It uses the median. The lowest price is only used to determine the excess collateral needed for the 3.5 day loan (it is a loan because the HBD is delivered immediately even though the rate is determined and the actual conversion can be said to occur after 3.5 days).
I misunderstood the mechanics of the conversion process. If we view it as a loan instead, then a fee is justified. I still think that it is a bit high (~2 percent would be better in my view), but that is just my opinion.
I would like to see both conversion operations shifted down by half the fee (i.e. convert HBD to HIVE at 97.5 and convert HIVE to HBD at 1.025) which would make the fee 2.5% in effect. But it could be that the total fee should also be smaller (say 1% on each side). In any case I think we should assess for a while before making any changes.