If you are planning your first holiday abroad, or researching the fundamentals of the currency trading markets, it’s important you approach currency exchange rates with an educated eye. There are several exchange rate classifications which you should consider before heading to the airport, choosing as money transfer service provider or making a trade.
The essential rate categories which travelers should concern themselves with are:
- Mid-market rates
- Transactional rates
- Interbank rates or wholesale rates
- Spot rates
Yet naming exchange rate categories is only the beginning. Understanding the nuances and differences between them will make. Let’s look at each of these rate classes in more detail.
Mid-market and transactional rates
You might be looking to exchange euros for sterling, yen for USD, or Australian dollars for Canadian ones. The basic principles of supply and demand dictate what currency traders are willing to pay for a country’s currency, based on economic and political forces.
When you use the XE Currency app on your Android or iOS mobile device, use the XE Alexa Bot on your Amazon Echo speaker, or pull up your desired currency pair on the XE.com website, you aren’t seeing or hearing the mid-market rate. It is the interbank rate, or spot rate which you see. In other words, the cost at which banks trade currency with each other.
The mid-market rate is at the mid-point between buy and sell rates in the foreign currency exchange markets. Money transfer service providers add a “spread” or margin to cover the cost of doing business and to make a reasonable profit. Some call them retail rates, and like with all retail transactions, you will find a variety of rates depending on the broker you do business with.
The transactional rate or retail rate are essentially the same, but if a money transfer service or bank charges fees, the transactional rate is higher. One way businesses and consumers can save money is by purchasing forward contracts to lock a rate in until a trade
Wholesale or interbank currency exchange rates are those which banks, government organizations, investment brokers and large corporations buy currency at. Wholesale rates are based on the “spot market”, meaning the rate based on clearing a transaction as fast as markets and regulators allow. This timeframe averages around two business days.
Interbank rates are mentioned above, yet if you read about a wholesale or spot rate, just know they’re synonymous. Currency brokers need to cover their operating costs just as product retailers do, which is why there are deltas between interbank and transactional rates.
Fixed vs Floating Rates
In some countries and groups of countries like the European Economic Community, the basis of currency rates are set and maintained by a Central Bank of a given country. These currencies have fixed rates, which are also called peg(ged) rates.
Floating currency rates are based on the value of other currencies, such as the US dollar, or based on the economic forces of supply and demand which were described earlier. Though fixed and floating rates are a separate conversation from mid-market and interbank rates, knowing which countries have fixed rates (Japan and the EU, for example) or floating rates is an important consideration when investing or trading in currency.
XE has been providing businesses and consumers with accurate, timely currency exchange data for over twenty-five years. We curate this data from over one hundred of the world’s most trusted data sources, to provide our customers and users with the most reliable data available.
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