Glossaire

A forex trading platform is a portal or software interface that allows customers to trade currencies with execution in all major FX instruments, including spot, forwards, NDFs, limit orders, options and swaps. Forex trading platforms provide liquidity through a single dealer (single dealer platform) or multiple dealers (multi-dealer platforms). Forex trading platforms advertise their capacity in terms of displaying transparent pricing, complying with best price execution requirements and providing trade history. Leading forex trading platforms targeting corporate clients offer seamless integration to Treasury Management Systems (TMS) with Straight-Through Processing (STP). Currency Management Automation solutions integrate forex trading platforms, providing connectivity between the ERP/TMS and forex trading platforms in order to automate FX hedging and distribute risks among multiple banks.

A forward contract, in the context of foreign exchange, is a contractual agreement to buy or sell a specified amount of one currency against payment in another currency at a fixed future date, known as the value date.The exchange rate is fixed at the time the contract is entered into. A forward contract effectively ‘locks in’ today’s exchange rate, plus or minus the forward points, i.e. the difference between the forward and the spot rate due to interest rate differentials between currencies. An open forward contract, the funds can be exchanged before the value date. By contrast, when both parties are legally obliged to exchange the funds on the value date, the forward contract is said to be’ closed’ or ‘standard’.

A forward contract opportunity profit exists when the value of a long (short) forward position increases (decreases) prior to contract expiration, reflecting a shift in the underlying spot exchange rate. A speculator might take the opportunity profit and close out the position. However, closing out a forward position taken as a hedge would leave the underlying exposure unprotected. When forward points are not favourable and the firm tolerates some degree of deviation between the budget rate and the spot rate at the time of setting the budget, the budget can be hedged with conditional orders—’take-profit’ if currency markets move in the firm’s favour, and ‘stop-loss’ if markets move against. This program allows the firm to protect a ‘worst-case scenario’ budget rate while delaying hedging as much as possible and still allowing it to profit from possible favourable market moves.

The forward element is a concept introduced by the IFRS 9 standards for general hedge accounting and defines the forward points of a forward contract, to distinguish it from the spot element of the contract. Forward points are the basis points added to or deducted from the current spot rate to determine the forward rate at which the forward contract will be settled on the delivery date. These forward points result from the difference between the interest rates of the two currencies and the duration of the contract. One of the changes under IFRS 9 is the possibility of excluding it from the designation of a forward contract as the hedging instrument and accounting for it as costs of hedging.Under IFRS 9, companies can store the forward element in other comprehensive income (OCI). Changes in the fair value of the forward points, thus, will not affect the profit and loss, thereby increasing the effectiveness of the hedging relationship and mitigating income statement volatility.

The forward point premium is the additional value of a given currency against another, when the forward and spot rates are compared. For example, if spot JPY-USD is 0.009189 and the corresponding 180-day forward rate is 0.009360, JPY trades at a 171-point premium. The forward premium can also be calculated in percentage terms. In this case, the annualised 180-day JPY premium is 3.72% = [(9360-9189)/9189] x 360/180. The forward premium reflects the interest rate differential between USD and JPY. In this example, short-term interest rates are lower in JPY than in USD, which explains the forward premium of JPY. The forward rate makes it impossible for arbitrageurs to take advantage of interest rates differentials without risk.

A full convertible currency is the monetary unit of a country where holders of the currency have the right to convert it freely at the going exchange rate into any other currency. A currency is deemed to be fully convertible if it fulfills the following three criteria: it can be used for all purposes without restrictions; it can be exchanged for another currency without limitations; it can be exchanged at a given exchange rate. A fully convertible currency is the monetary unit of a country where holders of the currency have the right to convert it freely at the going exchange rate into any other currency. A currency is said to be fully convertible if it fulfills one or more of the following three criteria about usability, exchangeability and market value: it can be used for all purposes without restrictions; it can be exchanged for another currency without limitations; It can be exchanged at a given exchange rate.

The functional currency is the currency of the primary economic environment in which a company operates. It is the currency in which a company primarily generates and expends its cash. In most cases, the functional currency is also the firm’s ‘accounting currency’ or ‘reporting currency’, i.e. the monetary unit used by a firm to record its transactions and to present its financial statements. A company can decide to present its financial statements in a currency different from its functional currency, for example when preparing a consolidated report for its parent in a foreign country. While a company can choose its accounting currency, it cannot change its functional currency.

FX or ‘foreign exchange’, also known as ‘forex’, is a term used to describe the exchange or trading of one currency to another. The foreign exchange market has no central marketplace: spot and forward market transactions take place in an ‘Over-the-Counter’ market made up of dealers and large commercial and investment banks. Turnover in global FX markets reached $6.6 trillion per day in April 2019, according to data from the Bank for International Settlements (BIS). It is by far the largest financial market in the world. OTC markets are larger and more diversified than ever, owing in part to the rise of electronic and automated trading While trading continues to be dominated by the major currencies, in particular the US dollar and the euro, in FX markets the trading of emerging market currencies is growing faster than that of major currencies. The rise in electronic and automated trading is one of the key features of today’s foreign exchange markets.

A foreign exchange broker is an intermediary who matches the buy and sell orders from its clients to other clients buy and sell orders. They organise trades on behalf of their clients, the traders. This is the main difference with forex dealers, who trade with and against their clients. There are several benefits that an FX broker can bring to its clients. A broker will guarantee that there is trust and creditworthiness between the two trading parties. This means that trades will actually be settled and also there is no need for traders to check every other trader’s creditworthiness to make the exchange. This would be impossible without the broker. A second benefit is that the broker has access to liquidity providers and market makers. These relationships with banks, financial institutions and dealers mean that the broker will get preferential exchange rates that they then pass on to their clients.

A significant step-change in pricing that occurs when businesses pass on the accumulated impact of sharp foreign exchange movements to their customers at the beginning of a new campaign period. This phenomenon represents the acceptance by clients of price adjustments that reflect currency market changes that occurred during the previous period, essentially creating a pricing discontinuity or "cliff" between periods.

The FX ‘cliff’ plays a major role in both FX-driven firms and non FX-driven firms. In the first case, firms that use an FX rate in pricing while facing a competitive landscape may need to keep prices as steady as possible, for example, a South Korean exporter of commodity-type chemicals. In the second case, companies that desire to display the same prices to their customers for commercial reasons, period after period, for example, Netflix who has recently announced a layered FX hedging program.

This term denotes the impact of currency fluctuations on profit margins. The principal aim of layered FX hedging programs is to achieve a smooth hedge rate to mitigate the impact of ‘cliff’-related episodes.

The FX Global Code of Conduct is a set of global principles of good practice in the foreign exchange market, developed to provide a common set of guidelines to promote the integrity and effective functioning of the wholesale foreign exchange market. It is intended to promote a robust, fair, liquid, open, and appropriately transparent market. The FX Global Code of Conduct was put together as a joint effort by central banks (the so-called Foreign Exchange Working Group or FXWG) and the private sector side (the so-called Market Participants Group or MPG. The FX Global Code of Conduct does not impose legal or regulatory obligations on market participants, nor does it substitute for regulation. Signatories, however, are expected to abide by its informal set of recommendations in the following areas: ethics, governance, execution, information sharing, risk management and compliance and confirmation and settlement process.

FX market participants are the main players in the world of global foreign exchange. They can be classified into three broad categories: liquidity providers, end-users and governments. Helped by brokers and dealers with whom they have close relationships, international banks are the key liquidity providers. They facilitate end-users’ access to liquidity. The most important end-users are corporations, hedgers and speculators. Corporations use FX markets to settle foreign-currency denominated transactions and to hedge the corresponding currency risk, mainly with forward contracts. Speculators include FX- and macro-oriented hedge funds, asset managers and retail investors. Governments are active in FX markets mainly with the activities of central banks. Central banks are the issuers of individual currencies; they can affect currency rates by intervening directly in FX markets or —as happens much more frequently— by altering liquidity conditions through monetary policy tools to act on short-term interest rates.