Jargon Buster

What is a Forward? (Fixed)

A forward is a fantastic tool which allows you to secure an exchange rate for up to 12 months. This allows you to know exactly what your property will cost you on the day of completion. A small fluctuation in the currency markets during the time from agreeing your purchase price to the completion date can make thousands of pounds difference. To lock in the rate they will ask for a 10% deposit and the rest is needed when the money is transferred.


What is a Spot trade?

Spot is an industry term used when the exchange is made there and then. This is usually used when money is need quickly. It can be a large sum for a house or a smaller sum for a deposit. Payment is needed straight away.


What is a Limit order?

This is used less often than a forward or spot when purchasing foreign property. You can set a pre-determined exchange rate you would like to achieve and if the currency market reaches the rate your trader will try and buy at that rate.


What is Forex?

Forex is the market where currencies are traded also know as FX or The Currency Market.


What are PIPS?

Pips means Price in Point (pips). It is a term used in the industry by traders when talking about small fluctuations in a currency, compared with another currency. You may also hear it used when they are talking about profit and loss.


What does Exchange Rate Spread mean?

The exchange rates that you see quoted online or in the newspaper are called the mid-market rates. This rate is half-way between the bank’s sell rate and their buy rate.

For example:

If the GBP/ EUR mid market rate is quoted at 1.30 (€1.30 to £1) then the Banks will buy GB Pounds from each other for slightly more than €1.30 and will buy Euros for slightly less than €1.30.

For example:
Mid-market rate = 1.3000 EUR/GBP
Interbank buy GBP = 1.3005 EUR/GBP
Interbank buy EUR = 1.3995 EUR/GBP

These rates are known as wholesale rates and are only available to the big financial institutions (including currency exchange companies) who undertake an enormous volume of currency exchange transactions.

Individuals are therefore not able to access these wholesale rates. Therefore, when you exchange your pounds for Euros directly with your bank, you are more likely to be offered rates like these for bank-to-bank transfers:

Mid-market rate = 1.3000 EUR/GBP
Customer can buy GBP = 1.3300 EUR/GBP
Customer can buy EUR = 1.2700 EUR/GBP

The difference is an additional profit margin that the Bank makes on the transaction.

As currency exchange companies are able to buy the currency at the cheaper wholesale rate than you are, they are able to pass these savings on to their customers, therefore giving you access to rates much more favourable than those offered to you by the banks.