SIAA Foreign Exchange flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Spot FX settlement date

The date on which a spot FX transaction is settled, typically T+2 business days after trade date for most pairs, except USD/CAD which settles T+1.

Bid-ask spread

The difference between the ask (offer) price and the bid price quoted by a dealer; it represents the dealer's compensation for making a market and is usually measured in pips.

Direct quotation

An exchange rate quotation expressed as the number of units of domestic currency per one unit of foreign currency; used in many countries for consumer-facing rates.

Cross rate

An exchange rate between two currencies derived from their individual exchange rates against a common third currency, typically the US dollar, by multiplication or division.

Triangular arbitrage

A trading strategy that exploits discrepancies among three currency pairs by simultaneously buying and selling to lock in a riskless profit when the implied cross rate differs from the quoted rate.

Outright forward

A binding agreement to exchange a specified amount of one currency for another at a predetermined rate on a future date; traded over-the-counter and customizable in size and maturity.

Forward points

The difference between the forward exchange rate and the spot exchange rate, expressed in pips; determined by the interest rate differential between the two currencies.

Non-deliverable forward

A forward contract that is cash-settled in a major currency (usually USD) rather than delivering the underlying restricted currency; used for currencies with capital controls.

FX swap

A transaction combining a spot purchase (or sale) of a currency with a simultaneous forward sale (or purchase) of the same currency, used to manage short-term funding and rollover needs.

Currency swap

A long-term agreement to exchange principal and interest payments in two different currencies; principal is exchanged at inception and re-exchanged at maturity.

Covered interest parity

An arbitrage condition stating that the forward premium or discount equals the interest rate differential between two currencies, so hedged returns are equalized across currencies.

Uncovered interest parity

A theory positing that the expected change in the spot exchange rate equals the interest rate differential between two currencies, assuming risk-neutral investors and no arbitrage.

Forward premium

A situation where the forward exchange rate for a currency is higher than its spot rate, typically because its interest rate is lower than the other currency's rate.

Currency call option

A financial contract giving the buyer the right, but not the obligation, to buy a specified amount of a currency at a predetermined strike price on or before expiration.

Option delta

A measure of the sensitivity of an option's price to a one-unit change in the underlying spot exchange rate; call deltas are positive and put deltas are negative.

FX collar

An options strategy combining a purchased put and a written call (or vice versa) to limit exchange rate risk within a range, often reducing or eliminating the upfront premium cost.

Transaction exposure

The risk that exchange rate changes affect the value of known foreign currency cash flows, such as receivables, payables, or debt denominated in a foreign currency.

Translation exposure

The risk that exchange rate changes affect the consolidated financial statements when foreign subsidiary financials are translated into the parent company's reporting currency.

Economic exposure

The risk that exchange rate changes affect a firm's future cash flows and competitive position, even without known foreign currency transactions.

Hedge ratio

The proportion of an exposure that is hedged, calculated as the size of the hedging instrument divided by the size of the underlying exposure; a perfect hedge has a ratio of 1.0.

Value at Risk

A statistical measure estimating the maximum potential loss of a portfolio over a specified time horizon and confidence level, commonly used to quantify FX risk.

CLS settlement

Continuous Linked Settlement is a multi-currency payment-versus-payment system that eliminates FX settlement risk by ensuring both currency legs are settled simultaneously.

Herstatt risk

The risk that one party in an FX transaction delivers the currency it sold but fails to receive the currency it bought because the counterparty defaults, also called settlement risk.

Nostro account

A bank's account held at a foreign correspondent bank in the foreign bank's currency, used to facilitate FX settlements and international payments.

SWIFT MT300

A standardized SWIFT message type used for confirming foreign exchange and money market transactions between financial institutions.

FX Global Code

A set of global principles of good practice for the foreign exchange market, covering ethics, governance, execution, information sharing, and risk management, adherence to which is voluntary.

Best execution

A regulatory obligation requiring firms to take reasonable steps to obtain the best possible result for clients when executing orders, considering price, speed, cost, and likelihood of settlement.

KYC and AML

Know Your Customer and Anti-Money Laundering requirements obliging financial institutions to verify client identities, monitor transactions, and report suspicious activities to authorities.

Suitability assessment

The process of evaluating a client's investment objectives, risk tolerance, financial situation, and experience to ensure that a recommended FX product is appropriate for them.

Professional client

A client classification under regulations such as MiFID II indicating a client with sufficient experience and knowledge to make informed investment decisions, receiving fewer protections than retail clients.

Suitability report

A documented record provided to a client that explains why a recommended financial product or service is suitable for their personal circumstances and investment objectives.

Interdealer market

The segment of the FX market where banks and other financial institutions trade with each other, often through electronic brokering systems, providing liquidity and price discovery.