Currency and forex

37 terms · each links to a full explanation with a worked example and the exam traps

Base and quoting currencyIn a currency pair like USD/INR, the first currency is the base currency and the second is the quoting currency — the rate shows units of the quoting currency per one unit of the base currency.
Base currencyThe first currency in a pair, fixed at one unit and priced in the second (quotation) currency. In USDINR the base is USD, so the quote is the rupee price of one dollar.
Bid priceIn a two-way quote, the price at which the market maker will buy the base currency from you — always the lower of the two prices, and always quoted first.
Bretton Woods SystemThe 1944–1971 exchange rate system in which currencies were pegged to the US dollar within ±1% and the dollar was pegged to gold; it collapsed by 1973, giving way to floating rates.
Calendar spread tradingTaking opposite positions in two maturities of the same currency futures (or options) contract to trade the change in the spread between them, rather than the direction of the currency.
Card rateThe rate a bank fixes at the start of the day for buying and selling foreign exchange from retail customers, applied regardless of intraday movement in the currency.
Carry tradeBorrowing in a currency with low interest rates and investing the money in assets of a currency with high interest rates, to earn the interest rate differential.
Cash and tomThe two pre-spot settlement dates in the FX market: cash (or ready) settles the same day, tom settles the next business day, and both their rates are derived from the spot price rather than traded.
Clean floatAn exchange rate regime in which a currency's value is set purely by supply and demand in the market, with no government rule or central bank action affecting its price.
Cross currency derivativesIn the exchange traded context, derivatives on a currency pair not involving the Indian rupee — EURUSD, GBPUSD and USDJPY futures and options, introduced from 2018.
Cross currency swapAn OTC agreement to exchange floating-rate payments in one currency for floating-rate payments in another, with principal typically exchanged at both the start and end, used to hedge foreign-currency portfolio exposure.
Cross rateThe price of a currency pair that is not directly quoted, derived by combining two pairs that share a common currency — EURINR from EURUSD and USDINR, for example.
Currency Derivatives SegmentThe separate stock exchange segment where exchange-traded currency futures and options, and interest rate derivatives, are traded — with membership separate from the exchange's other segments.
Currency futuresA standardised exchange-traded contract to buy or sell one currency against another on a future date at a price fixed today; in India, cash-settled in rupees, USD 1,000 a lot for USDINR.
Currency optionAn option giving the buyer the right, but not the obligation, to buy or sell an agreed amount of one currency against another at a specified exchange rate, on or before a specified future date.
Currency pairEvery trade in the foreign exchange market, expressed as one currency bought against another currency sold — the unit in which all currency derivatives are quoted and traded.
Currency swapAn OTC derivative in which two parties exchange streams of interest payments and/or principal in different currencies on set dates over the swap's life, at an exchange rate agreed at the start.
Expiry dateThe last trading day of a currency futures or options contract — for monthly contracts, two working days before the month's last business day; for weekly, every Friday — with trading stopping at 12.30 pm.
FBIL reference rateThe daily USD/INR (and EUR, GBP, JPY vs INR) benchmark rate published by Financial Benchmarks India Pvt Ltd around 1.30 pm; it is the final settlement price of INR currency futures and options.
Fiat moneyGovernment-issued currency that is not backed by a physical commodity such as gold or silver; its value rests on supply and demand and on the stability of the issuing government.
Foreign exchange derivative contractUnder the FEMA regulations, a financial contract that derives its value from a change in the exchange rate of two currencies, at least one of which is not the rupee, and settles later than the spot date.
Foreign exchange forwardAn OTC derivative involving the exchange of two currencies on a specified future date more than two business days away, at a rate agreed on the date of the contract.
Foreign exchange swapAn OTC derivative in which two currencies are actually exchanged on one date (the short leg) and re-exchanged at a later date (the long leg), at rates agreed at the time of the contract.
FX-RetailThe electronic platform for buying and selling foreign exchange by retail customers of banks, introduced by the RBI in 2019 and rolled out by CCIL on 05 August 2019 to make retail forex pricing transparent.
Gold standardThe system, dating from around 1870, under which a central bank held gold against its paper currency, so the rate between any two currencies followed from their gold prices instead of from trading.
Interbank segmentThe part of India's spot foreign exchange market where banks quote two-way buy-sell rates to each other, as against the merchant segment, where businesses and retail customers take the price banks offer.
Interest rate parityThe principle that a currency pair's forward or futures price differs from spot by the two currencies' interest rate differential, so borrowing in one and lending in the other earns no riskless profit.
Liberalised Remittance SchemeThe RBI facility letting a resident individual remit up to USD 250,000 per financial year abroad for any permissible current or capital account transaction, including investment in offshore funds.
Non-deliverable forwardA cash-settled, usually short-term currency forward in which the notional amount is never exchanged — only the difference between the contracted rate and the reference rate changes hands.
NOOP limitThe cap the RBI framework places on a bank's net overnight open foreign exchange position — fixed by the bank's own board, reported to the RBI, and not exceeding 25% of its total Tier I plus Tier II capital.
Protective putBuying a put option to protect a foreign currency receivable: it sets a floor rate (strike minus premium) while keeping the benefit if the currency rises. Suited to contingent cash flows.
Quotation currencyThe second currency in a pair — the one that does the pricing. Its amount varies as the market moves, and a contract's value is always expressed in it.
Resident Foreign Currency (RFC) accountA bank account a returning NRI may open to hold foreign currency, transferring in balances from an NRE or FCNR(B) account and continuing to receive foreign-currency income from investments held abroad.
Spot value dateThe settlement date of a standard spot FX deal — the second business day after the trade, provided both currency centres are open; earlier dates are cash (T) and tom (T+1).
Spread order facilityAn exchange order type that trades a calendar spread as one order — priced as the difference between far and near months — so both legs execute together at once.
Triangular arbitrageExploiting a misalignment among three exchange rates by converting currency A to B, B to C and C back to A, ending with more of A than you started with.
Vehicle currencyA common third currency — most often the US dollar — through which two other currencies are traded, instead of trading them directly against each other.