Resources

FX Glossary

Plain-English definitions of the key terms used in foreign exchange and currency management.

A B C D E F H I K L M N O P Q R S T U V W

A

At-the-money (ATM)

An option whose strike price is equal (or very close) to the current spot rate. An ATM option has no intrinsic value but retains time value.

See also: In-the-money, Out-of-the-money, Strike rate, Intrinsic value, Time value

Appreciation / Depreciation

The increase (appreciation) or decrease (depreciation) in the value of one currency against another. Distinct from a business's own currency risk, which arises from how appreciation or depreciation of a foreign currency affects revenues, costs, or margins.

B

Base currency

The first currency quoted in a currency pair. In GBP/USD, sterling (GBP) is the base currency. One unit of the base currency is always equal to the quoted amount of the counter currency.

See also: Counter currency, Currency pair, Spot rate

Basis points (bps)

A unit of measurement equal to one hundredth of a percentage point (0.01%). Widely used to express changes in interest rates, spreads, and yield differentials. 100 basis points = 1%.

Bid/offer spread

The difference between the price a market maker will buy a currency (bid) and the price at which they will sell it (offer/ask). The spread represents the market maker's profit margin and is a key transaction cost.

C

Call option

An option giving the holder the right, but not the obligation, to buy a currency at a specified strike rate on or before a set expiry date. Used to protect against a strengthening in the price of a foreign currency.

See also: Put option, Strike rate, Option premium

Cash flow hedging

A hedging programme that protects anticipated future foreign currency cash flows, such as expected export revenues or import costs, rather than currency already sitting on the balance sheet. Forward-looking by nature: it targets sales or purchases that are highly likely to happen but haven't yet been invoiced, distinguishing it from balance sheet hedging, which addresses exposure that has already been recognised in the accounts.

See also: Balance sheet hedging, Hedging, Budget rate

Carry trade

A strategy that involves borrowing in a low-interest-rate currency and investing in a higher-yielding currency. Profitable in stable markets but vulnerable to sudden exchange rate moves.

See also: Interest rate differential, Forward points

Central bank intervention

Action taken by a country's central bank in the foreign exchange market — buying or selling its own currency — to influence the exchange rate or reduce volatility.

Cross rate

An exchange rate between two currencies calculated via each currency's rate against a third, usually the US dollar, rather than quoted directly against one another. Used where a direct market between two currencies is thin or untraded.

D

Delta hedging

A technique used to manage option risk by adjusting the underlying spot position so that the portfolio becomes neutral to small price movements in the underlying currency.

E

Economic calendar

A schedule of upcoming data releases, central bank meetings, and other events likely to move currency markets, such as inflation figures, interest rate decisions, and employment reports. Keeping half an eye on the calendar helps explain why a rate has moved on a given day, and can flag periods worth avoiding for a large, unhedged transaction.

See also: Central bank intervention, Volatility

Economic exposure

The long-term impact of exchange rate changes on a company's competitive position, future cash flows, and market value. Distinguished from transaction exposure (short-term, transactional) and translation exposure (accounting-related).

See also: Transaction risk, Translation risk

Exchange rate forecast

An estimate of where a currency pair is likely to trade at a future date, typically produced by banks and economists using models based on interest rate differentials, growth expectations, and other macroeconomic factors. Forecasts are a useful input when setting a budget rate, but their track record for accuracy is poor enough that they should inform a hedging decision, not replace one.

See also: Budget rate, FX risk management

Exposure

The general term for the extent to which a business's cash flows, balance sheet, or profitability are sensitive to movements in exchange rates. Usually broken down into transaction, translation, and economic exposure.

See also: Transaction risk, Translation risk, Economic exposure

F

Fixed exchange rate

An exchange rate regime in which a country's central bank pegs the value of its currency to another currency, a basket of currencies, or a reference asset, rather than letting it move freely with the market. Common among smaller or trade-dependent economies seeking to limit currency volatility, though maintaining a peg requires the central bank to hold sufficient reserves to defend it, and a peg under sustained pressure can break suddenly and sharply.

See also: Floating exchange rate, Central bank intervention

Fixing rate

A benchmark exchange rate published at a specific time each day, most commonly the WM/Reuters 4pm London fix, used as a reference point for valuing portfolios or settling certain contracts.

See also: Mid-market rate, Interbank rate

Floating exchange rate

An exchange rate regime in which a currency's value is left to the interplay of supply and demand in the market, rather than fixed by the central bank. Most major currencies, including sterling, the US dollar, and the euro, float freely. Some currencies operate a managed or 'dirty' float, where the central bank intervenes periodically to keep the rate within an informal range without formally pegging it.

See also: Fixed exchange rate, Central bank intervention

Forward contract

A binding agreement to buy or sell a fixed amount of currency at a predetermined exchange rate on a specified future date. Eliminates exchange rate uncertainty but also means you cannot benefit if the rate moves in your favour.

See also: Forward rate, Spot rate, Hedging

Forward points

The difference between the forward rate and the spot rate, driven by the interest rate differential between two currencies. Added to or subtracted from the spot rate to derive the forward rate.

See also: Forward rate, Spot rate, Interest rate differential

Forward rate

The exchange rate agreed today for a transaction that will be settled on a specific date in the future. Calculated by adjusting the spot rate for the interest rate differential between the two currencies over the relevant period.

See also: Spot rate, Forward points, Forward contract

FX markup

The margin a bank or broker builds into the exchange rate it offers, over and above the true mid-market rate. Unlike an explicit fee, a markup is invisible unless the client checks the rate against a reference source, which is why opaque pricing remains one of the most common complaints businesses have about their banking relationship.

See also: Bid/offer spread, Mid-market rate

FX risk management

The process of identifying, quantifying, and mitigating a business's exposure to adverse foreign exchange movements through a structured combination of financial instruments, internal policy, and strategic planning.

See also: Hedging, Currency risk, Budget rate

H

Hedging

Taking a financial position designed to reduce or eliminate the risk of adverse exchange rate movements. Common instruments include forward contracts, options, and swaps. Effective hedging provides cost certainty, not speculative profit.

See also: Forward contract, Currency risk, Option

Historic rate rollover (HRR)

Extending an existing forward contract using its original contracted rate rather than the current market rate. Tightly regulated in the UK because it can be used to defer and disguise a loss on the original contract; most brokers restrict or prohibit it.

I

Implied volatility

The market's forecast of how much an exchange rate is likely to move before an option's expiry, derived from current option prices rather than historical price data. Higher implied volatility increases the cost of an option premium.

K

Knock-in / Knock-out

Types of barrier option. A knock-in option only comes into existence if the spot rate reaches the barrier before expiry; a knock-out option ceases to exist if the spot rate reaches the barrier, regardless of how favourable the rate becomes afterwards.

L

Layered hedge

A hedging programme that builds up cover gradually through a series of transactions executed at different times, rather than hedging the full exposure in one go. Smooths out the effect of any single rate at which cover is taken, producing a blended average rate over the hedging period.

See also: Hedging, Rolling hedge, Budget rate

LIBOR / SONIA

Reference interest rates used as benchmarks for financial contracts. LIBOR (London Interbank Offered Rate) has largely been replaced by SONIA (Sterling Overnight Index Average) for sterling-denominated transactions following the LIBOR transition.

Liquidity

The ease with which a currency can be bought or sold in the market without causing a significant movement in price. Major currency pairs are highly liquid; exotic currencies typically have lower liquidity and wider spreads.

See also: Bid/offer spread, Currency pair

Limit order

An instruction to execute a currency transaction automatically if a specified target rate becomes available. Lets a business aim for a more favourable rate than the current market without needing to watch it continuously.

See also: Stop-loss order, One-cancels-other (OCO) order, Spot rate

M

Major currency pair

One of the small number of currency pairs that account for the bulk of global FX trading volume, including EUR/USD, GBP/USD, and USD/JPY. Major pairs are highly liquid, trade with tight bid/offer spreads, and are available around the clock, in contrast to minor and exotic pairs.

See also: Currency pair, Liquidity, Bid/offer spread

Market maker

A bank, broker, or trading firm that quotes both a buy and sell price for a currency and stands ready to deal at those prices, earning revenue from the bid/offer spread between them. Most FX transactions for businesses are ultimately priced by a market maker rather than matched directly against another end client.

See also: Bid/offer spread, Interbank rate

Market order

An instruction to buy or sell currency immediately at the best rate currently available, rather than waiting for a specific target. Used when certainty of execution matters more than the exact rate achieved.

N

Natural hedge

Reducing currency risk by matching foreign currency income against foreign currency costs, so exchange rate movements affect both sides of the business similarly, without the use of financial instruments such as forwards or options.

O

One-cancels-other (OCO) order

An instruction combining a limit order and a stop-loss order on the same amount. As soon as one is triggered, the other is automatically cancelled, giving a business both a target rate to aim for and a worst-case level to fall back on within a single instruction.

P

Participating forward

A structured product combining a forward contract with an option. It fixes a worst-case exchange rate (like a forward) while allowing the holder to participate in a proportion of any favourable market movement, typically without paying an upfront premium.

See also: Forward contract, Option, Collar

Pip

The smallest standard price movement in a currency pair, typically the fourth decimal place (0.0001) for most pairs. Japanese yen pairs are quoted to two decimal places, so a pip equals 0.01.

Q

Quantitative easing (QE)

A monetary policy tool in which a central bank creates new money to buy government bonds and other assets, aiming to lower borrowing costs and stimulate the economy. QE programmes tend to weigh on the currency of the country undertaking them, since they increase the money supply and often coincide with lower interest rates.

See also: Central bank intervention, Interest rate differential

R

Repatriation of profits

The process of returning profits earned overseas back to a business's home country, converting them into the home currency along the way. Some countries impose restrictions or additional tax on repatriated profits, which is worth checking before assuming overseas earnings can be brought home freely.

See also: Non-deliverable forward (NDF), Currency risk

Reserve currency

A currency held in significant quantities by central banks and major institutions worldwide as part of their foreign exchange reserves, most notably the US dollar, alongside the euro, sterling, and yen. Reserve currency status tends to support demand for a currency and can influence its long-term stability relative to non-reserve currencies.

See also: Fixed exchange rate, Floating exchange rate

Risk premium

The additional return investors demand for holding a riskier currency instead of a safer one, reflected in the interest rate differential between the two. Higher-yielding currencies with a larger risk premium, such as those of some emerging markets, often trade at a forward discount to lower-risk currencies like the US dollar or sterling.

See also: Interest rate differential, Forward points

Rolling hedge

A hedging programme in which a set proportion of expected currency needs is covered on a recurring, ongoing basis, so that cover is continuously extended forward as time passes rather than fixed at a single point. Keeps a consistent level of protection in place as new exposure arises.

See also: Hedging, Layered hedge, Budget rate

Rollover

The process of extending the settlement date of an open forward contract. A rollover typically involves closing the existing contract at the prevailing spot rate and reopening it for a new forward period, with any gains or losses realised on close.

See also: Forward contract, Forward points

S

Settlement

The final exchange of currencies agreed in a trade. For spot transactions this typically occurs two business days after the trade date (T+2). Forwards settle on the agreed future date.

See also: Spot rate, Forward contract, Value date

Spot rate

The current market exchange rate for immediate delivery of a currency, with settlement typically occurring two business days after the transaction date (T+2).

T

Take-profit order

An instruction to execute a currency transaction automatically if the rate moves in a business's favour beyond a specified level, locking in the improved rate before it can reverse. Often paired with a stop-loss order as part of a one-cancels-other instruction, so that only one of the two is ever triggered.

See also: Stop-loss order, One-cancels-other (OCO) order, Limit order

Time value

The portion of an option's premium attributable to the time remaining until expiry, reflecting the possibility that the option could move further into the money before then. Time value declines as expiry approaches, a process known as time decay.

See also: Option premium, Intrinsic value

Transaction risk

The risk that exchange rate movements between the date a commercial agreement is made and the date of settlement will affect the value of the transaction. The most immediate and tangible form of currency risk for most businesses.

See also: Currency risk, Translation risk, Economic exposure

Translation risk

The risk that a company's consolidated financial statements will be affected by exchange rate movements when converting foreign currency assets, liabilities, or earnings into the reporting currency. Also known as accounting exposure.

See also: Transaction risk, Economic exposure

U

Under-hedging

The situation where a business has hedged less currency than its actual exposure turned out to require, leaving part of it unprotected against adverse rate movements. Often happens when a business is reluctant to hedge a currency that trades at an unfavourable forward rate, which can be a costly decision if that currency then moves sharply against them.

See also: Over-hedging, Hedging, Forward points

V

Value date

The date on which a currency transaction is settled — i.e., when funds are actually exchanged between parties. For spot trades this is typically T+2; for forward trades it is the agreed future date.

See also: Settlement, Spot rate, Forward contract

Vanilla option

A standard put or call option without any additional features or conditions. Straightforward to price and widely available. Contrasted with exotic or structured options such as barriers, knockouts, and participating forwards.

See also: Call option, Put option, Option premium

Volatility

The degree to which an exchange rate fluctuates over a given period. Higher volatility means greater uncertainty for businesses with foreign currency exposure, and typically higher premiums for options.

See also: Currency risk, Implied volatility

W

Weighted average exchange rate (WAER)

The blended exchange rate across a business's accumulated currency exposure in a given pair, calculated by weighting each individual transaction or hedge by its size. Gives a single, meaningful reference rate for measuring FX performance, rather than comparing a current rate against any one historical transaction in isolation.