Foreign Exchange "Speak" Explained

Foreign Exchange "Speak" Explained

I often think that all the jargon, acronyms and plethora of terms are part of a conspiracy to confuse and blank us mere simple minded mortals! You know that feeling when you are "lost" when reading something and then just turn the page. Today it is even easier, just a click or swipe and we are into the sports section!

LIBOR (London Interbank Offered Rate)

It is an interest rate based on the average interest rates at which a large number of international banks in London lend money to one another. The official LIBOR rates are calculated on a daily basis and made public at 11:00 (London Time) by the British Bankers' Association (BBA). This rate is more of a reference rate today as banks will negotiate the rate at which they lend money to each other.

You may have heard of a currency being combined with LIBOR. For example US $ LIBOR. The US dollar LIBOR rates can be considered as the interbank cost of borrowing funds in US dollars.

Mid-Market/Midpoint Exchange Rates

The Mid-Market/Midpoint exchange rate is the average between the buy and sell rates. If you had an exact match between someone buying US$1,000 for Sterling and another person selling US$1,000 for Sterling, then the average between the two rates would be the Midpoint rate. This is effectively the "cost" price of the currency.

Normally "Buy" and "sell" foreign exchange rates include overheads and profit margins that are independently set by foreign exchange providers; their rates can vary a lot and will differ from the mid-market rate.

PIPS

A Pip is one basis point. Normally exchange rates are quoted to 4 decimal places. Therefore a pip is the last decimal place or 1/100th of one percent. Banks and Foreign Exchange Traders refer to this when talking about differences in the exchange rate. For example: The difference between 1.6000 and 1.6200 is 200 PIPS.

I hope this has shed a little light on the subject.

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