The Language Of FX: Foreign Exchange Terms You Need To 3/3

Real Effective Exchange Rate

The Real Effective Exchange Rate, or REER, is a measure of a country’s competitiveness. It is the trade-weighted average of the currency’s nominal exchange rates versus the currencies of the country’s principal trading partners, adjusted for the effects of inflation.

Spot FX

A Foreign exchange spot transaction, also known as FX spot, is an agreement between two parties to buy one currency and sell another currency at an agreed price for settlement on the spot date. The exchange rate at which the transaction is done is called the spot exchange rate.

SDR (Special Drawing Rights)

The IMF defines =SDRs as international reserve assets, created by the IMF in 1969 to supplement member countries' official reserves. SDR value is based on a basket of four international currencies, currently US dollar, British pound sterling, Euro and Japanese yen. SDRs cannot be used for trade but can be freely exchanged for usable currencies.

Transaction Risk

The risk that a company will incur losses due to adverse exchange rate movements between entering into and settling a transaction in a foreign currency.

Translation Risk

When a company denominates part of its equity, assets, liabilities or income in a foreign currency, it incurs the risk that the value of these will change due to exchange rate movements. Typically a problem of multinationals whose subsidiaries’ accounts are in a different currency from the parent company. Also known as "accounting exposure".