Automatic execution helps traders implement strategies for entering and exiting trades based on automated algorithms with no need for manual order placement.

Automatic execution is a method for placing and executing trades without the need for manual input. When events happen which may warrant avoiding trading in a specific market, automated orders will still be processed without human intervention,
A few of the possible automatic execution settings include:
Limit order is an order a buy or sell transaction at a specified limit price or better.
Stop loss order is designed to limit an investor’s loss on a position in a security and can work with short and long positions or holdings. Automatic execution refers to orders that do not need to be manually inputted; the order is created and executed by an automated trading program. Automatic execution permits trades to be placed and filled even when the trader who is running the automated trading program isn't present. Automated trading strategies are often used by professional traders such as high-frequency trading (HFT) and market makers, but is increasingly available to some retail traders.

Automatic Execution  and Example

A back-to-back loan, occurs when two parent companies in different countries borrow in their own local currency in similar amounts and then lend it to their domestic subsidiaries.

A back-to-back loan, also known as a parallel loan, is when two companies in different countries borrow offsetting amounts from one another in each other's currency as a hedge against currency risk. When the loan term ends, the company repays the loan at the fixed rate agreed upon at the beginning of the loan term, thereby ensuring against currency risk during the term of the loan. Therefore, the company and the bank create a back-to-back loan, whereby the company deposits CA$1 million with the bank, and the bank (using the deposit as security) lends the company CA$1 million worth of euros based on the current exchange rate. A back-to-back loan, also known as a parallel loan, is when two companies in different countries borrow offsetting amounts from one another in each other's currency as a hedge against currency risk. Because both loans are made in the local currencies, there is no currency risk (the risk that the exchange rates between two currencies will swing widely) when the loans are paid back.

Back-to-Back Loan

A basket of USD shorts is a foreign exchange trading strategy where the U.S. dollar is traded against a basket of currencies.

A basket of USD shorts is a forex trading strategy that involves selling the U.S. dollar against a group of currencies, instead of against a single currency pair. A basket of USD shorts is a strategy is generally employed by traders who are bearish on the U.S. dollar, and who would prefer to have a short trading position on the USD. A basket of USD shorts is a forex trading strategy that involves selling the U.S. dollar against a group of currencies, instead of against a single currency pair. A basket of USD shorts is a forex strategy where the U.S. dollar is sold, while taking a long position in a basket of several other currencies. A basket of USD shorts is one of many different forex trading strategies used by foreign exchange traders to determine whether to trade currencies at any given point in time.

Basket Of USD Shorts

Beggar-thy-neighbor is a term for policies that a country enacts to address its economic woes that worsen the economic problems of other countries. 

Beggar-thy-neighbor is a term used for a set of policies that a country enacts to address its economic woes that, in turn, actually worsen the economic problems of other countries. This is usually achieved with some kind of trade barrier—tariffs or quotas—or competitive devaluation in order to lower the price of exports and drive employment and the price of imports up.
A currency war is a prime example of beggar-thy-neighbor in action since it amounts to a nation attempting to gain an economic advantage without consideration for the ill effects it may have on other countries. Smith saw mercantilism and its zero-sum understanding of the market encouraging nations to beggar each other in order to increase economic gain as misguided; instead, he believed that free trade would lead to long-term economic growth that was not zero-sum, but would actually increase the wealth of—you guessed it—all nations. Beggar-thy-neighbor is a term used for a set of policies that a country enacts to address its economic woes that, in turn, actually worsen the economic problems of other countries. Often, beggar-thy-neighbor policies are not intended to negatively affect other countries; rather, it is a side effect of policies meant to bolster the country's domestic economy and competitiveness.

Beggar-Thy-Neighbor

A blocked currency is one which can not be traded on the forex (FX) market, usually due to government restrictions. 

A blocked currency is a currency that can’t freely be converted to other currencies on the foreign exchange (FX) market as a result of exchange controls. These are several reasons for making money blocked, including foreign exchange regulations, government restrictions, physical barriers, political sanctions or extremely high volatility.​​​​​​​
A blocked currency refers to money in which exchanges into another country's currency is not allowed, typically in forex markets. A blocked currency is a currency that can’t freely be converted to other currencies on the foreign exchange (FX) market as a result of exchange controls. Depending on how large of a player the country blocking currency is on the global market, a blocked currency can have a widespread economic impact. An exchange may decide to block or restrict trading or convertibility of a particular currency, or national regulations may preclude listing a currency pair entirely due to geo-political purposes, physical barries, or extreme asset volatility.

Blocked Currency

A carry grid is a trading strategy that involves buying currencies with relatively high interest rates and selling currencies with low interest rates.

A carry grid is a foreign exchange trading strategy that attempts to profit from a series of simultaneous currency carry trade currency positions. A carry grid is a foreign exchange trading strategy that attempts to profit from a series of simultaneous currency carry trade currency positions. The major risk of employing a carry grid is that a major turnaround in the carry trade can lead to significant losses that could be exacerbated by the multiple trading positions in the trading grid. A carry trade is a trading strategy where you borrow at a low-interest rate and re-invest the proceeds in a currency with a higher interest rate. A carry trade involves buying currencies (i.e. lending) with relatively high interest rates, and concurrently selling currencies (i.e. borrowing) that have low interest rates.

Carry Grid

Currency convertibility is the degree to which a country's domestic money can be converted into another currency or gold.

Currency convertibility is the ease with which a country's currency can be converted into gold or another currency. Non-deliverable forward contracts (NDFs) can give a trader, for instance, indirect exposure to the Chinese renminbi, Indian rupee, South Korean won, new Taiwan dollar, and Brazilian real and other inconvertible currencies.
Good currency convertibility requires a readily available supply of physical currency which is why some countries impose capital controls on money leaving its country. For example, a government with low reserves of hard foreign currency usually restricts currency convertibility because that government would otherwise not be in a position to intervene in the foreign exchange (forex) market (i.e., to revalue, devalue) in order to support their own currency if and when necessary. When a country has poor currency convertibility, meaning it is difficult to swap it for another currency or store of value, it poses a risk and barrier to trade with foreign countries who have no need for the domestic currency. A blocked currency is a currency that can’t freely be converted to other currencies on the forex markets as a result of exchange controls.

Currency Convertibility

Countertrade is a reciprocal form of international trade in which goods or services are exchanged for other goods or services rather than for hard currency. This type of international trade is more common in lesser-developed countries with limited foreign exchange or credit facilities.

Countertrade is a reciprocal form of international trade in which goods or services are exchanged for other goods or services rather than for hard currency. Countertrade is a reciprocal form of international trade in which goods or services are exchanged for other goods or services rather than for hard currency. A **counterpurchase** refers to the sale of goods and services to a company in a foreign country by a company that promises to make a future purchase of a specific product from the same company in that country. In any form, countertrade provides a mechanism for countries with limited access to liquid funds to exchange goods and services with other nations. Under a counterpurchase arrangement, the exporter sells goods or services to an importer and agrees to also purchase other goods from the importer within a specified period.

Countertrade

Covered interest arbitrage is a strategy where an investor uses a forward contract to hedge against exchange rate risk. Returns are typically small but it can prove effective.

Covered interest arbitrage is a strategy in which an investor uses a forward contract to hedge against exchange rate risk. This means that the one-year forward rate for X and Y is X = 1.0125 Y.
A savvy investor could therefore exploit this arbitrage opportunity as follows:
Borrow 500,000 of currency X @ 2% per annum, which means that the total loan repayment obligation after a year would be 510,000 X.
Convert the 500,000 X into Y (because it offers a higher one-year interest rate) at the spot rate of 1.00.
Lock in the 4% rate on the deposit amount of 500,000 Y, and simultaneously enter into a forward contract that converts the full maturity amount of the deposit (which works out to 520,000 Y) into currency X at the one-year forward rate of X = 1.0125 Y.
After one year, settle the forward contract at the contracted rate of 1.0125, which would give the investor 513,580 X.
Repay the loan amount of 510,000 X and pocket the difference of 3,580 X. Covered interest arbitrage is only possible if the cost of hedging the exchange risk is less than the additional return generated by investing in a higher-yielding currency—hence, the word _arbitrage._ It may be contrasted with uncovered interest arbitrage.
Covered interest arbitrage uses a strategy of arbitraging the interest rate differentials between spot and forward contract markets in order to hedge interest rate risk in currency markets. Covered interest rate arbitrage is the practice of using favorable interest rate differentials to invest in a higher-yielding currency, and hedging the exchange risk through a forward currency contract. As a simple example, assume currency X and currency Y are trading at parity in the spot market (i.e., X = Y), while the one-year interest rate for X is 2% and that for Y is 4%.

Covered Interest Arbitrage

A crawling peg is an exchange rate adjustment system whereby a currency with a fixed exchange rate is allowed to fluctuate within a band of rates. 

Recovery from the Asian Crisis and the Role of the IMF.

A crawling peg is a system of exchange rate adjustments in which a currency with a fixed exchange rate is allowed to fluctuate within a band of rates. To maintain equilibrium, the central bank of the country with the pegged currency either buys or sells its own currency on foreign exchange markets, buying to soak up excess supply and selling when demand rises. A crawling peg is a system of exchange rate adjustments in which a currency with a fixed exchange rate is allowed to fluctuate within a band of rates. As a pegged currency weakens, both the par value and the bracketed range can be adjusted incrementally to smooth the decline and maintain a level of exchange rate predictability between trading partners. A crawling peg is a band of rates that a fixed-rate exchange rate currency is allowed to fluctuate.

Crawling Peg

Cross-currency settlement risk is the risk that the counterparty in a foreign currency transaction will not hold up their end of the deal.

Cross-currency settlement risk is a type of settlement risk in which a party involved in a foreign exchange transaction sends the currency it has sold but does not receive the currency it has bought. Cross-currency settlement risk is a type of settlement risk in which a party involved in a foreign exchange transaction sends the currency it has sold but does not receive the currency it has bought. Cross-currency settlement risk is also called Herstatt risk, after the small German bank whose failure in June 1974 highlighted this risk. Cross-currency settlement risk is also called Herstatt risk, after the small German bank whose failure in June 1974 highlighted this risk. In cross-currency settlement risk, the full amount of the currency purchased is at risk.

Cross-Currency Settlement Risk

Currency arbitrage is the act of buying and selling currencies instantaneously for a riskless profit.

A currency arbitrage is a forex strategy in which a currency trader takes advantage of different spreads offered by brokers for a particular currency pair by making trades. A currency arbitrage is a forex strategy in which a currency trader takes advantage of different spreads offered by brokers for a particular currency pair by making trades. Currency arbitrage can be practiced using different strategies, such as two-currency arbitrage and three-currency arbitrages. In currency arbitrage, the trader would take one euro, convert that into dollars with Bank A and then back into euros with Bank B. By definition, currency arbitrage requires the buying and selling of the two or more currencies to happen instantaneously, because an arbitrage is supposed to be risk free.

Currency Arbitrage

A currency band represents the floor and ceiling that the price of a given currency can trade between.

A currency band is a monetary regulation imposed by a government or central bank that specifies both a price floor and ceiling for its national currency in relation to other currencies. The monetary policy of a country with a currency band is dependent on the behavior of its reference foreign currency because the central bank must make decisions that cause the value of the local currency to change in a way that approximates changes in the value of the reference currency. A currency band allows the currency to float between these two specified prices, but upon reaching those limits the currency price will switch to a fixed rate. A currency band allows the currency to float between these two specified prices, but upon reaching those limits the currency price will switch to a fixed rate. Basically, a currency band can be understood as a managed exchange rate system that is a hybrid of a fixed exchange rate and a floating exchange rate.

Currency Band

Currency risk sharing is a form of hedging currency risk in which two parties agree to share the risk from exchange rate fluctuation.

Currency risk sharing is a way of hedging currency risk in which the two parties of a deal or a trade agree to share in the risk from exchange rate fluctuations. Currency risk sharing is a way of hedging currency risk in which the two parties of a deal or a trade agree to share in the risk from exchange rate fluctuations. Currency risk sharing generally involves a legally binding price adjustment clause, wherein the base price of the transaction is adjusted if the exchange rate fluctuates beyond a specified neutral band or zone. Currency risk sharing is a contractual agreement between counterparties to a trade or deal to share in any losses due to currency risk or exchange rate fluctuations. On the other hand, if the spot rate in three months is €1 = $1.22, instead of ABC paying EC the equivalent of $1.22 million per turbine, the two companies split the difference between the base price of $1.3 million and the current price of $1.22 million.

Currency Risk Sharing

A currency basket is comprised of a mix of several currencies with different weightings.

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change Relating to Listing and Trading of Shares of Twenty-Six Series of ProShares Trust II under NYSE Arca Equities Rule 8.200

A currency basket is a set of several currencies with different weightings. A basket of USD shorts is a forex trading strategy that involves selling the U.S. dollar against a group of currencies, instead of against a single currency pair. The currency group that the USD is traded against in such a situation is referred to as the basket. On the other hand, currency traders who have a broad-based view of a single currency will choose to own that currency against a variety of different currencies. A countries monetary authority, such as its central bank, may use a basket of currencies as a reference with which to set its own currency exchange rate, such as in the case of a pegged currency. The European currency unit (which was replaced by the euro) and the Asian currency unit are examples of currency baskets.

Currency Basket

A currency swap is a foreign exchange transaction that involves trading principal and interest in one currency for the same in another currency.

A currency swap, sometimes referred to as a cross-currency swap, involves the exchange of interest—and sometimes of principal—in one currency for the same in another currency. A currency swap involves the exchange of interest—and sometimes of principal—in one currency for the same in another currency.
Companies doing business abroad often use currency swaps to get more favorable loan rates in the local currency than if they borrowed money from a local bank.
Considered to be a foreign exchange transaction, currency swaps are not required by law to be shown on a company's balance sheet.
Interest rate variations for currency swaps include fixed rate to fixed rate, floating rate to floating rate, or fixed rate to floating rate.
Currency swaps were originally done to get around exchange controls, governmental limitations on the purchase and/or sale of currencies. There are three variations on the exchange of interest rates: fixed rate to fixed rate; floating rate to floating rate; or fixed rate to floating rate. This means that in a swap between euros and dollars, a party that has an initial obligation to pay a fixed interest rate on a euro loan can exchange that for a fixed interest rate in dollars or for a floating rate in dollars. A currency swap, sometimes referred to as a cross-currency swap, involves the exchange of interest—and sometimes of principal—in one currency for the same in another currency.

Currency Swap

A dual currency service allows investors to speculate on exchange rate movement between two currencies. 

A dual currency service is a forex trading service that allows an investor to speculate on exchange rate movement between two specific currencies through a fund or instrument. Dual currency service instruments typically involve currency pairs of major, liquid currencies, such as the U.S. dollar, British pound, Swiss franc, euro and Japanese yen. Generally, currencies that are traded in exchange for the U.S. dollar (USD) are called major currencies, while those currencies that are not associated with the USD are referred to as minor currencies. Often using major currency pairs, a dual currency service is intended for directional bets in exchange rate spreads and not on spot rates. In a currency pair, the value of two currencies, the base currency and the quote currency, are compared to each other.

Dual Currency Service

A fixed-for-fixed currency swap involves exchanging fixed interest payments in one currency for fixed interest payments in another

A fixed-for-fixed swap refers to a type of foreign currency swap in which two parties exchange currencies with one another. A fixed-for-fixed swap may be contrasted with a fixed-for-floating swap, where fixed interest payments in one currency are exchanged for floating interest payments in another. A fixed-for-fixed swap is a foreign currency derivative where both counterparties agree to pay each other a fixed interest rate on the principal amount negotiated. The parties involved in a fixed-for-fixed swap—who are also called counterparties—enter into an agreement, paying each other interest at a fixed rate. Foreign currency swaps come in fixed-for-floating and fixed-for-fixed swaps.

Fixed-for-Fixed Swaps

Forex options trading allows currency traders to realize gains or hedge positions of trading without having to purchase the underlying currency pair.

Forex options are derivatives based on underlying currency pairs. The characteristics of currency options trading include a decentralized forex market that varies much more widely than options in the more centralized exchanges of stock and futures markets. There are two types of options primarily available to retail forex traders for currency options trading. Forex options trading is a strategy that gives currency traders the ability to realize some of the payoffs and excitement of trading without having to go through the process of buying a currency pair. Forex options come in two varieties, so-called vanilla options and SPOT options.

Forex Options Trading

Forex arbitrage is the simultaneous purchase and sale of currency in two different markets to exploit short-term pricing inefficiency. 

Forex arbitrage is the strategy of exploiting price disparity in the forex markets. An uncovered interest rate arbitrage involves changing a domestic currency which carries a lower interest rate to a foreign currency that offers a higher rate of interest on deposits. Other forex arbitrage includes:
Currency arbitrage involves the exploitation of the differences in quotes rather than movements in the exchange rates of the currencies in the currency pair. It may be effected in various ways but however it is carried out, the arbitrage seeks to buy currency prices and sell currency prices that are currently divergent but extremely likely to rapidly converge. Because the Forex markets are decentralized, even in this era of automated algorithmic trading, there can exist moments where a currency traded in one place is somehow being quoted differently from the same currency in another trading location.

Forex Arbitrage

Forex forecasting software provides technical indicators and trading tools to FX traders.

Forex forecasting software is an analytical toolkit used to help currency traders with foreign exchange trading analysis through technical charts and indicators. Forex forecasting software provides charts and graphs of currency pairs that display price changes over time as well as indicator overlays such as moving averages, which help analysts and traders to determine appropriate and profitable entry and exit points for their forex trades. As with charting software used with trading other types of securities, forex forecasting software is applied primarily by technical analysts to short-term forecast future price movements. Forex forecasting software refers to computer-based technical analysis software geared to currency markets. Forex forecasting software is an analytical toolkit used to help currency traders with foreign exchange trading analysis through technical charts and indicators.

Forex Forecasting Software

Forward booking is the process of entering into a contract with a booking company, or risk agent, to lock in a specific price for a future date.

Forward booking is the process of entering into a contract with a booking company, or risk agent, to lock in a specific price for a future date. If the company is correct, then the booking company assumes the loss, which would be the difference between the EUR/USD rate when the contract expires and the specified exchange rate on the contract. Forward booking is the process of entering into a contract with a booking company, or risk agent, to lock in a specific price for a future date. Forward booking is the process of entering into a contract with a booking company, or risk agent, to lock in a specific price for a future date. Forward booking is a method of mitigating the risk of foreign exchange rate volatility.

Forward Booking

A forward exchange contract (FEC) is a special type of foreign currency transaction.

A forward exchange contract (FEC) is a special type of over-the-counter (OTC) foreign currency (forex) transaction entered into in order to exchange currencies that are not often traded in forex markets. The forward exchange rate for a contract can be calculated using four variables:
S = the current spot rate of the currency pair
r(d) = the domestic currency interest rate
r(f) = the foreign currency interest rate
t = time of contract in days
The formula for the forward exchange rate would be:
> Forward rate = S x (1 + r(d) x (t / 360)) / (1 + r(f) x (t / 360)) A forward exchange contract (FEC) is a special type of over-the-counter (OTC) foreign currency (forex) transaction entered into in order to exchange currencies that are not often traded in forex markets. The contract's rate of exchange is thus fixed and specified for a specific date in the future, allowing the parties involved to better budget for future financial projects and know in advance precisely what their income or costs from the transaction will be at the specified future date. A forward exchange contract (FEC) is an agreement between two parties to effect a currency transaction, usually involving a currency pair not readily accessible on forex markets.

Forward Exchange Contract (FEC)

A funding currency is exchanged in a currency carry trade.

The funding currency is the currency that is exchanged in a currency carry trade transaction. Once converted, the amount that he would have is:
U.S. dollars = 50 million yen ÷ 115 = $434,782.61
After a year invested at the 4 percent U.S. rate, the trader has:
Ending balance = $434,782.61 x 1.04 = $452,173.91
Now, the trader owes the 50 million yen principal plus 0.5 percent interest for a total of:
Amount owed = 50 million yen x 1.005 = 50.25 million yen
If the exchange rate stays the same over the course of the year and ends at 115, the amount owed in U.S. dollars is:
Amount owed = 50.25 million yen ÷ 115 = $436,956.52
The trader profits on the difference between the ending U.S. dollar balance and the amount owed, which is:
Profit = $452,173.91 - $436,956.52 = $15,217.39
Notice that this profit is exactly the expected amount: $15,217.39 ÷ $434,782.62 = 3.5%
If the exchange rate moves against the yen, the trader would profit more. The most popular carry trades have involved buying currency pairs like the Australian dollar/Japanese yen and New Zealand dollar/Japanese yen because the interest rate spreads of these currency pairs have been quite high. For example, a trader will borrow Japanese yen and purchase a currency with a higher interest rate, such as the Australian dollar or New Zealand dollar. The funding currency is the currency that is exchanged in a currency carry trade transaction.

Funding Currency

An inflation hedge is an investment that is considered to provide protection against the decreased value of a currency, made by investing in safe-haven assets and other less volatile instruments.

An inflation hedge is an investment that is considered to protect the decreased purchasing power of a currency that results from the loss of its value due to rising prices either macro-economically or due to inflation. For example, Delta has not consistently made money from its refinery in the years since it was purchased, limiting the effectiveness of its inflation hedge.
The arguments for and against investing in commodities as an inflation hedge are usually centered around variables such as global population growth, technological innovation, production spikes and outages, emerging market political turmoil, Chinese economic growth, and global infrastructure spending. An inflation hedge is an investment that is considered to protect the decreased purchasing power of a currency that results from the loss of its value due to rising prices either macro-economically or due to inflation. So an owner of gold is protected (or hedged) against a falling dollar because, as inflation rises and erodes the value of the dollar, the cost of every ounce of gold in dollars will rise as a result. Delta felt they could produce jet fuel themselves at a lower cost than buying it on the market and in this way directly hedged against jet fuel price inflation.

What Is an Inflation Hedge?

The Ithaca HOUR is a local currency issued and used in Ithaca, NY. 

The Ithaca HOUR is a local currency issued and used in Ithaca, NY. One Ithaca HOUR is valued at $10 and is generally recommended to be used as payment for one hour's work, although the rate is negotiable.
In 1991, Paul Glover launched the new Ithaca currency and set the value of an HOUR at $10. The Ithaca HOUR is a local, time-based currency system established in Ithaca, NY, in 1991. Since then, dozens of U.S. communities have followed Ithaca's lead and introduced local currencies designed to promote local business and limit the movement of that currency to a particular locality. The Ithaca HOUR is a local currency issued and used in Ithaca, NY.

Ithaca HOURS

A money market hedge is a technique used to lock in the value of a foreign currency transaction in a company’s domestic currency, helping a domestic company reduce its currency risk when doing business with a foreign company.

A money market hedge is a technique used to lock in the value of a foreign currency transaction in a company’s domestic currency. The money market hedge would be executed by:
Buying the current value of the foreign currency transaction amount at the spot rate.
Placing the foreign currency purchased on deposit with a money market and receiving interest until payment is made. The company could use a money market hedge to lock in the value of the euro relative to the dollar at the current rate so that, even if the dollar weakens relative to the euro in six months, the U.S. company knows exactly what the transaction cost is going to be in dollars and can budget accordingly. The money market hedge allows the domestic company to lock in the value of its partner’s currency (in the domestic company’s currency) in advance of an anticipated transaction. Therefore, a money market hedge can help a domestic company reduce its exchange rate or currency risk when conducting business transactions with a foreign company.

Money Market Hedge

A natural hedge is a management strategy that seeks to mitigate risk by investing in assets whose performance is negatively correlated.

A natural hedge is a management strategy that seeks to mitigate risk by investing in assets whose performances are inherently negatively correlated. For example, a commodity company could shift as much of their operations to the country where they plan to sell their product, which is a natural hedge against currency risk, then use futures contracts to lock in the price to sell (revenue) that product at a later date.
Most hedges (natural or otherwise) are imperfect, and usually do not eliminate risk completely, but, they are still deployed and are considered to be successful if they can reduce a vast portion of potential risk. A natural hedge is a strategy that seeks to mitigate risk by investing in assets whose performance is negatively correlated through some intrinsic or natural mechanism. A natural hedge entails using asset classes, that have historically exhibited contrasting performance in a given economic climate, to reduce a portfolio's or company's overall risk. They can reduce this risk if they can shift operations to where they can incur expenses also in that foreign currency, which would qualify as a natural hedge.

Natural Hedge

A private currency is a limited and non-legal tender issued by a private firm or group as an alternative to a national or fiat currency.

In a world first, El Salvador makes bitcoin legal tender

Private currencies are units of value issued by a private organization (such as a corporation or nonprofit enterprise) to act as an alternative to a national or fiat currency, which would otherwise be the standard unit of value in a country. While similar, local currencies differ from private currencies in that they are not issued by a private organization for internal use, but by a community or local government to stimulate local economic activity. Private currencies are units of value issued by a private organization (such as a corporation or nonprofit enterprise) to act as an alternative to a national or fiat currency, which would otherwise be the standard unit of value in a country. Private currencies are not legal tender, and may be illegal in some jurisdictions; however, the advent of cryptocurrencies may spark a renaissance in digital private currencies. Although issuing private currency is restricted by law in many countries, there are still estimated to be thousands of private currencies circulating in dozens of countries worldwide.

Private Currency

Redenomination is the process of changing the value of a currency, typically due to hyperinflation or when a new currency is adopted.

Press Statement: Demonetization of the Zimbabwe Dollar

Redenomination is the recalibration of a country's currency, typically due to hyperinflation and currency devaluation, whereby an old currency is exchanged for a new one at a fixed rate. Redenomination is the recalibration of a country's currency, typically due to hyperinflation and currency devaluation, whereby an old currency is exchanged for a new one at a fixed rate. For example, in 2006, Zimbabwe redenominated its currency at a rate of 1,000 old Zimbabwe dollars to one new Zimbabwe dollar. Old currency could be exchanged for new currency at a rate of one trillion to one. Hyperinflation, decimalization, or a country joining a currency union are some of the reasons that a currency may undergo redenomination.

Redenomination

Settlement risk is the possibility that one or more parties will fail to deliver on the terms of a contract at the agreed-upon time.

Settlement risk is the possibility that one or more parties will fail to deliver on the terms of a contract at the agreed-upon time. Settlement risk is a type of counterparty risk associated with default risk, as well as with timing differences between parties. Settlement risk is also called delivery risk or Herstatt risk. The two main types of settlement risk are default risk and settlement timing risks. The two main types of settlement risk are default risk and settlement timing risks.

Settlement Risk

Spot next is a short term swap where the settlement day is one business day after the spot date.

Spot next (S/N) is a term used in foreign currency trading. The spot next date is usually the day after the spot date, which is the day that the funds of the foreign currency or instrument transaction are transferred. For some currency pairs such as the U.S. dollar / Canadian dollar cross (USD/CAD), spot-next will settle two days after the trade date because the spot date is T+1, not T+2. During a spot trade, the spot date references the day that the funds of the foreign currency or instrument transaction are transferred. For example, a currency that is bought on Tuesday will have a spot date of Thursday and if it is rolled spot-next it will settle on Friday.

Spot Next

Sterilized intervention is a central bank action to influence the exchange value of the domestic currency, without changing the monetary base. 

Sterilized intervention is the purchase or sale of foreign currency by a central bank to influence the exchange value of the domestic currency, without changing the monetary base. Sterilized intervention is the purchase or sale of foreign currency by a central bank to influence the exchange value of the domestic currency, without changing the monetary base. Sterilized intervention is the purchase or sale of foreign currency by a central bank to influence the exchange value of the domestic currency, without changing the monetary base. Sterilized interventions involve two separate transactions:
1.  The sale or purchase of foreign currency assets
2.  An open market operation involving the purchase or sale of government securities (in the same size as the first transaction). Sterilized interventions involve the sale or purchase of foreign currency assets and an open market operation involving the purchase or sale of government securities (in the same size as the first transaction).

Sterilized Intervention

Triangular arbitrage involves the exchange of a currency for a second, then a third and then back to the original currency in a short amount of time.

Triangular arbitrage is the result of a discrepancy between three foreign currencies that occurs when the currency's exchange rates do not exactly match up. These opportunities are rare and traders who take advantage of them usually have advanced computer equipment and/or programs to automate the process.
A trader employing triangular arbitrage would exchange an amount at one rate (EUR/USD), convert it again (EUR/GBP) and then convert it finally back to the original (USD/GBP), and assuming low transaction costs, net a profit.
This type of arbitrage is a riskless profit that occurs when a quoted exchange rate does not equal the market's cross-exchange rate. As an example, suppose you have $1 million and you are provided with the following exchange rates: EUR/USD = 0.8631, EUR/GBP = 1.4600 and USD/GBP = 1.6939.
With these exchange rates there is an arbitrage opportunity:
1.  Sell dollars for euros: $1 million x 0.8631 = €863,100
2.  Sell euros for pounds: €863,100 ÷ 1.4600 = £591,164.40
3.  Sell pounds for dollars: £591,164.40 x 1.6939 = $1,001,373
4.  Subtract the initial investment from the final amount: $1,001,373 – $1,000,000 = $1,373
From these transactions, you would receive an arbitrage profit of $1,373 (assuming no transaction costs or taxes). While there are many benefits to automated trading, such as the ability to test a set of rules on historical data before risking capital, the ability to engage in triangular arbitrage is only feasible using an automated trading platform. Triangular arbitrage is a form of profit-making by currency traders in which they take advantage of exchange rate discrepancies through algorithmic trades.

Triangular Arbitrage

Uncovered interest rate parity (UIP) states that the difference in two countries' interest rates is equal to the expected changes between the two countries' currency exchange rates.

Uncovered interest rate parity (UIP) theory states that the difference in interest rates between two countries will equal the relative change in currency foreign exchange rates over the same period. 1:25
F 0 \= S 0 1 \+ i c 1 \+ i b where: F 0 \= Forward rate S 0 \= Spot rate i c \= Interest rate in country  c i b \= Interest rate in country  b \\begin{aligned} &F\_0=S\_0\\frac{1+i\_c}{1+i\_b}\\\\ &\\textbf{where:}\\\\ &F\_0=\\text{Forward rate}\\\\ &S\_0=\\text{Spot rate}\\\\ &i\_c=\\text{Interest rate in country }c\\\\ &i\_b=\\text{Interest rate in country }b \\end{aligned} ​F0​\=S0​1+ib​1+ic​​where:F0​\=Forward rateS0​\=Spot rateic​\=Interest rate in country cib​\=Interest rate in country b​
Forward exchange rates for currencies are exchange rates at a future point in time, as opposed to spot exchange rates, which are current rates. Said another way, uncovered interest rate parity assumes foreign exchange equilibrium, thus implying that the expected return of a domestic asset (i.e., a risk-free rate like a U.S. Treasury Bill or T-Bill) will equal the expected return of a foreign asset after adjusting for the change in foreign currency exchange spot rates. Meanwhile, uncovered interest rate parity (UIP) involves forecasting rates and not covering exposure to foreign exchange risk—that is, there are no forward rate contracts, and it uses only the expected spot rate. Uncovered interest rate parity conditions consist of two return streams, one from the foreign money market interest rate on the investment and one from the change in the foreign currency spot rate.

Uncovered Interest Rate Parity – UIP

An unsterilized foreign exchange intervention is a method by which a country's central bank can try to influence exchange rates and money supply. 

The term unsterilized foreign exchange intervention refers to how a country's monetary authorities influence exchange rates and its money supply—by not purchasing foreign or by not selling domestic currencies or assets. The term unsterilized foreign exchange intervention refers to how a country's monetary authorities influence exchange rates and its money supply—by not purchasing foreign or by not selling domestic currencies or assets. If the central bank purchases domestic currency by selling foreign assets, the money supply shrinks because it has removed domestic currency from the market. As noted above, central bank authorities use sterilized and nonsterilized methods of foreign exchange intervention when and if they want to influence exchange rates and/or the money supply. Unsterilized foreign exchange interventions take place when a country's monetary authorities influence exchange rates and its money supply.

Unsterilized Foreign Exchange Intervention

WM/Reuters benchmark rates are spot and forward foreign exchange rates used as standard rates for portfolio valuation and performance measurement. 

WM/Reuters FX Benchmark Statement: WM/Reuters Closing and Intraday Spot, Forward and NDF Rates

Thomson Reuters Acquires WM/Reuters Foreign Exchange Benchmarks From State Street Corporation

Foreign Exchange Benchmarks: Final Report

WM/Reuters FX benchmark rates are spot and forward foreign exchange rates that are used as standard rates for portfolio valuation and performance measurement. WM/Reuters FX benchmark rates are spot and forward foreign exchange rates that are used as standard rates for portfolio valuation and performance measurement. The WM/Reuters Benchmark rates are spot and forward exchange rates used as standard rates for portfolio valuation and performance measurement. While most major equity and bond index compilers use the WM/Reuters benchmark rates in their calculations, the rates are also used for other purposes such as calculating benchmark rates for the settlement of financial derivatives. In addition, WM/Reuters also provides closing rates for currency forwards and non-deliverable forwards (NDF) hourly intraday for spot, forward and NDF rates, as well as historical data.

Advanced Forex Trading Concepts

More in Trading

Terms in Advanced Forex Trading Concepts

Automatic Execution and Example