SIAA Foreign Exchange key terms

The wholesale network where banks and dealers trade currencies directly with one another, usually by electronic means, at prices that form the reference for customer pricing.

A dealer that continuously publishes two-way prices and stands ready to buy or sell a currency in reasonable size, earning the spread in return for providing liquidity.

The gap between the price at which a dealer will buy a currency and the price at which it will sell it, expressed in pips or percentage and reflecting liquidity and risk.

In a currency pair, the base is the unit being priced and the quote is the currency in which that price is expressed, so EUR/USD shows dollars per one euro.

A quotation from the perspective of a domestic user that states how much domestic currency is needed to buy one unit of foreign currency.

A quotation that states how much foreign currency is needed to buy one unit of the domestic currency, the reciprocal of the direct quotation.

The smallest conventional price increment used in a currency quote, typically the fourth decimal place for most pairs and the second decimal place for yen pairs.

An agreement to exchange two currencies at a rate fixed now, with settlement normally occurring two business days after the trade date.

The date on which the two legs of a foreign exchange transaction are actually credited and debited, determined by market convention and holiday calendars.

A single contract to buy or sell a currency amount on a fixed future date at a rate agreed today, with no offsetting leg at inception.

The difference between the forward rate and the spot rate, driven by the interest rate differential between the two currencies and quoted in pips.

A forward contract on a restricted currency that is settled by paying the difference between the agreed rate and an official fixing, rather than by delivering currency.

A pair of simultaneous transactions that exchange two currencies on one date and reverse the exchange on a later date, used to manage short-term funding and liquidity.

A longer-term agreement in which counterparties exchange principal and periodic interest payments in two currencies, commonly used to hedge cross-currency financing.

The spread added to one leg of a cross-currency swap to reflect supply and demand imbalances in funding for the two currencies, quoted in basis points.

A contract giving the buyer the right, but not the obligation, to exchange one currency for another at a specified rate on or before an expiry date.

The sensitivity of an option's value to a small change in the underlying exchange rate, also used as the hedge ratio for the equivalent spot position.

The price paid by the option buyer to the seller for granting the right to exchange currencies, quoted either in percentage of notional or in pips.

A packaged instrument combining a deposit or note with derivatives, such as currency options, so that the payoff is tailored to a client's view or hedging need.

The relationship stating that the forward premium or discount between two currencies equals the difference in their interest rates, preventing riskless arbitrage.

A strategy that borrows in one currency, invests in another, and hedges the currency exposure with a forward contract to lock in a riskless profit when parity is violated.

An exchange rate between two currencies derived from their individual rates against a common third currency, such as a shared base currency.

Trading three currency pairs in a loop to exploit inconsistencies among their quoted rates, generating profit when the implied cross rate differs from the quoted one.

The risk that a firm's known foreign currency cash flows from existing contracts change in domestic value because of exchange rate movements before settlement.

The accounting effect on reported financial statements when foreign currency assets, liabilities, and earnings are converted into the parent company's reporting currency.

The longer-term effect of exchange rate changes on a firm's competitive position, future cash flows, and market value, beyond already contracted transactions.

Offsetting currency exposures created by a firm's own operations, such as matching foreign currency revenues with costs in the same currency.

A documented framework setting which exposures a firm hedges, permitted instruments, target hedge ratios, and the authority and reporting controls for those decisions.

The due diligence process of identifying a client, verifying identity and beneficial ownership, and understanding the purpose of the relationship before transacting.

Laws, rules, and internal controls designed to detect and prevent the use of financial services, including foreign exchange transactions, to disguise criminal proceeds.

A confidential filing made to the appropriate authority when a firm detects transactions or behavior that may indicate money laundering, fraud, or other financial crime.

The obligation to take reasonable steps to obtain the best available outcome for client orders, considering price, cost, speed, and likelihood of execution and settlement.

The risk that one party delivers the currency it sold but does not receive the currency it bought, because the counterparty fails before the offsetting payment arrives.

Cross-currency settlement risk arising from time zone differences, where one leg of a transaction settles before the other and the counterparty defaults in between.

A multilateral settlement service that matches and settles both legs of eligible foreign exchange transactions simultaneously, reducing principal and settlement risk between members.

Discharging a contract by paying the net difference between the agreed rate and a reference rate, rather than by delivering the underlying currency amounts.

The assessment that a recommended product or strategy matches a client's objectives, financial capacity, experience, and tolerance for loss, including derivative risks.

The written record of a client's profile, the rationale for a recommendation, disclosed risks, and the client's acknowledgement and consent to proceed.