Foreign Currency Transaction

Summary of Foreign Currency Transaction

For accounting purposes, a transaction stated in terms of a currency other than the firm’s functional currency. The purchase or sale of goods priced in terms of a foreign currency and the lending or borrowing of foreign funds represent such transactions. (Main Author: William J. Miller)

Elements of the Foreign Currency and Deposit Market

• Spot : Settlement two working or business days from today; (exceptions to the general rule may occur by mutual agreement among the counterparties). In Saudi Riyals the US Dollar spot date normally applies.
• Value today : Same day value.
• Value tomorrow : Value the next working or business day.
• Swap : The simultaneous purchase and sale of identical amounts of a currency, for different value dates.
• Forward : All deals extending over more than two working or business days from today, fixed at the time of dealing. Where the forward date falls on a non-trading day, the maturity is the following working day. Where the deal is arranged on a day for which the spot value date occurs on the last working day of the month, the forward date is the last working day of the appropriate month in the future.
• “Shorts” short dates : All deals for a broken number of days normally up to one week.
• Straight Dates : The words ‘straight date’, ‘even dates’, ‘regular dates’, ‘normal run’ and ‘spot run’ refer to deposit or forward maturities on the same date of months falling after the value date of the commencement of such deals, or the first possible working day thereafter.
• Overnight-Today/Tomorrow : A currency deposit transaction or the simultaneous purchase and sale of currency, or vice versa, by means of a swap, for value today against the next working day.
• Tomorrow/next; Tom/next: A currency deposit transaction or the simultaneous purchase and sale of currency, or vice versa, by means of a swap, for value the next working day against the spot value.
• Spot/next: A currency deposit transaction or the simultaneous purchase and sale of currency, or vice versa, by means of a swap, for the spot value date against the next working day.
• Weekend: A currency deposit transaction or the simultaneous purchase and sale of currency, or vice versa, by means of a swap, for value the last working day of the week (normally FRIDAY) against the first working day of the following week (normally MONDAY). For the Middle Eastern currencies, for example, the specific days should be mentioned to avoid possibility of confusion.
• Forward/forward: A forward sale against a forward purchase, or forward purchase against a forward sale. The lending and borrowing of the same amount of currency from one forward date to another forward date.
• Outright: The purchase or sale of currency for delivery for any date other than spot not being a swap transaction.
• Par: Forward price is the same as spot.
• Parity or same: No proposition on the rate(s) quoted by the other party.
• Square: Purchases and sales, or foreign currency assets and liabilities, are equal, i.e. no position, or no further interest in dealing.
• ‘Put On’ : When a bank ‘puts a broker on’ the broker is given an order to arrange a deal on the principal’s behalf. The broker may be put on either ‘firm’ or ‘under reference’.
• Firm: A dealer making an offer or bid on a “firm” basis commits the bank but he should put some restriction on at the same time (e.g. “firm for one minute” or “firm for one million only”). The word “firm” can also be used in the context of strength.
• For indication (only) – For information (only): Quotations which are not firm, and intended as an indication of unwillingness or inability to deal.
• Under reference : A deal cannot be finalised without reference to the bank which placed the order.
• ‘Take off’: When a bank ‘takes off a broker he is removing his own obligation to deal.
• Details : Information a dealer requires following the completion of a transaction, i.e. rate and dates etc.
• Mine : The dealer takes the “spot”, or “deposit”, whichever has been quoted, from his counterparty. (N.B. This is a very dangerous term and should be discouraged. It should not be used unless amounts have been qualified first).
• Yours : Reversal of above, the dealer giving the “spot”, or “deposit”. (N.B. this is a very dangerous term and should be discouraged. It should not be used unless amounts have been qualified first). (1)
• Package deal : A deal involving several operations which have to be done simultaneously, e.g. a dealer borrows dollars for three months. He then sells spot dollars against buying three months forward and lends the resulting currency for three months.
• At your risk : Quoted rates are subject to change and no more committing.
• Margin/spread : The difference between the buying and selling rates of a foreign exchange quotation or between the borrowing and lending rates in deposits. (2)
• Point/pip : The last decimal place of a quotation.
• Mio : One million.
• Billion/Yard : One thousand million (1,000,000,000).
• Lakh : One hundred thousand rupees.
• Swaps terminology : Ambiguous terms such as ‘I give’, ‘bid’, ‘offer’, ‘borrow’, ‘yours’ and ‘mine’ should not be used in swap deals unless clarified by, for example, ” I buy and sell D.M. at”.

Note : terms such as ‘yours’ and ‘mine’ should be qualified by the amount (see also the
separate definitions of ‘yours’ and ‘mine’).

In the paper markets, such as for CDs and FRN’s, normal terminology should always refer to
the movement of paper and not to the movement of funds. For example to ‘sell’ paper means
that the paper is being sold or offered, and not the money.

Notes

1. An unqualified ‘mine’ or ‘yours’ on European spots indicates a willingness to deal in an
   amount of at least $ 5 mio. Whether qualified or unqualified these terms are used for buying and selling US dollars and NOT the relative currency, except for Cable spot when used for buying and selling Pounds Sterling.
2. The expression is also used in Eurocurrency loans to determine the rate of interest charged to the borrower over and above the rate of interest which is fixed at the commencement of each rollover period, such as every six months; e.g. a margin, or spread of x % p. a. above LIBOR (London Inter-Bank Offered Rate).