Commonly Used Terms In Foreign Exchange Transactions

When trading foreign exchanges, whether amongst the dealers or dealer/client, we often hear technical terms that are tuned to the language used in the foreign exchange market. Append below are some of the commonly used terms.



Commonly Used Terms In Foreign Exchange Transactions



·          refers to simultaneous buying and selling of foreign exchange. The profits are made from the difference between foreign exchanges prevailing in the different centres at the same time or in different currencies.

Buying Rates:


·         refers to the exchange rtaes on which foreign exchange dealers are prepared to buy in the market.

Closing Position:


·         it means that covering is either open long or short positions by means of a spot operation. Sometimes it is by means of forward operations.

Cross Rate:


·          refers to ratio between the exchange rates of two foreign currencies in terms of a third currency

Currrency Swap


·         a transaction in which two counterparties exchange specific amounts of two different currencies at the outset and repay over time according to a predetermined rule which reflects interest payments and possibly amortization of principal.

Exchange Contracts:


·         it means that documents are issued by foreign exchange dealers or brokers to both parties to confirm a foreign exchange transaction.

Floating Exchanges:


·         refers to a system having no parities, and exchange rate fluctuate freely.

Foreign Bills:


·         it means that bills of exchange drawn on a foreign centre in term of a foreign currency.

Forward Exchange:


·         it refers to the operation of foreign exchange for future delivery.

Forward Rates:


·         the actual rates on whcih foreign exchanges for future delivery are quoted

Forward Rate Agreement(FRA)


·         an agreement between two parties wishing to protect themselves against a future movement in interest rates. The two parties agree on an interest rate for a specified period from a specified future settlement date based on an agreed principal amount. No committment is made by either party to lend or borrow the principal amount. Their exposure is only the interest difference between the agreed and actual rates at settlement.




·         to reduce risk by taking a position which offsets existing or anticipating exposure to a change in market rates.


Long Position:


·         refers to an excess of short term balances

Nostro Accounts:


·         it means that current accounts of a bank with its correspondents in overseas in the latter’s currencies.

Open Position:


·         the differences between long positions and short positions in a particular foreign currencies. It may be the grand total of long and short positions in all foreign currencies.

Optional Forward Contracts:


·         this is a forward exchange transaction where one of the parties has the choice on various delivery dates.



·         refers to foreign exchange bought and sold and that it has no connection with the simultaneous sale or purchase of spot exchanges.

Selling Rate:


·         it means that exchange rate on which dealers are willing to sell foreign currencies in the market.

Short Forward Rate:


·         this is a relative term used for maturities under one month

Short Position:


·         this is an excess of short term liabilities over short term assets to be claimed in a foreign currency

Spot Exchanges:


·          it means that foreign exchanges are bought and sold for immediate delivery



·         it refers to a discrepancy between buying and selling rates

Swap Rate:


·         similar to forward rate

Two Way Quotation:


·         it means that a bank quotes simultaneous quotation of buying and selling rates and indicates its willingness to deal in either way.

Value Date:


·          it refers to the date on which foreign exchanges are bought and sold to be delivered and to be paid in local currency

Value Today:


·         this means that arrangement for spot exchanges has to be delivered and paid for on the same day instead of two clear days after.

Vostro Accounts:


·          it refers to the current accounts of a foreign bank with its correspondents in the latter’s currency

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