Foreign Exchange Glossary Of Terms
The FX Terminology You Need To Know
Navigating the foreign exchange market can be challenging enough, and that’s before you’ve delved into the terminology it’s good to have an understanding of. Having knowledge of the key terminology can help you make informed decisions when it comes to your currency.
Here you’ll find a glossary of FX terms with simple definitions.
Deliverable FX
A type of foreign exchange transaction where the underlying currencies are physically exchanged following a contract. Common in international trade and investment transactions.
Spot Contract
A contract for buying or selling currency at the current market rate, with delivery usually within two business days.
Forward Contract
An agreement to buy or sell a set amount of a foreign currency at a specified price on a predetermined future date. Used to hedge against currency fluctuations.
FX Swap
A simultaneous purchase and sale of identical amounts of one currency for another with two different value dates (normally spot to forward).
Currency Pair
The quotation of two different currencies, with the value of one currency being quoted against the other. The first listed currency is the base currency, while the second is the quote currency.
Exchange Rate
The rate at which one currency can be exchanged for another. It fluctuates constantly in the open market.
Pip (Percentage in Point)
A unit of measurement to express the change in value between two currencies. Often used in forex trading to denote the change in the fourth decimal point.
Margin
The amount of capital required in an account to maintain a currency trade. It’s not a transaction cost but a security deposit to cover potential losses.
Leverage
The use of borrowed capital (such as margin) to increase the potential return of an investment. In FX, it allows traders to open a much larger position with a smaller amount of actual capital.
Liquidity
The ability of a currency to be converted quickly into cash without any price discount.
Market Order
An order to buy or sell a currency immediately at the best available current price. It’s executed quickly, ensuring that a trade is made, but does not guarantee the execution price.
Stop Loss Order
An order placed with a broker to buy or sell once the currency reaches a certain price. It is designed to limit a trader’s loss on a position.
Margin Call
A demand by a broker that an investor deposits further cash or securities to cover possible losses. It occurs when an account’s value falls below the broker’s required minimum level.
Initial Margin
The initial deposit required to open a position when trading. It’s a portion of the total trade value and is often used in the context of leveraged trading.
KYC (Know Your Customer)
A standard compliance process for financial institutions to verify the identity of their clients. It helps prevent fraud, money laundering, and terrorist financing.
Compliance
Adherence to laws, regulations, guidelines, and specifications relevant to the business. In the FX market, it involves following financial services rules and guidelines.
Bid-Ask Spread
The difference between the bid (buy) and ask (sell) price of a currency pair. It represents the broker’s profit from the trade (aside from commission or fees).
Rollover
The process of extending the settlement date of an open position. In forex, it involves the transfer of the settlement of a trade to another value date.
Slippage
The difference between the expected price of a trade and the price at which the trade is executed. It can occur during periods of higher volatility.
Arbitrage
The simultaneous purchase and sale of an asset to profit from a difference in the price in two different markets. It is a trade that profits by exploiting price differences of identical or similar financial instruments.
SWIFT (Society for Worldwide Interbank Financial Telecommunication)
A vast messaging network used by banks and other financial institutions to quickly, accurately, and securely send and receive information, such as money transfer instructions.
SEPA (Single Euro Payments Area)
An initiative by the European Union that allows for fast, reliable, and cheap Euro (EUR) transfers between banks in the SEPA zone, which covers much of Europe.
MT103
A standard format of SWIFT message used specifically for making a single customer transfer. It is used to convey a payment order from one bank to another.
ACH (Automated Clearing House)
A network used for electronic payments and money transfers. ACH is popular in the United States for domestic transactions, including direct deposit, payroll, and bill payments.
Wire Transfer
An electronic transfer of funds across a network administered by banks and transfer service agencies around the world. It involves a direct transfer of funds from one bank or credit union to another.
BIC (Bank Identifier Code)
Also known as a SWIFT code, it is a standard format used to identify a specific bank during an international transaction.
IBAN (International Bank Account Number)
An international standard for identifying bank accounts across national borders with a minimal risk of propagating transcription errors.
Cross-Border Payment
A transaction involving money transfer between two entities in different countries. These payments typically involve currency conversion and are subject to foreign exchange regulations.
Currency Conversion Fee
A fee charged for converting one currency to another. This is commonly encountered in international transactions and is a significant consideration in foreign exchange services.
EFT (Electronic Funds Transfer)
The transfer of funds from one account to another electronically, including transactions like direct debits, online payments, and wire transfers.
Payment Gateway
An e-commerce service that processes credit card payments for online and traditional brick-and-mortar stores, acting as an intermediary between the merchant and the payment processor.
