Apr 20 - 2:30 Minutes
Every minute of every day, individuals, banks, and institutions exchange money from one currency to another. Exchange rate determines how much to pay and receive. Therefore, it is crucial to check which exchange rate applies to your transaction and attracts you. You have often heard about the term "real-time rate" or "mid-market rate", where international money transfer providers boast about their respective offers
Global forces like demand and supply and economic influence the exchange rate between any currency pair, resulting in continuous fluctuation. However, on average most banks and other providers only change their exchange rate once a day.
Gist of mid market rate
It is the fairest rate because here, banks buy and sell currencies with one another. This rate compares the services offered by different money transfer providers and banks to determine a fair deal. Additionally, money transfer services use the mid-market rate to base their exchange rate margins. In most cases, the bank or financial services will use markups on the mid-market exchange rate. It will lead to a charge for using the transfer service for an international transaction. Hence, the rate determines how much foreign currency will be received after completing the money transfer.
The difference between the selling bid and buying bid is known as a spread. The financial spreads occur in industries such as the stock markets, currencies, and other financial markets. For example, to buy one Euro you have to spend 1.16 USD, but when you sell one Euro, you get 1.10 USD. Hence the spread is 0.06 USD or 5.3%.
The mid-market rate, in this case, would be 1.13 USD, which is also called the "real" currency rate. The spread is still a part of its financial accounting and costs and often expressed in percentages. Banks and brokers apply the spread to the mid-market exchange rate, which is effectively a hidden charge that amends the quoted rate.
Can money be transferred at a mid-market exchange rate?
It is not possible to send money at the mid-market exchange rate. Here the banks and currency exchange providers fix their own, slightly different exchange rates for customers called exchange rate margins. These exchange rate margins lead to earning a profit on international money transfers. Hence, the exchange rate margin depends on the different remittance provider to transfer money which falls anywhere between 0.01% and 10% or more of the transfer amount. While transferring money, many expats are interested in saving money on their international money transfers. A few economists suggested the expats need to update themselves with the current mid-market rate. So that they can save more on international money transfers provided the exchange rates are closer to the mid-market exchange rate. The reason is that most currency providers and banks make money from the exchange rate margin. Therefore, the closer to the exchange rate, the more money the respective beneficiary will receive.
For exporters, stepping into the world of electronic payments and virtual bank accounts was a challenge for them. Updating themselves to navigate successfully with automating payment systems and unleashing currency exchange services. Simultaneously exporters enjoy the benefits of being on the cutting edge of financial transactions in the electronic world by accepting more payments.
Every currency pair has a unique mid-market exchange rate, driven by global and regional macroeconomic forces. Therefore, low demand and high supply for a currency pair result in lower exchange rates. Whereas high demand and low supply for a currency pair result in higher exchange rates. The study of such ups and downs in the currency markets defines a "Trend" that predicts future exchange rates.
Spreads have contracted to a point where counterparts meeting at a middle rate is less beneficial due to online trading and increased liquidity. Results in fewer foreign exchange transactions via brokers, middle rate transactions are less prevalent. The middle market theory is also applicable to other financial instruments like stocks, commodities, futures and many more.
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Reading time 2:30 Minutes
Irene has completed her post-graduation in Integrated Marketing Communication from Calcutta Media Institute, Kolkata, India. Her key areas are blogging and content writing. She is in this industry for three years. Her interest areas include travelling listening to music, and painting.
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