the reserves, and intervenes to curb excessive volatility — not to earn a trading profit |
| 2. Forward rate is the rate of the day of the transaction | That describes the spot rate. A forward rate is agreed today for delivery at a future date, and is used to hedge exchange risk |
| 4. The selling rate is the bid rate | Reversed. The bid is the rate at which the dealer will buy; the ask or offer is the rate at which he will sell. The gap between them is the spread, and it is the dealer’s margin |
The way to hold the bid-ask convention is to read it always from the dealer’s side, never the customer’s: the dealer bids to buy and asks to sell, and the ask is always the higher of the two, which is how he makes his money.
Forward rates and their names. A currency trades at a premium when its forward rate is above its spot rate, and at a discount when below; under interest rate parity the difference reflects the interest-rate differential between the two countries.
Hence, the answer is the statement about the cross rate.
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