| Traders Dictionary
| A | B | C | D | E | F | G | H | I | J | K | L | M | | N | O | P | Q | R | S | T | U | V | W | X | Y | Z | Aggregate Risk Total amount of exposure a bank has with a customer for both spot and forward contracts. ABA A alphabetic code used by the American Bankers Association to define a bank. American Option An option which may be exercised on any valid business date through out the life of the option. Appreciation A currency is said to appreciate when it strengthens in price in response to market demand. Arbitrage The purchase or sale of an instrument and simultaneous taking of an equal and opposite position in a related market, in order to take advantage of small price differentials between markets. Ask (Offer) Price The price at which the market is prepared to sell a specific Currency in a Foreign Exchange Contract or Cross Currency Contract. In the quotation, it is shown on the right side of the quotation. For example, in the quote USD/CHF 1.4527/32, the ask price is 1.4532; meaning you can buy one US dollar for 1.4532 Swiss francs. Asset In the context of foreign exchange is the right to receive from a counterparty an amount of currency either in respect of a balance sheet asset (e.g. a loan) or at a specified future date in respect of an unmatched forward Forward or spot deal. At Best Back Office Settlement and related processes. Back to Back • Transaction where all the obligations and liabilities in one transaction are mirrored in a second transaction. • Transaction where a loan is made in one currency in one country against a loan in another country in another currency. Balance of Payments A systematic record of the economic transactions during a given period for a country. • The term is often used to mean either: (i) balance of payments on "current account"; or (ii) the current account plus certain long term capital movements. • The combination of the trade balance, current balance, capital account and invisible balance, together make up the balance of payments total. Balance of Trade The value of a country's exports minus its imports. Bank Line Line of credit granted by a bank to a customer, also known as a " line". Bank Rate The rate at which a central bank is prepared to lend money to its domestic banking system. Bar Chart A type of chart which consists of four significant points: the high and the low prices, which form the vertical bar, the opening price, which is marked with a little horizontal line to the left of the bar, and the closing price, which is marked with a little horizontal line of the right of the bar. Barrier Option A family of path dependent options whose pay-off pattern and survival to the expiration date depend not only on the final price of the underlying currency but also on whether or not the underlying currency breaks a predetermined price level at any time during the life of the option. See Down and Out call/put, Down and in call/put, Up and out call/put, Up and in call/put. Base Currency The first currency in a Currency Pair. It shows how much the base currency is worth as measured against the second currency. For example, if the USD/CHF rate equals 1.6215 then one USD is worth CHF 1.6215 In the FX markets, the US Dollar is normally considered the 'base' currency for quotes, meaning that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair. The primary exceptions to this rule are the British Pound, the Euro, the Australian Dollar and the New Zealand Dollar. Base Rate A term used for the rate used by banks to calculate the interest rate to borrowers. Top quality borrowers will pay a small amount over base. Basis The difference between the cash price and futures price. Basis Convergence The process whereby the basis tends towards zero as the contract expiry approaches. Basis Price The price expressed in terms of yield maturity or annual rate of return. Basis Point One hundredth of one percentage point. A change from 5.25% to 5.75% is said to be a 50 basis point move. See 'Point' for currency moves. Basket A group of currencies normally used to manage the exchange rate of a currency. Sometimes referred to as a unit of account. Basis Trading Taking opposite positions in the cash and futures market with the intention of profiting from favourable movements in the basis. Bear A person who believes that prices will decline. Bear Market A market distinguished by declining prices. Bid The price that a buyer is willing to pay to purchase a given currency and sell another at a particular time. Bid Price The bid is the price at which the market is prepared to buy a specific Currency in a Foreign Exchange Contract or Cross Currency Contract. It is shown on the left side of the quotation. For example, in the quote USD/CHF 1.4527/32, the bid price is 1.4527; meaning you can sell one US dollar for 1.4527 Swiss francs. Big Figure Refers normally to the first digits of an exchange rate that dealers treat as understood in quoting. For example a quote of 50/55 on NZD/USD indicates a current price of 0.7750-0.7755. The 0.77 is known and understood and is not to be under negotiation. BIS Bank for International Settlements. Bilateral Clearing A system used where foreign currency is limited. Payments are usually routed through the central banks, and sometimes require that the trade balance is equaled every year. Binary Options A binary "call" (or "step up") is like a standard European call option except that the pay off at expiry is fixed at one unit of the counter currency, if the call expires in the money. Black-Scholes Model An option pricing formula initially derived by Fisher Black and Myron Scholes for securities options and later refined by Black for options on futures. It is widely used in the currency markets. Book In a professional trading environment, a 'book' is the summary of a trader's or desk's total positions Break Even Point The price of a financial instrument at which the option buyer recovers the premium, meaning that he makes neither a loss nor gain. In the case of a call option, the break even point is the exercise price plus the premium. Bretton Woods Agreement of 1944 An agreement that established fixed foreign exchange rates for major currencies, provided for central bank intervention in the currency markets, and pegged the price of gold at US $35 per ounce. The agreement lasted until 1971, when President Nixon overturned the Bretton Woods agreement and established a floating exchange rate for the major currencies. Broker An individual or firm that acts as an intermediary, putting together buyers and sellers for a fee or commission. In contrast, a 'dealer' commits capital and takes one side of a position, hoping to earn a spread (profit) by closing out the position in a subsequent trade with another party. Bull A person who believes that prices will rise. Bull Market
Cable Trader jargon referring to the Sterling/US Dollar exchange rate. So called because the rate was originally transmitted via a transatlantic cable beginning in the mid 1800's. Cable Transfer Telegraphic transfer of funds from one centre to another. Now synonymous with inter bank electronic fund transfer. Call Option A call option confers the right but not the obligation to buy stock, shares, futures or Currencies at a specified price. Candlestick Chart A chart that indicates the trading range for the day as well as the opening and closing price. If the open price is higher than the close price, the rectangle between the open and close price is shaded. If the close price is higher than the open price, that area of the chart is not shaded. Capital Account Juxtaposition of the long and short term capital imports and exports of a country. Carry The interest cost of financing securities or other financial instruments held. Carry-Over Charge A finance charge associated with the storing of commodities (or foreign exchange contracts) from one delivery date to another. Carry Trade (Currency carry trade) A trade strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the prevailing interest rates - which can often be substantial depending on the amount of leverage an investor is applying. Cash normally refers to an exchange transaction contracted for settlement on the day the deal is struck. This term is mainly used in the North American markets and those countries which rely for foreign exchange services on these markets because of time zone preference i.e. Latin America. In Europe and Asia, cash transactions are often referred to as value same day deals. Cash and Carry The buying of an asset today and selling a future contract on the asset. A reverse cash and carry is possible by selling an asset and buying a future. Cash Settlement A procedure for settling futures contract where the cash difference between the future and the market price is paid instead of physical delivery Cash Market - The market in the actual financial instrument on which a futures or options contract is based. CBOE Chicago Board Options Exchange. CBOT or CBT Chicago Board of Trade. CD Certificate of Deposit. Central Bank A government or quasi-governmental organization that manages a country's monetary policy. For example, the US central bank is the Federal Reserve. the Reserve bank of New Zealand or the Reserve bank of Australia. Certificate of Deposit (CD) A negotiable certificate in bearer form issued by a commercial bank as evidence of a deposit with that bank which states the maturity value, maturity rate and interest rate payable.CDs vary in size with maturities ranging from a few weeks to several years. CDs may normally be redeemed before maturity only by sale on the secondary market but may also be redeemed back to issuing bank through payment of a penalty. CFTC The Commodity Futures Trading Commission, the US Federal regulatory agency for futures traded on commodity markets, including financial futures. CHAPS Clearing House Automated Payment System. Chartist An individual who uses charts and graphs and interprets historical data to find trends and predict future movements. Also referred to as a Technical Trader. CHIPS The New York clearing house clearing system. (Clearing House Interbank Payment System). Most Euro transactions are cleared and settled through this system. Cleared Funds Funds that are freely available, sent in to settle a trade. Closed Position Exposures in Foreign Currencies that no longer exist. The process to close a position is to sell or buy a certain amount of currency to offset an equal amount of the open position. This will 'square' the position. Clearing The process of settling a trade. Consumer Price Index (CPI) A measure of the average amount (price) paid for a market basket of goods and services by a typical U.S. consumer in comparison to the average paid for the same basket in an earlier base year. Contagion The tendency of an economic crisis to spread from one market to another. In 1997, political instability in Indonesia caused high volatility in their domestic currency, the Rupiah. From there, the contagion spread to other Asian emerging currencies, and then to Latin America, and is now referred to as the 'Asian Contagion'. Commission A transaction fee charged by a broker. Confirmation A document exchanged by counterparts to a transaction that states the terms of said transaction. Contract The standard unit of trading. Correspondent Bank The foreign banks representative who regularly performs services for a bank which has no branch in the relevant centre, e.g. to facilitate the transfer of funds. In the US this often occurs domestically due to inter state banking restrictions. Cost of Carry This is the benefit or detriment that accrues to the holder of one currency at the detriment or benefit of holding another currency. Can also be referred to as Yield play or carry trade, NZD/YEN is a prime example of this cost of carry. The holder of NZD against an opposite position of YEN accrues income on a daily basis, equal to the difference in cash interest rate on an annualised basis. Cost of Living Index Broadly equivalent to Retail Price Index or Consumer price. Counter Currency The second listed Currency in a Currency Pair. Counterparty One of the participants in a financial transaction. Country Risk Risk associated with a cross-border transaction, including but not limited to legal and political conditions. Coupon Value The annual rate of interest of a bond. Cover • To take out a forward foreign exchange contract. • To close out a short position by buying currency or securities which have been sold. CPI - see Consumer Price Index. Crawling Peg (Adjustable Peg) An exchange rate system where a country's exchange rate is "pegged" (i.e. fixed) in relation to another currency. The official rate may be changed from time to time. Credit Risk The risk that a debtor will not repay; more specifically the risk that the counterparty does not have the currency promised to be delivered. Cross Currency Pairs or Cross Rate A foreign exchange transaction in which one foreign currency is traded against a second foreign currency. For example; EUR/GBP Cross Rate The exchange rate between two currencies expressed as the ratio of two foreign exchange rates that are both expressed in terms of a third currency. Foreign exchange rate between two currencies other than the U.S. dollar, the currency in which most exchanges are usually quoted. Currency Money denominated in the lawful currency of a country. Currency symbols NZD - New Zealand Dollar AUD - Australian Dollar CAD - Canadian Dollar EUR - Euro JPY - Japanese Yen GBP - British Pound CHF - Swiss Franc Currency Any form of money issued by a government or central bank and used as legal tender and a basis for trade. Currency Basket Various weightings of other currencies grouped together in relation to a basket currency(e.g. ECU or SDR). Sometimes used by currencies to fix their rate often on a trade weighted basket. Currency Pair The two currencies that make up a foreign exchange rate. For Example, EUR/USD Currency Risk The probability of an adverse change in exchange rates. Current Account A category in the balance of payments account that includes all transactions that either contribute to national income or involve the spending of national income. Current Balance The value of all exports (goods plus services) less all imports of a country over a specific period of time, equal to the sum of trade and invisible balances plus net receipt of interest, profits and dividends from abroad. Day Trader Speculators who take positions in commodities which are then liquidated prior to the close of the same trading day. Deal Date The date on which a transaction is agreed upon. Deal Ticket The primary method of recording the basic information relating to a transaction. Declaration Date The latest day or time by which the buyer of an option must intimate to the seller his willingness or unwillingness to exercise the option. Dealer
Delta
A method used by option writers to hedge risk exposure of written options by purchase or sale of the underlying instrument in proportion to the delta. Delta Spread
Economic Exposure Reflects the impact of foreign exchange changes on the future competitive position of a company in the sense of the impact it can have on the future cash flows of the company. Economic Indicator A government issued statistic that indicates current economic growth and stability. Common indicators include employment rates, Gross Domestic Product (GDP), inflation, retail sales, etc. Effective Exchange Rate An attempt to summarize the effects on a country's trade balance of its currency's changes against other currencies. EFT Electronic Fund Transfer. End Of Day Order (EOD) An order to buy or sell at a specified price. This order remains open until the end of the trading day which is typically 5PM ET. EOE European Options Exchange. EURO The currency of the European Union European Central Bank (ECB) The Central Bank for the new European Monetary Union. Euro Clear A computerized settlement and depository system for safe custody, delivery of, and payment for Eurobonds. European Union The group formerly known as the European Community. Exchange Rate Risk The potential loss that could be incurred from an adverse movement in exchange rates. Exercise Price (Strike Price) The price at which an option can be exercised. Exotic A less broadly traded currency. Expiry Date The last day on which the holder of an option can exercise his right to buy or sell the underlying security. Expiration Date • Options - the last date after which the option can no longer be exercised. • Bonds - the date on which a bond matures. Expiration Month The month in which an option expires. Expiry Date The last date on which an option can be bought or sold. Exposure The total amount of money loaned to a borrower or country. Banks set rules to prevent overexposure to any single borrower. In trading operations, it is the potential for running a profit or loss from fluctuations in market prices. Fast Market Rapid movement in a market caused by strong interest by buyers and/or sellers. In such circumstances price levels may be omitted and bid and offer quotations may occur too rapidly to be fully reported. Fed The United States Federal Reserve. Fed Funds Cash balances held by banks with their local Federal Reserve Bank. The normal transaction with these fund is an inter bank sale of a Fed fund deposit for one business day. Straight deals are where the funds are traded overnight on a unsecured basis. Fed Fund Rate The interest rate on Fed funds. This is a closely watched short term interest rate as it signals the Feds view as to the state of the money supply. Federal National Mortgage Association A privately owned but US government sponsored corporation that trades in residential mortgages. Its activities are funded by the sale of instruments commonly known as Fannie Maes. Federal Open Market Committee (FOMC) The body that is responsible for setting the interest rates and credit policies of the Federal Reserve System. A 12-member committee consisting of the seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank presidents. The Committee sets objectives for the growth of money and credit. These objectives are implemented through purchases and sales of U.S. government securities in the open market. The FOMC also establishes policy relating to System operations in the foreign exchange markets. Federal Reserve Board The board of the Federal Reserve System, appointed by the US President for 14 year terms, one of whom is appointed for four years as chairman. Federal Reserve System The central banking system of the US comprising 12 Federal Reserve Banks controlling 12 districts under the Federal Reserve Board. Membership of the Fed is compulsory for banks chartered by the Comptroller of Currency and optional for state chartered banks. Fiscal Policy Government policy regarding taxation and spending. Fiscal policy is made by Congress and the Administration. Fixed Exchange Rate Official rate set by monetary authorities for one or more currencies. Fixing A method of determining rates by normally finding a rate that balances buyers to sellers. Such a process occurs either once or twice daily at defined times. Used by some currencies particularly for establishing tourist rates . The system is also used in the London Bullion market. Flat/square Dealer jargon used to describe a position that has been completely reversed, e.g. you bought $500,000 then sold $500,000, thereby creating a neutral (flat) position. Float • see Floating exchange rate. Floating Exchange Rate When the value of a currency is decided by the market forces dictating the demand and supply of that particular currency. Floor • An agreement with a counterparty that sets a lower limit to interest rates for the floor buyer for a stated time. • A term for an exchanges trading area (cf. screen based trading), normally the trading area is referred to as a pit in the commodities and futures markets. FOMC Federal Open Market Committee, the committee that sets money supply targets in the US which tend to be implemented through Fed Fund interest rates etc. Foreign Exchange - (Forex, FX) The simultaneous buying of one currency and selling of another. Forward The pre-specified exchange rate for a foreign exchange contract settling at some agreed future date, based upon the interest rate differential between the two currencies involved. Forex - Industry term - Same as Foreign Exchange Forward Cover Taking Forward contracts to protect against movements in the exchange rate. Forward Deal A deal with a value date greater than the spot value date. Forward Points The interest rate differential between two currencies expressed in exchange rate points. The forward points are added to or subtracted from the spot rate to give the forward or outright rate depending on whether the currency is at a forward premium or discount. Forward Rate The rate at which a foreign exchange contract is struck today for settlement at a specified future date which is decided at the time of entering into the contract. The decision to subtract or add points is determined by the differential between the deposit rates for both currencies concerned in the transaction. Free Reserves Fundamental Analysis
G7 The seven leading industrial countries, being US, Germany, Japan, France, UK, Canada, Italy. G-10 G7 plus Belgium, Netherlands and Sweden, a group associated with the IMF discussions. Switzerland is sometimes involved. G-20 A group composed of the Finance Ministers and central bankers of the following 20 countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the United States and the European Union. The IMF and the World Bank also participate. The G-20 was set up to respond to the financial turmoil of 1997-99 through the development of policies that 'promote international financial stability'. Gamma The rate at which a delta changes over time or for one unit change in the price of the underlying asset. Gold Standard The original system for supporting the value of currency issued. This system was in vogue before 1973 when the fixed exchange rates were commonplace. GNP Deflator Removes inflation from the GNP figure. Usually expressed as a percentage and based on an index figure. GNP Gap The difference between the actual real GNP and the potential real GNP. If the gap is negative an economy is overheated. Going Long The purchase of a stock, commodity, or currency for investment or speculation. Going Short The selling of a currency or instrument not owned by the seller. Gross Domestic Product Total value of a country's output, income or expenditure produced within the country's physical borders over a defined time period.usually expressed quarterly. Gross National Product Gross domestic product plus income earned from investment or work abroad. Good 'Til Cancelled Order (GTC) An order to buy or sell at a specified price. This order remains open until filled or until the client cancels. GTC Good Till Cancelled Hard Currency A currency whose value is expected to remain stable or increase in terms of other currencies. Hedge
IFEMA International Foreign Exchange Master Agreement. IMF International Monetary Fund, established in 1946 to provide international liquidity on a short and medium term and encourage liberalization of exchange rates. The IMF helps its members to tide over the balance of payments problems with supplying the necessary loans. Implied Rates The interest rate determined by calculating the difference between spot and forward rates. In-the-Money A call option is in-the-money if the price of the underlying instrument is higher than the exercise/strike price. A put option is in-the-money if the price of the underlying instrument is below the exercise/strike price. Inconvertible Currency Currency which cannot be exchanged for other currencies either because it is forbidden by the foreign exchange regulations or the currency witnesses extreme volatility that it is not perceived to be a safe haven for parking the funds. Indicative Quote A market-maker's price which is not firm. Indirect quote See reciprocal currency. Inflation J Curve A term describing the expected effect of a devaluation on a country's trade balance. It is anticipated that the cost of imports rises before export orders and receipts increase. Kiwi Market jargon for the New Zealand dollar. Knock In A process whereby a barrier option becomes active only after a certain price level is reached before the expiration of the option. Knock Out option may permanently cease to exist or is knocked out after obtaining a certain price. LDC Less developed countries, often used with respect to secondary debt market. Leading Indicators
Limit order Managed Float When the monetary authorities intervene regularly in the market to stabilise the rates or to push the exchange rate in a required direction. Margin
Nostro Account An account that you maintain with a foreign bank . The account is used to receive and pay currency assets and liabilities denominated in the currency of the country in which the bank is resident. Note A financial instrument consisting of a promise to pay rather than an order to pay or a certificate of indebtedness. Offer (ask) The rate at which a dealer is willing to sell a currency. See Ask (offer) price Offsetting transaction A trade with which serves to cancel or offset some or all of the market risk of an open position. One Cancels the Other Order (OCO) A designation for two orders whereby if one part of the two orders is executed the other is automatically canceled. Open order An order that will be executed when a market moves to its designated price. Normally associated with Good 'til Canceled Orders. Open position An active trade with corresponding unrealized P&L, which has not been offset by an equal and opposite deal. Out-of-the-Money A put option is out-of-the-money if the exercise/strike price is below the price of the underlying instrument. A call option is out-of-the money if the exercise/strike price is higher than the price of the underlying instrument. Outright Forward Foreign exchange transaction involving either the purchase or the sale of a currency for settlement at a future date. Outright Rate The forward rate of a foreign exchange deal based on spot price plus forward discount/premium. Over the Counter (OTC) Used to describe any transaction that is not conducted over a recognised exchange. Overnight Limit The limit imposed on Net long or short position in one or more currencies that a trader can carry over into the next dealing day. Passing the book to other bank dealing rooms in the next trading time zone reduces the need for traders to maintain these unmonitored exposures. Overnight Position The net long or short exposure in a currency that a trader carries over to the next business day Order An instruction to execute a trade at a specified rate. Par • The nominal(face) value of a security or instrument. • The official value of a currency. Parities The value of one currency in terms of another. Permitted Currency It means a foreign currency which is freely convertible i.e a currency which is permitted by the rules and regulations of the country concerned to be converted into major reserve currencies and for which a fairly active and liquid market exists for dealing against the major currencies. Pip The smallest unit of price for any foreign currency. Digits added to or subtracted from the fourth decimal place, i.e. 0.0001. Also called Points. PIP is an acronym for 'price interest point'. Point The term used in currency market to represent the smallest incremental move an exchange rate can make. It is one one-hundredth of a percent. For example, when a currency moves from 1.5720 to 1.5725 it has moved 5 points. Political Risk Exposure to changes in governmental policy which will have an adverse effect on a traders or investors position. Position A view expressed by a trader through the buying or selling of currencies, and can also refer to the amount of currency either owned or owed by an investor. PPI Producer Price Indices. See wholesale price indices. Premium • The amount by which a forward rate exceeds a spot rate. • The amount by which the market price of a bond exceeds its par value. • Options, the price a put or call buyer must pay to a put or call seller for an option contract. • The margin paid above the normal price level. Prime Rate • The rate which commercial banks lend to their best or most credit worthy clients. Used as a benchmark in the USA • The rate of discount of prime bank bills in the UK. Principal A dealer who buys or sells stock for his/her own account. Profit Taking The unwinding of a position to realize profits. Purchasing Power Parity Model of exchange rate determination stating that the price of goods in one country should equal the price of the same goods in another country after adjusting for the changes in the price due to the exchange rate.This measure gives an idea of how undervalued or overvalued a currency maybe. Also known as the law of one price. The 'Big Mac' theory of PPP is the most widely adopted. Put Option A put option confers the right but not the obligation to sell currencies, instruments or futures at the option exercise price within a predetermined time period. Quote An indicative price. The price quoted for information purposes but not to deal. Rally A recovery in prices after a period of decline. Range The difference between the highest and lowest price of a currency, an index or a future recorded during a given trading session or certain time frame Rate The price of one currency in terms of another. Recession A significant decline in business activity measured through industrial production, employment,incomes and wholesale and retail trade data. Generally defined as two consecutive quarters with negative economic growth in GDP Repurchase Agreements (REPO) When the Federal Reserve makes a repurchase agreement with a government securities dealer, it buys a security for immediate delivery with an agreement to sell the security back at the same price by a specific date (usually within 15 days) and receives interest at a specific rate. This arrangement allows the Federal Reserve to inject reserves into the banking system on a temporary basis to meet a temporary need and to withdraw these reserves as soon as that need has passed. Reserve Currency A currency held by a central bank on a permanent basis as a store of international liquidity, these are normally the US Dollar , Euros, and sterling. Reserves Funds held against future contingencies, normally a combination of convertible foreign currency, gold, and SDRs. Official reserves are to ensure that a government can meet near term obligations. They are an asset in the balance of payments. Resistance A price level at which selling is expected to take place, and buyers will find difficult to go beyond Retail Price Index Measurement of the monthly change in the average level of prices at retail, normally of a defined group of goods. Revaluation Increase in the exchange rate of a currency as a result of official action. Reuters Dealing A system for screen based trading that has been in operation since the early 1980s. Risk management The identification and acceptance or offsetting of the risks threatening the profitability or existence of an organisation. With respect to foreign exchange, it involves consideration of market, sovereign, country, transfer, delivery, credit, and counterparty risk. Risk Premium Additional sum payable or return to compensate a party for adopting a particular risk. Risks There are risks associated with any market. It means variance of the returns and the possibility that the actual return might not be in line with the expected returns. The risks associated with trading foreign currencies are: market, exchange, Interest rate, yield curve, volatility, liquidity, forced sale, counter party, credit, and country risk. Rollover Where the settlement of a deal is carried forward to another value date based on the interest rate differential of the two currencies example: next day. Selling Rate Rate at which a bank is willing to sell foreign currency. Settlement The process by which a trade is entered into the books and records the details of the counterparts to a transaction. The settlement of currency trades may or may not involve the actual physical exchange of one currency for another. Settlement Date It means the business day specified for delivery of the currencies bought and sold under a forex contract. Short Position A market position that benefits from a decline in market price. When the base currency in the pair is sold, the position is said to be short. Spot • The most common foreign exchange transaction. • Spot refers to the buying and selling of the currency where the settlement date is two business days forward. Spot Next The overnight swap from the spot date to the next business day. Spot Rate The current rate for a spot transaction. Spread • The difference between the bid and ask price of a currency. • The difference between the price of two related futures contracts. • For options, transactions involving two or more option series on the same underlying currency. Stable Market An active market which can absorb large sale or purchases of currency without having any major impact on the interest rates. Standard and Poors (S&P) A US firm engaged in assessing the financial health of borrowers. The firm also has generated certain stock indices i.e. S&&P 500. Sterling Market jargon for the British Pound. Stop Loss Order Order type whereby an open position is automatically liquidated at a specific price. Often used to minimize exposure to losses if the market moves against an investor's position. As an example, if an investor is long USD at 156.27, they might wish to put in a stop loss order for 155.49, which would limit losses should the dollar depreciate below that. Straddle The simultaneous purchase/sale of both call and put options for the same share, exercise/strike price and expiry date. Stagflation Recession or low growth in conjunction with high inflation rates and interest rates Strike Price Also called exercise price. The price at which an option holder can buy or sell the underlying instrument. Strip A combination of two puts and one call. Structural Unemployment Unemployment levels inherent in an economic structure. Support Levels A technique used in technical analysis that indicates a specific price floor at which a given exchange rate will automatically correct itself. Opposite of resistance. Swap A currency swap is the simultaneous sale and purchase of the same amount of a given currency at a forward exchange rate. Swift Society of Worldwide Interbank Financial Telecommunications. It is a dedicated computer network that is set up to support fund transfer messages between member banks worldwide. Swissy Market slang for Swiss Franc. Technical Analysis • Is analysis based on market action through chart study, volume, trends, moving averages, patterns, formations and many other technical indicators. • An effort to forecast prices by analyzing market data, i.e. historical price trends and averages, volumes, open interest, etc. Technical Correction An adjustment to price not based on market sentiment but technical factors such as volume and charting. Terms of Trade The ratio between export and import price indices. Theta A measure of the sensitivity of the price of an option to a change in its time to expiry. Thin Market A market in which trading volume is low and in which consequently bid and ask quotes are wide and the liquidity of the instrument traded is low. TIBOR Tokyo Inter-bank Offered Rate. Tick A minimum change in price, up or down. TIFFE Tokyo International Financial Futures Exchange. Tomorrow Next (Tom/Next) Simultaneous buying and selling of a currency for delivery the following day. Trade Date The date on which a trade occurs. Tranche A portion of, specifically used for borrowings from the IMF. Transaction Cost The cost of buying or selling a financial instrument. Transaction Date The date on which a trade occurs. Transaction Exposure Potential profit and loss generated by current foreign exchange transactions. Treasury Bill Short-term U.S. government obligations sold at a discount from face value. Treasury bills generally are issued with 13-, 26- or 52-week maturities. Treasury Bond Obligations of the U.S. government that mature in 15 or more years and pay a specified coupon. Treasury Note Obligations of the U.S. government that mature in 2 to 10 years and pay a specified coupon Trend Simply the direction of the market, usually broken down to three categories:- major, intermediate and short-term trends. Three directions are also associated with a trend; that is, uptrend, downtrend, and a sideways trend. Turnover The total money value of all executed transactions in a given time period; volume. Types of Foreign Exchange Orders • Entry Order: An order, stop or limit, initiating an open position and executed when a specific price level is reached and/or broken. The execution is handled by the dealing desk and the order is in effect until cancelled by the client.
• Entry Limit Order: An order initiating an open position to sell as the market rises, or buy as the market falls. The client believes the market will reverse direction at the level of the order. • Entry Stop Order: An order initiating an open position to sell as the market falls, or buy as the market rises. The client placing the order believes that prices will continue to move in the same direction as the previous momentum after hitting the order level. • Limit Order: A limit order is an order tied to a specific position for the purpose of locking in the gains from that position. A limit order placed on a buy position is an order to sell. A limit order placed on a sell position is an order to buy. A limit order remains in effect until the position is liquidated or cancelled by the client. • Market Order: An order to buy or sell which is to be filled immediately at the prevailing currency price. • OCO (One Cancels the Other): A stop-loss order and a limit order linked to a specific position. One order, the stop, is to prevent additional loss on the position, and one order, the limit is to take profit on the position. When either order is executed, closing the position, the other is automatically cancelled. • Stop-Loss Orders: An order linked to a specific position to close that position and prevent additional losses. A stop-loss order placed on a long position will be an order to sell if the market continues to move lower. A stop-loss order placed on a short position will be an order to buy if the market continues to move higher. A stop-loss order remains in effect until the position is liquidated or cancelled by the client. Under-Valuation An exchange rate is normally considered to be undervalued when it is below its purchasing power parity. Unrealized Gain/Loss The theoretical gain or loss on Open Positions valued at current market rates, Unrealized Gains or Losses become Profits/Losses when position is closed. Uptick A new price quote at a price higher than the preceding quote. Uptick Rule In the U.S., a regulation whereby a security may not be sold short unless the last trade prior to the short sale was at a price lower than the price at which the short sale is executed. US Prime Rate The rate at which US banks will lend to their prime corporate customers Value Date The date that both parties of a transaction agree to exchange payments. Value Spot Normally settlement for two working days from the date the contract is entered into. Value Today Transaction executed for same day settlement; sometimes also referred to as "cash transaction". Vanilla A simple option whose terms and conditions do not include any provisions other than exercise style, expiry and strike. To compare with exotic options which have additional terms. Vega Expresses the price change of an option for a one per cent change in the implied volatility. Velocity of Money The speed with which money circulates or turnover in the economy. It is calculated as the annual national income: average money stock in the period. Volatility (Vol) • A statistical measure of a market's price movements over time. • A measure of the amount by which an asset price is expected to fluctuate over a given period. Normally measured by the annual standard deviation of daily price changes (historic). Can be implied from futures pricing, implied volatility. Vostro Account A local currency account maintained with a bank by another bank. The term is normally applied to the counterparty's account from which funds may be paid into or withdrawn, as a result of a transaction. Volume Represents the total amount of trading activity in a particular stock, commodity or index for that day or specific period. It is the total number of contracts traded during the day. Warning Threshold A predetermined level at which the trading platform will send you an automated e-mail advising that your margin is insufficient to cover the current mark to market of your outstanding positions. Whipsaw Slang for a condition of a highly volatile market where a sharp price movement is quickly followed by a sharp reversal. Wholesale Money Money borrowed in large amounts from banks and institutions rather than from small investors. Wholesale Price Index It measures changes in prices in the manufacturing and distribution sector of the economy and tends to lead the consumer price index by 60 to 90 days. The index is often quoted separately for food and industrial products. Working Day A day on which the banks in a currency's principal financial centre are open for business. For FX transactions, a working day only occurs if the bank in both (all relevant currency centers in the case of a cross are open). World Bank A bank made up of members of the IMF whose aim is to assist in the development of member states by making loans where private capital is not available. Writer The seller of a position. Also known as the grantor of the trade. "Writing an Currency" is to sell it. Yard Slang for an American billion, one thousand million. Yield Curve The graph showing changes in yield on instruments depending on time to maturity. A system originally developed in the bond markets is now broadly applied to various financial futures. A positive sloping curve has lower interest rates at the shorter maturities and higher at the longer maturities. A negative sloping curve has higher interest rates at the shorter maturities. Zero Coupon Bond A bond that pays no interest. The bond is initially offered at a discount to its redemption value. |
