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Spot Contract.
A Spot Contract is the most common type of foreign currency contract. It is the real time currency price at any given time. The price is fixed although it takes two days for settlement. On receipt of cleared funds (usually BACS, CHAPS or using online Banking) the currency is then ready for immediate delivery (usually by Electronic Fund Transfer).
Fixed Term Forward Contract.
A Fixed Term Forward Contract can give the purchaser peace of mind and the ability to budget costs more effectively. A Fixed Term Forward Contract gives the facility to fix an exchange rate at the current market exchange rate. The delivery of the currency is then fixed for a date in the future.Depending on the applicable interest rates the exchange rate may vary from the 'spot' exchange rate.
The rate is guaranteed irrespective of the fluctuations in the currency markets. A deposit is required to secure the forward contract and is usually payable within two working days. The final payment is paid in time to be cleared before the maturity of the contract. If you do not need the currency immediately brokers can hold it on account until required. Competitive foreign Exchange Rates can be fixed up for up as much as two years in advance (Full terms available from the Foreign Exchange dealer).
A Fixed Term Forward Contract or forward rate helps you effectively budget for your foreign payments as you know the exchange rate is fixed. It also helps you hedge against any fluctuations in the currency markets.
Forward Time Option Contract.
A Forward Time Option Contract is similar to a Fixed Term Forward Contract but allows for a little more flexibility. The exchange rate is fixed as per a Fixed Term Forward Contract but the currency can be transferred at any point in a fixed period (usually a three month window) and not at a fixed time. Usually a deposit is required within two days to secure the rate and final payment is made when the full foreign currency transfer is required.
A Forward Time Option Contract is very useful if an exact date for the transfer of foreign currency is unknown but you want a fixed exchange rate because it is favourable
The best example is if you are purchasing a property overseas and the completion date is unknown.
Limit Orders and Stop Loss Orders.
Foreign exchange companies have the ability to monitor the foreign currency markets to achieve a price not currently available in the market for their clients. A formal written order can be placed with a Currency Exchange company to buy or sell when a particular exchange rate is met. This is particularly important for contracts of substantial value where a small currency fluctuation will have a huge impact on the overall cost of importation. A Spot or forward contract can then be made should the market move in the client's favour.
Terms used in the 'Foreign Currency Exchange Business'
Ask
The Ask price is the price that a currency is offered for sale.
BACS
The BACS network is the electronic funds transfer system in the U.K.
Back Office
Back office is the expression for the location where the processing of currency transactions occur.
Base Currency
Currencies are quoted as a currency pair,such as pound against dollar. The first currency quoted in the pair is the base currency. For Example GBP/EUR or GBP/USD.
Base Point
One hundredth (1/100) of one percent is a basis point. If a currency changes from 4.50% to 4.80%; it is represented as a 30 basis point move.
Bear Market
A market is a Bear Market when market prices, in this case exchange rates, are in decline.
Bid
The Bid Price is the price at which a client is willing to pay to aquire a given currency and sell another.
Bull Market
A Bull market is a market that is on a upward trend.
Central Bank
A central bank is administered by a national government. A Central Bank will frequently administer monetary policy.
Commission
A commission is a transaction fee charged to a client for processing a trade.
Confirmation
After a foreign currency transaction the confirmation is verification of a trade that lists important details such as the exchange rate, value and contract date.
Currency
Currency is money that is issued by a national government.
Currency exchange rates
Higher exchange rates attract foreign investors in search of good returns on their investment. The Exchange rates are determined by the supply and demand for various currencies. Exchange rates change second to second as the supply and demand changes.
Currency Fluctuation
Currency exchange rates constantly change as economic market pressures, supply and demand, and political issues all impact currency values.
Draft
A Draft is the issuing of an international cheque for payment of goods and services in a foreign currency.
EFTs
EFTs are Electronic Fund Transfers between banks. EFTs are the safest, most secure, and timely method of sending or receiving payments.
Exchange Rate
Exchange Rates are influenced by inflation, economic growth, interest rates, international trade, and investment flows between countries.
Euro
The Euro is the common currency that was adopted in January 2002 by the following countries: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain.
FX
FX is industry speak that represents the international foreign exchange industry.
Federal Reserve
The Federal Reserve is the central bank of the United States. The Fed is responsible for implementing monetary policy.
Foreign Currency Drafts
Companies with foreign invoices can settle accounts with international drafts rather than currency transfers. Drafts are drwn fron a local bank so clear more quickly than a cheque from another country in that currency.
Foreign Exchange
Foreign Exchange is the buying and selling of foreign currency
Foreign Exchange Markets
Foreign Exchange Markets are the arena where approximately 1.5 trillion dollars are traded on a daily basis in the worldwide foreign exchange markets.
Forward Contract
Forward contracts fix the exchange rate for the future delivery of a currency at a date that is agreed by both the currency broker and the client. A deposit is required to secure a forward contract.
Hedge
Hedging is a buying or selling of foreign currency transaction that reduces the risk of future currency price fluctuations.
Interbank rates
Interbank rates are the exchange rates that large banks would quote similar banks to buy or sell currency.
International Money Order
International Money Orders are less common and often reffered to as International Currency drafts.
Maturity
Maturity is the date when a payment of an obligation or contract is due.
Offer
Offer is the pricing level that a seller is prepared to sell a foreign currency at.
On Line Transfer
Many individual clients settle currency payments via Online Banking Transfer as it is very convenient. A transfer normally takes three working days to clear.
Order
An order is a client's instruction to buy or sell currency.
PIP
PIP's are also referred to as a point. Term used in the foreign exchange industry that represents the smallest incremental change on an exchange rate. It is one hundredth (1/100) of a percentage point.
Rate
Rate is the price that a currency can be bought or sold against another currency.
Settlement
The actual physical exchange of one currency for another.
Spot
Spot is a transaction that will become due in two days. The spot market is where you buy and sell currencies for settlement two days ahead.
Spread
Spread is the difference between bid and offer pricing levels of currencies.
Stop-Loss
A stop-loss order specifies that a trade should be closed at a specific rate. For example you may have a sum of euros to convert to sterling and may place an order to sell at a desired rate and palce a stop loss as well so that the rate gets no less favourable. in other words you would place a 'best' and 'worse' exchange rate.
Stop Order
A Stop Order is a client's order to buy or sell a currency when the pricing level of that currency reaches an agreed price.
Value Date
Value Date is the maturity date that both parties agree upon to exchange payments. This can be either spot or forward
Wire transfer
A Wire Transfer is an electronic transfer of funds, commonly referred to as a wire transfer.
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