What are all these FX terms?

Xe Corporate

March 8, 20223 min read

Businessman checking exchange rates

The foreign exchange or “forex” market (also abbreviated to “FX”) is the largest financial market in the world – larger even than the stock market, with a daily estimated volume of $6.6 trillion. The market determines the relative values of currencies and operates across the globe. You can exchange foreign currencies 24/7.

Understand the fundamentals of currency exchange – and the language used - so you can make better decisions for your business. We’ve put together some information on the most common terms you’re likely to come across.


Currency Codes

Market standard three-letter code that refers to a specific currency.

Examples: BRL = Brazilian Real; CHF = Swiss Franc.


Currency Pair

The two currencies involved in an FX quotation. The 1st currency is the Base currency; the 2nd is the Pricing currency.

Examples: EURUSD, GBPCAD, AUDJPY.


Base Currency

The 1st currency listed in the Currency Pair and its value is always 1-unit of that currency.

Example: in EURUSD, Euro is the Base currency.


Quote Currency

The 2nd currency listed in the Currency Pair.  It represents the amount of the 2nd currency required to buy 1-unit of the Base Currency.

Example: EURUSD is 1.1200 means 1 Euro costs $1.12.

Bid vs. Ask

FX traders buy the Base Currency on their “Bid” and sell the Base Currency on their Ask. As a customer, you Buy currency from the trader's “Ask” and you Sell currency to the trader's “Bid”.


Spot Rate/Trade

The purchase and sale of one currency for another at an agreed rate typically for T+2 settlement (trade date + 2 days settlement cycle). The Spot trade is the building block for many FX products.

Pip

Pip is an acronym for "percentage in point" or "price interest point." A pip is a one-digit change in the last decimal of a Spot Rate quote, the smallest price move that an exchange rate can make. In four decimal quotations it is a 0.0001 change up or down; in two decimal quotations (many Asian currencies) it is a 0.01 change in the rate.


Functional Currency

The primary currency for the economic environment where the business operates.


Hedging

A method for a business to mitigate FX risk exposures to earnings or cash flows. Hedgers use FX tools (e.g. FX Forwards) to create an off-setting effect to an underlying long or short FX risk exposure.


FX Forward Contract

A contractual obligation to Buy or Sell a foreign currency at an agreed rate on a future date. 


Balance Sheet Hedging

Hedges that offset the remeasurement risk of non-functional currency monetary assets and liabilities that are "on-balance sheet".

Cash Flow Hedging

Hedges placed to mitigate the anticipated FX risk related to forecasted non-functional currency assets and liabilities.


Margin

A deposit required on a Forward trade to provide collateral protection against potential adverse FX rate movement that create credit exposure.


Mark-to-Market

The change in value - either positive or negative - of an outstanding foreign exchange contract due to currency rate movements and changes in forward points