International currency exchange

BACS

Money transfer service from an automated clearing house providing predominantly retail payment services that include direct debit, standing order and direct credit (e.g. salary payments).

Bankers Draft

This is a cheque drawn on the bank (or building society) itself against a cash deposit. A 'bankers draft' is thought of as being a secure way of receiving money from someone you don't know where you fear his/her cheques bounce (may not be honoured) and where it's not convenient or desirable to receive cash. 'Bankers drafts' are commonly used for large purchases such as homes and cars.

Bid

The price that a buyer is prepared to purchase at; the price offered for a currency.

Bid/Ask Spread

The difference between the bid and offer (ask) prices; used to measure market liquidity. Narrower spreads usually signify high liquidity.

Broker

An agent who handles investors' orders to buy and sell currency. For this service, a commission is charged which, depending upon the broker and the amount of the transaction, may or may not be negotiated.

Bull

Someone who believes the prices/market will rise.

Call Rate

The overnight interbank interest rate.

Cash Market

The market for the purchase and sale of physical currencies.

CHAPS

A real time funds clearing system used by over 400 financial institutions in Europe alone to process payments.

Client Trust Account

A segregated bank account which ensures that client funds are in no way commingled company funds.

Convertible Currency

Currency which can be freely exchanged for other currencies or gold without special authorisation from the appropriate central bank.

Counter party

The customer or bank with whom a foreign deal is made. The term is also used in interest and currency swaps markets to refer to a participant in a swap exchange.

Cross Rate

An exchange rate between two currencies, usually constructed from the individual exchange rates of the two currencies, measured against the United States dollar.

Currency Option

Option contract which gives the right to buy or sell a currency with another currency at a specified exchange rate during a specified period.

Currency Risk

The risk of incurring losses resulting from an adverse change in exchange rates.

Currency Swap

Contract which commits two counter-parties to exchange streams of interest payments in different currencies for an agreed period of time and to exchange principal amounts in different currencies at a pre-agreed exchange rate at maturity.

Day Trading

Refers to opening and closing the same position(s) within one day’s trading.

Dollar Rate

When a variable amount of foreign currency is quoted against one US Dollar, regardless of where the dealer is located or in what currency he/she is requesting a quote. The exception is the Sterling/US Dollar rate (cable) that is quoted as variable amount of US Dollars to one pound Sterling.

Exchange Rate

The rate at which one currency is exchanged for another e.g. if £100,000 = US$180,000 the exchange rate is 1.80 “Exchange Rate” is frequently abbreviated to simply “rate”.

Exchange Rate Risk

See Currency Risk.

Federal Reserve (Fed)

The Central Bank of the United States.

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.

Floating Exchange Rate

When the value of currency is determined by supply and demand.

Foreign Exchange (or Forex or FX)

The simultaneous buying of one currency and selling of another in an over-the-counter market. Most major FX is quoted against the US Dollar.

Foreign Exchange Swap

Transaction which involves the actual exchange of two currencies (principal amount only) on a specific date at a rate agreed at the time of the conclusion of the contract (short leg), at a date further in the future at a rate agreed at the time of the contract (the long leg).

Forward

A deal that will commence at an agreed date in the future. Forward trades in FX are usually expressed as a margin above (premium) or below (discount) the spot rate. To obtain the actual forward FX price, one adds the margin to the spot rate. The rate will reflect what the FX rate has to be at the forward date so that if funds were re-exchanged at that rate there would be no profit or loss (i.e. a neutral trade). The rate is calculated from the relevant deposit rates in the 2 underlying currencies and the spot FX rate. Unlike in the futures market, forward trading can be customized according to the needs of the two parties and involves more flexibility. Also, there is no centralized 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 rate.

Forward Rate

The rate at which a foreign exchange contract is struck today for settlement at a specified date between 2 days and 12 months into the future.

GTC

An abbreviation for Good Till Cancelled that is an order left with a dealer to buy or sell at a fixed rate. The order remains in place until it is cancelled by the customer.

Hedging

The practice of undertaking one investment activity in order to protect against loss in another, e.g. selling short to nullify a previous purchase, or buying long to offset a previous short sale. While hedges reduce potential losses, they also tend to reduce potential profits.

High/Low

Usually the highest traded price and the lowest traded price for the underlying instrument for the current trading day.

Initial Margin

The required initial deposit of collateral to enter into a position as a guarantee on future performance.

Interbank Rates

The Foreign Exchange rates at which large international banks quote other large international banks.

Limit Order

An order given which has restrictions upon its execution, where the customer may specify a price and the order can be executed only if the market reaches that price.

Long Position

A market position where the Client has bought a currency he previously did not hold own. Normally expressed in base currency terms, e.g., long Dollars (short Euros).

Margin

Margin is a deposit provided by the customer as collateral to cover losses (if any) that may result from the customer’s foreign exchange trades.

Margin Call

A demand for additional funds, a requirement which is made by the trading bank to bring a margin up to a required minimum level to cover any adverse movement in price in the market.

Market Maker

A dealer who supplies prices and is prepared to buy or sell at those stated bid and ask prices. A market maker runs a trading book.

Market Rate

The rate at which any two currencies are being quoted against each other in the London Interbank Foreign Exchange Market.

Maturity

Date of Settlement of Contract.

Off Market

An exchange rate which is not at the current market rate. Examples would be those quoted by high street banks and smaller companies in the foreign exchange market which either don’t have access to, or choose not to quote, market rates.

Offer

The rate at which a dealer is willing to sell the base currency.

Open Position

Any deal which has not been settled by physical payment or reversed by an equal and opposite deal for the same value date.

Pip (or Points)

The term used in currency market to represent the smallest incremental move an exchange rate can make. Depending on context, normally one basis point (0.0001 in the case of EUR/USD, GBD/USD, USD/CHF and .01 in the case of USD/JPY).

Premium

More expensive than the spot price e.g. Forward premium.

Settlement

Actual physical exchange of one currency for another.

Short

To go `short` is to have sold an instrument without actually owning it, and to hold a short position with expectations that the price will decline so it can be bought back in the future at a profit.

Spot

Spot means the settlement date of a deal which is two clear business days forward.

Spread

The difference between the bid and offer (ask) prices; used to measure market liquidity. Narrower spreads usually signify high liquidity.

Stop Loss Order

An order to buy or sell currency, at a particular price if it is reached either above or below the price that given was given at that time. Used to limit or prevent i.e. “stop” a loss before rates can move further against the client.

SWIFT

(financial) Industry owned cooperative supplying secure, standardised messaging services to over 7,500 financial institutions in over
200 countries. Used to confirm receipt or non receipt of funds.

Value Date

Settlement date of a spot or forward deal.

Variation Margin

Funds required to be deposited by a Customer when a price movement has caused funds to fall below the minimum margin requirement. Conversely, funds may be withdrawn by a Customer when a price movement has caused funds to rise above the minimum margin requirement.

Volatility

A statistical measure of a market or a security's price movements over time and is calculated by using standard deviation. Associated with high volatility is a high degree of risk.