Cable
- A term used in the foreign exchange market for the US Dollar/British
Pound rate.
Capital
Risk - The risk arising from a bank having to pay to the counter
party with out knowing whether the other party will or is able
to meet its side of the bargain. see Herstatt.
Carry
- The interest cost of financing securities or other financial
instruments held.
Cash
Delivery - Same day settlement.
Cash
market - The market in the actual financial instrument on
which a futures or options contract is based.
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.
Central
Bank - A nations main regulatory bank. Traditionally, its
primary responsibility is development and implementation of monetary
policy.
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.
Clean
float - An exchange rate that is not materially effected by
official intervention.
Closed
position - A transaction which leaves the trade with a zero
net commitment to the market with respect to a particular currency.
Commission
- The fee that a broker may charge clients for dealing on their
behalf.
Confirmation
- A memorandum to the other party describing all the relevant
details of the transaction.
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).
Conversion
Account - A general ledger account representing the uncovered
position in a particular currency. Such accounts are referred
to as Position Accounts.
Conversion
- The process by which an asset or liability denominated in one
currency is exchanged for an asset or liability denominated in
another currency.
Conversion
arbitrage - A transaction where the asset is purchased and
buys a put option and sells a call option on the asset purchased,
each option having the same exercise price and expiry.
Convertible
currency - A currency that can be freely exchanged for another
currency (and or gold) without special authorization from the
central bank.
Copey
- Slang for the Danish krone.
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.
Counterparty
- The other organisation or party with whom the exchange deal
is being transacted.
Countervalue
- Where a person buys a currency against the dollar it is the
dollar value of the transaction.
Country
risk - The risk attached to a borrower by virtue of its location
in a particular country. This involves examination of economic,
political and geographical factors. Various organisations generate
country risk tables.
Cover
- (1) To take out a forward foreign exchange contract. (2) To
close out a short position by buying currency or securities which
have been sold.
Covered
Arbitrage - Arbitrage between financial instruments denominated
in different currencies, using forward cover to eliminate exchange
risk.
Covered
Margin - The interest rate margin between two instruments
denominated in different currencies after taking account of the
cost of forward cover.
Crawling
peg - A method of exchange rate adjustment; the rate is fixed/
pegged, but adjusted at certain intervals in line with certain
economic or market indicators.
Credit
Risk - Risk of loss that may arise on outstanding contracts
should a counter party default on its obligations.
Cross
deal - A foreign exchange deal entered into involving two
currencies, neither of which is the base currency.
Cross
rates - Rates between two currencies, neither of which is
the US Dollar.
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.
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.
Dealer
- One who, as opposed to a broker, acts as a principle in all
transactions, buying and selling for its own accounts.
Deflator
- Difference between real and nominal Gross National Product,
which is equivalent to the overall inflation rate.
Delivery
date - The date of maturity of the contract, when the exchange
of the currencies is made This date is more commonly known as
the value date in the FX or Money markets.
Delivery
Risk - A term to describe when a counterparty will not be
able to complete his side of the deal, although willing to do
so.
Depreciation
- A fall in the value of a currency due to market forces rather
than due to official action.
Desk
- Term referring to a group dealing with a specific currency or
currencies.
Details
- All the information required to finalize a foreign exchange
transaction, i.e. name, rate, dates, and point of delivery.
Devaluation
- Deliberate downward adjustment of a currency against its fixed
parities or bands, normally by formal announcement.
Direct
quotation - Quoting in fixed units of foreign currency against
variable amounts of the domestic currency.
Dirty
Float - Floating a currency when the rate is controlled by
intervention by the monetary authorities.
Easing
- Modest decline in price.
Economic
Indicator - A statistics which indicates current economic
growth rates and trends such as retail sales and employment.
ECU
- European Currency Unit.
EDI
- Electronic Data Interchange.
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.
EMS
- European Monetary System.
European
Monetary System - A system designed to stabilize if not eliminate
exchange risk between member states of the EMS as part of the
economic convergence policy of the EU. It permits currencies to
move in a measured fashion (divergence indicator) within agreed
bands (the parity grid) with respect to the ECU and consequently
with each other.
Exchange
control - Rules used to preserve or protect the value of a
countries currency.
Exotic
- A less broadly traded currency.
Exposure
- In foreign exchange, a potential for gain or loss because of
movement in foreign exchange rate. There are three primary types
of exposure:
- Economic:
The change in future earning power and cash flow arising from
a change in exchange rates. In effect, it represents a change
in the value of a company holding foreign currency.
- Transnational:
A potential gain or loss arising from transactions that will
definitely occur in the future, are currently in progress, or
could have already been completed. A signed but not shipped
sales contract, a receivable or foreign currency payment collected
but not converted to local currency would all be examples of
transaction exposure.
- Translation:
The potential for change in reported earnings and/or the book
value of the consolidated company equity accounts, as the result
of a change in foreign exchange rates used to translate the
foreign currency statements of subsidiaries and affiliates known
as accounting exposure.
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
- 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
Reserve System - The central banking system in the United
States.
Fill
or Kill - An order which must be entered for trading, normally
in a pit three times, if not filled is immediately canceled.
Fisher
Effect - The relationship that exists between interest rates
and exchange rate movements, so that in an ideal situation interest
rate differentials would be exactly off set by exchange rate movements.
See interest rate parity.
Fixed
exchange rate - Official rate set by monetary authorities.
Often the fixed exchange rate permits fluctuation within a band.
Flexible
exchange rate - Exchange rates with a fixed parity against
one or more currencies with frequent revaluation's. A form of
managed float.
Floating
exchange rate - An exchange rate where the value is determined
by market forces. Even floating currencies are subject to intervention
by the monetary authorities. When such activity is frequent the
float is known as a dirty float.
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 - The purchase or sale of a currency against sale
or purchase of another.
Forex
- Term commonly used when referring to the foreign exchange market.
Forex
Club - Groups formed in the major financial centers to encourage
educational and social contacts between foreign exchange dealers,
under the umbrella of Association Cambiste International.
Forward
margins - Discounts or premiums between spot rate and the
forward rate for a currency. Normally quoted in points.
Forward
Operations - Foreign exchange transactions, on which the fulfillment
of the mutual delivery obligations is made on a date later than
the second business day after the transaction was concluded.
Forward
Outright - A commitment to buy or sell a currency for delivery
on a specified future date or period. The price is quoted as the
Spot rate minus or plus the forward points for the chosen period.
Forward
Rate - Forward rates are quoted in terms of forward points
, which represents the difference between the forward and spot
rates. In order to obtain the forward rate from the actual exchange
rate the forward points are either added or subtracted from the
exchange rate. The decision to subtract or add points is determined
by the differential between the deposit rates for both currencies
concerned in the transaction. The base currency with the higher
interest rate is said to be at a discount to the lower interest
rate quoted currency in the forward market. Therefor the forward
points are subtracted from the spot rate. Similarly, the lower
interest rate base currency is said to be at a premium, and the
forward points are added to the spot rate to obtain the forward
rate.
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.
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.
FX
- Foreign Exchange.
G7
- The seven leading industrial countries, being US , Germany,
Japan, France, UK, Canada, Italy.
G10
- G7 plus Belgium, Netherlands and Sweden, a group associated
with IMF discussions. Switzerland is sometimes peripherally
involved.
Gap
- A mismatch between maturities and cash flows in a bank or
individual dealers position book. Gap exposure is effectively
interest rate exposure.
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.
Gold
Standard - The original system for supporting the value
of currency issued. The was that where the price of gold is
fixed against the currency it means that the increased supply
of gold does not lower the price of gold but causes prices to
increase.
Good
until canceled - An instruction to a broker that unlike
normal practice the order does not expire at the end of the
trading day, although normally terminates at the end of the
trading month.
Grid
- Fixed margin within which exchange rates are allowed to fluctuate.
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.
Hard
currency - Any one of the major world currencies that is
well traded and easily converted into 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 a 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.
Hedged
position - One open buy position and one open sell position
in the same currency.
Hit
the bid - Acceptance of purchasing at the offer or selling
at the bid.
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 supports countries
with balance of payments problems with the provision of loans.
IMM
- International Monetary Market part of the Chicago Mercantile
Exchange that lists a number of currency and financial futures
Implied volatilityA measurement of the market's expected price
range of the underlying currency futures based on the traded
option premiums.
Implied
Rates - The interest rate determined by calculating the
difference between spot and forward rates.
Indicative
quote - A market-maker's price which is not firm.
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.
Initial
margin - The margin required by a Foreign Exchange firm
to initiate the buying or selling of a determined amount of
currency.
Inter-bank
rates - The bid and offer rates at which international banks
place deposits with each other. The basis of the Interbank market.
Interest
Arbitrage - Switching into another currency by buying spot
and selling forward, and investing proceeds in order to obtain
a higher interest yield. Interest arbitrage can be inward, i.e.
from foreign currency into the local one or outward, i.e. from
the local currency to the foreign one. Sometimes better results
can be obtained by not selling the forward interest amount.
In that case some treat it as no longer being a complete arbitrage,
as if the exchange rate moved against the arbitrageur, the profit
on the transaction may create a loss.
Interest
parity - One currency is in interest parity with another
when the difference in the interest rates is equalized by the
forward exchange margins. For instance, if the operative interest
rate in Japan is 3% and in the UK 6%, a forward premium of 3%
for the Japanese Yen against sterling would bring about interest
parity.
Interest
rate Swaps - An agreement to swap interest rate exposures
from floating to fixed or vice versa. There is no swap of the
principal. It is the interest cash flows be they payments or
receipts that are exchanged.
Internationalization
- Referring to a currency that is widely used to denominate
trade and credit transactions by non residents of the country
of issue. US dollar and Swiss Franc are examples.
Intervention
- Action by a central bank to effect the value of its currency
by entering the market. Concerted intervention refers to action
by a number of central banks to control exchange rates.
Kiwi - Slang for
the New Zealand dollar.
Leading
Indicators - Statistic 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 counterparty 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 - A request to deal as a buyer or seller for a foreign
currency transaction at a specified price, or at a better price,
if obtainable.
Liquidation
- Any transaction that offsets or closes out a previously established
position.
Liquidity
- The ability of a market to accept large transactions.
Maintenance
margin - The minimum margin which an investor must keep
on deposit in a margin account at all times in respect of each
open contract.
Make
a market - A dealer is said to make a market when he or
she quotes bid and offer prices at which he or she stands ready
to buy and sell.
Managed
float - When the monetary authorities intervene regularly
in the market to stabilize the rates or to aim the exchange
rate in a required direction.
Margin
call - A claim by one's broker or dealer for additional
good faith performance monies usually issued when an investor's
account suffers adverse price movements.
Margin
- The amount of money or collateral that must be, in the first
instance, provided or thereafter, maintained, to ensure against
losses on open contracts. Initial must be placed before a trade
is entered into. Maintenance or Variation margin must be added
to initial to maintain against losses on open positions. Sometimes
herein the amount that needs to be present to establish or thereafter
maintained is sometimes herein referred to as necessary margin.
Mark
to market - The daily adjustment of an account to reflect
accrued profits and losses often required to calculate variations
of margins.
Market
maker - A market maker is a person or firm authorized to
create and maintain a market in an instrument.
Market
order - An order to buy or sell a financial instrument immediately
at the best possible price.
Micro
economics - The study of economic activity as it applies
to individual firms or well defined small groups of individuals
or economic sectors.
Mid-price
or middle rate - The price half-way between the two prices,
or the average of both buying and selling prices offered by
the market makers.
Minimum
price fluctuation - The smallest increment of market price
movement possible in a given futures contract.
Monetary
Base - Currency in circulation plus banks' required and
excess deposits at the central bank.
Moving
Average - A way of smoothing a set of data, widely used
in price time series.
Net Position - The
amount of currency bought or sold which have not yet been offset
by opposite transactions.
Odd
Lot - A non standard amount for a transaction.
Offer
- The price at which a seller is willing to sell. The best offer
is the lowest such price available.
Offset
- The closing-out or liquidation of a futures position.
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.
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.
Overnight
- A deal from today until the next business day.
Parity
- (1) Foreign exchange dealer's slang for your price is the
correct market price. (2) Official rates in terms of SDR or
other pegging currency.
Parities
- The value of one currency in terms of another.
Pegged
- A system where a currency moves in line with another currency,
some pegs are strict while others have bands of movement.
Pip
- One unit of price change in the bid/ask price of a currency.
It stands for "price interest point." For most currencies,
it denotes the fourth decimal place in an exchange rate and
represents 1/100 of one percent (.01%). Read more information
on using pips to calculate
profit and loss in currency trading.
Position
- The netted total commitments 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).
Profit
Taking - The unwinding of a position to realize profits.
Quote - An indicative
price. The price quoted for information purposes but not to
deal.
Rally
- A recovery in price after a period of decline.
Range
- The difference between the highest and lowest price of a
future recorded during a given trading session.
Rate
- (1) The price of one currency in terms of another, normally
against USD. (2) Assessment of the credit worthiness of an
institution.
Reaction
- A decline in prices following an advance.
Reciprocal
currency - A currency that is normally quoted as dollars
per unit of currency rather than the normal quote method of
units of currency per dollar. Sterling is the most common
example.
Resistance
Point or Level - A price recognized by technical analysts
as a price which is likely to result in a rebound but if broken
through is likely to result in a significant price movement.
Revaluation
- Increase in the exchange rate of a currency as a result
of official action.
Revaluation
rate - The rate for any period or currency which is used
to revalue a position or book.
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.
Risk
Position - An asset or liability, which is exposed to
fluctuations in value through changes in exchange rates or
interest rates.
Rollover
- An overnight swap, specifically the next business day against
the following business day (also called Tomorrow Next, abbreviated
to Tom-Next).
Round
trip - Buying and selling of a specified amount of currency.
Same
day transaction - A transaction that matures on the day the
transaction takes place.
Selling
rate - Rate at which a bank is willing to sell foreign currency.
Settlement
date - The date upon which foreign exchange contracts settle.
Settlement
Risk - Where a payment is made to a counter party before the
counter value payment has been made. The risk is that the counter
party's payment will not be received.
Short
sale - The sale of a specified amount of currency not owned
by the seller at the time of the trade. Short sales are usually
made in expectation of a decline in the price.
Short-term
interest rates - Normally the 90 day rate.
Sidelined
- A major currency that is lightly traded due to major market
interest being in another currency pair.
Slippage
- Refers to the negative (or depreciating) pip value between where
a stop loss order becomes a market order and where that market
order may be filled.
Soft
Market - More potential sellers than buyers, which creates
an environment where rapid price falls are likely.
Spot
- (1) The most common foreign exchange transaction. (2) Spot or
Spot date refers to the spot transaction value date that requires
settlement within two business days, subject to value date calculation.
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.
Spread
- (l)The difference between the bid and ask price of a currency.
(2) The difference between the price of two related futures contracts.
Square
- Purchase and sales are in balance and thus the dealer has no
open position.
Squawk
Box - A speaker connected to a phone often used in broker
trading desks.
Squeeze
- Action by a central bank to reduce supply in order to increase
the price of money.
Stable
market - An active market which can absorb large sale or purchases
of currency without major moves.
Standard
- A term referring to certain normal amounts and maturities for
dealing.
Sterilization
- Central Bank activity in the domestic money market to reduce
the impact on money supply of its intervention activities in the
FX market.
Sterling
- British pound, otherwise known as cable.
Stocky
- Market slang for Swedish Krona.
Stop-Loss
order - Order to buy or sell at the best available price when
a given price threshold has been reached.
Support
levels - When an exchange rate depreciates or appreciates
to a level where (1) Technical analysis techniques suggest that
the currency will rebound, or not go below; (2) the monetary authorities
intervene to stop any further down ward movement. See resistance
point.
Swap
price - A price as a differential between two dates of the
swap.
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.
Swissy
- Market slang for Swiss Franc.
Technical
Correction - An adjustment to price not based on market sentiment
but technical factors such as volume and charting.
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.
Thursday/Friday
Dollars - A US foreign exchange technicality. If a foreign
bank buys dollars on Tuesday for Thursday delivery. If the bank
leaves the funds overnight and transfers them on Friday by means
of a clearing house cheque then clearance is not until Monday,
the next working day. Higher interest rates for this period are
thus available.
Tick
- A minimum change in price, up or down.
Today/Tomorrow
- Simultaneous buying of a currency for delivery the following
day and selling for the spot day, or vice versa. Also referred
to as overnight.
Tomorrow
next (Tom next) - Simultaneous buying of a currency for delivery
the following day and selling for the spot day or vice versa.
Trade
date - The date on which a trade occurs.
Tradeable
amount - Smallest transaction size acceptable.
Transaction
date - The date on which a trade occurs.
Transaction
- The buying or selling of currencies resulting from the execution
of an order.
Two
Tier market - A dual exchange rate system where normally only
one rate is open to market pressure, e.g. South Africa.
Two-Way
quotation - When a dealer quotes both buying and selling rates
for foreign exchange transactions.
Uncovered
- Another term for an open position.
Under-valuation
- An exchange rate is normally considered to be undervalued
when it is below its purchasing power parity.
Up
tick - A transaction executed at a price greater than the
previous transaction.
Value
Date - 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. The only exception to this
general rule is the spot day in the quoting centre coinciding
with a banking holiday in the country(ies) of the foreign currency(ies).
The value date then moves forward a day.
Value
Spot - Normally settlement for two working days from today.
See value date.
Volatility
- A measure of the amount by which an asset price is expected
to fluctuate over a given period.
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
Wash
trade - A matched deal which produces neither a gain nor
a loss.
Whipsaw
- Term for where a trader takes a position, then has to move
against it triggering stop loss limits and liquidation of positions,
then having to move in the original direction. Normally occurs
in volatile markets.
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 financial centre's
are open for business (all relevant currency centers in the
case of a cross are open).
Yard
- Slang for a billion.
