Glossary

Glossary
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
A

Aggregate

Total amount of exposure a bank has with a customer for both spot and forward contracts.

American Option

An option which may be exercised at any valid business date throughout the life of the option.

Appreciation

Describes a currency strengthening in response to market demand rather than by official action.

Arbitrage

A type of trading where the same instrument is bought and sold simultaneously in two different markets in order to cash in on the difference in these markets.

Around

Used in quoting forward “premium / discount”.

Ask Price

Ask is the lowest price acceptable to the buyer.

Asset

In the context of foreign exchange it 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 or spot deal.

At Best

An instruction given to a dealer to buy or sell at the best rate that is currently available in the market.

At Par Forward Spread

When the forward price is equivalent to the spot price.

At or Better

An order to deal at a specific rate or better.

At the Price Stop-Loss Order

A stop-loss order that must be executed at the requested level regardless of market conditions.

At-the-Money

An option whose strike/exercise price is equal to or near the current market price of the underlying instrument.

Average Rate Option

A contract where the exercise price is based on the difference between the strike price and the average spot rate over the contract period. Sometimes called an “Asian option”.

B

BUBA

Bundesbank, the reserve bank of Germany.

Back Office

Settlement and related processes.

Band

The range in which a currency is permitted to move. A system used in the ERM.

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.

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 currency in which the operating results of the bank or institution are reported.

Base Rate

A term used in the UK for the rate used by banks to calculate the interest rate to borrowers. Top quality borrowers will pay a small amount over base.

Basis Convergence

The process whereby the basis tends towards zero as the contract expiry approaches.

Basis Point

One per cent of one per cent.

Basis Price

The price expressed in terms of yield maturity or annual rate of return.

Basis Trading

Taking opposite positions in the cash and futures market with the intention of profiting from favorable movements in the basis.

Basis

The difference between the cash price and futures price.

Basket

A group of currencies normally used to manage the exchange rate of a currency. Sometimes referred to as a unit of account.

Bear Market

A market in which prices decline sharply against a background of widespread pessimism (opposite of Bull Market).

Bear

A person who believes that prices will decline.

Bid Price

Bid is the highest price that the seller is offering for the particular currency at the moment; the difference between the ask and the bid price is the spread. Together, the two prices constitute a quotation; the difference between the two is the spread. The bid-ask spread is stated as a percentage cost of transacting in foreign exchange.

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.

Booked

The recording of a transaction outside the country where the transaction is itself negotiated.

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 a gain. In the case of a call option, the break even point is the exercise price plus the premium.

Break Out

In the options market, undoing a conversion or a reversal to restore the option buyer’s original position.

Bretton Woods

The site of the conference which in 1944 led to the establishment of the post war foreign exchange system that remained intact until the early 1970s. The conference resulted in the formation of the IMF. The system fixed currencies in a fixed exchange rate system with 1% fluctuations of the currency to gold or the dollar.

Broker

An agent, who executes orders to buy and sell currencies and related instruments either for a commission or on a spread. Brokers are agents working on commission and not principals or agents acting on their own account. In the foreign exchange market brokers tend to act as intermediaries between banks bringing buyers and sellers together for a commission paid by the initiator or by both parties. There are four or five major global brokers operating through subsidiaries affiliates and partners in many countries.

Bull Market

A market characterized by rising prices.

Bull

A person who believes that prices will rise.

Bulldogs

Sterling bonds issued in the UK by foreign institutions.

Bundesbank

Central Bank of Germany.

C

CBOE

Chicago Board Options Exchange.

CBOT or CBT

Chicago Board of Trade.

CD

Certificate of Deposit.

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.

CHIPS

The New York clearing house clearing system. (Clearing House Interbank Payment System). Most Euro transactions are cleared and settled through this system.

CIBOR

Copenhagen Interbank Rate, the rate at which the banks lend the Danish Krone on an unsecured basis. The rate is calculated daily by the Danmarks Nationalbank (the Danish Central Bank), based on rules set out by the Danish Banker’s Association.

CME

Chicago Mercantile Exchange.

CPI

Consumer Price Index. Monthly measure of the change in the prices of a defined basket of consumer goods including food, clothing, and transport. Countries vary in their approach to rents and mortgages.

CPSS

Committee on Payment and Settlement Systems.

Cable Transfer

Telegraphic transfer of funds from one centre to another. Now synonymous with inter bank electronic fund transfer.

Cable

A term used in the foreign exchange market for the GBP/USD pair.

Carry-Over Charge

A finance charge associated with the storing of commodities (or foreign exchange contracts) from one delivery date to another.

Carry

The interest cost of financing securities or other financial instruments held.

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 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

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.

Central Bank

A central bank provides financial and banking services for a country’s government and commercial banks. It implements the government’s monetary policy, as well, by changing interest rates.

Central Rate

Exchange rates against the ECU adopted for each currency within the EMS.Currencies have limited movement from the central rate according to the relevant band.

Chartist

An individual who studies graphs and charts of historic data to find trends and predict trend reversals which include the observance of certain patterns and characteristics of the charts to derive resistance levels, head and shoulders patterns, and double bottom or double top patterns which are thought to indicate trend reversals.

Closed Position

A transaction which leaves the trade with a zero net commitment to the market with respect to a particular currency.

Closing Purchase Transaction

The purchase of an option identical to one already sold to liquidate a position.

Coincident Indicator

An economic indicator that generally moves in line with the general business cycle such as industrial production.

Comex

Commodity Exchange of New York.

Commission

The fee that a broker may charge clients for dealing on their behalf.

Compound Option

An option on an option, the dates and price of such option being fixed.

Confirmation

A memorandum to the other party describing all the relevant details of the transaction.

Contract Expiration Date

The date on which a currency must be delivered to fulfill the terms of the contract. For options, the last day on which the option holder can exercise his right to buy or sell the underlying instrument or currency.

Contract Month

The month in which a futures contract matures or becomes deliverable if not liquidated or traded out before the date specified.

Contract

An agreement to buy or sell a specified amount of a particular currency or option for a specified month in the future (See Futures contract).

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

The interest rate parity, where the forward price is determined by the cost of borrowing money in order to hold the position.

Cost of Living Index

Broadly equivalent to Retail Price Index or Consumer price.

Counterparty

The customer or bank with which a foreign exchange deal is executed.

Country Risk

Factors that affect currency trading unique to the specific country include political, regulatory, legal and holiday risks.

Coupon Value

The annual rate of interest of a bond.

Coupon

  • On bearer stocks, the detachable part of the hide behind nominee status. Certificate exchangeable for dividends.
  • Denotes the rate of interest on a fixed interest security.

Cover

  • To take out a forward foreign exchange contract.
  • To close out a short position by buying currency or securities which have been sold.

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 Deal

A foreign exchange deal entered into involving two currencies, neither of which is the base currency.

Cross Hedge

A technique using financial futures to hedge different but related cash instruments based on the view that the price movements between the instruments move in concert.

Cross Rate

An exchange rate between two currencies, usually constructed from the individual exchange rates of the two currencies, as most currencies are quoted against the dollar.

Cross-Trade

A cross-trade transaction is a transaction where either the buy broker and the sell broker are the same, or the buy broker and the sell broker belong to the same firm.

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

The type of money that a country uses. It can be traded for other currencies on the foreign exchange market, so each currency has a value relative to another.

Current Account

The net balance of a country’s international payment arising from exports and imports together with unilateral transfers such as aid and migrant remittances. It excludes capital flows.

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.

Cycle

The set of expiration dates applicable to different classes of option.

D

Day Order

An order that if not executed on the specific day is automatically canceled.

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.

Dealer

An individual or firm acting as a principal, rather than as an agent, in the purchase and /or sale of securities. Dealers trade for their own account and risk in contrast to the brokers who trade only on behalf of their clients.

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.

Deficit

Shortfall in the balance of trade, balance of payments, or government budgets.

Delivery Date

The date of maturity of the contract, when the final settlement of transaction is made by exchanging the currencies. This date is more commonly known as the value date.

Delivery Risk

A term to describe when a counterparty will not be able to complete his side of the deal. This risk is very high in case of over the counter transactions where there is no exchange which can stand as a guarantee to the trade between the two parties to the contract.

Delivery

The settlement of a transaction by receipt or tender of a financial instrument or currency.

Depo

Deposit

Derivatives

A broad term relating to risk management instruments such as futures, options, swaps, etc. The contract value moves in relation to the underlying instrument or currency. The issue of derivatives and their control following large losses by banks and corporates has been subject of much debate.

Desk

Term referring to a group dealing with a specific currency or currencies.

Devaluation

Deliberate downward adjustment of a currency against its fixed parities or bands which is normally accompanied by formal announcement.

Direct Quotation

Quoting in fixed units of foreign currency against variable amounts of the domestic currency.

Discount Rate

The rate at which a bill is discounted. Specifically it refers to the rate at which a central bank is prepared to discount certain bills for financial institutions as a means of easing their liquidity, and is more accurately referred to as the official discount rate.

Discount

Less than the spot price. For example, forward discount.

Domestic Rates

The interest rates applicable to deposits domiciled in the country of origin. Value and values may vary from Eurodeposits due to taxation and varying market practices.

E

EFT

Electronic Fund Transfer.

EMS

European Monetary System.

EMU

European Monetary Union.

EOE

European Options Exchange.

ERM

Exchange Rate Mechanism.

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 statistic which indicates current economic growth rates and trends such as retail sales and employment.

Effective Exchange Rate

An attempt to summarize the effects on a country’s trade balance of its currency’s changes against other currencies.

Either Way Market

In the Euro Interbank deposit market where both bid and offer rates for a particular period are the same.

Epsilon

The change in the price of an option associated with a 1% change in implied volatility (technically the first derivative of the option price with respect to volatility). Also referred to as eta, vega, omega and kappa.

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.

Exotic

A less broadly traded currency.

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.

F

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.

FX

Foreign Exchange.

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 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.

Fed Funds

Cash balances held by banks with their local Federal Reserve Bank. The normal transaction with these funds 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

The United States Federal Reserve. Federal Deposit Insurance Corporation Membership is compulsory for Federal Reserve members. The corporation had deep involvement in the Savings and Loans crisis of the late 80s.

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 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

Use of taxation as a tool in implementing monetary policy.

Fixed Exchange Rate

Official rate set by monetary authorities for one or more currencies. In practice, even fixed exchange rates are allowed to fluctuate between definite upper and lower bands, leading to intervention by the central bank.

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

Where a client has not traded in that currency or where an earlier deal is reversed thereby creating a neutral (flat) position. example: you bought $500,000 then sold $500,000 = FLAT .

Float

  • see Floating exchange rate.
  • Cash in hand or in the course of being transferred between banks
  • Federal Reserve Float arises from the system where cheques sent to the Federal Reserve Banks are credited sometimes in advance of the depositing bank loosening the reserve.

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.

Foreign Exchange

The purchase or sale of a currency against sale or purchase of another.

Foreign Position

It means a position under which one party agrees to purchase from or sell to the other party an agreed amount of foreign currency.

Forex Deal

The purchase or sale of a currency against sale or purchase of another currency. The maximum time for a deal is defined when the deal opens, the deal can be closed at any moment until the expiry date and time. A deal cannot be closed on its first 3 minutes, due to technical reasons.

Forex

An abbreviation of foreign exchange.

Forward Contract

Sometimes used as synonym for “forward deal” or “future”. More specifically for arrangements with the same effect as a forward deal between a bank and a customer.

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.

Free Reserves

Total reserves held by a bank less the reserves required by the authority.

Front Office

The activities carried out by the dealer, normal trading activities.

Fundamental Analysis

Analysis based on economic and political factors.

Fundamentals

The macro economic factors that are accepted as forming the foundation for the relative value of a currency, these include inflation, growth, trade balance, government deficit, and interest rates.

Futures Contract

A contract traded on a futures exchange which requires the delivery of a specified quality and quantity of a commodity, currency or financial instruments a specified future month, if not liquidated before the contract matures.

Futures Exchange-Traded Contracts

They are firm agreements to deliver (or take delivery of) a standardized amount of something on a certain date at a predetermined price. Futures exist in currencies, money market deposits, bonds, shares and commodities. They are traded on an exchange with the clearing corporation gauranteeing the contract and moreover the trade is done on a mark to market basis.

G

G10

G7 plus Belgium, Netherlands and Sweden, a group associated with IMF discussions. Switzerland is sometimes peripherally involved.

G5

The five leading industrial countries – US, Germany, Japan, France, UK.

G7

The seven leading industrial countries, being US , Germany, Japan, France, UK, Canada, Italy.

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.

GTC “Good Till Cancelled”

An order left with a dealer to buy or sell at a fixed price. The order remains in place until it is cancelled by the client.

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 prevalent.

Gross Domestic Product

Total value of a country’s output, income or expenditure produced within the country’s physical borders.

Gross National Product

Gross domestic product plus ” factor income from abroad” – income earned from investment or work abroad.

H

Hard Currency

A currency whose value is expected to remain stable or increase in terms of other currencies.

Head and Shoulders

A pattern in price trends which chartist consider indicates a price trend reversal. The price has risen for some time, at the peak of the left shoulder, profit taking has caused the price to drop or level. The price then rises steeply again to the head before more profit taking causes the the price to drop to around the same level as the shoulder. A further modest rise or level will indicate that a further major fall is imminent. The breach of the neckline is the indication to sell.

Hedge

The purchase or sale of options or futures contracts as a temporary substitute for a transaction to be made at a later date. Usually it involves opposite positions in the cash or futures or options market.

Hedging

A hedging transaction is one whose main aim is to protect an asset or liability against a fluctuation in the foreign exchange rate rather than profit from the exchange rate fluctuations.

Hyperinflation

Very high and self sustaining inflation levels. One definition being the period while inflation exceeds 50% until it drops below that level for 12 months.

I

ICCH

International Commodities Clearing House Limited, a clearing house based in London operating world wide for many futures markets.

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.

IMM

International Monetary Market part of the Chicago Mercantile Exchange that lists a number of currency and financial futures.

IOM

Index and Options Market part of the Chicago Mercantile Exchange.

IPI

Industrial Production Index. A coincident indicator measuring physical output of manufacturing, mining and utilities.

ISDA (International Securities Dealers Association

Organization which foreign currency exchange banks have formed to regulate inter-bank markets and exchanges.

Implied Rates

The interest rate determined by calculating the difference between spot and forward rates.

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

Where the foreign currency is a variable amount and the domestic currency is fixed at one unit.

Inflation

Continued rise in the general price level in conjunction with a related drop in purchasing power. Sometimes referred to as an excessive movement in such price levels.

Info Quote

Rate given for information purposes only.

Initial Margin

The deposit required by the Broker before a client can trade/transact a deal to have some cushion in the event of default by the party.

Interbank Rates

The forex rates large international banks quote to other large international banks. Normally the public and other businesses do not have access to these rates.

Interest Rate Risk

The potential for losses arising from changes in interest rates.

Interest Rate Swaps

An agreement to exchange interest rate exposures from floating to fixed or vice versa. There is no swap of the principal. The principal amount is notional as at the end of the tenure only cash flows related with the interest payments (whether payment or reciept) are exchanged.

Intervention

Action by a central bank to effect the value of its currency by entering the market.

Intra Day Position

Open positions run within the day. Usually squared by the close.

K

Kiwi

Slang for the New Zealand dollar.

L

LDC

Less developed countries, often used with respect to secondary debt market.

LIBOR (London Inter Bank Offer Rate)

British Bankers’ Association average of interbank offered rates for dollar deposits in the London market based on quotations at 16 major banks. Effective rate for contracts entered into two days from date appearing.

LIFFE

London International Financial Futures Exchange.

Lay Off

To carry out a transaction in the market to offset a previous transaction and return to a square position.

Leading Indicators

Statistics that are considered to precede changes in economic growth rates and total business activity, e.g. factory orders.

Liability

In terms of foreign exchange, the obligation to deliver to a counter party an amount of currency either in respect of a balance sheet holding at a specified future date or in respect of an un-matured forward or spot transaction.

Limit Order – Reserved Day Trading Deal

An order to perform a Day Trading deal at a rate pre-defined by the customer, when and if such rate comes up in real market time. The Limit rate is superior to the existing rate at the time of reservation. The reservation order lasts for a period defined by the customer, and is associated by the necessary collaterals to facilitate the potential Day Trading deal, when and if activated, under the pre-defined terms.

Limited Convertibility

When residents of a country are prohibited from buying other currencies even though non-residents may be completely free to buy or sell the national currency and the foreign institutional investors also have the liberty to buy and sell shares on the stock exchange of that country.

Liquidation

Any transaction that offsets or closes out a previously established position.

Liquidity

The ability of a market to accept large transactions without having any major impact on the interest rates.

Long

A market position where the Client has bought a currency they previously did not own. For example: long Dollars.

M

M0

Cash in circulation. Only used by the UK.

M1

Cash in circulation plus demand deposits at commercial banks. There are variations between the precise definitions used by national financial authorities.

M2

Includes demand deposits, time deposits and money market mutual funds excluding large CDs.

M3

In the UK it is M1 plus public and private sector time deposits and sight deposits held by the public sector.

M4

In the US it is M2 plus negotiable CDs.

MITI

Japanese Ministry of International Trade & Industry.

MM

Money Markets.

Make a Market

A dealer is said to make a market when he quotes both the bid and offer prices at which he stands ready to buy and sell.

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. Also called a dirty float.

Margin Call

A demand for additional funds to cover positions.

Margin

Collateral that the holder of a position in securities, options, Forex or futures contracts, has to deposit to cover the credit risk of his counterparty. Other definitions to MARGIN, used in other areas are:

  • Difference between the buying and selling rates, also used to indicate the discount or premium between spot or forward.
  • For options, the sum required as collateral from the writer of an option.
  • For futures, a deposit made to the clearing house on establishing a futures position account.
  • The percentage reserve required by the US Federal Reserve to make an initial credit transaction.

Marginal Risk

The risk that a customer goes bankrupt after entering into a forward contract. In such an event the issuer must close the commitment running the risk of having to pay the marginal movement on the contract.

Mark – To – Market

The profits and/or losses are tallied at the end of the session according to the closing prices of the security and the account is “marked to the market” daily. The party will be called upon to make good the losses if there has been an adverse movement in the prices and it can book the profits in case there has been a favorable movement in the prices.

Market Value

Market value of a forex position at any time is the amount of the domestic currency that could be purchased at the then market rate in exchange for the amount of foreign currency to be delivered under the forex Contract.

Maturity

Date for settlement of the transaction which is decided at the time of entering into the contract.

Money Supply

The amount of money in the economy, which can be measured in a number of ways.

Mutual fund

An open-end investment company. Equivalent to unit trust.

N

Nickel

US term for five basis points.

Not Held Basis Order

An order whereby the price may trade through or better than the client’s desired level, but the principal is not held responsible if the order is not executed.

Note

A financial instrument consisting of a promise to pay rather than an order to pay or a certificate of indebtedness.

O

Off-Shore

The operations of a financial institution which although physically located in a country, has little connection with that country’s financial systems. In certain countries a bank is not permitted to do business in the domestic market but only with other foreign banks. This is known as an off shore banking unit.

Offer

The rate at which a dealer is willing to sell the base currency.

Official Settlements Account

A US balance of payments measure based on movement of dollars in foreign official holdings and US reserves. Also referred to as reserve transaction account.

Old Lady

Old lady of Threadneedle Street, a term for the Bank of England.

One Cancels Other Order

Where the execution of one order automatically cancels a previous order also referred to as OCO or “One cancels the other”.

Open Market Operations

The central bank operations in the markets to influence exchange and interest rates.

Open Position

Any deal which has not been settled by physical payment or reversed by an equal and opposite deal for the same value date. It can be termed as a high risk, high return proposition.

Option

A contract conferring the right but not the obligation to buy (call) or to sell (put) a specified amount of an instrument at a specified price within a predetermined time period.

Outright Deal

A forward deal that is not part of a swap operation.

Outright Rate

The forward rate of a foreign exchange deal based on spot price plus forward discount/premium.

Over The Counter (OTC)

A market conducted directly between dealers and principals via a telephone and computer network rather than a regulated exchange trading floor. These markets have not been very popular because of the risks both the parties face in case the other party fails to honour the contract. They were never part of the Stock Exchange since they were seen as “unofficial”.

Overheated (Economy)

Is an economy on a high growth rate trajectory placing pressure on the production capacity resulting in increased inflationary pressures and higher interest rates.

Overnight Limit

Net long or short position in one or more currencies that a dealer 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 dealers to maintain these unmonitored exposures.

P

PPI

Producer Price Indices. See wholesale price indices.

Package Deal

When a number of exchange and /or deposit orders have to be fulfilled simultaneously.

Par

  • The nominal value of a security or instrument.
  • The official value of a currency.

Parities

The value of one currency in terms of another.

Parity

  • Foreign exchange dealer’s slang for your price is the correct market price.
  • Official rates in terms of SDR or other pegging currency.

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

For currency pairs displayed to four decimal places, one pip is equal to 0.0001. Yen-based currency pairs are an exception and are displayed to only two decimal places (0.01).

Point

  • 100th part of a per cent, normally 10,000 of any spot rate. Movement of exchange rates are usually in terms of points.
  • One percent on an interest rate e.g. from 8-9%.
  • Minimum fluctuation or smallest increment of price movement.

Political Risk

The potential for losses arising from a change in government policy or due to the risk of expropriation (nationalisation by the government).

Position

The netted total exposure in a given currency. A position can be either flat or square (no exposure), long (more currency bought than sold), or short ( more currency sold than bought).

Prime Rate

  • The rate from which lending rates by banks are calculated in the US.
  • 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 a good in one country should equal the price of the same good in another country after adjusting for the changes in the price due to the change in exchange rate. Also known as the law of one price.

Q

Quote

An indicative price. The price quoted for information purposes but not to deal.

R

Range

The difference between the highest and lowest price of a future recorded during a given trading session.

Rate

The price of one currency in terms of another. It has the same meaning as the term parities.

Recession

A decline in business activity. Often defined as two consecutive quarters with a real fall in GNP.

Reserve Currency

A currency held by a central bank on a permanent basis as a store of international liquidity, these are normally Dollar, Deutschemark, 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 the selling is expected to take place.

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.

Risk Premium

Additional sum payable or return to compensate a party for adopting a particular risk.

Risk management

The identification and acceptance or offsetting of the risks threatening the profitability or existence of an organisation. With respect to foreign exchange involves, among others, consideration of market, sovereign, country, transfer, delivery, credit, and counterparty 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.

Rolling over

The substituting of a far option for a near option of the same underlying stock at the same strike/exercise price.

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.

S

SITC

Standard International Trade Classification. A system for reporting trade statistics in a common manner.

SOFFEX

Swiss Options and Financial Futures Exchange, a fully automated and integrated trading and clearing system.

Selling Rate

Rate at which a bank is willing to sell foreign currency.

Settlement Date

It means the business day specified for delivery of the currencies bought and sold under a forex contract.

Settlement

Actual physical exchange of one currency for another.

Short

A market position where the client has sold a currency he does not already own. Usually expressed in base currency terms.

Soft Market

More potential sellers than buyers, which creates an environment where rapid price falls are likely.

Spot Next

The overnight swap from the spot date to the next business day.

Spot Price/Rate

The price at which the currency is currently trading in the spot market.

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.

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.

Stagflation

Recession or low growth in conjunction with high inflation 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.

Sterilization

Central Bank activity in the domestic money market to reduce the impact on money supply of its intervention activities in the forex market.

Sterling

British pound.

Stop Loss Order

Order given to ensure that, should a currency weaken by a certain percentage, a short position will be covered even though this involves taking a loss. Realize profit orders are less common.

Stop Out Price

US term for the lowest accepted price for Treasury Bills at auction.

Structural Unemployment

Unemployment levels inherent in an economic structure.

Support Levels

A price level at which the buying is expected to take place.

Swap

The simultaneous purchase and sale of the same amount of a given currency for two different dates, against the sale and purchase of another. A swap can be a swap against a forward. In essence, swapping is somewhat similar to borrowing one currency and lending another for the same period. However, any rate of return or cost of funds is expressed in the price differential between the two sides of the transaction.

Swift

Society for Worldwide Inter-bank Financial Telecommunication is a clearing system for international trading.

Swissy

Market slang for Swiss Franc.

T

T-Bill

Treasury Bill.

TIBOR

Tokyo Inter-bank Offered Rate.

TIFFE

Tokio International Financial Futures Exchange.

Technical Analysis

The study of the price that reflects the supply and demand factors of a currency. Common methods are flags, trend-lines spikes, bottoms, tops, pennants, patterns and gaps.

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.

Tick

A minimum change in price, up or down.

Tomorrow Next (Tom next)

Simultaneous buying and selling of a currency for delivery the following day and selling for the next day or vice versa.

Trade Balance

The value of exports less imports. Invisibles are normally excluded, and is otherwise referred to as mercantile or physical trade. Figures can be quoted on FoB/ FaS , customs cleared, or FoB export.

Trade Date

The date on which a trade occurs.

Transaction Exposure

Potential profit and loss generated by current foreign exchange transactions.

Transaction

The buying or selling of securities resulting from the execution of an order.

U

Under-Valuation

An exchange rate is normally considered to be undervalued when it is below its purchasing power parity.

V

Value Date

For exchange contracts it is the day on which the two contracting parties exchange the currencies which are being bought or sold. For a spot transaction it is two business banking days forward in the country of the bank providing quotations which determine the spot value date.

Value Spot

Normally settlement is for two working days from the date the contract is entered into. Value Today Transaction is 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.

Variation Margin

Funds required to be deposited by a client when a price movement has caused funds to fall below the stipulated percentage of the value of the contract.

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

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.

W

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.

Y

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.

Z

Z-Certificate

Certificate issued by the Bank of England to “discount houses” in lieu of stock certificates to facilitate their dealing in the short dated gilt edge securities.

Zero Coupon Bond

A bond that pays no interest. The bond is initially offered at a discount to its redemption value.