Key FX terms and jargon buster

Claire Hogarth08/Jan/2015Currency Updates

The currency market is the largest and most liquid financial market in the world, moving more than $4 trillion daily and through which financial institutions, organisations and individuals buy and sell currency. The relative value of a currency is based on the fluctuations of its currency pairs, trade, political events and global financial flows.

Key terms:

Currency risk – Currency risk is the possibility of incurring losses due to unfavorable fluctuations in an exchange rate. Typically, companies with overseas operations or partnerships use hedging strategies to mitigate the potential losses.

Exchange exposure – Exchange exposure is the level of sensitivity to fluctuations in an exchange rate.

Risk Mitigation – Currency risk can be mitigated through in depth market insight, which allows you to analyse the implications of macroeconomic factors on a currency, as well as a range of strategies from specialist FX providers.

Hedging strategies in particular can minimise potential losses and so organisations with significant international operations typically utilise Forward Contracts in order to achieve a set exchange rate against which to budget their operations.

Liquidity – The liquidity of a currency is determined by the activity and volume of transactions. Typically, the higher the trading volume, the easier it is to buy or sell the currency.

The most liquid currencies are characterised by stable political and economic circumstances. Since the Euro was created as a unified European currency, the Euro has become one of the most liquid currencies in the world, alongside the US Dollar, Japanese Yen, British Pound and Canadian Dollar.

Convertible currencies – A currency is convertible when it is exchanged freely for other currencies and its price is determined by supply and demand in the foreign exchange market. Also a currency is fully convertible when there are no restrictions or limits on the movements and trends of deposits in the associated country.

Of the total of 165 currencies, only a small proportion are convertible. The clearest examples of convertible currencies are the US Dollar, Euro, Yen and Sterling.

Non-convertible currencies –  In opposition we find non-convertible currencies, which are not listed on the forex market and are often subject to legal restrictions, usually by the local government.

Non-convertible currencies are closely related to emerging markets, as the restrictions are imposed as protection against high volatility. One example of a non-convertible currency is the Nigerian Naira.

Jargon buster:

BACS – Bankers’ Automated Clearing Services.

Beneficiary – A person or legal entity who receives the money from an international payment.

BIC – Bank Identifier Code – A unique ID code used for institutions when transferring money between banks.

CHAPS – Clearing House Automated Payment System – A British-based company offering same-day sterling transfers.

CHIPS – Clearing House Interbank Payments System – a US-based, privately-held clearing house that settles over USD1 trillion per day.

Credit Transfer – A method of performing an electronic transfer of funds between banks or bank accounts.

Fedwire – The Federal Reserve Wire Network – a real time gross settlement funds transfer system run by the Federal Reserve Banks. The average daily value of transferred funds is around USD2.7 trillion.

FPS – Faster Payments Service – a British banking initiative designed to reduce transfer times between banks’ client accounts.

IBAN – International Bank Account Number – an international standard used to identify bank accounts designed to minimize the chance of spreading errors.

SWIFT – Society for Worldwide Interbank Financial Telecommunication – An international financial messaging network which sends payment orders rather than the actual transfer of funds.

Wire Transfer – A method of performing an electronic transfer of funds between banks or bank accounts.

We hope this has been helpful but if you have any further questions, please do get in contact on +44 (0)20 3582 0454.

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Written by Claire Hogarth

Marketing Executive at Ebury. English Literature graduate from the University of York and a motivated professional.