Forex Terminology
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Buy price (BID)
This is the rate at which the bank is willing to buy a specific foreign currency from clients. For example: You are back from your US trip, and wish to sell to the bank your remaining $200. Use the bank's buy price per USD to determine how many NIS you would get for the $200.
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Collection
This is the case where there is limited trust between exporter and importer. In this case, the exporter does not send the goods directly to the importer. Instead, the goods are sent in the name of a bank, by issuing a bill of lading in the name of this bank. The bank commits to assign the bill of lading, in future, to the importer. The purchase documents are not sent directly to the importer, either, but rather to the bank. The bank informs the importer of receiving the payment documents and payment or receipt terms (commitment by the importer to pay at a later date, typically within 30, 60 or 120 days, by signing a debt note). The purchase documents would be transferred to the importer immediately upon payment, or upon signing the note. This is the second-ranked option in terms of cost for the importer and exporter.
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Correspondent Bank
This is a bank which maintains a direct relationship with another bank, which provides various business services to the former.
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Foreign Trade
Foreign trade may be transacted in one of three ways:Open Account – This is the case where there is complete trust between exporter and importer. This is the case where the exporter sends the goods and purchase documents directly to the importer's address, and the importer pays the exporter on a pre-agreed future date. Upon the agreed date, payment is made to the exporter as per the invoice. This is the cheapest, most efficient way for both parties to conduct foreign trade. -
Forward transaction
An agreement / contract specifying the terms for a future transaction to buy and sell foreign currency. In this transaction, the buyer and seller agree in advance the future exchange rate (i.e. the value of one currency in terms of the other currency), the date for the transaction to be made, and the transaction amount. The future exchange rate is calculated based on the spot rate, plus difference between interest rates on the currencies for the transaction term. For example: In two weeks you are about to receive a certain amount in NIS, and wish to buy US Dollars for it. The current exchange rate is NIS 3.50 for USD 1, but you are concerned about the exchange rate changing in two weeks' time. To ensure this exchange rate, you can use a forward contract to specify the exchange rate, amount and date for the future transaction.
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Letter of Credit / Stand-by Letter of Credit
This is used in cases where there is no trust between exporter and importer. Therefore, the exporter requires the importer to provide a contingent bank guarantee prior to shipping the goods (in order to ensure payment for these goods). The bank guarantee consists of dozens of conditions which, if fulfilled by the importer, the bank would guarantee the payment. This is the most costly option for foreign trade.
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LIBOR interest rate
Acronym for London InterBank Offered Rate. LIBOR interest is the inter-bank interest on loans. This is the interest rate at which banks provide to each other loans in foreign currencies for different terms. This interest is set daily, based on a calculation made by the British Bankers' Association, which reviews interest rates for 21 leading banks in London. The LIBOR Interest rate is published daily at 11:00 am (London time).
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Official exchange rate
An indication of the current value of a foreign currency (such as US Dollar or Euro) in terms of the local currency (for Israel - this is the NIS). Therefore, the official exchange rate in Israel specifies how many NIS are in one Dollar or in one Euro, or in any other foreign currency. The official exchange rate is calculated by the Bank of Israel on any day on which foreign currency is traded. The Bank of Israel publishes the list of official exchange rates every weekday at 3:30 pm, and every Friday or holiday eve at 12:30 pm. Important to know: The official exchange rate for a currency is not binding, and is offered as a public service. This means that if you are about to enter into any transaction in foreign currency, e.g. rent an apartment for $1,000 monthly rent, you and the landlord may agree to use an exchange rate other than the official exchange rate. For example: Even if the official exchange rate upon signing the lease is NIS 3.50 per $1, you may agree that the transaction would be conducted at a higher or lower exchange rate.
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Pips
This is an acronym for Price Interest Point. Pips represent the smallest change possible (one hundredth of one percent) in the exchange rate between any pair of currencies. For example: Assume the EUR/USD rate is 1.4011 (i.e. 1 Euro is equal to $1.4011). If this rate would go up to 1.4019 - the change would be 8 pips.