Reading an FX term sheet: the eight lines that set the price

Your bank sends you a page headed « indication of price » or « term sheet ». It contains about thirty lines, some partly translated English jargon, and sometimes a chart. The practical question is simple: what should you stop on?

Eight lines set the price. Spotting them takes two minutes once you know what you are looking for.

The eight lines that matter

1. 1
   The pair and the direction

   Buy or sell, and which currency. This is the line that decides the sign of everything else. A direction error here makes checking the price pointless — and it happens, particularly when the proposal is written from the bank's point of view rather than yours.

2. 2
   The notional

   The amount hedged, and the currency it is expressed in. On multi-leg structures, check the notional is identical on every leg: a doubled notional on the adverse leg is the most common leverage mechanism.

3. 3
   The value date and the maturity

   The exact duration of the transaction, which drives the forward points. A maturity a few weeks out of line with your real flow will force you into a rollover, which is quoted and paid for.

4. 4
   The guaranteed rate, the strike or the forward rate

   The central figure. This is the one you compare with the reference price. On a structure there are several levels: each is checked separately.

5. 5
   The premium

   Paid, received, or nil. A nil premium does not mean a free product: it means the remuneration is elsewhere, in the level of the guaranteed rates.

6. 6
   The barriers

   Level, type — knock-in or knock-out — and above all how they are observed: continuously, or only on set dates? A continuously observed barrier is far more likely to be touched than one observed at maturity, and is therefore worth considerably less to the bank.

7. 7
   The fixing schedule

   On accumulators and multi-maturity products, the number of dates and their spacing drive most of the value. A discreet line reading « weekly fixings over 52 weeks » actually describes 52 transactions, not one.

8. 8
   Termination and margin-call clauses

   What happens if you want out before maturity, and whether a deposit can be called during the life of the trade. This is not price, it is liquidity risk — and it is the line most often discovered too late.

The vocabulary, translated

The three questions to ask in writing

1. What is the plain forward rate, with no option and no barrier, on the same notional and the same maturity? That is your benchmark, and it is always available. A refusal to provide it is itself information.
2. What is this structure's maximum loss if the market moves against me, in euros? If the answer is not a number, the structure is not bounded.
3. Can a margin call occur during the life of the trade, and on what trigger? The answer commits your cash, not just your margin.

What does not matter

The rest of the page — definitions, market conventions, force majeure clauses, regulatory wording — is market standard. It matters legally, it barely varies from one counterparty to another, and it contains no price. Do not give it the time the eight lines above deserve.