NISM Series I (Currency Derivatives) key terms

A contract whose value depends on the exchange rate between two currencies. It is settled in cash or by delivery and is used mainly to hedge or take exposure to currency movements.

Standardised contracts to buy or sell a fixed amount of one currency against another at a future date, traded on a recognised exchange with clearing-house guarantee and daily mark-to-market settlement.

A decentralised market where parties negotiate currency forwards and swaps directly, customising amount, date and price. Contracts carry counterparty credit risk because no exchange clearing house stands between the parties.

A bilateral agreement to exchange a specified amount of currency at a fixed rate on a future date. Amounts and dates are negotiable, and the contract is normally settled by actual delivery.

The exchange rate agreed today for a transaction that will settle on a future value date. It reflects the spot rate adjusted for the interest-rate differential between the two currencies over the period.

The price at which one currency can be exchanged for another for settlement within the standard near-term period, usually two business days. It is the base from which forward rates are calculated.

An agreement in which two parties exchange principal amounts in different currencies and later reverse the exchange, with periodic interest payments. It manages long-term funding and currency exposure.

A contract giving the buyer the right, but not the obligation, to buy or sell a currency at a stated rate before or on expiry. The buyer pays a premium and has limited downside.

The exchange-defined terms of a futures contract, including the underlying currency pair, contract size, quotation method, tick size, trading hours, expiry date and settlement procedure.

The fixed quantity of the underlying currency covered by one futures contract, set by the exchange. It allows traders to compute the notional exposure and the value of each price tick.

The smallest permitted price movement in a futures contract, specified by the exchange. Multiplying the tick size by the contract size gives the rupee value of one tick.

The first currency in a currency pair quotation, whose fixed unit is priced in terms of the second currency. For example, in USD/INR the US dollar is the base currency.

The second currency in a currency pair, showing how much of it is needed to buy one unit of the base currency. In USD/INR the rupee is the quote currency.

A quotation expressing the price of one unit of a foreign currency in terms of the home currency. In India, USD/INR is a direct quote for the rupee.

A quotation expressing the price of one unit of the home currency in terms of a foreign currency. It is the reciprocal of the direct quote and moves opposite to it.

The difference between the price at which a dealer buys a currency (bid) and the price at which it sells (ask). It compensates the dealer for risk and is a transaction cost to the trader.

A rise in the value of a currency relative to another under a floating-rate system. In a direct quote, appreciation of the foreign currency raises the quoted exchange rate.

A fall in the value of a currency relative to another under a floating-rate system. In a direct quote, depreciation of the foreign currency lowers the quoted exchange rate.

A relationship stating that the forward premium or discount between two currencies equals the difference in their interest rates. It links spot rates, forward rates and money-market rates.

The amount by which the forward rate exceeds the spot rate for a currency pair. It usually reflects a lower interest rate in the base currency relative to the quote currency.

Simultaneous buying and selling of the same or equivalent instruments in different markets to profit from price differences. In currency markets it enforces interest rate parity and consistent cross rates.

An exchange rate between two currencies derived from their individual rates against a third, commonly quoted currency. It is used when no direct market in the pair exists.

Taking an offsetting position in a derivative to reduce the risk of loss from adverse currency movements. The hedger gives up potential gains in exchange for greater certainty of cash flows.

Taking a position in a currency derivative to profit from anticipated price movements rather than to offset an existing exposure. It increases risk and adds liquidity to the market.

The possibility that exchange-rate movements will reduce the value of assets, liabilities or cash flows denominated in a foreign currency. It is managed mainly through forwards, futures and options.

Risk arising when a transaction or balance is denominated in a currency different from the entity's home or functional currency. It affects exporters, importers and foreign investors.

The minimum deposit a trader must place with the broker before opening a futures position. It acts as a performance guarantee and is set by the exchange or clearing house.

Daily revaluation of open futures positions at the settlement price, with profits credited and losses debited to the trader's account. It prevents the build-up of unpaid losses.

The minimum account balance a trader must keep while a futures position remains open. If the balance falls below this level, a margin call requires the trader to restore funds.

A demand by the broker or clearing member for additional funds after a trader's balance falls below the required maintenance margin. Failure to meet it can lead to forced liquidation.

The ability to control a large notional position with a relatively small margin deposit. It magnifies both gains and losses, so small rate changes can produce large percentage returns.

The total number of futures contracts that remain outstanding and have not been closed, exercised or expired. It is used together with volume to gauge participation and market activity.

The number of contracts traded during a specified period, such as a trading session. It measures activity, whereas open interest measures positions still outstanding.

The ease with which a position can be bought or sold without materially moving the price. Deep liquidity is associated with narrow bid-ask spreads and easy entry and exit.

The official price fixed by the exchange at the close of trading for marking open positions and computing daily obligations. It is distinct from the last traded price.

The price at which an expiring futures contract is settled, determined according to the exchange's rules, often based on a reference spot rate. It closes out remaining positions.

Closing a derivative contract through a cash payment equal to the difference between the contract price and the final settlement price, rather than by delivering the underlying currency.

The date on which the exchanged currencies must actually be delivered and funds become available to the counterparties. It is fixed when the transaction is agreed.

The price a buyer pays to the seller for a currency option, representing the value of the right granted. It is paid upfront and is the maximum loss for the buyer.

The exchange rate at which the holder of a currency option may buy or sell the underlying currency. It determines whether the option is in, at or out of the money.

The level of future exchange-rate variability that the market expects, as reflected in current option prices. Higher implied volatility generally raises option premiums.