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In the financial world there is a specific language that those-in-the-know speak fluently. There are some special words that everyone should know and understand when they interact with Finance.
- Foreign Exchange (Forex or FX) - The exchange of currency of one country to the currency of another country. It’s a commonly heard phrase but what does it really mean. If you are traveling overseas it simply means how much of the other currency you can buy with your own currency. But on the financial market it means so much more. Forex is the way companies do international business. A US auto maker can’t send a check for auto parts from Mexico using American dollars, they first need to buy Mexican peso. A higher rate of exchange means the US company can afford to buy more products from Mexico at a lower price.
- Exchange Rate Risk - This means the potential loss that could happen if a bank or other financial institution would suffer if there was a major change in the exchange rate. If a company purchased millions of dollars in foreign currency only to have that country experience a devastating natural disaster or political upheaval, then the demand for the currency might drop so much that there is little to no chance the company could ever make that money back.
- Interbank Rates – Even though Forex is done by individuals, businesses and even governments, they all usually go to a bank to buy and sell currency. The Interbank rate is the exchange rate international banks sell currency to other large international banks or businesses.
- Spread – The spread is the variation between the buying and selling prices of different currencies. Based on the spread banks create the rates for buying and selling.
- Volatility – Since no financial transaction is fully stable, the Volatility is the way to measure the price fluctuations that make up the spread.
- Volume - This is the amount of the transaction of Forex. Larger volumes carry higher risks but also offer greater rewards for success.
So the next time you hear one of these financial terms on TV or radio, you’ll understand what they are talking about and how it can affect you.
If you really want to learn more about the foreign exchange market you need to learn the top 8 Trading Terms for Forex Traders and become an expert.