FX Specialist 1 flashcards

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

Spot value date

The date on which a spot FX trade settles, normally two business days after trade date (T+2); USD/CAD settles T+1 and same-day trades are called cash or value-today.

Base currency

The currency quoted first in a currency pair, nominally one unit; in EUR/USD the euro is the base and the US dollar is the quote or counter currency.

Forward points

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

Pip

The smallest conventional price increment in an FX quote: 0.0001 for most pairs and 0.01 for JPY pairs; used to express spreads and forward points.

Cross rate

An exchange rate between two currencies derived from their respective rates against a common currency, usually the US dollar, such as EUR/JPY from EUR/USD and USD/JPY.

Bid-ask spread

The difference between the price at which a market maker buys (bid) and sells (ask); it compensates the dealer for liquidity provision, inventory risk, and processing costs.

FX swap

A transaction combining a spot leg and an opposite forward leg on the same currency pair, used to fund positions or roll hedges; the near leg is at spot and the far leg at forward.

Cross-currency basis swap

A swap exchanging floating-rate interest payments in two currencies plus principal at inception and maturity; its price reflects the cross-currency basis, a supply-demand premium for funding.

Covered interest rate parity

The principle that the forward premium or discount equals the interest rate differential between two currencies; deviations create arbitrage opportunities until the basis closes.

Non-deliverable forward

A forward contract on a restricted currency that is cash-settled against an official fixing rate rather than by physical delivery of the currencies; used for CNY, INR, and BRL.

Currency option

A contract granting the buyer the right, but not the obligation, to buy (call) or sell (put) a currency at a specified strike rate on or before expiry.

Garman-Kohlhagen model

A European FX option pricing model that extends Black-Scholes by treating the foreign interest rate as a continuous dividend yield; inputs include spot, strike, two rates, volatility, and time.

Delta

The sensitivity of an option's price to a one-unit change in the underlying spot rate; also approximates the number of units of the underlying needed to hedge the option.

Transaction exposure

The risk that FX movements change the domestic-currency value of existing foreign-currency receivables, payables, or committed cash flows before they are settled.

Translation exposure

The accounting risk that FX movements change the reported value of foreign subsidiaries' assets, liabilities, and earnings when consolidated into the parent's financial statements.

Economic exposure

The long-term risk that FX movements affect a firm's competitiveness, future cash flows, and market value, even without existing foreign-currency contracts.

Money-market hedge

A hedge that borrows in one currency, converts at spot, and invests in the other for the same period; it replicates a forward when covered interest rate parity holds.

Natural hedge

Offsetting foreign-currency revenues with costs in the same currency, reducing net exposure without using derivative instruments.

Value-at-Risk

A statistical estimate of the maximum expected loss on a portfolio over a given horizon at a specified confidence level, based on historical volatility and correlations.

Herstatt risk

Settlement risk that one party to an FX trade pays out its currency but the counterparty fails before paying the other leg, leaving the first party exposed to full principal loss.

CLS settlement

Continuous Linked Settlement, a multilateral payment-versus-payment system for eligible currencies that settles both legs simultaneously, reducing Herstatt risk and settlement exposure.

Standing settlement instructions

Pre-agreed account and correspondent details for receiving each currency; changes must be verified by call-back to prevent payment fraud and misdirection.

ISDA Master Agreement

The standard bilateral contract governing OTC derivatives between counterparties, providing close-out netting, events of default, and a framework for confirmations and collateral.

Credit Support Annex

An annex to the ISDA Master Agreement setting out collateral terms: eligible collateral, thresholds, valuation frequency, and margin call mechanics.

Know your customer

The due-diligence process of identifying clients and beneficial owners, verifying identity, and understanding the purpose of the relationship before executing transactions.

Suspicious activity report

A confidential filing to the financial intelligence unit when a firm suspects money laundering, terrorist financing, or other criminal activity; tipping off the client is prohibited.

Sanctions screening

Checking counterparties, beneficial owners, and payment routes against sanctions lists such as OFAC, EU, and UN; prohibited transactions must be blocked or rejected.

Best execution

The obligation to take reasonable steps to obtain the best possible result for clients, considering price, cost, speed, likelihood of execution, and settlement.

Last look

A practice allowing a liquidity provider to reject or re-price a trade after receiving it; must be disclosed and applied consistently to avoid unfair client treatment.

Front-running

Trading on advance knowledge of a client's pending order to profit from the expected price impact; prohibited market conduct.

FX market turnover

The total value of FX transactions over a period, dominated by FX swaps and spot; surveyed triennially by the Bank for International Settlements.

Reporting dealer

A bank or securities firm that actively quotes two-way FX prices to clients and other dealers and reports turnover in the BIS Triennial Survey.