b-sharpe’s currency exchange glossary!

Bank

Version 4.0 of the Swiss banking system, a mainstay of the Swiss economy. It comprises investment banks, private banks, industrial and commercial banks, and even ‘non-bank banks’ (i.e. large retailers which, driven by shrinking profit margins, sell financial products). Not to mention the latest addition: online banking!

A bank is therefore a business that provides and trades in banking and other financial services. It lies at the heart of the financial sector and is directly responsible for managing financial risks. It can handle your foreign exchange and credit transactions… depending on the rates and terms, which you should compare carefully!

ECB

The European Central Bank (ECB) is the central bank of the nineteen European Union countries that have adopted the euro. It is the European Union’s main monetary institution.

Not to be confused with the Banque Commune d’Épreuves! Although its main remit could be seen as a challenge: maintaining price stability in the eurozone, and thereby preserving the purchasing power of the single currency for all the member states concerned.

SNB

The Swiss National Bank (SNB) is Switzerland’s central bank.

The SNB is a public limited company, though it is not really one in the strict sense of the term, in that no one is supposed to be unaware of either its existence or its remit:

• The SNB ensures the stability of the Swiss franc by drawing on its gold reserves and its foreign exchange reserves;

• The SNB manages the accounts that the Confederation has opened with the bank for the purpose of making payments;

• The SNB issues federal government bonds;

• The SNB advises the Swiss Confederation on where to invest its funds on a temporary basis.

Currency exchange

Currency exchange bureaux are financial intermediaries whose main business is manual currency exchange, i.e. the immediate exchange of one currency for another. As traders dealing in banknotes, they are subject to specific rules and must clearly display their rates and terms of sale (exchange rates, commission or any charges). A currency exchange bureau purchases its currencies and, depending on the balance between supply and demand, determines the selling rate and the buying rate for the currency.

Indexation clause

In the case of an international foreign exchange settlement agreement, the contracting parties may include an indexation clause designed to set out in the contract how the foreign exchange risk associated with the transaction is to be shared between the buyer and the seller.

It provides for compensation in the event of a fluctuation in the exchange rate of the currency chosen by the parties. Thus, the price may be adjusted automatically to protect against the risk of currency depreciation: a clause indexing the price to the value of gold (gold-backing clause) or to the exchange rate of a foreign currency (exchange rate guarantee).

Deadline

The specific time by which a transaction must be completed. This is the time by which payment orders must be submitted in order to be processed on the same day. These procedures ensure that transactions are allocated consistently when the accounts are closed at the end of each financial year. Right then… Cut. That’s enough said!

Today’s rates

Set daily, a currency’s daily exchange rate is the value of that currency relative to another on a given day. Quoted on the foreign exchange market, known as ‘Forex’, exchange rates fluctuate constantly depending on trading activity. The exchange rate is determined by supply and demand: if demand for the first currency exceeds supply, then its value rises relative to the second. In short: a constant balance of power!

Currency hedging

Hedging is a practice that involves protecting oneself against an unwanted risk. It is used by both manufacturers (who seek to protect themselves against fluctuations in the capital markets) and investors in the financial markets.

For a private individual, a foreign exchange hedge is a binding contract with their bank that allows them to lock in the exchange rate between two currencies at the time the transaction is concluded. The rate is fixed for a future date, for a specified amount.

A word of advice: check your cover, as you might get cold feet and want to switch 😉

You may also want to read our guide to futures trading for private individuals.

Value date

The date on which a particular banking transaction is recorded. In the case of a foreign exchange transaction, this is the date on which the currencies will be credited to the account. This is referred to as the spot value date, which corresponds to the date of delivery of the currencies for a spot foreign exchange transaction. This should be distinguished from the transaction date, which corresponds to the date on which the transaction is recorded. The two may differ by one or more days.

However, when calculating debit or credit interest, the value date is taken into account…

Currency

A currency accepted by a foreign country. The ‘currency’ is that of one’s own country.

Direct debit

Option to have the amount debited directly from your account. The account holder (debtor) authorises the issuer of an invoice (creditor) to debit the amount due directly from their bank account for payment.

FED

The Federal Reserve System, or the Fed. Contrary to popular belief, the Federal Reserve is indeed the central bank of the United States (and not a nickname for the tennis player from Basel).

The US Federal Reserve has a dual mandate to ensure price stability whilst supporting employment. As the body responsible for monetary policy – notably through setting key interest rates, and thus the cost of borrowing – the Fed closely monitors the economy to prevent it from overheating: inflation, unemployment, domestic and external growth…

Figure

In forex jargon, these are the first three digits of a buy or sell quote for a currency pair. For a spot EUR/USD quote of 1.2530/40, for example, the figure is 1.25. For the sake of speed, currency traders refer only to the pips, i.e. the last two digits of the 54 to 65 significant digits quoted in a ‘calm’ market and for a ‘non-exotic’ currency. Thus, if the rate moves from 1.25 to 1.26, we say it has risen by one pip.

Forex

An abbreviation often used to refer to Foreign Exchange, i.e. the global currency market. The foreign exchange market is a decentralised global market that determines the relative values of different currencies. It generally refers to the trading activities of investors and speculators in the foreign exchange market.

Unlike other markets, there is no centralised exchange or clearing house through which transactions are conducted. Transactions are carried out over-the-counter. You can buy or sell any currency pair at any time, subject to available liquidity. There is no ‘seller’s market’ in the traditional sense of the term. You can make (or lose) money, whether the market is trending upwards or downwards.

Forward

Means ‘forward’ in English. An over-the-counter technique that allows a rate to be fixed in advance.

IBAN

International Bank Account Number: an international bank account number that complies with the ISO international standard.

Consisting of 21 characters for Switzerland: 4 characters (2 letters for the country and 2 digits), followed by the bank identifier (SWIFT or BIC) and the account number. It facilitates transactions between economic operators in the eurozone and contributes to the development of trade.

Spot market

A market in which the purchase and sale of financial assets are settled and delivered on T+2, unlike deferred settlement transactions or the futures market. In a spot market, the spot price is therefore used to determine the value of the transaction. The investor must hold the assets required to settle the orders placed in order for the transaction to take place.

Futures market

A market in which transactions involve payment and delivery at a future date. The flagship product of these markets, the futures contract, is an agreement whereby a buyer undertakes to purchase from the seller all manner of assets: currencies, interest rates, and mineral, agricultural or energy commodities. All of this takes place at a specified future date.

Unlike forward contracts (traded on over-the-counter markets), the terms of futures contracts are standardised: the quality of the deliverable commodity, the quantity or trading unit, the expiry dates and the delivery terms are all fixed in advance. Only the price is negotiated by the traders.

Margin

You don’t need to watch *The Wolf of Wall Street* and its famous “sell me this pen!” scene to understand that margin is a key indicator in any commercial or banking transaction.

Strictly speaking, it is defined as the difference between the selling price and the purchase price. The margin may relate to a purchased item (goods), a manufactured item (product) or a service (provision of services), as in the case of a foreign exchange transaction, for example.

NDF (non-deliverable forward)

When a currency is not deliverable. This is an instrument designed to hedge currency risk for currencies where access to a forward foreign exchange market is (very) restricted, or even prohibited for non-residents. In principle, an NDF is equivalent to a forward exchange contract, except that at maturity there will be no delivery of the local currency.

Designed to hedge currency risk for currencies that cannot be traded on the conventional forward market, the convertible currency is usually the US dollar, although it is possible to trade against the euro, Swiss franc, pound sterling, etc. A ‘non-deliverable forward’ contract is for a fixed amount in the local currency. 

The counterparties agree on a maturity date, a forward exchange rate and the method for determining the reference rate (at maturity).

Forward transaction

A firm contract between the bank and its customer, which allows the customer to lock in, at the time the transaction is concluded, the exchange rate of one currency against another, for a specified amount, at a future date.

A forward contract allows the client to lock in and guarantee, at the time the contract is concluded and without paying a premium, a buy/sell rate for their currency for a transaction with a fixed maturity date and amount.

It allows a company to hedge the foreign exchange risk associated with a commercial transaction involving foreign currency. The company thus knows the exchange rate at which it will sell or buy the currency in the future. The rate is fixed, regardless of the currency’s market rate at maturity. The company cannot benefit from any favourable movements in the currency’s value.

Currency exchange option

A foreign exchange option is a contract that gives the buyer the right (but not the obligation) to buy or sell a specified amount of foreign currency on a specified date (or during a specified period) at a predetermined exchange rate known as the strike price, in return for the payment of a premium.

Parity

In the Forex market, it indicates the exact point at which two currencies are of equal value: the exchange rate between these two currencies is 1. This concept is also used in options, where the value of an option is equal to its intrinsic value.

Pips

This is the unit of measurement for changes in the exchange rate (of a currency pair) in points. In practical terms, it refers to the last two digits of a quote, out of the four or five significant digits given in a foreign exchange market. In our example of a quote of 1.2530/40 for EUR/USD, the pips are 30/40.

Bank details

Commonly known as a bank account number. A sort of banking barcode, just as well-known as its counterpart, the PIN: it helps to streamline transactions and reduce transaction costs by standardising account numbers and the details of banking transactions.

Why? Because there are as many types of transactions and accounts as there are regional specialities … So it’s just as important to be able to provide your bank details as it is to give your mobile number. You get the picture.

Currency risk

Currency risk refers to fluctuations in exchange rates that may affect the profitability of an investment.

SEPA

“Single Euro Payments Area”, literally “single euro payments area”. It was established by the member banks of the European Payments Council to harmonise euro payment methods across member countries, which include the countries of the European Union, Monaco, Liechtenstein, … and Switzerland.

SEPA covers credit transfers, direct debits and the use of bank cards. In practical terms, this enables users (consumers, businesses, merchants and public authorities) to make payments in euros under the same conditions throughout the European Economic Area, just as easily as they would in their own country.

SPOT (spot market)

The term ‘spot rate’ refers to the current rate applicable to an immediate transaction. The spot rate is distinct from the forward rate.

Spread

Refers to a spread (usually between the bid and ask prices). If we take the example of an EUR/USD quote of 1.25 {30} / {40}, the difference between the ‘bid’ (i.e. the price at which the dealer buys) and the ‘ask’ (i.e. the price at which the dealer sells) is called the spread.

The spread, which is determined by the broker, is set based on the transaction amount, market volatility and market sentiment.

SWAP

Derivative financial product. It involves the exchange of debt instruments or different currencies on different terms (at a fixed or variable interest rate) in different countries.

Swaps are contracts for the exchange of cash flows:

• That is, interest rate swaps: transactions involving loans.
• That is, foreign exchange swaps: contracts for the exchange of currencies.

Currency swap

A financial transaction in which two parties agree to exchange currencies today at the spot exchange rate and to exchange the same currencies at the contract’s maturity date at the forward exchange rate. No interest is exchanged; only currencies are exchanged at the start and end of the swap, which has a term of less than one year.

Currency swaps

In the over-the-counter market, over the longer term: these are transactions involving financing terms. The aim is to diversify and thus optimise the loan portfolios of banks and businesses.

Not to be confused with:

• the blogosphere swap (gift exchanges between internet users based on a theme, for example swapping slimming products for cookbooks);

• the wrap (even though ‘the better the operation is organised, the more satisfaction it will bring you’);

• swag (someone who is stylish and charismatic). The only thing they have in common is that any self-respecting swag must follow the rules of ‘swagitude’, which, by definition, vary from country to country and with changing fashions.

SWIFT

An acronym for the Society for Worldwide Interbank Financial Telecommunication. Originally established as a banking cooperative, it now provides standardised interbank messaging services and interfaces to more than 10,800 institutions in over 205 countries.

The organisation manages the registration of BIC codes. This is why the term ‘SWIFT code’ is sometimes used to refer to the BIC, which is linked to the IBAN. The SWIFT code identifies a bank; it consists of a country code, a bank code, a code to locate the bank and, finally, a code to identify the branch. E.g.: BCGECHGGXXX.

Exchange rates

The rate (i.e. the price) at which one currency can be bought or sold in exchange for another. As it is floating, the exchange rate is determined at each transaction by the balance between supply and demand on the foreign exchange markets. It is then traded either at the spot rate (generally within two working days) or at a forward rate, at a future maturity date.

Interbank exchange rate

The interbank exchange rate is the real-time rate at which banks trade currencies with one another on the interbank market, a market reserved for banks.

Minimum rate

Set by the SNB in 2011 at 1.20 francs to the euro, the exchange rate floor was intended to counter the appreciation of the franc and protect exports by Swiss SMEs. It was abandoned in January 2015 because the mass purchase of euros was no longer sustainable for the institution.