CURRENCY HEDGER

Deliverable FX & Hedging Glossary.

A practical guide to foreign exchange, deliverable forwards, currency hedging, settlement and institutional FX terminology. Understand the language of global currency markets and make more informed decisions about managing currency exposure.

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Core Deliverable FX Concepts

Deliverable Forward Contract

A binding agreement to exchange a specific amount of currency at a fixed rate on a future date, where physical delivery of both currencies takes place.

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Foreign Exchange Forward Contract

A customised OTC agreement that locks in an exchange rate today for settlement at a future date, helping businesses manage currency risk.

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Spot Contract

An FX transaction agreed at the current market exchange rate and normally settled within two business days, depending on the currency pair.

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Deliverable FX Transaction

A currency transaction where the underlying currencies are physically exchanged between counterparties at settlement.

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Currency Pair

Two currencies quoted against one another, such as EUR/USD, GBP/USD or USD/CHF, representing the relative value of one currency against another.

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Base Currency

The first currency in an FX pair. In EUR/USD, EUR is the base currency and USD is the quote currency.

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Forward Pricing & Structure

Forward Rate

The agreed exchange rate for a future FX transaction, derived from the spot rate and the interest-rate differential between the two currencies.

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Forward Points

The adjustment added to or subtracted from the spot rate to determine the forward exchange rate.

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Forward Premium

A situation where the forward rate is higher than the spot rate, generally reflecting interest-rate differentials.

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Forward Discount

A situation where the forward rate is lower than the spot rate, reflecting the relative interest rates of the currencies.

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Value Date

The date on which the currencies specified in an FX transaction are exchanged and settlement takes place.

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Notional Amount

The total contractual amount of currency referenced by an FX transaction or hedging instrument.

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Tenor

The length of time between the trade date and the maturity or settlement date of an FX contract.

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Broken-Date Forward

A forward contract with a maturity date that does not correspond to a standard market tenor such as one month, three months or one year.

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Bid-Ask Spread

The difference between the price at which a market participant can buy a currency and the price at which it can sell it.

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Hedging & Risk Management

Currency Hedging

The practice of reducing the financial impact of exchange-rate movements using instruments such as forwards, options and swaps.

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FX Exposure

The risk that movements in foreign exchange rates will affect the value of future income, expenses, assets or liabilities.

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Hedging Strategy

A structured approach to managing currency risk using suitable FX instruments and defined objectives.

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Cash Flow Hedging

Using FX instruments to reduce uncertainty around future cash flows affected by currency movements.

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Transaction Risk

The risk that exchange-rate movements between the agreement and settlement of a transaction change its underlying value.

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Counterparty Risk

The possibility that the other party to an OTC FX transaction fails to meet its contractual obligations.

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Natural Hedge

Managing currency exposure by matching foreign-currency revenues and expenses without necessarily using a derivative.

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Hedge Ratio

The proportion of an underlying currency exposure that is covered by a hedging instrument.

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Hedge Effectiveness

A measure of how successfully a hedge offsets movements in the underlying currency exposure.

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Settlement & Delivery Mechanics

Physical Settlement

The actual exchange of the contracted currencies at maturity in a deliverable FX transaction.

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Settlement Risk

The risk that one party delivers currency but does not receive the other currency as expected. This is also known as Herstatt risk.

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Payment versus Payment (PvP)

A settlement mechanism designed to ensure that both sides of an FX transaction are settled simultaneously.

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Maturity Date

The date on which a forward contract expires and the agreed settlement obligations become due.

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Settlement Instructions

The payment and account details required to complete the delivery and settlement of an FX transaction.

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Cut-Off Time

The deadline by which instructions or payments must be submitted for processing on a particular business day.

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Related FX Instruments

Non-Deliverable Forward (NDF)

A forward contract settled in cash rather than through physical delivery, commonly used for currencies subject to restrictions.

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FX Swap

A transaction combining a spot exchange with a simultaneous forward exchange that reverses the currency position at a later date.

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Forward Roll

Extending an existing forward position to a new future value date, subject to prevailing market pricing.

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Currency Option

A financial contract giving the holder the right, but not the obligation, to exchange currency at a specified rate.

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FX Fixing

A published reference exchange rate established at a specified time and used for valuation, settlement or financial reporting.

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Mark-to-Market

The process of valuing an existing FX position using current market prices to determine its unrealised gain or loss.

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Advanced & Institutional Concepts

Over-the-Counter (OTC)

A market where financial contracts are privately negotiated between counterparties rather than traded on a central exchange.

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Long Position (Forward)

The party in a forward contract agreeing to buy the specified currency at the agreed future value date.

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Short Position (Forward)

The party in a forward contract agreeing to sell the specified currency at the agreed future value date.

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Cost of Carry

The financing cost or benefit associated with holding a currency position, reflected in the pricing of forward contracts.

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Interest Rate Differential

The difference between the interest rates applicable to two currencies, which is a key factor in determining forward rates.

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Liquidity

The availability of buyers and sellers in a market and the ability to transact efficiently without significantly moving price.

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Market Maker

A financial institution or liquidity provider that continuously provides bid and offer prices in a market.

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Liquidity Provider

A bank or financial institution that supplies executable FX pricing and liquidity to market participants.

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Execution

The process of completing an FX transaction at an agreed exchange rate and for a specified settlement date.

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Price Discovery

The process through which market participants establish currency prices based on available liquidity, orders and information.

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