If your business makes international payments, pays overseas suppliers or receives revenue in foreign currencies, understanding FX terminology directly affects the decisions you make about cost, cash flow and currency risk.
This glossary covers the key terms used in foreign exchange and currency risk management.
Core FX concepts
Exchange rate
The rate at which one currency can be exchanged for another. Exchange rates fluctuate constantly in response to market conditions.
Currency pair
The quotation of two currencies where one is valued against the other. The first currency is the base currency and the second is the quote currency
Spot contract
Exchange currency at the current market rate with quick settlement. The most common and fastest way to convert currency, suited to one-off payments or transfers.
Forward contract
A contract to buy or sell a set amount of currency at a fixed rate on a specified future date. Used to provide protection against future currency volatility by fixing exchange rates for payments in advance, supporting more predictable budgeting and cash flow.
Currency exposure
The degree to which a business is affected by movements in exchange rates. Businesses with international revenues, costs or supplier payments carry currency exposure.
Hedging
A structured approach to managing currency risk over time by securing exchange rates for future transactions. Designed to support margin protection and reduce reliance on single-point market timing decisions.
Hedging programmes
Rolling hedge
A hedging approach where a proportion of expected currency needs is secured on a recurring basis, extending coverage forward over time. Supports consistent margin protection and aligns hedging activity with recurring cash flow cycles.
Layered hedge
A hedging approach where currency protection is built gradually through multiple transactions at different exchange rates or time periods. Reduces timing risk and can support a more balanced average rate outcome.
Boundary hedge
A hedging structure that sets upper and lower exchange rate levels within which currency risk is managed. Establishes clear rate parameters and supports more disciplined decision-making during periods of market volatility.
Hedging programmes are designed for commercial risk management purposes and are not suitable for speculative trading. All execution is subject to market conditions, liquidity and applicable terms at the time of trade
Market orders
Market order
An instruction to buy or sell currency immediately at the best available price. Execution is prioritised over rate optimisation, suited to situations where timing matters more than the rate itself.
Limit order
An instruction to execute a currency transaction automatically if a chosen target exchange rate becomes available. Allows you to target a more favourable exchange rate without the need for constant market monitoring.
Stop-loss order
An instruction to execute a currency transaction automatically if the exchange rate reaches a predefined worst-case level. Defines a worst-case exchange rate in advance, helping to limit downside risk and introduce clear risk parameters into currency decisions.
One-cancels-other (OCO) order
An instruction that combines a limit order and a stop-loss order. When one order is triggered, the other is automatically cancelled, combining opportunity and protection within a single instruction.
Trailing stop-loss order
A stop-loss order that automatically adjusts as the exchange rate moves in your favour, maintaining a set distance from the current market rate. Helps preserve improved exchange rates while reducing the need to manually reset stop levels.
Orders are triggered based on Lumon’s prices, which may differ from interbank or external reference rates and may include spreads or adjustments. As a result, you may not know exactly when an order will be triggered, and execution may occur at a different level than expected. This is an execution-only service.
Important information
Foreign exchange markets can be volatile and movements in exchange rates may result in increased costs or reduced revenue. FX risk management strategies may reduce exposure but do not eliminate risk and may result in less favourable outcomes depending on market movements.
This publication is provided for general information purposes and does not constitute legal, tax or other professional advice from Lumon or its subsidiaries, and it is not intended as a substitute for obtaining advice from the relevant professional services. We make no representations, warranties or guarantees, whether expressed or implied, that the content in the publication is accurate, complete or up to date.
Lumon Pay Ltd, trading as Lumon, is authorised by the Financial Conduct Authority as an Electronic Money Institution (FRN: 902022). Lumon Risk Management Ltd, trading as Lumon, is authorised by the Financial Conduct Authority as an Authorised Payment Institution (FRN: 567835) for the provision of payment services and is also authorised and regulated by the Financial Conduct Authority as an investment firm (FRN: 671108).
