FX Glossary

Ask price

The purchase price for a currency pair. It is systematically slightly higher than the market price.

Base currency

On the forex market, we speak of a base currency when a unit of national currency is expressed in a variable quantity of a foreign currency. For example (with the euro as the national currency), 1 EUR = 0.86 GBP.

Bear market

Market on which prices are trending downwards.

Bid price

The sales price for a currency pair. It is systematically lower than the market price.

BOC

For Bank of Canada. Its main monetary policy objective is to keep the consumer price index within a range of 1% to 3%. During the Covid crisis, it broke new ground by launching an asset buyback programme (of Canadian sovereign debt). Unlike the ECB, which can only buy debt on the secondary market (corresponding to the second-hand market), the BOC can also buy back debt on the primary market (directly from the Canadian Treasury when it issues sovereign bonds).

BOE

For Bank of England. It has a hierarchical mandate. It must first ensure price stability (annual inflation target of 2%) and then support economic policy by promoting growth and employment. Unlike the SNB, it does not intervene directly on the forex market to make the pound fluctuate according to the country’s economic objectives.

BOJ

For Bank of Japan. The first central bank to have implemented unconventional monetary policy measures in the early 2000s (asset buyback programmes) in order to combat deflation. Its success was mixed. The BOJ has never been able to meet or even come close to its 2% inflation target. It is committed to a policy of massive asset purchases, which is unlikely to stop in the medium term.

Breakout

There is no suitable translation for this English term. When a breakout occurs on the forex market, it means that a pair has crossed a major technical threshold (pivot point, resistance or support, etc.). It is generally considered that this is the right time to enter the market following the trend.

Bull

A term often used to refer to investors who believe that an asset, sector or currency will rise in price. We will also talk about the bull market.

Bull market

Market on which prices are trending upwards.

Bullwhip effect

A term referred

Cross

Refers to a currency pair (EUR/USD for example).

Currency forward

This is an agreement between two parties to buy or sell an asset at a predefined price and on a specific future date. In many ways, the currency forward resembles futures contracts. However, there are two differences: currency forwards are traded on an over-the-counter market (between banks and financial institutions), and are not standardised in terms of amounts and due dates. The difference between the price pre-negotiated and the market price is settled when the contract is unwound. This tool is a very effective way to manage currency risk. Its main drawback is that it does not allow the company using it to benefit from a possible favourable rise in the exchange rate.

Currency option

By using this currency risk management tool, the company that buys a currency call option acquires the possibility of buying a certain amount of currency at a price set from the outset (we talk about a strike price) until a certain expiry date (referred to as the exercise date). Please note this is a right and not an obligation. We usually distinguish between three types of options: 1) spot currency options with delivery 48 working hours after the exercise date; 2) invoice options, which are a promise of delivery at a later date and at a price set from the outset. These contracts are standardised; 3) options on forward prices with the right to buy or sell a forward currency at a certain due date, but with a delivery which will not take place until a later date. The main advantage of currency options is that they allow the company to guarantee an exchange rate without losing the ability to complete the transaction in cash, in the event of a more favourable exchange rate.

Currency risks

There are commonly three types of currency risk: 1) transaction risk; 2) consolidation risk and 3) economic risk.

The transaction risk is linked to unexpected losses that may occur during the conversion of a currency, typically during commercial transactions (via import/export), financial transactions (e.g. loans) or dividend streams denominated in foreign currency. To assess this risk, the company’s overall foreign exchange position must be calculated, which amounts to calculating the difference between its receivables and its payables, by currency.
The consolidation risk exists only when a company has subsidiaries abroad. In this case, when consolidating the financial statements, the parent company uses the exchange rate to denominate the accounts of its subsidiaries abroad in its national currency. This operation can lead to variations in profits if the parent company has not adopted an appropriate exchange rate hedge.
The economic risk refers to uncommitted expenditure and revenues that may be affected by an unexpected change in the exchange rate.

Currency swap

Swaps have been around for a very long time, originally in an informal and non-standardised manner. The parties who enter into a currency swap agreement (typically an exporter and an importer) agree to exchange a predetermined amount of foreign currency, to make regular payments corresponding to interest and to swap back the exchanged amount at a date set in advance. These agreements involve an intermediary for the transaction, usually a bank. There are several types of swaps: export swaps which, as its name suggests, are aimed at exporting companies, but also parallel loans, which allow two companies, located in different countries, to grant each other a loan in the currencies they need.

Depreciation

Refers to the fall in the price of a currency due to market forces (particularly the supply and demand dynamic).

Derivative

This can be either a futures contract or an option. Please read about these terms in our glossary.

Devaluation

Refers to the deliberate decrease in the price of a currency as a result of direct intervention by the authorities, usually the central bank. An exporting country could, for example, intervene to devalue its currency in order to gain competitiveness.

Dynamic futures contract

The main difference between dynamic futures and other types of futures contracts (fixed and flexible) is that they allow the holder to benefit from a better exchange rate at the contract expiry date, depending on market conditions. This type of futures contract is less well known. However, it represents an ideal solution for companies that would like both to benefit from the security offered by a guaranteed exchange rate and, potentially, to have the possibility of benefiting from a more favourable rate. In many ways, it is optimal currency risk management tool that combines security and opportunity for gain.

ECB

For European Central Bank. Its monetary policy depends on a recently modified inflation target of 2%, which gives it more flexibility to react to macroeconomic developments or external shocks (such as the pandemic). In addition, its monetary policy now incorporates climate change.

Economic calendar

This presents all the economic events (statistics, central bank meetings, speeches by central bankers, major political events, etc.) likely to have an impact on currency exchange rates.

Emerging/exotic currency

Exotic currencies have two main characteristics: 1) low liquidity and 2) higher volatility than major currencies. For example, the currencies of emerging countries are exotic currencies.

Factoring

Originally a financing solution that makes it possible to anticipate cash-flow problems. Concretely, the company using this mechanism assigns its trade receivables to a third party institution, known as the “factor”, which will support the company in its cash flow needs and in all phases of development. This includes, even if this was not the initial idea, the hedging of the exchange risk within the framework of export factoring. To protect themselves against variations in exchange rates, exporting companies can obtain an advance on the payment of invoices. However, this solution is used less and less because of its major drawbacks: the high cost of the mechanism, contracts that are complicated and difficult to understand, among others.

FED

for US Federal Reserve. The US central bank has a dual mandate. It has both a full employment target (which is not clearly defined) and an inflation target. In the wake of the pandemic, the FED adjusted its inflation target to give it more flexibility in managing its monetary policy. It has adopted a symmetrical inflation target of 2% in the medium term. Concretely, in the event of a temporary rise in inflation above 2%, it may continue to follow an accommodative monetary policy to support activity as long as inflation comes in at 2% in the medium term. Before adopting this new inflation target, the FED would have been forced to tighten its monetary policy.

Fixed futures contract

With good reason, futures contracts are popular with companies as they can protect themselves against currency risk by locking in a rate for a specific amount of foreign currency that can be used in the future, regardless of fluctuations in the forex market over the period. More than 80% of companies that have exchange rate issues use this tool. The fixed futures contract is the most well-known and common, because it is simple to understand, effective and easy to implement on a daily basis. By entering into a futures contract, the company locks in an exchange rate to be used at a later date. Thus, it neutralises any fluctuation in the currency that could be unfavourable to it. This process is particularly relevant if it has to pay an invoice in a foreign currency on a date that is already known. In general, the maturities in force in fixed futures contracts range from three days to 24 months. Once the contract reaches maturity, the amount purchased is directly credited to the corresponding currency account.

Flexible futures contract

This currency risk management option has important similarities with fixed futures contracts: guaranteed exchange rate, payment on maturity. However, it offers more flexibility since the locked-in exchange rate can be used at any time during the hedging period to purchase currencies. Flexible futures contracts are particularly suitable for companies that will have to make several payments over a given time period without knowing in advance the precise settlement date.

FOMC

For Federal Open Market Committee. This is the governing body of the FED responsible for setting US monetary policy and controlling all open market operations (for example, the purchases and sales of sovereign bonds). It consists of eleven members and is headed by a chairman. The chairman is appointed by the White House and confirmed by the US Senate. In recent decades, it has been noted that the FOMC has often adapted US monetary policy to fluctuations in the dollar, in order to support economic activity when necessary.

Forex insurance

Insurance policies that allow exporting companies to hedge themselves against foreign exchange risk, whether for one-off transactions or for more regular flows. Some insurance policies even include clauses allowing them to benefit from a positive trend in the currency. The main disadvantage is the cost to benefit from these insurance policies.

Forex market

The market on which currencies are exchanged. It has several characteristics: 1) it is an over-the-counter market (without intermediaries); 2) it is global; 3) it operates continuously due to time differences; and 4) it is the largest in terms of amounts traded (approximately USD 4 billion daily, or 12 times the total amount traded on equity markets around the world).

Fundamental analysis

Refers to the taking into account of macroeconomic statistics, political events and central bank decisions to anticipate changes in currency prices.

Hedging

This is hedging against unfavourable price changes on the forex market. A classic hedging technique consists of taking two opposing positions on the same currency pair for the same amount. Regardless of future fluctuations, this strategy reduces risk.

IMF

Emerging from the post-war period, the International Monetary Fund is a leading organisation of 190 member countries intended to promote financial stability and monetary cooperation at global level. The IMF also aims to provide financial assistance to the most troubled members, by releasing emergency credit lines. The main IMF borrowers at present are Argentina, Egypt, Ukraine and Pakistan.

Indexation clause

Contractual clauses exist to limit the currency risk, although they are often imperfect. The indexation clause is the best known. It aims to spread the currency risk and to explain the terms between the contracting parties. There are two categories: proportional indexation clause (where the currency risk is eliminated on one side, but passed on to the other) and proportional indexation clause with deductible (where the currency risk is passed on to the price, but only from a threshold jointly determined by the contracting parties).

Inflation

This is very topical at the moment for the financial markets in the wake of the end of the Covid crisis. Inflation is measured by two main indicators: the consumer price index and the producer price index. The forex market tends to follow the former more closely than the latter. These two statistics are relatively imperfect constructions for judging the general price trend. For example, the rise in the prices of financial assets is not taken into account in calculating inflation. In addition, in Europe, rents are included in the calculation of the consumer price index, but not loan repayments obtained to purchase a home. Some economists have also pointed out that after Covid, consumer behaviour has permanently changed (with the growing importance of digital), which is only imperfectly taken into account in the calculation of inflation.

Interbank rate

This is the interest rate in force on short-term loans that banks can provide to each other. The specific feature of the interbank rate is that it has an impact on all interest rates (including interest rates for regulated savings accounts, rates for consumer loans, property rates or even the rates at which companies can take out debt with banks).

Leads and lags

This is an internal currency risk management technique, like netting. In this specific context, the company will play with payment terms in order to benefit from a favourable exchange rate trend. For example, if it is an importing company and expects a strengthening of the invoicing currency, it will seek to accelerate payment of the supplier. However, it is clear that this technique has many drawbacks, and requires fine, almost daily, management of the currency risk - which is not possible for most companies and treasurers.

Leverage

This makes it possible to invest a sum greater than one’s financial capacity and position, and thus obtain a higher gain. For example, if you invest 100 euros with a leverage of 10, you can invest almost 1,000 euros. Be careful, however, you may also suffer very significant losses due to leverage. If the asset in which you are positioned falls by 10%, the loss will be 100 euros - that is to say the whole of the amount you actually invested at the beginning.

Majors (currencies)

We talk about major currencies in reference to the most traded currencies on the forex market. These are, in descending order, the US dollar, the euro, the Japanese yen and the pound sterling. The Chinese yuan only comes in eighth place.

Margin call

A demand made by a broker asking an operator positioned on the forex market to provision new capital in order to cover their open positions.

Market order

Market orders have no price limits and have priority in execution over other types of stock market order. Market orders normally guarantee the complete execution of the order. They are used to trade securities in very liquid markets. Market orders have the disadvantage of not controlling the strike price.

Multi-currency clause

Some contracts provide for this mechanism, which makes it possible to express the amount to be invoiced in several currencies, allowing for the possibility for one of the parties to choose upon maturity the settlement currency most suitable according to exchange rate trends. However, again, this implies that the company has the internal tools and skills to judge the best strategy to implement.

Netting

This is an internal currency risk management technique, like leads and lags (see below). Treasury teams offset the flow of receivables and payables between the parent company and its subsidiaries, and put in place the necessary currency hedges on a regular basis (weekly or monthly). This technique has many advantages (e.g. streamlining of settlement flows). But it requires in-house expertise, possibly with the creation of a clearing house, an option only available to large multinational firms.

Non-convertible currency

For a currency to be considered non-convertible, it must meet one or more of the following criteria: 1) its use is restricted (for example: it cannot be bought outside the territory where it is officially in use); 2) it cannot be freely exchanged for another currency; and 3) it cannot be exchanged at a given exchange rate. Non-convertible currencies include the Argentine peso and the Indian rupee.

Open position

A position on the forex market that has not been liquidated or closed.

Pips

A unit of measurement that is used on the forex market to assess the spread between two currencies. For example, if the euro trades against the US dollar at 1.1802 and resells at 1.1805, the spread is 3 pips.

Pivot points

This is one of the key concepts in technical analysis. A pivot point refers to a price level that, if reached, will have a major impact on the trend of the currency pair and result in the price either falling or rising. Typically, when using the concept of the pivot point, we also refer to support and resistance levels.

Quote

Typically, this is the price of a transaction carried out on the financial markets. In the specific case of the forex market, we talk about the quote currency in reference to the second currency mentioned in a currency pair. For example, in the case of EUR/USD, the quote currency is USD.

Quoted currency

On the forex market, we talk about a quoted currency when the value of a foreign currency is expressed in a certain number of units of the national currency. For example (with the euro as the national currency), 1 GBP = 1.17 EUR.

Range

Refers to the price zone within which a pair of currencies moves over a given period.

Resistance

In technical analysis, we talk about resistance to denote a ceiling price reached by a currency pair which corresponds to the end of the upward trend in the price. When a pair hits a resistance, the price then often falls.

Roll-over

Keeping an open position in a derivative product once the maturity date has been reached. The position is not closed and a new maturity date is set. The roll-over costs (commissions) may vary greatly depending on the financial instrument.

Shared risk clause

This clause provides for risk to be shared between the two parties to the contract (generally, it is distributed in halves) in the event of an unfavourable exchange rate trend.

SNB

For Swiss National Bank or the central bank of the Swiss Confederation. Its specific role is to adjust its monetary policy according to that of the ECB and to the trend in the Swiss franc/euro exchange rate (in order to take into account the close trade relations between Switzerland and the eurozone). The SNB is part of the club of central banks that intervene directly on the foreign exchange market to combat the strength of their currency. At present, it is estimated that a EUR/CHF exchange rate below 1.05 is the sensitivity area that the SNB does not want to see crossed.

Spot price

Refers to the price of one currency against another for a settlement that would occur on the same day.

Spread

At currency market level, the spread refers to the difference between the bid price and the ask price of a currency pair. The bid price is the price at which you can sell the base currency. The ask price is the price at which you can buy the base currency.

Support

In technical analysis, we talk about support to denote a price threshold or floor reached by a currency pair which corresponds to the end of the downward trend in the price. When a currency pair hits a support, the price often rebounds.

Tapering

Also called quantitative tightening, this is the process by which a central bank reduces the size of its balance sheet. This can cause two phenomena: 1) a sharp rise in interest rates or 2) a decrease in the liquidity available on the financial markets, perceived as a factor in the rise in the prices of certain assets (such as equities, for example). When the FED started its tapering at the end of the 2007-2008 financial crisis, this triggered a rise in the dollar across the board and above all a fall in emerging assets, particularly emerging currencies such as the Brazilian real.

Technical analysis

Refers to the taking into account of technical indicators (such as pivot points) and past price levels to anticipate changes in currency prices. In reality, forex traders (i.e. forex market participants) typically use both fundamental and technical analysis to anticipate currency market fluctuations.

Value date

In the forex market, this refers to the date on which the traded currencies are delivered or debited. It is important to bear in mind that the forex market operates on a D+2 value date.

Volatility

This is a measure of the extent to which one currency fluctuates against another over a given period. The more volatile a currency, the more advisable, within a good risk management approach, to provide appropriate hedging tools. Certain currencies may in particular experience a sudden increase in volatility owing to an unforeseen event (e.g. high volatility of the pound after the victory of the “Leave” campaign in the EU membership referendum in 2016).