Pangea’s Guide to FX Terms

The exchange rate at which a company or individual obtains currency for a particular 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.

The first currency in a currency pair quote, representing the currency that is being bought or sold.

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.

The difference between the highest price that a buyer is willing to pay for an asset and the lowest price that a seller is willing to accept.

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.

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).

A contract that grants the holder the right, but not the obligation, to exchange currency at a specified rate before a specified date.

An acronym representing two different currencies, with the value of one currency being quoted against the other.

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 value of one currency expressed in terms of another currency; affected by domestic and foreign currency values.

The final rate quoted by a financial institution or broker for a currency transaction, which includes the acquisition rate plus any 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 difference between the market rate (or mid-market rate) and the rate provided by a financial institution or broker. This is essentially a fee added to the transaction by the provider.

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

Add our own definition here Commonly referred to as “Forex,” foreign exchange is the global market for trading national currencies against one another.

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.

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.

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.

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

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.

An order to buy or sell a security at a specified price or better. Limit orders allow traders to control the price at which their orders are executed, providing more precise entry and exit points.

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 order to buy or sell a security immediately at the best available current price. Market orders provide quick execution, making them ideal for traders who value speed over price precision. However, they may result in higher transaction costs if the market is volatile.

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

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

A financial derivative that gives the holder the right, but not the obligation, to buy or sell an asset at a predetermined price within a specified timeframe.

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.

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.

The practice of determining the appropriate amount of capital to allocate to a particular trade or investment to manage risk. Position sizing helps traders limit their exposure to any single trade, thereby reducing the impact of potential losses on their overall portfolio. It is a key component of a comprehensive risk management strategy.

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 second currency in a currency pair quote, representing the amount needed to buy one unit of the base currency.

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

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 current exchange rate (or current market value) at which a currency pair can be bought or sold for immediate delivery.

An order placed with a broker to buy or sell a security when it reaches a certain price, used to limit an investor's loss on a position. Stop-loss orders are essential tools for managing risk, as they can automatically close a position before losses escalate.

An order placed with a broker to buy or sell a security when it reaches a certain price, used to lock in an investor's profit on a position. Take-profit orders help traders secure gains by automatically closing positions when a target price is reached.

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

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.