FX Specialist 1 key terms

The global decentralized marketplace where currencies are bought and sold. It operates over the counter through banks and brokers, trades continuously across time zones, and sets exchange rates through supply and demand.

The wholesale segment of the FX market where banks and financial institutions trade currencies directly with one another. Pricing here forms the base from which client rates are derived.

The first currency in a currency pair. Its value is expressed relative to the quote currency, and a price of 1.25 means one unit of base currency costs 1.25 units of the quote currency.

The second currency in a currency pair. It shows how much of that currency is required to purchase one unit of the base currency.

Two currencies quoted against each other, such as EUR/USD. The pair defines which currency is the base and which is the quote, fixing the direction in which the price is read.

A quotation where the exchange rate states the amount of domestic currency needed to buy one unit of foreign currency. For a US-based firm, USD per EUR is a direct quote.

A quotation expressing the exchange rate as the amount of foreign currency that one unit of domestic currency can buy. It is the reciprocal of the direct quotation.

An exchange rate between two currencies derived from their respective rates against a common third currency, usually the US dollar. It allows pricing of pairs that are not directly traded.

The price at which currencies are exchanged for immediate or near-immediate delivery, typically settling within two business days. It reflects current market supply and demand.

A contract to exchange two currencies at an agreed rate for settlement on or near the trade date. It is the most basic and liquid FX transaction type.

The date on which the exchanged currencies actually settle and are credited to the counterparties' accounts. It is agreed at trade execution and determines funding needs.

A binding agreement to exchange currencies at a fixed rate on a future date. It locks in a price but is not exchange-traded, so counterparty credit risk must be managed.

The exchange rate agreed today for delivery on a specified future date. It is derived from the spot rate adjusted for the interest rate differential between the two currencies.

The difference between the forward rate and the spot rate, quoted in pips. Positive points indicate the forward rate is above spot; negative points indicate it is below.

A forward contract on a restricted currency where no physical delivery occurs. Instead, a cash settlement is made based on the difference between the contracted rate and an official fixing.

An official reference rate set at a specific time by a designated authority or market process. It is used to settle non-deliverable contracts and to value positions.

An agreement to exchange principal amounts in two currencies at inception and re-exchange them at maturity, with periodic interest payments in between. It manages long-term funding and currency exposure.

A swap exchanging principal and interest payments in two different currencies over an agreed term. It differs from a currency swap mainly in conventions and market usage.

A contract granting the buyer the right, but not the obligation, to exchange currencies at a specified strike rate before or on an expiry date. The buyer pays a premium for that right.

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

The price paid by the option buyer to the seller for granting the right to exercise the contract. It reflects volatility, time to expiry, and the difference between strike and market rate.

The difference between the price at which a dealer will buy a currency and the price at which it will sell. It is the dealer's compensation for making a market.

The smallest conventional price increment in an FX quotation, usually the fourth decimal place for most pairs. It provides a standard unit for expressing rate changes and spreads.

A relationship stating that the forward rate reflects the spot rate adjusted for the interest rate differential between two currencies. It prevents risk-free arbitrage between money markets and FX.

The risk that exchange rate movements change the value of committed cash flows denominated in foreign currencies. It arises from existing contracts and is often hedged with forwards.

The risk that currency fluctuations affect a firm's long-term competitiveness, market value, and future cash flows. It is broader than transaction exposure and harder to hedge precisely.

The risk that currency movements alter reported financial statements when foreign subsidiaries' results are consolidated. It affects accounting values rather than actual cash flows.

Taking an offsetting position to reduce exposure to adverse currency movements. Common tools include forwards, options, and swaps, each with different cost and flexibility trade-offs.

Offsetting currency exposure created by matching inflows and outflows in the same currency, rather than using a financial instrument. It reduces the need for derivative-based hedging.

The risk that one party delivers the currency it owes but does not receive the counterparty's currency, often due to a time-zone or counterparty failure. It is also called Herstatt risk.

Continuous Linked Settlement is a multi-currency settlement system that pays and receives both legs of an FX trade simultaneously, materially reducing settlement risk across major currencies.

The formal written record of a trade's economic terms, exchanged and matched between counterparties after execution. It evidences the agreement and supports dispute resolution.

The date on which an FX transaction is executed and its terms are agreed. It may differ from the value date when settlement is scheduled.

The due diligence process by which a financial institution verifies a client's identity, business nature, and risk profile before providing services. It is a core anti-money-laundering control.

Laws, regulations, and procedures designed to prevent the movement of illicit funds through the financial system. FX providers must monitor, report, and retain records accordingly.

The natural person who ultimately owns or controls an account or entity, even if a nominee or corporate structure appears on record. Identification is required under customer due diligence rules.

The obligation to take reasonable steps to obtain the best possible result for client orders, considering price, cost, speed, and likelihood of settlement. It is a conduct standard, not a guarantee.