Key terms:

Currency risk

Currency risk is the possibility of incurring losses due to unfavorable fluctuations in an exchange rate. Typically, companies with overseas operations or partnerships use hedging strategies to mitigate the potential losses.

Exchange exposure

Exchange exposure is the level of sensitivity to fluctuations in an exchange rate.

Risk Mitigation

Currency risk can be mitigated through in depth market insight, which allows you to analyse the implications of macroeconomic factors on a currency, as well as a range of strategies from specialist FX providers.

Hedging strategies in particular can minimise potential losses and so organisations with significant international operations typically utilise Forward Contracts in order to achieve a set exchange rate against which to budget their operations.

Liquidity

The liquidity of a currency is determined by the activity and volume of transactions. Typically, the higher the trading volume, the easier it is to buy or sell the currency.

The most liquid currencies are characterised by stable political and economic circumstances. Since the Euro was created as a unified European currency, the Euro has become one of the most liquid currencies in the world, alongside the US Dollar, Japanese Yen, British Pound and Canadian Dollar.

Convertible currencies

A currency is convertible when it is exchanged freely for other currencies and its price is determined by supply and demand in the foreign exchange market. Also a currency is fully convertible when there are no restrictions or limits on the movements and trends of deposits in the associated country.

Of the total of 165 currencies, only a small proportion are convertible. The clearest examples of convertible currencies are the US Dollar, Euro, Yen and Sterling.

Non-convertible currencies

In opposition we find non-convertible currencies, which are not listed on the forex market and are often subject to legal restrictions, usually by the local government.

Non-convertible currencies are closely related to emerging markets, as the restrictions are imposed as protection against high volatility. One example of a non-convertible currency is the Nigerian Naira.

 

Jargon buster:

 

A

Asset

In the context of foreign exchange, it is the right to receive from a counter-party an amount of currency either in respect of a balance sheet asset (e.g. a loan) or at a specified future date in respect of an unmatched forward or spot deal.

Ask Price

Ask is the lowest price acceptable to the buyer.

Analyst

A professional working for a fund manager or broker whose job is to analyse industry sectors (e.g. retail, oil, pharmaceuticals) and determine the prospects for the companies operating in them.

Ask

The lowest price at which a dealer or market maker will sell a specified number of shares of a stock at any given time. The term ‘bid’ refers to the highest price a market maker will pay to purchase the stock. The ask price (also known as the ‘offer’ price) will be higher than the bid price as market makers make money on the difference between the bid price and the ask price, the difference being called the ‘spread’.

 

B

Bear (Bearish)

Trader going short or advocating this action in the expectation of a depreciation of a currency.

Bull (Bullish)

Trader going long or advocating this action in the expectation that the currency will appreciate.

Bid

The price at which a buyer is willing to buy. The best bid is the highest such price available (Also see buying rate).

Broker

An agent, who executes orders to buy and sell currencies and related instruments either for a commission or on a spread. Brokers are agents working on commission and not principals or agents acting on their own account. In the foreign exchange market brokers tend to act as intermediaries between banks bringing buyers and sellers together for a commission paid by the initiator or by both parties. There are four or five major global brokers operating through subsidiaries affiliates and partners in many countries.

Buying Selling FX

Buying and selling in the foreign exchange market always happens in the currency which is quoted first. “Buy Dollar/Yen” means buy the dollar/sell the Yen. Traders buy when they expect a currency’s value to rise and sell when they expect a currency to fall.

BACS

Bankers Automated Clearing Services – The process for Sterling clearing for domestic banks. Usually takes 3 business days.

Beneficiary

A person or legal entity who receives the money from an international payment.

BIC

Bank Identifier Code – A unique ID code used for institutions when transferring money between banks.

BoE

Bank of England

Bear Market

A market in which prices decline sharply against a background of widespread pessimism (opposite of Bull Market).

Bull Market

A market characterized by rising prices. A market in which prices are rising and in which investor confidence in the continuation of rising prices is high.

 

C

Cable

A term used in the foreign exchange market for the US Dollar/British Pound rate.

Central Bank

A central bank provides financial and banking services for a country’s government and commercial banks. It implements the government’s monetary policy, as well, by changing interest rates.

Contract Rate

The agreed exchange rate at which the currency pair may be exchanged on the settlement date.

Currency Pair

The two currencies that are involved in the exchange transaction.

CHAPS

Clearing House Automated Payment System – A British based company offering a faster means of making sterling payments. Usually occurs on the same day.

CHIPS

Clearing House Interbank Payments System – a US-based, privately-held clearing house that settles over USD1 trillion per day.

Credit Transfer

A method of performing an electronic transfer of funds between banks or bank accounts.

Cross Rate

An exchange rate between two currencies, usually constructed from the individual exchange rates of the two currencies, as most currencies are quoted against the dollar

Currency Basket

Various weightings of other currencies grouped together in relation to a basket currency (e.g. ECU or SDR). Sometimes used by currencies to fix their rate often on a trade weighted basket.

 

D

Dealing

The buying and selling of foreign currencies in the foreign exchange markets in the world.

Delivery Date

The date of maturity of the contract, when the exchange of the currencies is made. This date is more commonly known as the value date in the FX or Money markets. The date of maturity of the contract, when the final settlement of transaction is made by exchanging the currencies. This date is more commonly known as the value date.

Deal Ticket

The primary method of recording the basic information relating to a transaction

Dealer

An individual or firm acting as a principal, rather than as an agent, in the purchase and /or sale of securities. Dealers trade for their own account and risk in contrast to the brokers who trade only on behalf of their clients.

European Central Bank

The bank created to look after the financial affairs of the countries that have joined the euro. (1) Cash in hand or in the course of being transferred between banks (2) Federal Reserve Float arises from the system where cheques sent to the Federal Reserve Banks are credited sometimes in advance of the depositing bank loosening the reserve.

 

E

Economic Exposure

Reflects the impact of foreign exchange changes on the future competitive position of a company in the sense of the impact it can have on the future cash flows of the company

Economic Indicator

A statistic which indicates current economic growth rates and trends such as retail sales and employment.

Exchange Rate

The expression of value of one currency in terms of another.

Exotic – Exotic Currencies

A less broadly traded currency.

ECB

European Central Bank

Expiration Date

The date at which an option transaction is expired which is usually 2 business days before the settlement date.

 

F

FPS

Faster Payments Service – a British banking initiative designed to reduce transfer times between banks’ client accounts.

Forward Contract

Sometimes used as synonym for “forward deal”. More specifically for arrangements with the same effect as a forward deal between a bank and a customer. A contract to exchange a specific amount of one currency for another on a future date at a predetermined rate. A deposit is normally required for forward contracts.

Fed

The United States Federal Reserve. Federal Deposit Insurance Corporation Membership is compulsory for Federal Reserve members. The corporation had deep involvement in the Savings and Loans crisis of the late 80s.

Fedwire

The Federal Reserve Wire Network – a real time gross settlement funds transfer system run by the Federal Reserve Banks. The average daily value of transferred funds is around USD2.7 trillion.

Fixed Exchange Rate

Official rate set by monetary authorities for one or more currencies. In practice, even fixed exchange rates are allowed to fluctuate between definite upper and lower bands, leading to intervention by the central bank.

Foreign Exchange

Currencies issued by foreign countries.

Forex

An abbreviation of foreign exchange

FX

Foreign Exchange

Forward Points

The interest rate differential between two currencies expressed in exchange rate points. The forward points are added to or subtracted from the spot rate to give the forward or outright rate depending on whether the currency is at a forward premium or discount. and the forward rate. The difference between the spot rate

Foreign Exchange Market

Market where currencies are traded internationally. About 5 trillion (5 million million) dollars-worth of foreign exchange is traded globally every day, making forex larger than all bond markets put together. Currency markets exist in the form of spot, forward, futures and options markets. Foreign exchange transactions are made up of: Trade flows Only 5% to 10% of total forex transactions. Imports usually need to be paid for in the currency of the country from which they originate. Exports are usually paid for in one’s own currency. A trade deficit therefore causes a currency to depreciate. Flow-ons Created when a large trade is split up into several smaller trades. Capital flows Cross-border investment. Speculation Short-term investment based on expected currency movements. This accounts for the lion’s share of forex market volume

Forward

A transaction with a settlement date that is more than 2 business days after the trade date.

 

H

Hard Currency

A currency whose value is expected to remain stable or increase in terms of other currencies.

Hedge

The purchase or sale of options or futures contracts as a temporary substitute for a transaction to be made at a later date. Usually it involves opposite positions in the cash or futures or options market.

 

I

IBAN

International Bank Account Number – an international standard used to identify bank accounts designed to minimize the chance of spreading errors.

IBANEX

International Bank Exchange – a company who provides you with exceptional service and value for all your foreign exchange needs.

IMF

International Monetary Fund, established in 1946 to provide international liquidity on a short and medium term and encourage liberalization of exchange rates. The IMF helps its members to tide over the balance of payments problems with supplying the necessary loans.

Inconvertible Currency

Currency which cannot be exchanged for other currencies either because it is forbidden by the foreign exchange regulations or the currency witnesses extreme volatility that it is not perceived to be a safe haven for parking the funds.

Inflation

Continued rise in the general price level in conjunction with a related drop in purchasing power. Sometimes referred to as an excessive movement in such price levels.

Interbank Rates

The forex rates large international banks quote to other large international banks. Normally the public and other businesses do not have access to these rates. The bid and offer rates at which international banks place deposits with each other. The basis of the interbank market.

Interest Rate Swaps

An agreement to exchange interest rate exposures from floating to fixed or vice versa. There is no swap of the principal. The principal amount is notional as at the end of the tenure only cash flows related with the interest payments (whether payment or receipt) are exchanged

 

L

LIBOR (London Inter Bank Offer Rate)

British Bankers’ Association average of interbank offered rates for dollar deposits in the London market based on quotations at 16 major banks. Effective rate for contracts entered into two days from date appearing.

London Stock Exchange

The world’s third largest stock exchange by market capitalisation of domestic stocks listed, after the New York Stock Exchange and Tokyo Stock Exchange. The LSE also lists foreign companies, and its turnover of foreign shares is the largest in the world.

Limit Order – Reserved Day Trading Deal

An order to perform a Day Trading deal at a rate pre-defined by the customer, when and if such rate comes up in real market time. The Limit rate is superior to the existing rate at the time of reservation. The reservation order lasts for a period defined by the customer, and is associated by the necessary collaterals to facilitate the potential Day Trading deal, when and if activated, under the pre-defined terms

Long Position

Excess of purchases over sales or of foreign currency assets over liabilities

 

M

Market Price

The price for a security. As far as stocks are concerned, there is not one market price but two: The price half-way between the two prices, or the average of both buying and selling prices offered by the market makers.

Maturity Date

Date on which, under the contracted agreements, the foreign exchange is to be delivered or received.

Margin

In general, the difference between the cost price of a product and the selling price. More specifically, in trading, it is the amount deposited with a broker in order to obtain credit for purchase of shares or futures. The margin is the price of a security less credit advanced by the broker

Money Supply

The amount of money in the economy, which can be measured in a number of ways

 

N

Non-farm Payrolls

The official US monthly report on labour market trends closely followed by the markets.

Nickel

US term for five basis points

O

Open Position

The difference between assets and liabilities in a particular currency. This may be measured on a per currency basis or the position of all currencies when calculated in base currency. Any deal which has not been settled by physical payment or reversed by an equal and opposite deal for the same value date. It can be termed as a high risk, high return proposition

Option

A contract conferring the right but not the obligation to buy (call) or to sell (put) a specified amount of an instrument at a specified price within a predetermined time period.

Order

You can leave an “order” with us to transact on your behalf if a particular exchange rate is reached.

 

P

Pip/Point

100th part of a per cent, normally 10,000 of any spot rate. Movement of exchange rates are usually in terms of points. Or, one percent on an interest rate e.g. from 8-9%.

Par

Is the term applied when the forward price of the purchase or sale of a currency is the same as the spot price.

Parity

Foreign exchange dealer’s slang for your price is the correct market price

 

Q

Quote

An indicative price. The price quoted for information purposes but not to deal.

QE

Quantitative Easing

Quantitative Analysis

The process of determining the value of a security by examining its numerical, measurable characteristics such as sales, margins and market share

 

R

Recession

A decline in business activity. Often defined as two consecutive quarters with a real fall in GNP.

Reserve Currency

A price recognised by technical analysts as a price which is likely to result in resistance but if broken through is likely to result in a significant price movement. As well as the currency held by a central bank on a permanent basis as a store of international liquidity, these are normally Dollar, and Sterling.

Risk management

The identification and acceptance or offsetting of the risks threatening the profitability or existence of an organisation. With respect to foreign exchange involves, among others, consideration of market, sovereign, country, transfer, delivery, credit, and counterparty risk.

Rate

The price of one currency in terms of another. It has the same meaning as the term parities.

Risks

There are risks associated with any market. It means variance of the returns and the possibility that the actual return might not be in line with the expected returns. The risks associated with trading foreign currencies are: market, exchange, Interest rate, yield curve, volatility, liquidity, forced sale, counter party, credit, and country risk.

 

S

Settlement Date

It means the business day specified for delivery of the currencies bought and sold under a forex contract.

Spot

Foreign exchange bought and sold for delivery two business days after the deal is firmed. (1) The most common foreign exchange transaction. (2) Spot refers to the buying and selling of the currency where the settlement date is two business days forward.

Selling Rate

Rate at which a bank is willing to sell foreign currency.

Spread

The difference between the bid and ask price of a currency

SWIFT

Society for Worldwide Interbank Financial Telecommunication – An international financial messaging network which sends payment orders rather than the actual transfer of funds.

 

T

Technical Analysis

The study of the price that reflects the supply and demand factors of a currency. Common methods are flags, trend-lines spikes, bottoms, tops, pennants, patterns and gaps.

Tick

A minimum change in price, up or down

Telegraphic Transfer

A method of transferring money abroad from one bank to another by telegraphy.

 

V

Value Date

For exchange contracts it is the day on which the two contracting parties exchange the currencies which are being bought or sold.

Volatility

A measure of the extent to which the exchange rate changes over a given period. A measure of the amount by which an asset price is expected to fluctuate over a given period. Normally measured by the annual standard deviation of daily price changes (historic). Can be implied from futures pricing, implied volatility.

 

W

Working Day

A day on which the banks in a currency’s principal financial center are open for business. For FX transactions, a working day only occurs if the bank in both (all relevant currency centers in the case of a cross) are open.

World Bank

A bank made up of members of the IMF whose aim is to assist in the development of member states by making loans where private capital is not available.

Wire Transfer

A method of performing an electronic transfer of funds between banks or bank accounts.