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FOREX GLOSSARY

Backwardation
Term referring to the amount that the spot price exceeds the forward price.

Balance of Payments
A record of a nations claims of transactions with the rest of the world over a particular time period. These include merchandise, services and capital flows.

Balance of Trade
The value of a country's exports minus its imports.

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

Banking day (or Business day)
Any day that commercial banks are open for business in the financial center of the country whose currency a position is taken.

Bank Line
Line of credit granted by a bank to a customer, also known as a "line."

Bank of Japan or BOJ
The central bank of Japan.

Bank Note
Paper issued by the central bank, redeemable as money and considered to be full legal tender

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

Base Currency
The currency in which an investor or issuer maintains its book of accounts; the currency that other currencies are quoted against. In the forex market, 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

Base Rate
A term used predominantly in the UK for the rate used by banks to calculate the interest rate charged to borrowers. Top quality borrowers will pay a small amount over base rate while lesser quality credits will pay a rate much higher than the base rate.

Basis
The difference between the cash price and futures price.

Basis Point
One hundredth of a percent

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

Bear
An investor who believes that price of an investment product is going to fall.

Bear Market
A market distinguished by a prolonged period of declining prices accompanied with widespread pessimism.

Bear Squeeze
The condition in the market where investors or traders who are short an investment product are forced to cover their position because a rising market condition, has inflicted losses on the account

Best-Efforts Basis
The execution of an order at the next available price taking into consideration the volume available to buy or sell at that price and the quantity and volume of orders that precede the customers order.

BID
Dealer phrase referring to the first few digits of an exchange rate. These digits rarely change in normal market fluctuations, and therefore are omitted in dealer quotes, especially in times of high market activity. For example, a USD/Yen rate might be 107.30/107.36, but would be quoted verbally without the first three digits i.e. "30/36".

Big Figure
The first two or three digits of a foreign exchange price or rate. Examples: USD/JPY rate of 110.00/06 the big figure is 110. GBP/USD price of 1.8450 the big figure is 1.84

Book
In a professional trading environment,a “book” is the summary of a trader’s or desk’s total positions

Bonds
Bonds are tradable instruments (debt securities) which are issued by a borrower to raise capital. They pay either fixed or floating interest, known as the coupon. As interest rates fall, bond prices rise and vice versa.

Break or Break out
Term used to describe a sudden or rapid fall in instruments pricing away from a consolidated range.

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 usually 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.

Brokerage
Commission charged by a broker.

Buba
Bundesbank, Central Bank of Germany

Bull
An investor who believes that prices/the market will rise.

Bull Market
A market distinguished by a prolonged period of rising prices. (Opposite of bear market)

Business Day
Any day on which commercial banks are open for business other than Saturday or Sunday in the principal financial center of the country in whose currency a position is taken.

Buying Rate
Rate at which the market and a market maker in particular is willing to buy the currency. Sometimes called bid rate.

Buy Limit
Specifies the highest price at which the purchase of the Base Currency in a Currency Pair can be executed. The limit price in a Buy limit order should be BELOW the current dealing Ask price.

Buy On Margin
The process of buying a currency pair where a client pays cash for part of the overall value of the position. The word margin refers to the portion the investor puts up rather than the portion that is borrowed.

Buy Stop
A Buy Stop is a Stop Order that is placed ABOVE the current dealing Ask price and is not activated until the market Ask price is at or above the Stop Price. The buy stop order, once triggered, becomes a market order to buy at the current market price.

FOREX GLOSSARY

OCO - One Cancels the Other
A contingent order where the execution of one part of the order automatically cancels the other part.

Odd Lot
A non standard amount for a transaction.

OECD
Organisation of Economic Co-operation and Development. Membership is the more than developed countries.

Offer(ask)
The price at which a dealer is willing to sell. The Offer is also called the Ask or Ask Price.

Offered market
Temporary situation where offers exceed bid

Offset
The closing-out or liquidation of a futures position.

Official Settlements Account
A U.S. 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, the central bank of England.

Omnibus Account
An account maintained by one broker with another in which all of the accounts of the former are combined and carried only in its name, rather than designated separately.

Open Interest
The total number of outstanding option or futures contracts that have not been closed out by offset or fulfilled by delivery

Open Market Operations
Central Bank operations in the markets to influence exchange and interest rates.

Open Order
An order that will be executed when a market moves to its designated price. Normally associated with Good 'til Cancelled Orders.

Open Outcry
A public auction method of trading conducted by calling out bids and offers across a trading ring or pit and having them accepted.

Open Position
The difference between assets and liabilities in a particular currency. This may be measured on a per currency basis or the position of all currencies when calculated in base currency.

Options
An agreement that allows the holder to have the option to buy/sell a specific security at a certain price within a certain time. Two types of options – call and put. A call is the right to buy while a put is the right to sell. One can write or buy call and put options.

Option Class
All options of the same type - calls or puts -listed on the same underlying instrument

Option Contract
A financial contract giving the buyer the right, but not the obligation, to purchase or sell a specific forex contract (the underlying) at a specific price (the strike price) on or before a specific date (the expiration date). The amount the buyer pays to the seller for the contract rights is called the "premium."

Option Premium
The amount the buyer pays to the seller for the rights of an option contract.

Option Series
All options of the same class having the same exercise/strike price and expiration date.

Order
An order is an instruction, from a client to a broker to trade. An order can be placed at a specific price or at the market price. Also, it can be good until filled or until close of business.

OTC/Over The Counter
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. They were never part of the Stock Exchange since they were seen as "unofficial". Each OTC firm operates a market in the shares of a restricted list of (generally small and little-known) companies. Sometimes the dealer simply puts would-be buyers and sellers together but does not take a position in the shares himself. These days OTC trading is seen as "consumer-friendly," meaning that it is interested in getting the buyer and seller the best possible price. Some see this as what share-trading is all about. However, market makers, many of whom create market movements purposefully, feel they are being elbowed out by OTC, and that speculation, arbitrage and "smart-trading" are undermined by the new market.

Out-of-the-Money
An option contract having no intrinsic value.

Outright Deal
A forward deal that is not part of a swap operation

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.

Overhang
A holding of foreign exchange that is temporarily unable to be converted from the reserve currency into other reserve assets.

Overheated (Economy)
Is an economy where high-growth rates placing pressure on 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.

Overnight Position
A trade that remains open until the next business day.

Oscillators
Quantitative methods designed to provide signals regarding the overbought and oversold conditions

FOREX GLOSSARY

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

Paris
A term for USD FRF Spot Rate.

Parity
The equivalent value of one currency in terms of another; also, sometimes used as a synonym for currency pair.

Parity Grid
A term used in the context of the European Monetary System which consists of the upper, central and lower intervention points between member currencies

Payment Date
A system where a currency moves in line with another currency, some pegs are strict while others have bands of movement.

Pegged
A system where a currency moves in line with another currency. Some pegs are strict while others have bands of movement.

Pending Orders Report
The Pending Orders report will show all the pending orders that the client has entered over the user specified dates whether the Pending Order is executed or not. Any Pending Order that is cancelled by the client will still be displayed, giving the client a full audit trail of the orders.

Petrodollars
Foreign exchange reserves of oil producing nations arising from oil sales

Philadelphia Stock Exchange (PHLX)
The oldest U.S. securities exchange which offers currency futures and options on currency futures

Points, Pips
The term used in currency market to represent the smallest incremental move an exchange rate can make. Depending on context, normally one basis point (0.0001 in the case of EUR/USD, GBD/USD, USD/CHF and .01 in the case of USD/JPY).

Political Risk
Exposure to changes in governmental policy which will have an adverse effect on an investor's
position.

Portfolio Insurance
An option hedging strategy to protect long cash market positions.

Position
trading view expressed by buying or selling. It can refer to the amount of a currency either owned or owed by an investor.

Position Clerk
A clerk who assist the dealer in recording a dealers position and ensures that all deal tickets are completed and transferred to the back office or input into the books in a position keeping system.

Position Limit
The maximum position, either net long or net short, in one future or in all futures of one currency or instrument combined which may be held or controlled by one person.

Premium
In the currency markets, it is the amount of points added to the spot price to determine a forward or futures price.

Pre-Spot Dates
Quoted standard periods that fall between the transaction date and the current spot value date.

Price
The price at which the underlying currency can be bought or sold.

Price Transparency
The ability of all market participants to "see" or deal at the same price.

Prime Rate
(1) The rate from which lending rates by banks are calculated in the US.
(2) The rate of discount of prime bank bills in the UK

Primary Reserves
Gold related monetary reserves, being gold, SDR, etc.

Principal
A dealer who buys or sells stock for his/her own account.

Principal Value
The original amount invested by the client.

Producer Price Index
An economic indicator which gauges the average changes on prices received by domestic producers for their output at all stages of processing

Profit/Loss (P&L)
The actual "realized" gain or loss resulting from trading activities on Closed Positions, plus the theoretical "unrealized" gain or loss on Open Positions that have been Mark-to-Market.

Profit Graph
A graphical representation of the profits to a given options strategy for different underlying asset prices

Proxy Hedge
A term to describe when it is necessary to hedge against a currency where there is no market but it follows a major currency, the hedge is entered against the major currency.

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, exchanged at the current rate. Also known as the law of one price

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

Put Call Parity
The equilibrium relationship between premiums of call and put options of the same strike and expiry

Pyramiding
The use of cash generated by positive variation margins on a futures position to increase the size of the position, each reinvestment in successively smaller increments

FOREX GLOSSARY


Random Walk Theory
An efficient market hypothesis, stating that prices move randomly versus their intrinsic value. Therefore, no one can forecast market activity based on the available information

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
The price of one currency in terms of another.

Ratio Calendar Spread
Selling more near-term options than longer maturity options at the same strike price.

Ratio Spread
Buying a specific quantity of options and selling a larger quantity of out of the money options.

Reaction
A decline in prices following an advance.

Real
A price, interest rate or statistic that has been adjusted to eliminate the effect of inflation

Realignment
Simultaneous and mutually co-ordinated re- and devaluation of the currencies of several countries. An activity that mostly refers to EMS activity.

Realized P/L
The profit and loss generated from closed positions.

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

Regulated Market
A market that is regulated usually by a governmental agency that issues a number of guidelines and restrictions designed to protect investors.

Reinvestment Rate
The rate at which interest earned on a loan can be reinvested. The rate may not attract the same level of interest as the principal amount

Repo - Re-purchase
This type of trade involves the sale and later re-purchase of an instrument, at a specified time and date. Occurs in the short-term money market.

Report
French term for premium

Reporting Dealer
Term for US Primary Dealers

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

Reserve Currency
A currency held by a central bank on a permanent basis as a store of international liquidity, these are normally Dollar, Euro, and sterling

Reserve Requirement
The ratio of reserves to deposits, expressed as a fraction prescribed by national banking authorities, including the United States

Reserve Tranche
The 25% of its quota to which a member of the IMF has unconditional access, and for which there is no obligation to repay.

Resistance
A term used in technical analysis indicating a specific price level at which a currency will have the inability to cross above. Recurring failure for the price to move above that point produces a pattern that can usually be shaped by a straight line.

Rescheduling
The renegotiation of the terms of existing debts. The term is usually used with reference to LDC debt. The term rescheduling is considered to be refinancing to avoid any implication of default. Major sovereign debt rescheduling for Brazil, and Mexico have been undertaken in recent years

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.

Revaluation Rate
(1)The rate for any period or currency which is used to revalue a position or book.
(2) Revolving credit Upon repayment by the borrower the credit becomes automatically available.

Reversal
(1)Process of changing a call into a put.
(2) Reversal patterns that occur at the end of the trend, signalling the trend change

Right hand side
Corresponds to the Ask or Offer price of a foreign exchange rate. For example, given a price of 1.9720 - .1.9726, the right hand side is .9635. The right hand side is the side that a client would buy at.

Ring
An area on a trading floor where futures or equities are traded

Risk Capital
The amount of money the Customer is willing to put at risk and, which if lost would not, change the Customer's lifestyle or the Customer's family lifestyle

Risk Factor
The risk factor (delta) indicates the risk of an option position relative to that of the related futures contract.

Risk Management
To hedge one's risk they will employ financial analysis and trading techniques
Process whereby the settlement of a deal is rolled forward to another value date. The cost of this process is based on the interest rate differential of the two currencies.

Risk Position
An asset or liability, which is exposed to fluctuations in value through changes in exchange rates or interest rates

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

Risk Reversal
(1)Additional sum payable or return to compensate a party for adopting a particular risk
(2)The put limits downside, while the call limits the upside

Rollover
The process of extending the settlement value date on an open position forward to the next valid value date.

Rollover Credit
Medium term credit with a variable interest rate, which is governed by the currently prevailing rates on the Euromarket.

Round Trip
Buying and selling of a specified amount of currency.

Running a Position
Keeping open positions in the hope of a speculative gain.

FOREX GLOSSARY

Quota
(1) A limit on imports or exports.
(2) A country's subscription to the IMF

Quote
An indicative market price; shows the highest bid and/or lowest ask price available on a security at any given time.

FOREX GLOSSARY

Kappa
A measure of the sensitivity of the price of an option to a change in its implied volatility.

Key currency
Small countries, which are highly dependent on exports, orientates their currencies to their major trading partners, the constituents of a currency basket.

Kiwi
The New-Zealand Dollar

FOREX GLOSSARY

J Curve
Where short term instruments are trading at premiums to long term instruments.

Jobber
A trader who trades for small, short-term profits during the course of a trading session, rarely carrying a position overnight.

FOREX GLOSSARY

Take Profit Order
A customer's instructions to buy or sell a currency pair which, when executed, will result in the reduction in the size of the existing position and show a profit on said position.

Technical Analysis
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 on technical factors such as volume and charting.

Temporal Accounting
Method of determining accounting exposure which translates all balance sheet items at the current rate of exchange, not the one at the time the cost was incurred

Tender
(1) a formal offer to supply or purchase goods or services.
(2) In the UK the term for the weekly Treasury Bill issue.

Tenor
Maturity or number of days to maturity normally on bills of exchange

Terms of Trade
The ratio between export and import price indices

Theory of Elasticities
A model of exchange rate determination stating that the exchange rate is simply the price of the foreign exchange which maintains the BOP in equilibrium. The degree to which the exchange rate responds to a change in price

Threshold of Divergence
A safety feature for the EMS which creates an emergency exit for currencies which become the singular focus of various adverse forces. The threshold of divergence indicates when the specific country with the pressured currency should take additional steps other then simple central bank intervention in the foreign exchange markets

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 bid and ask quotes are wide and the liquidity of the instrument traded is low.

Thursday/Friday Dollars
A U.S. foreign exchange technicality. 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.

Tier One
A measure of a banks financial strength used by the BIS being the shareholders' equity available to cover actual or potential irredeemable and non-cumulative preference shares. It excludes, hybrid forms of capital such as fixed term stock, goodwill, and revaluation reserves. BIS has a minimum requirement of 4 percent on risk-weighted assets.

Tight Money
A condition where there is a shortage of credit as a result of monetary policy restricting the supply of credit normally through raising interest rates

TIFFE
Tokyo International Financial Futures Exchange

Time Decay
(1)The decline in the time value of an option as the expiry approaches
(2) Interest bearing deposits at a savings institution that has a specific maturity

Time Value
That part of an option premium which reflects the length of time remaining in the option prior to expiration. The longer the time remaining until expiration, the higher the time value.

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

Tombstone
Colloquial term for announcement in a publication that a loan or bond has been arrange

Tomorrow Next (Tom/Next),(T/N),T/N Roll
Simultaneous buying and selling of a currency for delivery the following day.

Trade date
The date on which a trade occurs.

Trade Deficit/Surplus
The difference between the value of imports and exports. Often only reported in visible trade terms

Trade-weighted Exchange Rate
The changes in the exchange rate against a trade weighted basket including the currencies of the county's principal trading partners

Tradeable Amount
Smallest transaction size acceptable

Traded Options
Transferable options with the right to buy and sell a standardised amount of a currency at a fixed price within a specified period.

Tranche
A portion of, specifically used for borrowings from the IMF.

Transaction
The buying or selling of foreign exchange amount resulting from the execution of an order.

Transaction Cost
The cost of buying or selling a financial instrument.

Transaction Date
The date on which a trade occurs.

Transaction Exposure
(1)Potential profit and loss generated by current foreign exchange transactions
(2) The calculation of loss or profit resulting from the valuation of foreign assets and liabilities for balance sheet purposes, when consolidating into the base currency

Treasury Bills
Short-term obligations of a Government issued for periods of one year or less. Treasury bills do not carry a rate of interest and are issued at a discount on the par value. Treasury bills are repaid at par on the due date. In the UK they are normally for 91 days, and are offered at weekly tenders. In the US they are auctioned.

Turnover
The total volume of all executed transactions in a given time period.

Two-Tier Market
A dual exchange rate system where normally only one rate is open to market pressure, e.g. South Africa.

Two Way Price
Both the bid and ask rate is quoted for a Forex transaction.