Glossary
Exchange rate
The price of one currency expressed in another, and the basis of every conversion.
An exchange rate expresses how much of one currency is required to buy one unit of another. It is quoted as a currency pair — GBP/USD at 1.2700 means one pound buys 1.27 US dollars. The rate you read in the market is normally the mid-market rate: the midpoint between the prices at which the market is willing to buy and sell. The rate applied to a commercial conversion is derived from that midpoint, with the provider's margin built into the quoted price.
In practice
How this works for a UK business
Currency pairs are always quoted in a fixed order: the first currency is the base, the second is the quote currency. GBP/EUR at 1.1600 means one pound buys 1.16 euros. The same relationship expressed the other way round — EUR/GBP — is the reciprocal, roughly 0.8621. Reading a rate in the wrong direction is one of the most common sources of confusion when reconciling a payment, because both numbers describe exactly the same market.
The mid-market rate is a reference point, not a price anyone transacts at. It is the midpoint between the bid (what buyers will pay) and the offer (what sellers will accept). Published reference rates — for example the European Central Bank's daily euro reference rates — are snapshots of that midpoint taken at a fixed time, which is why a reference rate and a live rate for the same pair will rarely match exactly.
The difference between the mid-market rate and the rate actually applied to a conversion is the spread, sometimes described as the margin. It is expressed in the rate itself rather than shown as a separate charge, which is why comparing providers on transfer fees alone can be misleading: a payment advertised with no fee can still carry a wider spread than one with a small explicit fee. The meaningful comparison is the final amount that reaches the beneficiary.
Rates move continuously while the market is open, driven by interest-rate expectations, economic data, trade and capital flows and general market sentiment. For a business, the practical consequence is that a quoted rate is only valid for a short window: the rate seen when an invoice is approved may not be the rate applied when the payment is instructed later the same day.
Worked example
Pitfalls
Common mistakes
- Comparing a provider's quoted rate against the mid-market rate and treating the difference as an error, when the spread is the normal way conversion is priced.
- Reading a pair in the wrong direction (GBP/EUR instead of EUR/GBP) and reconciling a payment against the reciprocal figure.
- Reconciling against an indicative rate seen earlier in the day rather than the rate actually applied to the executed payment.
- Assessing providers on advertised transfer fees alone, without accounting for the spread built into the rate.
- Treating a published daily reference rate as an executable price — reference rates are informational snapshots, not quotes you can trade on.
FAQs
Frequently asked questions
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