FX & Related Derivatives

In a pair like EUR/USD = 1.0850, the first currency (EUR) is the BASE and the second (USD) is the QUOTE (or terms) currency. The rate is the number of QUOTE units per 1 unit of BASE.

A pip is the smallest standard price increment in an FX quote — conventionally the 4th decimal place for most pairs (0.0001), or the 2nd decimal place for JPY pairs (0.01). Sub-pip moves are quoted as fractional pips ('pipettes').

Most spot FX trades settle T+2 (two business days after trade date). Exceptions: USD/CAD, USD/TRY, USD/RUB, USD/PHP typically settle T+1.

MAJORS: pairs involving USD and another G10 currency (EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, USD/CAD, NZD/USD). MINORS (crosses): pairs of two majors not including USD (EUR/GBP, EUR/JPY). EXOTICS: a major paired with an emerging-market currency (USD/TRY, USD/ZAR, USD/MXN).

F / S = (1 + r_d · τ) / (1 + r_f · τ), where S, F are spot/forward (domestic per foreign), r_d, r_f are simple interest rates over tenor τ. Equivalently F = S · e^((r_d − r_f)·T) in continuous compounding. Holds via no-arbitrage when funding currencies are freely deliverable.

If F > S·(1+r_d)/(1+r_f): borrow foreign, convert at S to domestic, invest domestic, sell domestic forward at F to lock foreign repayment — risk-free profit. If F is too low, do the reverse.