💱 Deliverable FX & Hedging Glossary (Currency Hedger)
🟢 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. This ensures businesses receive or pay actual funds, not just a cash difference.
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Foreign Exchange Forward Contract
A customized OTC agreement locking 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 settled typically within two business days at the current market rate.
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Deliverable FX Transaction
A currency trade where the underlying currencies are physically exchanged between counterparties at settlement.
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🔵 Forward Pricing & Structure
Forward Rate
The agreed exchange rate for a future transaction, derived from the spot rate and interest rate differentials.
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Forward Points
The adjustment (premium or discount) added to the spot rate to determine the forward rate.
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Forward Premium
Occurs when the forward rate is higher than the spot rate due to interest rate differences.
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Forward Discount
Occurs when the forward rate is lower than the spot rate.
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Value Date (Settlement Date)
The future date when the currencies are exchanged in a forward contract.
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Notional Amount
The total amount of currency being exchanged in a contract.
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🟡 Hedging & Risk Management
Currency Hedging
The practice of reducing exchange rate risk using financial instruments like forwards.
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FX Exposure
The risk that currency movements will impact financial outcomes.
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Hedging Strategy
A structured approach to managing currency risk using forwards, options, or swaps.
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Cash Flow Hedging
Using FX instruments to stabilize future cash flows impacted by currency fluctuations.
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Transaction Risk
Risk arising from exchange rate changes between contract agreement and settlement.
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Counterparty Risk
The risk that the other party in a forward contract fails to fulfill obligations (common in OTC markets).
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🔴 Settlement & Delivery Mechanics
Physical Settlement
The actual exchange of currencies at maturity in a deliverable forward.
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Settlement Risk (Herstatt Risk)
The risk that one party delivers currency but does not receive the other.
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Payment vs Payment (PvP)
A mechanism ensuring both sides of a currency transaction settle simultaneously to reduce risk.
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Maturity Date
The date when the forward contract expires and settlement occurs.
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🟣 Related FX Instruments
Non-Deliverable Forward (NDF)
A forward contract settled in cash without physical delivery, typically used for restricted currencies.
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FX Swap
A simultaneous spot and forward transaction exchanging currencies now and reversing later.
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Forward Roll (Roll Over)
Extending a forward contract to a new future date.
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Currency Option
A contract giving the right (not obligation) to exchange currency at a set rate.
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⚙️ Advanced / Institutional Concepts
Over-the-Counter (OTC)
A market where contracts are privately negotiated rather than traded on an exchange.
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Long Position (Forward)
The party agreeing to buy currency at maturity.
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Short Position (Forward)
The party agreeing to sell currency at maturity.
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Cost of Carry
The cost (or benefit) of holding a currency position, reflected in forward pricing.
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Interest Rate Differential
The difference in interest rates between two currencies, influencing forward rates.
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