No one likes jargon, yet everyone seems to use it. We prefer to cut through the technical terms, to help develop a clear understanding of what’s involved in foreign exchange risk management.
Bear and Bull Market
We often hear the terms bear and bull market, but what do they actually mean and where did the animalistic form emerge from?
Bear Market – Bear markets are defined by the market going down over a period of time. Market participants are pessimistic. As the market starts to fall, there becomes more and more fear as investors sell.
Bull Market – Bull markets are defined by the market going up over a period of time. Market participants are optimistic. As the market starts to rise, there becomes more and more greed as investors buy.
Typically, a move of 20% or more from a recent peak or trough triggers an “official” bear or bull market.
Why bears and bulls?
This is simply down to how the particular animal attacks its victims and used as a metaphor for market activity under these conditions
A bear swipes downward during an attack
A bull will charge and strike its upwards during an attack
Bankers’ Automated Clearing Services (BACS), this term is used to describe the process of making Sterling payments through local banks. Generally used in relation to credits and direct debits, such payments take three working days to clear.
A cash transfer is the action of moving funds from one institution to another. Can be used interchangeably with terms like currency transfer, foreign exchange or currency converting when discussing the movement of funds from one country to another.
The Clearing House Automated Payment System (CHAPS) is a speedier way of making payments, as funds clear on the same business day.
A currency converter is an online currency calculator that shows you the value of your money in another currency at the present exchange rate.
Currency transfer is the movement of money (currency) from one location to another, essentially changing one currency for another. Managing this process requires a consistent, prudent approach to risk, which just happens to be our specialty.
Exposure is the amount of money that is placed at risk due to foreign exchange market movements. Basically, an industry term that describes financial risk involved in a transaction.
Faster payment is when speed is of the essence, this UK system can be used to escalate payments of up to £10,000, bank-dependent. This money usually clears within minutes.
Foreign exchange market
Foreign exchange market, also known as forex, FX or the currency market, this is a forum that facilitates the movement of capital (money) from one global location to another through the trading of currencies.
This market is characterised by its global nature, the sheer volume of transactions that occur daily and the variety of factors that influence exchange rate movements, as well as the use of leverage to counteract these movements by providing padding for profit and loss margins.
A forward contract legal instrument that promises to exchange a specific amount of one currency for another on a future date, at a predetermined rate.This product allows you to fix a price, based on the current market rate, for buying or selling currencies on a specified date in the future.
Forward points are the difference between the spot rate and the forward rate, this calculates the interest rate differential between the buy and sell currency.
Forward rate is the rate at which two currencies can be exchanged on a predetermined date in the future.
FX (Foreign Exchange)
FX is the industry abbreviation that is used to signify foreign exchange, it refers to the worldwide trading market that facilitates the movement of currencies.
Good ‘Til Cancelled. A GTC foreign exchange order will sit in the market at a fixed rate until executed or cancelled.
Hedge protects your international payments against future currency movements, the instruments used to achieve FX risk management are called Currency Options.
Interbank rate is the bulk rate at which banks trade volumes of currency with other banks.
Contextually speaking, margin is used to describe the profit we make on transferring funds. (See the definition of Spread for more.)
Mid-market rate is bought by the client at the offer rate, and sold at the bid rate, the mid-market currency rate is halfway between the bid and offer rates.
There are a multitude of ways in which a money transfer can occur between countries, depending on volume and currency types. Some of the most common transfer methods include: electronic funds transfers, wire transfers, Giro and money orders.
One Cancels Other (OCO). This instrument is a hybrid between a stop loss order and take profit order (described below), and when one of these two orders executes, it automatically cancels the other.
An order is a directive that enables us to transact on your behalf when a desired exchange rate is reached.
The settlement date is the date on which funds are transferred and payment can be expected to clear into an account.
Spot rate is the foreign exchange rate at which two currencies can be exchanged in two days’ time.
A spot transaction is the exchange one currency for another at a predetermined rate, settlement occurs in two working days.
Stop Loss Order
Stop loss order is a method to limit risk in the event that the exchange rate worsens. By setting a currency stop loss level, the trade will be automatically executed if that worst case scenario exchange rate is reached. Because this rate is always worse than the current market rate, it’s possible to protect against detrimental market fluctuations without constant monitoring.
The spread refers to the bank or broker’s profit that is made up of the difference between the rate they receive, and the rate they pass on to clients. We prefer to keep our spread smaller, so we can pass bigger benefits onto our clients.
Take Profit Order
Take profit order is an instrument based on a set currency level, and once that level has been reached, the market trade is automatically triggered. The currency level is always better than current market prices, which allows clients to take profit on exchange rate upswings without having to constantly monitor rates.