Glossary: Currency Market Terms
Currency markets use specialized terminology that can obscure straightforward concepts. This glossary defines the essential terms you'll encounter when reading about foreign exchange, evaluating international investments, or managing currency exposure. Terms are listed alphabetically with one-sentence definitions.
A-C
Ask (Offer): The price at which a dealer will sell the base currency to you; you pay the ask when buying.
Base currency: The first currency in a quote pair (EUR in EUR/USD); the currency being priced in terms of the quote currency.
Bid: The price at which a dealer will buy the base currency from you; you receive the bid when selling.
Bid-ask spread: The difference between the bid and ask price, representing the dealer's profit margin and transaction cost to the trader.
Cable: Market slang for the GBP/USD exchange rate, named after the transatlantic telegraph cable that once transmitted rates between London and New York.
Carry trade: A strategy of borrowing in a low-interest-rate currency and investing in a high-interest-rate currency to capture the yield differential.
Central bank intervention: Direct buying or selling of currency by a central bank to influence the exchange rate, often to prevent excessive appreciation or depreciation.
Convertible currency: A currency that can be freely exchanged for other currencies without government restrictions (e.g., USD, EUR, GBP).
Cross rate: An exchange rate between two currencies that doesn't involve the US dollar (e.g., EUR/GBP or AUD/JPY).
Currency peg: A fixed exchange rate policy where a country's central bank maintains its currency at a set ratio to another currency or basket.
D-F
Depreciation: A decline in a currency's value relative to another currency under a floating exchange rate system.
Direct quote: An exchange rate expressed as domestic currency per unit of foreign currency (e.g., 1.25 USD per EUR for a US-based observer).
Dollar index (DXY): A weighted index measuring the US dollar against a basket of six major currencies: EUR, JPY, GBP, CAD, SEK, and CHF.
Exotic currency: A currency from a smaller or emerging market economy with lower liquidity and wider spreads (e.g., TRY, ZAR, MXN).
Forward contract: An agreement to exchange currencies at a predetermined rate on a future date, used to lock in exchange rates and hedge exposure.
Forward points: The pip difference between the forward rate and spot rate, reflecting interest rate differentials between the two currencies.
G-L
Hedge: A position or transaction designed to offset potential losses from adverse currency movements.
Indirect quote: An exchange rate expressed as foreign currency per unit of domestic currency (e.g., 0.80 EUR per USD for a US-based observer).
Interbank market: The wholesale market where banks trade currencies with each other, typically in amounts of $1 million or more with tighter spreads than retail.
Interest rate parity: The theory that forward exchange rates should reflect interest rate differentials between two currencies, preventing risk-free arbitrage.
Liquidity: The ability to buy or sell currency without significantly affecting the price; major pairs like EUR/USD are highly liquid with tight spreads.
Long position: A position that profits when the base currency appreciates (buying EUR/USD means you're long euros).
M-P
Major pairs: The most actively traded currency pairs involving the US dollar: EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, and USD/CAD.
Mark-to-market: The process of revaluing open positions at current market prices to calculate unrealized gains or losses.
Non-deliverable forward (NDF): A forward contract settled in a convertible currency (usually USD) rather than the non-convertible currency being hedged, used for currencies with capital controls.
Pip: The smallest standard price movement in a currency pair, typically 0.0001 for most pairs (EUR/USD moving from 1.0850 to 1.0851 is a one-pip move).
Purchasing power parity (PPP): The theory that exchange rates should adjust so that identical goods cost the same in different countries when expressed in a common currency.
Q-S
Quote currency: The second currency in a pair (USD in EUR/USD); the currency in which the base currency is priced.
Rollover: The process of extending a forex position to the next settlement date, with interest credits or debits based on the rate differential.
Short position: A position that profits when the base currency depreciates (selling EUR/USD means you're short euros).
Spot rate: The current exchange rate for immediate delivery (typically settlement in T+2 business days for most currency pairs).
Spread: See bid-ask spread; also used to describe the difference between two related rates or prices.
Swap points: The forward points used to calculate the cost or benefit of rolling a position, reflecting the interest rate differential.
T-Z
Technical analysis: The study of historical price patterns and trading volumes to forecast future currency movements, using charts and indicators.
Trade-weighted index: A currency index where weights are based on trade volumes with partner countries rather than fixed allocations.
Transaction exposure: The risk that the value of existing payables or receivables denominated in foreign currency will change before settlement.
Translation exposure: The risk that a company's reported financial statements will change when foreign subsidiary results are converted to the parent's reporting currency.
Value date: The settlement date for a forex transaction; for spot trades, typically two business days after the trade date.
Volatility: The degree of price fluctuation in a currency pair, often measured as annualized standard deviation of returns.
Updating This Glossary
Currency markets evolve, and new terminology emerges with market developments. Terms related to digital currencies, central bank digital currencies (CBDCs), and new trading technologies will be added as they become relevant to mainstream currency markets. For terms specific to cryptocurrency markets, see the related article on cryptoassets versus traditional currency markets.