Introduction

Foreign exchange (often abbreviated to FX or forex) means the buying and selling of currencies against other currencies. A massive 1.5 trillion US Dollars is traded every day in the wholesale foreign exchange market. That equates to 1 billion US Dollars per minute.

Pricing

FX spot prices are usually quoted to between 4 and 6 significant figures. For example, EUR/USD, the most frequently traded currency pair, has seen rates such as 0.8225, 1.0015 or 1.2928. The number of decimals does not vary for a particular currency pair according to movements in the rate, except in the case of devaluations.

FX spot prices have a bid price and an offer price, for example:

 BidOffer
EUR/USD1.03451.0347

The bid price is where the bank is willing to buy CCY1 and the offer price is where the bank is willing to sell CCY1. In this case, the bank is willing to buy EUR against USD at 1.0345 and is willing to sell EUR against USD at 1.0347. The difference between the bid and the offer is called the spread. It is market convention always to talk about what you are doing with CCY1. For example, if someone is "buying USD/JPY", they are buying USD and selling JPY.

Market participants are generally expected to know what the first part of the rate will be (in this case 1.03..), and this part is known as the "big figure". Because the current big figure does not usually vary from one minute to the next, traders normally quote only the last 2 digits of the rate (3 digits for some currency pairs), and these digits are known as the "pips". A trader would therefore quote the bid and offer in this example as "45 47". When trading over the phone, it is common to quote only the pips, whereas e-commerce systems generally display the entire rate, although the pips may be given more prominence.

EUR/GBP is displayed in a slightly different way from most other currency pairs in that although one pip is worth 0.0001, the rate is often displayed to five decimal places. The fifth decimal place can only be 0 or 5 and is used to display half pips. Many trading systems display the half pip digit in a smaller font than the two main pip digits.

Interbank trades are always traded in CCY1 amounts, regardless of the currency pair. Most customer trades are also traded in CCY1 amounts, although many customers have a business need to trade in CCY2 amounts. For example, even though EUR/USD is a standard currency pair, a US customer may have a need to trade a USD amount rather than a EUR amount. The rate is quoted in exactly the same way, but instead of multiplying the EUR amount by the EUR/USD rate to product a USD amount, the USD amount is divided by the EUR/USD rate to produce a EUR amount.

Market Terminology

Typical interbank traded amounts in major currency pairs such as EUR/USD include amounts such as USD 5 million and USD 10 million, and amounts are usually quoted in millions. A billion (1,000,000,000) is called a "yard", which originates from the French "milliard". For example, traders say "ten dollars" to mean USD 10,000,000, say "half a quid" to mean GBP 500,000 and say "three yards of Yen" to mean JPY 3,000,000,000.

The market has its own verbal abbreviated names for major currencies, examples of which are:

USD - Dollar
GBP - Sterling
JPY - Yen
CHF - Swiss(y)
AUD - Aussie
NZD - Kiwi
SEK - Stocky (named after Stockholm)
DKK - Copey (named after Copenhagen but no longer used)
NOK - Nocky (simply named after its ISO currency code)
SGD - Sing
HKD - Honky
MXN - Mex
ZAR - Rand
HUF - Huff (simply named after its ISO currency code)
ARS - Argie

Some of the old euro legacy currencies were known as:

DEM - Mark
FRF - Paris
ITL - Lira
PTE - Scud

For most other currencies, the country name or adjective is used. For example, USD/CAD is known as "Dollar Canada", USD/JPY is known as "Dollar Yen", and AUD/USD is known as "Aussie Dollar". An exception is GBP/USD, which is known as "Cable", which stems from the days when a cable under the Atlantic Ocean was used to synchronise the GBP/USD rate between the London market and the New York market. Before IEP (Irish Pound) became a denomination of the the euro, IEP/USD was sometimes known as "Wire", particularly in the forward market.

Decimal places on spot rates

The following rules can be used to determine how many decimal places a spot rate should have:

Triangulation

Triangulation is an analytical term used to describe the crossing of one currency pair with another. The resulting spread is wider after triangulation because the spreads of the two crossed currency pairs are merged together by multiplication or division. The following three examples show some typical ways that triangulation is calculated:

Example 1 (common CCY1)

EUR/GBP and EUR/CHF are traded as standard interbank currency pairs, but a customer would like a price in GBP/CHF. In order to calculate a GBP/CHF price from EUR/GBP and EUR/CHF prices, it is necessary to triangulate:

 BidOffer
EUR/GBP0.66420.6645
EUR/CHF1.57451.5748

Therefore:
GBP/CHF bid = EUR/CHF bid EUR/GBP offer = 2.3695
GBP/CHF offer = EUR/CHF offer EUR/GBP bid = 2.3708

Note that in this example, the cross rate is calculated via EUR rather than via USD, because EUR-based currency pairs are more liquid for most European currencies than USD-based currency pairs.

Example 2 (mixed CCY1 and CCY2)
 BidOffer
GBP/USD1.65231.6528
USD/SGD1.75851.7600

Therefore:
GBP/SGD bid = GBP/USD bid x USD/SGD bid = 2.9056
GBP/SGD offer = GBP/USD offer x USD/SGD offer = 2.9089

Example 3 (common CCY2)
 BidOffer
AUD/USD0.75040.7509
NZD/USD0.68090.6814

Therefore:
AUD/NZD bid = AUD/USD bid NZD/USD offer = 1.1013
AUD/NZD offer = AUD/USD offer NZD/USD bid = 1.1028

The following diagram illustrates which currencies are traded interbank against each other as standard spot currency pairs. Triangulation is necessary between any two currencies shown that are not joined by a line. Only currencies supported by EBS and D2 are shown.



Note that, although Reuters 3000 Spot Matching (D2) supports many non-standard spot currency pairs such as USD/DKK, EUR/NZD, AUD/NZD and GBP/JPY, traders do not use D2 for non-standard currency pairs and there are rarely any prices in the system.