Rate definition
When you look up exchange rates with a currency exchange service, you’ll see two options:
- the Buy rate
- and the Sell rate.
The difference between the Buy and Sell rates is called the spread.
A mid-market rate is the middle point between the buy and sell rate
It’s the only real exchange rate, because it shows you the actual exchange rate between two currencies, without any extra fees or hidden overheads.
Fee
Currency traders take the live mid market rate and add extra fees and overheads without telling you.
- The Sell rate charges you more of the original currency to get a certain amount of foreign currency.
- The Buy rate gives you less of the foreign currency for the same amount of your original currency.
Knowing the mid market rate is the only way to tell if you’re getting a fair deal on your currency exchange.
Example
Let’s say that your UK-based eCommerce business needs to pay £1000 to your suppliers in the Netherlands. You need to sell your GBP and buy Euros. Here’s how it works:
| Statistics / Rate | Desc | for £1 |
|---|---|---|
| Sell rate | GBP into Euros | €1.10 |
| Buy rate | Euros into GBP | €1.30 |
| Spread | €1.30 - €1.10 | €0.20 |
| Mid rate | for GBP to EUR | €1.20 |
You say:
| €1.20 | for | £1 |
| £1 | to | €1.20 |
Implementation
The exchange rate is not an average, but taken from a specific point in time.
An Exchange Rate can be defined as:
- Fixed: manually defined and changed
- Periodically: The exchange rate is refreshed periodically (daily or monthly) Example: If the daily refresh takes place at 7 am and if a product with a secondary currency is delivered at 6am in your time zone, it will use the exchange rate value from the previous day at 7am.