Currency Risk
The danger of losing capital due to changes in foreign exchange prices, including the risk to a portfolio when currency markets experience strong moves.
Related terms
FX Exposure
The degree to which a business’s financial results are affected by exchange-rate movements. It arises from foreign-currency sales, purchases, assets, liabilities or forecast cash flows.
Read full definitionHedging
Taking an offsetting position to reduce the impact of currency or price movements on a business. The aim is to protect margins and make cash flows more predictable, not to speculate.
Read full definitionVolatility
The degree of price fluctuation in a currency over a specific period. Higher volatility means larger price swings and greater uncertainty in exchange rates, making it a key measure of FX market risk.
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Spot Rate
The current market exchange rate at which one currency can be bought or sold for immediate delivery. Spot trades typically settle two business days later (T+2).
Read full definitionForward Contract
An agreement to exchange a set amount of one currency for another at a fixed rate on a future date. It locks in today’s rate, protecting a business from adverse currency moves before a payment falls due.
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The simultaneous purchase and sale of the same amount of a currency for two different value dates, typically a near leg at spot and a far leg forward. It is used to roll a hedge forward or manage short-term cash-flow timing.
Read full definitionCurrency Pair
Two currencies quoted against each other, such as GBP/USD. The first is the base currency and the second the quote currency; the price shows how much of the quote currency one unit of the base is worth.
Read full definitionBid-Ask Spread
The difference between the price at which the market will buy a currency (bid) and the price at which it will sell (ask). A tighter spread means lower transaction costs.
Read full definitionPip
The smallest standard increment by which a currency pair moves, usually the fourth decimal place (0.0001). Pips are the common unit for quoting spreads and price movements.
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