Understanding and Leveraging Mid-Market Currency Rates in International Business

Foreign exchange, also known as currency exchange, is the backbone of international transactions, with foreign market trades standing at over $6.6 trillion daily in 2023.

Businesses operating cross-border, that send and receive funds in multiple currencies, need to embrace another learning curve: learning about and effectively leveraging mid-market currency rates, a fundamental benchmark that serves as an aid to navigate the complex world of international finance.

In this article, we will discuss the intricacies of mid-market rates, their significance in global finance, and strategies businesses can use to optimise their currency exchanges.

Mid-market currency rates, also known as interbank rates or real exchange rates, refer to the midpoint between the buy and sell prices of two currencies in the global forex market. They are, in fact, the most accurate way businesses and finance professionals can assess the real-time value of currencies at any given time.

To illustrate, consider the following example: The buying rate for EUR/USD is 1.1800, and the selling rate is 1.1820. As a result, the mid-market rate is calculated as:

(1.1800 + 1.1820) / 2 = 1.1810

The 1.1810 rate is the fairest exchange rate between USD and EUR at that specific moment, free from additional fees, markups, or profit margins.

Determining mid-market rates is a complex process influenced by many factors. At its core, currency values are driven by supply and demand dynamics, with fluctuations based on relative demand. However, it's more nuanced than that. Economic indicators like GDP growth, inflation rates, employment figures, and interest rates all play significant roles in shaping currency values.

Geopolitical stability also heavily influences these rates. Events like Brexit, for instance, caused substantial fluctuations in the value of GBP, demonstrating how political uncertainties can ripple through the forex market. Central bank policies add another layer of complexity, with interest rate decisions and quantitative easing measures capable of triggering notable shifts in exchange rates.

Market sentiment and trader activities contribute to the ever-changing landscape of currency rates. Short-term fluctuations often result from speculative trading and rapid responses to global events, adding a layer of unpredictability to the forex market.

For businesses operating on the global stage, a deep understanding of mid-market rates is not just beneficial—it's essential. These rates serve as a crucial benchmark for fair pricing, allowing companies to accurately assess offers from banks and foreign exchange providers. By comparing offered rates against mid-market rates, businesses can optimise costs, potentially saving significant amounts on high-volume transactions.

These rates are important not just for immediate cost savings; they are essential for financial planning and budgeting in cross-border operations. They provide a stable reference in the unpredictable world of international finance. Understanding rate fluctuations is crucial for creating effective risk management strategies. This is especially important because nearly 70% of international businesses worry about foreign exchange risks, as reported by an HSBC survey.

Using mid-market rates effectively can give a competitive advantage in international markets. By adjusting pricing strategies based on these rates, companies can better position themselves globally and potentially outperform competitors who might not handle foreign exchange complexities as well.

Here are a few strategies businesses can rely on to leverage mid-market currency rates in their operations:

Real-Time Rate Monitoring: It is crucial to consistently check reliable financial data providers or currency conversion platforms that give access to real-time mid-market rates, as this helps in making informed decisions on the execution of currency exchanges and international payments.

Rate Comparison: Always compare the rates offered by banks or exchange providers with the current mid-market rate to pick the most cost-effective option. Consider this example:
A US-based company needs to transfer $1,000,000 to its UK subsidiary. The current mid-market rate for USD/GBP is 0.7250. At this rate, the company would receive £725,000. If a bank offers an exchange rate of 0.7100, the cost of the transaction is £710,000. Using a service that offers rates closer to the mid-market rate could save the company £15,000 on a single transaction.

Timing of Transactions: While it's challenging to predict market flows perfectly, keeping an eye on trends in mid-market rates can help with timing large transactions better.

Multi-Currency Accounts: Consider using multi-currency accounts that allow you to hold balances in different currencies. This flexibility enables you to take advantage of favourable exchange rates when they occur—recent studies have shown that businesses with multi-currency accounts save up to 3.5% per transaction compared to transactions done through traditional banks.

Diversification: Similarly, it is wise to keep multiple accounts with a diversified portfolio of currencies, especially if your business operates in multiple markets.

Forward Contracts: If your business has predictable currency needs, you can use a hedging strategy called forward contracts, allowing you to lock in the current mid-market rate for future transactions, thereby gaining more certainty about pricing and budgets.

Automated Orders: You can also use automation to set up payments to be executed when currency exchange rates reach a favourable level, taking advantage of short-term market movements.

Here are a few strategies businesses can rely on to leverage mid-market currency rates in their operations:

Real-Time Rate Monitoring: It is crucial to consistently check reliable financial data providers or currency conversion platforms that give access to real-time mid-market rates, as this helps in making informed decisions on the execution of currency exchanges and international payments.

Rate Comparison: Always compare the rates offered by banks or exchange providers with the current mid-market rate for the relevant currency pair to pick the most cost-effective option. Consider this example: A US-based company needs to transfer $1,000,000 to its UK subsidiary. The current mid-market rate for USD/GBP is 0.7250. At this rate, the company would receive £725,000. If a bank offers an exchange rate of 0.7100, the cost of the transaction is £710,000. Using a service that offers rates closer to the mid-market rate could save the company £15,000 on a single transaction.

Timing of Transactions: While it’s challenging to predict market flows perfectly, keeping an eye on trends in mid-market rates can help with better timing large transactions.

Multi-Currency Accounts: Consider using multi-currency accounts that allow you to hold balances in different currencies. This flexibility enables you to take advantage of favourable exchange rates when they occur—recent studies have shown that businesses with multi-currency accounts save up to 3.5% per transaction compared to transactions done through traditional banks.

Money Transfer Services: Consider using specialised money transfer services that offer competitive rates and lower fees compared to traditional banks, especially for large transaction volumes.

Diversification: Similarly, it is wise to keep multiple accounts with a diversified portfolio of currencies, especially if your business operates in multiple markets.

Forward Contracts: If your business has predictable currency needs, you can use a hedging strategy called forward contracts, allowing you to lock in the current mid-market rate for future transactions, thereby gaining more certainty about pricing and budgets.

Automated Orders: You can also use automation to set up payments to be executed when currency exchange rates reach a favourable level, taking advantage of short-term market movements.

Ignoring the Spread: While mid-market rates should be the focus, do not ignore the spread, which is the difference between the buy and sell rates that currency exchange providers offer in the foreign exchange market.

Overlooking Additional Fees: It’s not uncommon for providers to offer rates close to mid-market rates but compensate with higher transaction fees. Therefore, consider the total cost of the exchange, including all fees.

Neglecting Market Timing: It’s nearly impossible to perfectly time the market, but executing large currency exchanges without considering market trends can lead to suboptimal results. Being aware of significant economic events that might impact exchange rates can help optimise transaction costs.

Failing to Hedge: Businesses significantly exposed to currency fluctuations should implement hedging strategies, such as forward contracts, to avoid substantial financial risks.

Over-reliance on a Single Provider: It is important to compare and check options from providers other than your regular ones regularly. Loyalty to a single bank or exchange provider may result in missed opportunities for better rates.

Fyorin provides global businesses with a singular platform to send, receive, exchange, and hold funds in 100+ currencies. From one place, you can open virtual accounts and access domestic and local payment rails for fast, secure, and cost-effective cross-border payments.

Get in touch with us by emailing sales@fyorin.com or book a free demo!