B
Bid - Offer spread:
The difference between the rate at which a bank is willing to buy a currency and the
rate at which it is willing to sell the same currency.
Bid price:
The price that a bank is willing to pay for a particular base currency, quoted in terms of units of counter currency per unit of base currency.
[ Back to Top ]
C
Call Option:
An option that gives the holder the right, but not the obligation, to buy a currency at a specified price during a fixed time period or on a fixed date in the future.
Cross:
The exchange rate between two currencies that can be obtained by exchanging both currencies for a third currency.
Current account:
A government record of imports and exports, including both goods and services other than invisibles, eg interest payments. The current account balance represents the difference between national income and national expenditure.
[ Back to Top ]
D
Deal Confirmation:
All foreign exchange deals must be confirmed by both counterparts. The confirmation of the transactions is executed by the 'back-office'. For safety and soundness reasons, the back office operates independently of the trading room. Treasury best practice recommends that the person in a corporation that transacted the deal should not be the person who confirms it.
Devaluation:
Formal action by a central bank to reduce the external value of their currency.
[ Back to Top ]
F
Foreign-exchange rate:
The price at which one currency can be converted into another currency.
Foreign-exchange risk:
The risk that the functional currency value of an asset, liability, cash flow (or forecasted values of same) may change due to movements in the foreign exchange rate.
Foreign Exchange Swap:
The simultaneous purchase and sale of a currency for two different dates, one of which is the spot delivery date (or before) and the other occurring after this date. Funds are exchanged
on each date.
Forward Outright contract:
Purchase or sale of a quantity of a foreign currency at a forward rate agreed today (spot rate adjusted for forward points), with delivery and settlement on a specified future date. No funds are exchanged until the future settlement date.
Forward Forward Contract:
The simultaneous purchase and sale of a currency for two different dates, each of which occur after the current spot delivery date. Funds are exchanged on each date.
Forward points:
The points adjustment to the spot rate which must be made to fix a price for future delivery of a currency. The number of points is primarily dependent on the interest rate differential between the countries of the two currencies in question. The greater the interest rate differential, the greater the points adjustment and vice versa.
Forward Rate Agreement:
A Forward Rate agreement is an agreement between the bank and a customer which effectively fixes an interest rate for a deposit / loan which will arise at a future date. The FRA is based on a notional principal amount.
Functional Currency:
The currency of record for a discreet entity.
FX Order:
An FX order is a request by a company to buy or sell a specific amount of a currency at a specific rate. The company has empowered the bank to enter the inter-bank market and execute the trade at the specified 'strike' price. The order will be accompanied by instructions such as 'GTC - good till cancelled' or 'good till 5.00pm'. This second order will not be passed to other trading zones, but the GTC order will remain live until cancelled or amended by the customer.
[ Back to Top ]
I
Interbank market:
A generic term to describe the global trading activity that takes place between banks in foreign exchange and interest rate products.
Interest Rate Swap:
This product allows you to swap the interest rate basis of an asset or liability from a floating rate to a fixed rate or vice versa. This is an off-balance sheet instrument involving no exchange of principal amounts at any stage.
Interest Rate Cap:
An interest rate cap is an option that affords the company protection against an upward movement of rates while still allowing the company to exploit the benefit of falling interest rates. This is achieved by setting an upper limit (or cap) on the floating interest rate. If that limit is exceeded, the company will be fully compensated by the bank. The company pays a cash premium for the cap up front. The closer the cap level to the current interest rate, the more expensive the option.
Interest Rate Collar:
The collar is used when a company does not want to pay the full premium for a cap. The company can negate some of the cost by selling the bank an interest rate floor, which can totally or partially offset the cost of the cap. The company benefits from falling interest rates until the floor level is reached. The company is still protected from an adverse rise in rates above the cap level. Therefore a range or 'collar' is created and the company will never pay a lesser interest rate than the floor rate nor a greater interest rate than the cap rate.
[ Back to Top ]
L
Liquid market:
A liquid market, as opposed to a thin market, is one in which volume is large, trading is active and highly competitive, and spreads between bid and offer prices are narrow.
[ Back to Top ]
O
Offer:
Price that a bank is willing to sell a particular currency, quoted in terms of units of counter currency per unit of base currency.
Option Premium:
The price paid to purchase an option. On currency options the premium is due 2 days after the deal date.
[ Back to Top ]
P
Put Option:
An option that gives the holder the right, but not the obligation, to sell a currency at a specified price during a fixed time period or on a specified date in the future.
[ Back to Top ]
S
Settlement date:
The date on which both parties to a foreign exchange trade remits funds to the other
in settlement of the transaction. In a spot settlement, the exchange of funds takes place two business days after the spot trade has been struck.
Settlement Instructions:
On deal maturity, instructions must be added to the deal in order to direct currency payments to the correct counterparts. These are known as settlement instructions. Frequently used instructions or repetitive payments are known as 'Standard Settlement Instructions'.
Spot market:
Market for immediate as opposed to forward delivery. In the spot market for foreign exchange, settlement is two businesses days ahead
Spot rate:
The price at which a currency can be purchased or sold for delivery in two business days.
Stop Loss Order:
A 'stop loss' is an FX order placed in advance by a customer to protect their downside in the event of an adverse move in foreign exchange rates.
[ Back to Top ]
T
Take Profit Order:
A 'take profit' is an FX order placed in advance by a customer to avail of an advantageous rate if the market moves in their favor.
Thin market:
A foreign exchange market in which volume is light, trading activity is sporadic and the spread between the bid and offer prices is wide or wider than usual.
Transaction exposure:
Variability in the domestic currency value of a known future receipt of foreign currency.
[ Back to Top ]
V
Value date:
In the foreign exchange market, the value date refers to the date on which the foreign exchange deal is due to mature. (See also Settlement Date)
Z
Zero-Cost FX Option:
A customer uses this product to offset, either partially or in full, the premium cost for a bought FX option. The customer sells the bank an option, which if the bank exercises it, has the effect of covering out the customer's underlying exposure. The customer offsets the cost of the bought option against the income from the sold option. The mechanics are similar to that of an Interest Rate Collar.
[ Back to Top ]
