By Haris Q

For those of you who regularly send remittances to their home country or frequently exchange currencies for traveling abroad – the concept of currency exchange rates is not a new one.

Most of the times, exchange rates offered by different currency exchange companies would vary slightly – the TransferWise exchange rates, for example, will not be the same as offered by TorFX or Western Union. Whatever the rates might be, they are the primary driving force behind the entire overseas money transfer ecosystem. Hence, it is important to know about them and how they work.

There are usually three basic types of exchange rates: the buying, the selling, and the mid-market exchange rates. While most people are already aware of the buying and selling exchange rates, not many are familiar with the mid-market exchange rates. Through this post, we wish to explain the concept of mid-market exchange rates for anyone who might need them.

The Mid-Market Exchange Rate: What Is It?

When you venture into the world of currency exchange, you come across a buy rate and a sell rate for the currencies where the buy rate is always higher than the sell rate. The mid-market exchange rate is the rate that stands at the mid-point of the exchange rate spread – that is between the sell and buy rates. This is actually the real exchange rate that prevails between two currencies. It is accurate and transparent and it is constantly changing as new bids are created by the second.

This rate is calculated as the median average of the offer rates and bids made for the said currencies. To simplify it even further, it is the rate that is the middle point of the prices offered by the currency buyers and sellers in the market. The mid-market exchange rate is often called the Real Exchange Rate, the Spot Rate, or the Interbank Rate; and is provided by independent sources like Google and Reuters

So how is the mid-market exchange rate determined? Let’s take a look at an example:

For AUD to USD conversion, if -

Buy rate = 0.72USD/AUD; it means you can purchase 0.72 USD for 1 Australian dollar

Sell rate = 0.70USD/AUD; it means you can trade 0.70 USD for 1 Australian Dollar

In this case, the mid-market rate would be = 0.71 USD/AUD

Every other currency exchange would follow the same pattern regardless of what pair you choose to trade.

The mid-market rate is the established rate of the currency market. It is the real and/or spot rate, which determines the value of one currency against another currency at a given point in time. The difference between this rate and the one charged by currency exchange companies is basically a sum on the profit and service/transaction charges they wish to receive on each transaction. This disparity can be as low as 0.01% and can go as high as 8% - and is a downright cost for you.

So whenever you transfer money overseas, look for the mid-market rates and compare them with the rates offered to you by money transfer operators – this will help you keep a track of your additional costs of transferring money.