THE A - Z OF CURRENCY HEDGING

The glossary with insights and facts that makes currency hedging terms and concepts easily understandable.

A

At the money

at the money

At the money

At the money is a term used in options trading. Options are contracts that allow you to buy or sell an asset at a pre-agreed price.

B

Base currency

base currency

Base currency

The base currency is the first currency shown in a foreign exchange quotation. The second currency in the quotation is called the quote currency, or counter currency.

C

Collar

Collar - FX Glossary

Collar

A collar is a hedging strategy that helps you manage your foreign exchange risk by limiting your exposure to currency fluctuations to within a certain range.

D

Derivative

derivative

Derivative

A derivative is a type of financial contract that gets its value from an underlying asset. In foreign exchange transactions, the underlying asset is typically a currency’s exchange rate.

E

Exposure

exposure

Exposure

In foreign exchange transactions, exposure is the risk that you could lose money due to the exchange rate evolving in a way that is unfavourable to you.

F

Forward contract

forward contract

Forward contract

Forward contracts are a type of derivative – a financial contract that gets its value from an underlying asset such as a company share or a loan or coffee beans.

G

Greeks

greeks

Greeks

On the options markets, the so-called “Greeks” are the numerical indicators that traders use to measure the risks a particular type of trade entails.

H

Hedge

hedge

Hedge

A hedge is an investment that you make in order to manage your risk. When you hedge, you’re minimising or offsetting the possibility you’ll lose money should things go wrong.

I

Initial Margin

initial margin

Initial Margin

Initial margin is the amount you have to pay a broker to open a trade on the forex market. It’s worked out as a percentage of the total value of your trade.

J

Japanese Yen Carry Trade

Japanese-Yen-Carry-Trade

Japanese Yen Carry Trade

A carry trade is a type of foreign exchange trade in which you borrow money in one currency at low interest and use it to make high-interest investments in another currency (Yen — Japan’s currency).

K

Knock-in Option

 Knock-in Option

Knock-in Option

A knock-in option is an option that only comes into force — or knocks in — if the underlying asset reaches a certain price. In foreign exchange, the underlying asset is an exchange rate.

L

Leverage

Leverage

Leverage means investing using money you’ve borrowed, usually from a broker. When you trade on leverage, you pay your broker a sum of money called initial margin.

M

Mark-to-market

mark-to-market

Mark-to-market

Mark-to-market is the accounting process that measures the real-world value of foreign exchange trades. It shows whether you’ve made a profit or a loss on a trade and whether your broker should credit your trading account or make a margin call.

N

Non-deliverable forward

non-deliverable forward

Non-deliverable forward

A non-deliverable forward is a forward contract which is settled in your local currency. Like standard forward contracts, non-deliverable forwards are agreements to buy or sell X amount of a certain currency at a predetermined exchange rate on X date in the future.

O

Out of the money

out of the money

Out of the money

‘Out of the money’ is one of three terms used to describe an option’s value, or ‘moneyness’. The other two terms are ‘at the money ‘ and ‘in the money’. When an option is out of the money, its strike price — that is, the price at which you’d exercise the option — is lower than the market price.

P

Participating Forward

Participating forward

A participating forward is a Hybrid FX Forward and Option instrument. The amount you want to protect — or hedge  — is split into two parts. One part works like a standard forward contract. In other words, you enter a legal obligation to exchange a specified amount of foreign currency on a certain date at a specified rate.

Q

Quarterly roll

quarterly roll

Quarterly roll

The quarterly roll is a period of heightened market activity that happens every quarter, when forex traders roll their trades.

R

Ratio forward

ratio forward

Ratio forward

A ratio forward is a type of structured, or ‘exotic’ option. Exotic options are derivative contracts  in which two or more options are combined to create a more complex arrangement.

S

Straddle

straddle

Straddle

A straddle is a strategy that traders typically use when they want to bet on the price of an asset but aren’t sure if it’s likely to go up or down — if they are buying the straddle, or have a high conviction that the price will remain stable — if they sell the straddle.

T

Theta

theta

Theta

Theta (Θ) is one of the so-called Greeks. These are numerical indicators that traders use to measure the risks of a particular options trade. Theta represents time-sensitivity, or time-decay.

U

US Dollar Index

us dollar index

US Dollar Index

The US Dollar Index measures the US Dollar’s value relative to a basket of six currencies: Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, Swiss Franc.

Volatility

volatility

Volatility

Volatility is a measure of how much the price of an instrument moves. It is usually expressed as an annualised %. It is often calculated as the standard deviation of the daily moves in price of an asset from its average.

W

Warrant

warrant

Warrant

A warrant is a type of derivative : a financial instrument that gets its value from an underlying commodity. In foreign exchange transactions, the underlying commodity is a currency pair.

X

Xenocurrency

xenocurrency

Xenocurrency

Xenocurrency is another name for foreign currency — a currency that is traded, invested, deposited, or used outside the country where it’s issued.

Y

Yield

yield

Yield

Yield is how much you’ve earned or can expect to earn from an investment over a specific period of time, expressed as a percentage of the amount you originally invested or your investment’s current market value.

The letter Z will be published on the 3rd of December.

High Risk Investment Notice

Trading in leveraged financial instruments such as Options or other financial derivatives, carries a high level of risk and may not be suitable for all investors.  Investors who make use of these financial products run the risk of substantial capital losses which may exceed your initial deposit. Assure Hedge (UK) Limited makes no claim or warranty regarding either the appropriateness or suitability of these instruments for your purposes whether commercial or otherwise. Assure Hedge (UK) Limited may provide general commentary or educational material available on its website or otherwise, which is not intended as investment advice. You should carefully consider your financial situation and needs and seek independent advice from a duly authorised financial adviser. Assure Hedge (UK) Limited assumes no liability for errors, inaccuracies or omissions; does not warrant the accuracy, completeness of information, text, graphics, links or other items contained within these materials. You should read and understand Assure Hedge (UK) Limited’s Terms and Conditions prior to taking any further action.

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