Pangea’s Guide to FX Terms

Foreign currency exchange (FX) can be confusing enough without all the industry jargon. Whether you're new to FX or seeking to deepen your knowledge, Pangea’s comprehensive FX glossary is your go-to resource for navigating the complex language of FX trading, hedging, and international payments.

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Acquisition Rate

The exchange rate at which a company or individual secures currency for a specific transaction.

The practice of taking advantage of price differences between markets by simultaneously buying and selling the same asset in different markets to profit from the imbalance.

The price at which a currency can be bought in the market.

In a currency pair, the base currency is the first currency listed, serving as the reference point for the exchange rate.

A unit of measure equal to one-hundredth of one percent, used to denote changes in financial metrics such as interest rates.

The price at which a currency can be sold in the market.

The gap between the buyer’s bid and the seller’s asking price for a currency.

Central Bank Intervention

Actions taken by a central bank to influence the value of its currency and build up reserves by buying or selling foreign currency in the FX market.

An intermediary between buyers and sellers in financial markets that facilitates the clearing and settlement of trades. This intermediary brings stability and efficiency to the market, ensuring the contract is seen through and reducing risk.

Counterparty Risk

The risk or likelihood that the other party in a financial transaction will default on its contractual obligation.

The exchange rate between two currencies, neither of which is the official currency in the country where the exchange rate is quoted. Cross rates allow you to bypass converting currencies into a “base currency” (such as the USD).

Currency Option

A contract that gives the holder the right, but not the obligation, to exchange currency at a specified rate (the strike price) before a specified date.

A quote showing how much of the second (quote) currency is needed to buy one unit of the first (base) currency.

A policy in which a country maintains its currency's value (hoping to stabilize) at a fixed exchange rate to another currency.

The potential for losses due to changes in foreign exchange rates, which can negatively or positively impact the value of investments denominated in foreign currencies

An agreement between two parties to exchange principal and interest payments in different currencies over a specified period.

A financial instrument whose value is derived from the value of an underlying asset, index, or rate. Derivatives are often used as a device for hedging against foreign currency risk.

The risk that a company's market value will be negatively affected by exchange rate fluctuations due to changes in the broader economy.

The exchange rate represents the value of one currency in relation to another.

Executable Price Quote

The final rate offered by a financial institution or broker for a currency transaction, combining the acquisition rate and any applicable markup.

The amount of money that is at risk for the investor to lose due to movements in exchange rates, interest rates, or other market factors.

An intermediary who facilitates the buying and selling of currencies for clients in the foreign exchange market in exchange for a fee or commission.

The additional cost added by an FX provider to the rate at which they acquire a currency.

The market for buying and selling currencies for immediate delivery. The FX spot market reflects the most updated exchange rate.

Foreign Exchange

FX, or Foreign Currency Exchange, most literally refers to the process of buying or selling one currency for another.

Foreign Exchange Risk

Foreign exchange risk, also known as exchange rate risk, is the risk of financial loss that arises from fluctuations in the exchange rates between currencies.

The global marketplace for buying and selling national currencies, determining exchange rates across the globe.

Forward Contract

A personalized, privately negotiated agreement between two parties to buy or sell an asset at a specified future date for a predetermined price.

The number of basis points added to or subtracted from the spot rate to calculate the forward exchange rate.

Futures Contract

A standardized legal agreement to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future.

Hedging in foreign exchange (FX) is a financial strategy used to reduce or eliminate the risk of adverse price movements in an asset (e.g. a currency), typically by taking an offsetting position in a related security, such as a derivative in the futures market.

Interest Rate Differential

The difference in interest rates between two different countries' currencies.

Interest Rate Parity

A theory proposing that the difference in interest rates between two countries is equal to the differential between the forward exchange rate and the spot exchange rate. This equation is often used to identify arbitrage opportunities.

The use of borrowed funds to increase the potential return of an investment. Leverage amplifies both gains and losses, enabling traders to control larger positions with relatively small amounts of their own capital.

The exchange rate represents the value of one currency in relation to another.

The risk that an asset cannot be bought or sold quickly enough in the market to prevent or minimize a loss, potentially due to disruptions.

A trading position in which an investor buys a security with the expectation that it will increase in value. Long positions are considered to be less risky than short positions since losses are limited to the initial investment.

The collateral required by a broker to cover the credit risk of a trader, ensuring that the trader can cover potential losses. Margin allows traders to control larger positions with less capital, leveraging their investments. Subsequently, the risk of significant losses rises too.

A firm or individual that actively quotes two-sided markets in a financial instrument, providing bids and offers along with the market size of each.

An FX order to buy or sell a currency immediately at the best available current exchange rate.

Mid-Market Rate

The mid-point between the bid and ask prices of a currency pair at a specific point in time.

Non-Deliverable Forward (NDF)

A cash-settled forward contract in which the physical delivery of the currency is not required.

Over-the-Counter (OTC)

A decentralized market where securities are traded directly between parties without a central exchange or broker. OTC markets allow for more flexible trading conditions and tailored contracts compared to standardized exchange-traded products.

Pip (Percentage in Point)

The smallest price move that can be observed in a currency exchange rate, typically equal to 0.0001. A standard unit of measurement in forex trading to quantify exchange rates and calculate profits and losses.

Purchasing Power Parity

An economic theory that states that the exchange rate between two currencies should equalize the purchasing power of the two currencies by adjusting for price level differences.

The quote currency, also called the counter currency, is the second currency in a currency pair.

Request For Quote

A formal request to an FX provider for a price quote on a specific currency transaction.

Risk Management

The process of identifying, assessing, and controlling threats to an organization's capital and earnings.

Settlement Risk

The risk that one party will fail to deliver the terms of a contract at the time of settlement.

A trading position in which an investor sells a security with the intention of repurchasing it later at a lower price, allowing investors to profit from declining market prices.

The act of trading in financial instruments or commodities with the aim of profiting from price fluctuations, rather than underlying fundamentals.

The spot rate is the current exchange rate at which a currency pair can be bought or sold for immediate delivery.

Transaction Risk

The risk associated with the period of time time delay between entering into a contract and settling it, during which exchange rates may fluctuate and currency may depreciate.

Translation Risk

The risk that a company's financial statements will be affected by changes in exchange rates when consolidating foreign operations.

Value at Risk (VaR)

VaR measures the potential loss in value of a financial asset or portfolio due to adverse movements in market factors, such as exchange rates, over a specified period and at a given confidence level.

The statistical measure of the dispersion of returns for a given security or market index, often used as an indicator of risk.

In a currency pair, the base currency is the first currency listed, serving as the reference point for the exchange rate.

The quote currency, also called the counter currency, is the second currency in a currency pair.

A quote showing how much of the second (quote) currency is needed to buy one unit of the first (base) currency.

The exchange rate represents the value of one currency in relation to another.

Foreign Exchange

FX, or Foreign Currency Exchange, most literally refers to the process of buying or selling one currency for another.

Executable Price Quote

The final rate offered by a financial institution or broker for a currency transaction, combining the acquisition rate and any applicable markup.

The additional cost added by an FX provider to the rate at which they acquire a currency.

Acquisition Rate

The exchange rate at which a company or individual secures currency for a specific transaction.

Mid-Market Rate

The mid-point between the bid and ask prices of a currency pair at a specific point in time.

The price at which a currency can be sold in the market.

The price at which a currency can be bought in the market.

The exchange rate represents the value of one currency in relation to another.

The gap between the buyer’s bid and the seller’s asking price for a currency.

The spot rate is the current exchange rate at which a currency pair can be bought or sold for immediate delivery.

Value at Risk (VaR)

VaR measures the potential loss in value of a financial asset or portfolio due to adverse movements in market factors, such as exchange rates, over a specified period and at a given confidence level.

Foreign Exchange Risk

Foreign exchange risk, also known as exchange rate risk, is the risk of financial loss that arises from fluctuations in the exchange rates between currencies.

Counterparty Risk

The risk or likelihood that the other party in a financial transaction will default on its contractual obligation.

The risk that an asset cannot be bought or sold quickly enough in the market to prevent or minimize a loss, potentially due to disruptions.

Settlement Risk

The risk that one party will fail to deliver the terms of a contract at the time of settlement.

Risk Management

The process of identifying, assessing, and controlling threats to an organization's capital and earnings.

The risk that a company's market value will be negatively affected by exchange rate fluctuations due to changes in the broader economy.

Translation Risk

The risk that a company's financial statements will be affected by changes in exchange rates when consolidating foreign operations.

Transaction Risk

The risk associated with the period of time time delay between entering into a contract and settling it, during which exchange rates may fluctuate and currency may depreciate.

The amount of money that is at risk for the investor to lose due to movements in exchange rates, interest rates, or other market factors.

The statistical measure of the dispersion of returns for a given security or market index, often used as an indicator of risk.

The potential for losses due to changes in foreign exchange rates, which can negatively or positively impact the value of investments denominated in foreign currencies

Currency Option

A contract that gives the holder the right, but not the obligation, to exchange currency at a specified rate (the strike price) before a specified date.

Non-Deliverable Forward (NDF)

A cash-settled forward contract in which the physical delivery of the currency is not required.

An agreement between two parties to exchange principal and interest payments in different currencies over a specified period.

Futures Contract

A standardized legal agreement to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future.

A financial instrument whose value is derived from the value of an underlying asset, index, or rate. Derivatives are often used as a device for hedging against foreign currency risk.

Forward Contract

A personalized, privately negotiated agreement between two parties to buy or sell an asset at a specified future date for a predetermined price.

Hedging in foreign exchange (FX) is a financial strategy used to reduce or eliminate the risk of adverse price movements in an asset (e.g. a currency), typically by taking an offsetting position in a related security, such as a derivative in the futures market.