Understanding exchange rates, how they’re determined, and how this knowledge can help you save money.
If you’ve ever traveled to a foreign country and had to convert money into the currency of that nation, chances are, you’ve used the mid-market exchange rate. What we refer to as the “exchange rate” is known as the mid-market exchange rate and when you search up currency conversions or exchange rates on Google, that’s the figure you’re most likely to come across.
More formally, however, the mid-market rate, or mid-market exchange rate, is the exchange rate at which banks trade currencies.
Every currency pair in the world has a unique mid-market rate, also known as the interbank exchange rate. The mid-market rate is driven by global and macroeconomic factors such as imports, exports, trade agreements, inflation, interest rates, political uncertainty, speculation, and other economic conditions, to name a few.
Even more specifically, the mid-market rate is the midpoint of the buy and sell prices of the two currencies. These buy and sell prices boil down to what the buyer is prepared to pay and what the seller is ready to sell that currency for. As such, the mid-market rate is used by banks internationally.
For example, say the buy rate of a particular currency is 2 and the sell rate of that same currency is 1.5, the mid-market rate is simply the average of both, or 1.75. The difference between these buy and sell rates is known as the “spread”, so here the spread is 0.5. A spread like this often occurs in financial markets, including with stocks
What is the Benefit of Knowing the Mid-Market Rate?
If you often transfer money abroad, chances are that you’re paying quite a bit higher to convert your currency than what the mid-market rate may call for. After all, banks need to make money, too, and a large way in which they do that is by charging you a greater amount to exchange your currency than the mid-market rate may suggest.
As a result, comparing the rates of multiple banks with the mid-market rate can help you determine how much you may be losing in each transaction. While it’s not possible to exchange your currency at the mid-market rate, comparing banks and transfer sites can allow you to save more by selecting the rate that is closest to the mid-market rate.
Even when you’re traveling abroad and simply need to obtain foreign currency, the same rules apply. Essentially, certain currency exchange locations will have more favorable rates than others and determining which location’s rate is nearest to the mid-market rate will allow you to lose less money to exchange rate conversions.
The mid-market rate is largely unknown to most people, which allows a lot of banks and currency exchange sites to make money simply due to the lack of transparency when it comes to this figure, so educating yourself ahead of time will allow you to save more than you would otherwise be able to, whether it’s for an international trip or simply to send money to friends and family abroad
How To Find the Mid-Market Rate
Now that you know what the mid-market rate is and how it can help you, let’s dig deeper into how you can find the mid-market rate. Thanks to technology, it’s easier than ever to find the mid-market rate on Google or even websites like Yahoo.
These sites will publish the mid-market rate live, which makes it easier than ever to determine your starting point when converting currencies. Moreover, knowing the mid-market rate can help prevent you from settling on an exchange rate that’s too high.
The mid-market rate is the only “true” currency exchange rate — remember, the rates you see at banks or currency exchange locations are determined by the site and their internal policies, not what the market has predetermined. As such, become familiar with the mid-market rate and watch your savings grow, in the process.
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Keertana Anandraj is a recent college grad living in San Francisco. When she isn’t conducting international macroeconomic research at her day job, you can find her in the spin room or planning her next adventure.
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