Exchange Rate Quotations-Cont’d Not all currencies are actively traded in the foreign exchange markets. A currency that is widely traded in the world’s foreign exchange markets is called a vehicle currency. The USD is a vehicle currency. Exchange rates between two currencies that do not involve a vehicle currency are called cross rates. E.g. The ZAR/BWP exchange rate is across rate because neither the ZAR nor the BWP is a vehicle currency. On the other hand the ZAR/USD exchange rate is not across rate because it involves the USD, which is a vehicle currency. As a general rule, any exchange rate that does not involve the USD is across rate Temporary discrepancies sometimes exist between quoted cross rates and implied cross rates obtained by reference to a common vehicle currency. In such cases, it is possible to earn risk-free arbitrage profit by making simultaneous trades through the vehicle currency and at the quoted exchange rate.
