 Foreign exchange market is considered as the largest financial market in the world. It is a place where all currencies of different countries of the world is traded as it is an over-the-counter market so it does not provide a single location in the world where currency traders can get together. That is a reason that in this market all trading of currencies is traded in terms of US dollars. By cross-rate we mean the exchange rate between two non-US currencies or in other words cross-rate is the rate between dollar exchange of one currency and the dollar exchange rate of another currency. Let us assume that one euro is equal to one dollar and one Swiss franc is equal to two dollars so the cross-rate between euro and a Swiss franc is equal to 0.50 but what if the cross-rate of euro for a single Swiss franc is equal to 0.40. Now this means that there is some inconsistency and that inconsistency is between the cross-rate and the exchange rate. Let take an example to understand this inconsistency and the potential benefit that a foreign exchange trader can have using this particular inconsistency. We assume that you can convert 100 dollars to Swiss franc where the Swiss franc has two units equivalent to one US dollar so you can convert 100 US dollars into 200 US francs at this exchange rates. Now convert these, convert euros to the cross-rate where you have 200 Swiss francs and the cross-rate of the euro is 0.40 per Swiss franc one so you will get 80 euros. Now this means that we have two prices of euros one is 100 and the other is 80. However converting dollars into euros without going through the Swiss francs you can have 100 dollars where the exchange rate between the euro and dollar is equal to one as I have earlier said that in this example we have two prices of euro one is the exchange rate between euro and dollar equivalent to one and the other is the equality of 0.80 euro with one US dollar and this price is definitely depends on the fact that how we get the euros in the market. Now there is a concept that is the triangular arbitrage. This triangular arbitrage plays an important role in minting money using the cross rates and in this play we basically buy low and sell high different currencies. Now assume that euros are cheaper than the US dollars as we buy them with the US dollars so it is possible to get one euro instead of just 0.8 euro. This means that we need to proceed in certain steps in the triangular arbitrage process. The first step is to buy 100 euros for 100 dollars and then with these 100 euros you need to buy 200 Swiss francs at a cross rate of 0.4 euro and then you need to buy 125 dollars with the help of available 250 Swiss francs at the exchange rate of two Swiss francs equivalent to one dollars. This means that your dollar value raises from 100 dollars to 125 dollars so this three-step arbitrage transaction has given you a profit of 25 dollars in this particular play. Take another example. We assume that exchange rate between one unit of dollar is equivalent to 0.6 of British pound and there are two Swiss francs equal to one US dollars. The cross rate then the cross rate then is equal to the three six francs equivalent to 0.6 British pound. Now let us see whether there is any inconsistency between the cross rate and the exchange rate and how one can earn profit using these cross rates assuming that the person has 100 dollars with himself. If you see the cross rate then this should be equal to 3.33 Swiss francs per US British pound so the exchange rate for between dollars and six francs is equal to 200 Swiss francs and using the exchange rate between Swiss francs and the British pound we get a pound in total of 66.67 and using the exchange rate between US dollar and the British pound we get 111.12 dollars so we started from 100 dollars and ended up with 111.12 dollars so again this three-step triangular arbitrage transaction has resulted in the profit of 11.12 US dollars. In foreign exchange market when there are two types of transaction the one is spot trade and the second is the power trade. If we talk about spot trade this refers to an agreement to exchange currency at the spot means at the present or at zero time period. In spot trade transaction the trade is generally settled between the two business days and in such type of trade the exchange rate is called as a spot exchange rate whereas the forward trade is concerned this refers to the agreement to exchange currency at some point of time in future. The rate to be used in a future and that is but that is that rate is agreed upon today so this rate is called as forward exchange rate and forward trade transactions settlement is generally takes place between the coming 12 months period. There is a concept of forward premium and forward discount in these types of trades up I mean the foreign trade if a currency is more expensive in future then it is today then this means that the currency is to be selling at a premium in terms of the relative currency and opposite is true for the forward discount. Now how forward premium and forward discount can be computed let's take an example we expect a receipt of 1 million British pound in next six months the spot and 180 day forward exchange rate in terms of dollars per British pound is 1.5649 dollars and 1.5626 respectively how many dollars we can get in six months and the second question is that is the pound selling at a discount or premium relative to the US dollar for the first part of the question we need to multiply the 1 million British pound with the forward exchange rate of US dollar so we have 1.5625 million US dollars after six months and you see that buying a pound in the forward market is less cheaper than it is today this means that the pound is selling at discount at present in relation to the US dollar.