Middle Rate – Foreign Exchange Tutorials

What is Middle Rate in Foreign Exchange?

The newspapers frequently give news of the rate of exchange between different currencies, e.g. 1 USD = 60.21 INR, which means that you have to give 44.56 INR to buy 1 USD. This would be middle rate. It is between the rate at which banks are selling USD dollars in exchange for INR and the rate which banks are buying USD dollars for INR.

It gives a rough indication to the public of how many INR are required to buy 1 USD.

A transaction at the rate requires two parties wishing to transact in opposite directions (one buyer and one seller) at the same time. For example: If the price of EUR/USD is trading with a bid price of $1.1920 and an offer price of $1.1930 and two parties, a buyer and seller, wish to transact with each other they could do so at an agreed rate, which would be $1.1925. Both parties benefit by not crossing the entire spread to execute their transaction.

With the advent of online trading and increased liquidity, spreads have tightened to a point where counterparts meeting at a middle rate is less beneficial. Also, with less foreign exchange transactions happening via brokers, middle rate transactions are less prevalent.

Practice Questions

1. What is the middle rate in foreign exchange?
A) The average of the bid and offer rates
B) The highest of the bid and offer rates
C) The lowest of the bid and offer rates

2. Why is the middle rate important in foreign exchange?
A) It represents the actual exchange rate that buyers and sellers can obtain
B) It is used by market makers to make a profit
C) It is set by the government to control foreign exchange transactions

3. Which of the following statements about the middle rate is true?
A) It is always higher than the bid rate
B) It is always lower than the offer rate
C) It is the same as the bid rate in a buyer’s market

Answers:

1. A

2. A

3. A