Glossary

Account Payee
Also 'account payee only'. Words written on the face of a cheque between two parallel lines. The purpose is to ensure that the cheque may only be paid into an account in the name of the payee - the person to whom the cheque is made payable. This means that the payee cannot sign it in favour of another person.
Accrual
A term used in company accounts where income is due or a cost is incurred during an accounting period but has not been received or paid.
Aggregate
Total amount of exposure a bank has with a customer for both spot and forward contracts.
Aggregate Risk
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.
Analyst
A professional working for a fund manager or broker whose job is to analyse industry sectors (e.g. retail, oil, pharmaceuticals) and determine the prospects for the companies operating in them.
Appreciation
Describes a currency strengthening in response to market demand rather than by official action.
Around
Used in quoting forward "premium / discount."
Ask
The lowest price at which a dealer or market maker will sell a specified number of shares of a stock at any given time. The term 'bid' refers to the highest price a market maker will pay to purchase the stock. The ask price (also known as the 'offer' price) will be higher than the bid price as market makers make money on the difference between the bid price and the ask price, the difference being called the 'spread'.
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 or Better
An order to deal at a specific rate or better
At Par Forward Spread
When the forward price is equivalent to the spot price.
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.
ATM Card
A plastic card enabling the holder to access an automated teller machine to obtain cash and statements.
Auction
Sale of an item to the highest bidder. A method commonly used in exchange control regimes for the allocation of foreign exchange.
Auditor
A person appointed by a company to perform an audit. In the UK auditors are Chartered Accountants.Auditors are required to certify that the accounts produced by their client companies have been prepared in accordance with accounting standards and represent a true and fair view of the company. If they do not feel able to certify as such, they may qualify the accounts by saying that they were not able to perform the checks they would have liked to make. The qualification of a set of accounts by an auditor is a serious matter for a quoted company and will concern investors.
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".
Back Office
Settlement and related processes.
Back to Back
(1) Transaction where all the obligations and liabilities in one transaction are mirrored in a second transaction.
(2) Transaction where a loan is made in one currency in one country against a loan in another country in another currency.
BACS
Bankers Automated Clearing Services - The process for Sterling clearing for domestic banks. Usually takes 3 business days.
Balance Of Payments
1) A country's financial position vis-à-vis other countries of the world, made up of its current account and capital account (or capital movement) over a given period of time. The current account covers the balance of imports and exports and the capital account covers the difference between the capital that the country has invested in other countries, and the capital invested by other countries in it.
2) A systematic record of the economic transactions during a given period for a country.
Balance of Trade
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.
Baltic Exchange
A self regulated London exchange serving worldwide interests in the global maritime business. It is the world's premier maritime market for ship chartering and sale and purchase. The exchange publishes a range of market information, such as freight derivatives price settlements.
Band
The range in which a currency is permitted to move. A system used in the ERM.
Bank
An institution which:
* takes deposits from individuals, companies, organisations etc. and provides them with various financial services
* pays interest on deposits, which may be fixed or variable, but which usually vary according to the amount of money deposited and the amount of time it stays in the account
* makes loans and charges interest on them

Banks operating in the UK, formerly regulated by the Bank of England, are now authorised and supervised by the Financial Services Authority. In the USA, banks are regulated under the Federal Reserve System.
Bank Giro Credit
A system operated by the clearing banks in which a paper slip/document instructs a bank branch to credit a sum of money to a specified account at that branch.
Bank Line
Line of credit granted by a bank to a customer, also known as a "line".
Bank Notes
1)Paper issued by the central bank, redeemable as money and considered to be full legal tender.
2)Bank notes are paper issued by the central or issuing bank and are legal tender, but are not usually considered to be part of the FX market. However bank notes can be converted, in some counties, into FX. Bank notes are normally priced at a premium to the current spot rate for a currency.
Bank Of England
The central bank of the United Kingdom, sometimes known as the 'Old Lady' of Threadneedle Street. The Bank was founded in 1694, nationalised on 1st March 1946, and given operational independence for interest rates in 1997. Standing at the centre of the Uk's financial system, the Bank is committed to promoting and maintaining monetary and financial stability as its contribution to a healthy economy. It is similar to the Federal Reserve in the United States and the Bundesbank in Germany. Its main functions are: to ensure the stability and promote the efficiency and competitiveness of the financial system, to set the official interest rate in order to achieve the government's inflation target, to manage the government's foreign currency borrowing programme, to act as banker to the banks (and to act as the lender of last resort to banks facing liquidity problems), to support the government's exchange rate policy by intervening in the currency markets, to control the design, production and issue of banknotes in England and Wales.
Bank Rate
The rate at which a central bank is prepared to lend money to its domestic banking system.
Bankers Automated Clearing Services
BACS Payment Schemes Limited is a membership-based industry body whose role is to develop, enhance and promote the use and integrity of automated clearing service for payments originated by Settlement Members or those they sponsor.
Bar Chart
A charting method 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 horizontal line to the left of the bar, and the closing price, which is marked with a little horizontal line to the right of the bar.
Barrier Option
A family of path dependent options whose pay-off pattern and survival to the expiration date depend not only on the final price of the underlying currency but also on whether or not the underlying currency breaks a predetermined price level at any time during the life of the option. See Down and Out call/put, Down and in call/put, Up and out call/put, Up and in call/put.
Base Currency
The 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
The difference between the cash price and futures price.
Basis Convergence
The process whereby the basis tends towards zero as the contract expiry approaches.
Basis Point
One per cent of one per cent. Usually one hundredth of a percentage point used in quoting movements in interest rates of yields on securities.
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.
Basket
A group of currencies normally used to manage the exchange rate of a currency. Sometimes referred to as a unit of account.
Bear
A person who believes that prices will decline.
Bear (Bearish)
Trader going short or advocating this action in the expectation of a depreciation of a currency.
Bear Market
A market in which prices decline sharply against a background of widespread pessimism (opposite of Bull Market).
Beneficiary
A person who stands to benefit from a contractual or fiduciary relationship, such as a trust set up on his/her behalf or the proceeds of a will or life insurance policy.
Bid
The price at which a buyer is willing to buy. The best bid is the highest such price available (Also see buying rate).
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.
Bid-Offer Spread
The difference between the buy (bid) and sell (offer) price of a currency or financial instrument.
The difference between the selling price and the purchase price for investments.
When you ask a broker what price the shares of a company are trading at in the market, he will quote two prices: the bid price is the price at which you can sell your shares, and the offer price is the price at which you can buy them. The first is always lower than the second, and the difference between them is the spread.
Big Figure
The second figure after the decimal point.
If AUD/USD is 1.0895, the big figure is 8.
If GBP/USD is 1.5321, the big figure is 3.

Refers normally to the first three digits of an exchange rate that dealers treat as understood in quoting. For example a quote of "30/40" on dollar mark could indicates a price of 1.5530/40BIS: Bank of International Settlement.
Bilateral Clearing
A system used where foreign currency is limited. Payments are usually routed through the central banks, and sometimes require that the trade balance is equaled every year.
Bollinger Bands
A quantitative method which combines a moving average with the instrument''''s volatility. The bands were designed to gauge whether the prices are high or low on relative basis. They are plotted two standard deviations above and below a simple moving average. The bands look like an expanding and contracting envelope model.
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.
Broken Dates
Deals that are undertaken for value dates that are not standard periods e.g. 1 month. The standard periods are 1 week, 2 weeks, 1,2,3,6, and 12 months. Terms also used are odd dates, or cock dates, broken period or broken period.
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.
Brokerage
Commission charged by a broker.
BUBA
Bundesbank, the reserve bank of Germany.
Bull
A person who believes that prices will rise.
Bull (Bullish)
Trader going long or advocating this action in the expectation that the currency will appreciate.
Bull Market
A market characterized by rising prices.A market in which prices are rising and in which investor confidence in the continuation of rising prices is high.
Bulldogs
Sterling bonds issued in the UK by foreign institutions
Bundesbank
Central Bank of Germany.
Butterfly Spread
(1) A futures butterfly spread is a spread trade in which multiple futures months are traded simultaneously at a differential. The trade basically consists of two futures spread transactions with either three or four different futures months at one differential.
(2) An options butterfly spread is a combination of a bear and bull spread trade in which multiple options months and strike prices are traded simultaneously at a differential. The trade basically consists of two options spread transactions with either three or four different options months and strikes at one differential
Buying Rate
Rate at which a bank is prepared to buy foreign exchange. Also known as the Bid Rate.
Buying Selling FX
Buying and selling in the foreign exchange market always happens in the currency which is quoted first. "Buy Dollar/Yen" means buy the dollar/sell the Yen. Traders buy when they expect a currency''s value to rise and sell when they expect a currency to fall.
Cable
A term used in the foreign exchange market for the US Dollar/British Pound rate.
Cable Transfer
Telegraphic transfer of funds from one centre to another. Now synonymous with inter bank electronic fund transfer.
Call
An option that gives the holder the right to buy the underlying instrument at a specified price during a fixed period. Call Option
A call option confers the right but not the obligation to buy stock, shares or futures at a specified price.
Candlestick Chart
A type of chart which consist of four major prices: high, low, open, close. The body (jittai) of the candlestick bar is formed by the opening and closing prices. To indicate that the opening was lower than the closing, the body of the bar is left blank. If the currency closes below its opening , the body is filled. The rest of the range is marked by two "shadows": the upper shadow (uwakage) and lowershadow(shitakage).
Capital Account
Juxtaposition of the long and short term capital imports and exports of a country.
Carded Rate
Exchange rate quoted by the trading banks each day for small foreign exchange transactions.
Carry
The interest cost of financing securities or other financial instruments held.
Carry-Over Charge
A finance charge associated with the storing of commodities (or foreign exchange contracts) from one delivery date to another.
Cash
Money, in the form of notes and coin, which constitutes payment for goods at the time of purchase.Cash
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 Flow
The amount of money which flows in and out of a business, the difference between the two being the important number. If more money flows into a business than out of it, it is cash positive. If more money flows out than in, it is cash negative. Cash flow is regarded by many as the ultimate test of financial health. Seasoned analysts do not entirely trust the figure a company puts on its profits, since profits can be 'massaged', whereas cash is more difficult to manipulate. Profit, as they say, is a matter of opinion. Cash is a matter of fact.The best way to check the cash flow position of a company is to scrutinise the cash flow statement in its annual report and accounts. It provides fact on whether a company has generated or consumed cash in the year, and how. It can be used in conjunction with the p&l to assess the trading results, or it can be used in conjunction with the balance sheet to assess liquidity, solvency and financial flexibility.
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.
CBOE
Chicago Board Options Exchange
CBOT or CBT
Chicago Board of Trade.
CD
Certificate of Deposit. (or sometimes we use it for Currencies Direct abbreviation)
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.
Certificate of Deposit (CD)
A negotiable certificate in bearer form issued by a commercial bank as evidence of a deposit with that bank which states the maturity value, maturity rate and interest rate payable. CDs vary in size with maturities ranging from a few weeks to several years. CDs may normally be redeemed before maturity only by sale on the secondary market but may also be redeemed back to issuing bank through payment of a penalty.
CFTC
The Commodity Futures Trading Commission, the US Federal regulatory agency for futures traded on commodity markets, including financial futures.
CHAPS
Clearing House Automated Payment System - A faster means of making payments. Usually occurs on the same day.
Charity
An organisation whose aim is to provide help for the needy. Trusts which are registered with the appropriate authority can receive legacies from a deceased person's estate free of inheritance tax. Visit www.fx4charity.com
Cheque Clearing
A system enabling cheques to be transmitted between banks (and between branches) in order to transfer funds.
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.
Cleared Funds
Funds that is immediately available to you for settlement of a transaction.
Clearing
The process of moving payments between accounts from different banks or branches. Also a term used on futures and options exchanges that refers to the process of registration, settlement and provision of a guarantee of exchange-traded transactions.
Clearing House
An independent organisation, appointed by an exchange, which guarantees securities transactions. A clearing house may be a division of an exchange, an adjunct or affiliate, or a freestanding entity. An automatic clearing house is a nationwide electronic funds transfer network enabling participating financial institutions to distribute electronic credit and debit entries to bank accounts and to settle such entries. CHAPS is one example.
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.
CME
Chicago Mercantile Exchange.
Coincident Indicator
An economic indicator that generally moves in line with the general business cycle such as industrial production.
Collateral
An asset pledged by a borrower as a guarantee to a lender until a loan or bond is repaid. If the borrower defaults, the lender has a right to sell the collateral asset. An example of a type of financial collateral that can be offered is a life insurance policy which has a cash surrender value equal to or greater than the loan amount. This could be pledged as security.
Commercial Bank
A retail, clearing or money-centre bank, such as Barclays, Lloyds TSB or HSBC, which provides services to companies and individuals in the form of current, deposit and loan accounts plus a variety of other financial services including mortgages, insurance and financial planning. Commercial banks contrast with investment banks, which focus on raising funds for companies rather than lending and money transmission.
Commercial Paper
A short-term, discounted, unsecured note issued by banks and corporations with shorter maturities than certificates of deposit, typically around 30 days. Such notes are a negotiable instruments in bearer form.
Commission
The fee that a broker may charge clients for dealing on their behalf.
Compliance
Literally, the act of complying with the rules and regulations of the relevant authorities. In the financial markets, compliance with the rules of the SEC (in the US) and FSA (in the UK) is a major issue for banks, brokers and fund managers. Companies have dedicated compliance staff whose job is to make sure that the procedures used in the company's operations follow the prescribed rules. Penalties for breach can be severe, both in pecuniary terms and in damage to reputation. Within banks, one of the jobs of the compliance officer is to make sure that people working in the broking department do not find out about deals being worked on by people in the corporate finance department. If they did, and they acted on that information by buying or selling shares, they would be in breach of insider dealing laws.
Compound Option
An option on an option, the dates and price of such option being fixed.
Confederation Of British Industry
An independent non-profit making, non-party political organisation which represents the interests of companies in the UK, promoting the conditions where companies can compete and prosper. The CBI was founded in 1965 by the merger of the Federation of British Industries, the British Employers' Confederation and the National Association of British Manufacturers.
Confirmation
A memorandum to the other party describing all the relevant details of the transaction. Confirmation. The written document or email confirming the foreign exchange deal between two parties.
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.
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).
Contract Month
The month in which a futures contract matures or becomes deliverable if not liquidated or traded out before the date specified.
Contract Rate
The agreed exchange rate at which the currency pair may be exchanged on the settlement date.
Corporation Tax
A tax payable by a company on its profits. The full rate is 30% (in the UK in 2007) having fallen from over 50% in the 1970s. There is a lower rate for small companies.
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.
Counterparty Risks
Foreign Currency Inter-bank Exchange (FOREX) instruments are Positions (Buys and/or Sell) between the Client and its Counterparty and, unlike exchange-traded foreign exchange instruments which are, in effect, guaranteed by a clearing organization affiliated with the exchange on which the instruments are traded, are not guaranteed by a clearing organization. Thus, when the Customer purchases an OTC foreign exchange instrument, it relies on the Counterparty from which it has purchased the instrument to fulfill the contract. Failure of a Counterparty to fulfill a Position could result in losses of any prior payment made pursuant to the Positions as well as the loss of the expected benefit of the transaction.
Country Risk
Factors that affect currency trading unique to the specific country include political, regulatory, legal and holiday risks.
Coupon
On bearer stocks, the detachable part of the hide behind nominee status. Certificate exchangeable for dividends.
CPSS
Committee on Payment and Settlement Systems.
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 Card
A plastic payment card that allows the owner to obtain goods and services without the requirement to pay cash, on credit terms. Transactions during a month are totalled and presented to the card holder for settlement on a monthly basis. Alternatively a percentage of the outstanding amount can be paid and the balance extended to the next month and so on. This will normally incur a much higher annual rate of interest than usual, for example, 2% per month is equivalent to an annual percentage rate (APR) of 26.8%, when standard secured loan rates are much lower. In addition to obtaining goods, credit cards can be used to obtain cash.
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-Rate
The exchange rate between two currencies, e.g., AUD/NZD.
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
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.
Currency Basket
Various weightings of other currencies grouped together in relation to a basket currency (e.g. ECU or SDR). Sometimes used by currencies to fix their rate often on a trade weighted basket.
Currency Pair
The two currencies that are involved in the exchange transaction.
Currency Swap
An arrangement in which two parties exchange a series of cashflows in one currency for a series of cashflows in another currency, at agreed intervals over an agreed period. Companies would do this where they have existing borrowings in a currency which they want to convert into a borrowing in another currency. If the borrowing is at a fixed rate, and is being exchanged for another fixed rate borrowing, the swap is a 'fixed rate currency swap'. Unlike an interest rate swap, a currency swap usually does involve an exchange of the principal borrowed amount as well as the interest payments.
Current Account
In banking, a bank account that offers a number of facilities including cheque book for debt settlement, deposits, direct debits and, where applicable, overdrafts. This type of account is normally used for ongoing transactions (for example monthly direct debits and writing of cheques etc.) as opposed to a deposit account. In economics, a current account is a balance of payments account listing visible and invisible trade transactions and excluding flows produced by borrowing and investments which are in the capital account. In corporate affairs, it is an account listing transactions between trading companies.
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.
Customs And Excise
Short name for the department that was called Her Majesty's Customs and Excise until 2005, but has now merged with Inland Revenue to form HM Revenue & Customs. HMRC is responsible for collecting the bulk of tax revenue as well as paying tax credits and child benefit, and strengthening the Uk's frontiers
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.
Dealing
The buying and selling of foreign currencies in the foreign exchange markets in the world.
Dealing Systems
On-tine computers which link the contributing banks around the world on a one-on-one basis. In our case Aurora.
Debit Card
A plastic payment card, issued by a bank or other financial institution, which enables the holder to obtain goods and services without the requirement to pay cash. The debiting procedure commences directly after the transaction with the result that the holder's account is debited within a few days. In addition to obtaining goods, the card can be used to obtain cash either from the retailer in the form of "cash back" or from an ATM machine. Unlike a credit card, it does not allow the holder to make purchases on borrowed money.
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.
Default
Failure by a debtor to meet the terms of a loan either by not paying interest due or not repaying the capital due. Default risk is the possibility that the issuer of a bond might fail to repay its principal or interest as required under the terms of the agreement.
Deficit
Shortfall in the balance of trade, balance of payments, or government budgets.
Deflation
An economic situation in which there is a general fall in the level of prices.
Deflator
A factor used to convert current prices into inflation-adjusted prices, in order to make comparisons over time after factoring out the overall effects of inflation. For example, an economy might have grown by 4 per cent in one year but half of the growth could have been due to higher prices (inflation), in which case, real economic growth could be derived by deflating the total figure by the inflation rate, to give growth of 2 per cent.
Delivery
The settlement of a transaction by receipt or tender of a financial instrument or currency.
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.
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.
Delta
The ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative. Also referred as the "hedge ratio".
Delta Hedging
A method used by option writers to hedge risk exposure of written options by purchase or sale of the underlying instrument in proportion to the delta.
Delta Spread
A ratio spread of options established as a neutral position by using the deltas of the options concerned to determine the hedge ratio.
Depo
Deposit
Depreciation
A decline in the value of a currency in terms of a foreign currency due to market demand rather than official action such as a devaluation.
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. The attractions of derivatives from an investor's point of view are: large profits (but also losses) can be made on a small stake, because they offer 'leverage'; money can be made whether the market goes up or down, which is not true if you invest in shares where you only make a profit if the share price rises; they can be used to reduce the risk (or hedge) of an investment in the underlying instrument. In general, derivatives are high-risk investments and not suitable for the ordinary investor.
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
Amount by which a currency is cheaper to buy for future delivery than for spot delivery.
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
Disposable Income
The amount of money which an individual has available to spend on inessential items after essential bills have been met.
Dollar
In international finance "the dollar" is always the U.S. dollar. All other "dollar" currencies should be described specifically. i.e. The Australian Dollar.
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.
Draft
An order in writing by one party to another party to pay a specified sum to a third party or bearer on a particular date. The party making the order or drawing the draft is known as the drawer. The party to whom the bill is addressed is the drawee (for example a bank). The party to whom the bill is payable is the payee.
Earned Income
Income that comes from work - such as a salary or wages. As distinct from unearned income - bank interest and company dividends etc. Income from pensions is also classified as earned income.
Easier
Indicates that a currency is weakening/weaker than from where it was previously quoted.
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.
ECU - European Currency Unit
A basket of the member currencies. As a composite unit, the ECU consists of all the European Community currencies, which are individually weighted. It was created by the European Monetary System with the eventual goal of replacing the individual European member currencies.
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.
Either Way Market
In the Euro Interbank deposit market where both bid and offer rates for a particular period are the same.
Elliot Wave Principle
A system of empirically derived rules for interpreting action in the markets. It refers to a five-wave/three-wave pattern which forms one complete bull market /bear market cycle of eight waves.
Embargo
Temporary action, generally by one country, to halt shipment of goods intoor out of another country.
Emerging Markets
The stock markets of countries which have a low per head income compared with the developed world but which nevertheless have functioning stock exchanges. The potential loss that could be incurred from an adverse movement in exchange rates.
EMS
European Monetary System.
EMU
European Monetary Union.
EOE
European Options Exchange.
ERM
Exchange Rate Mechanism.
Estate Agent
An agent who acts in the arrangements of property sales and purchases in return for a commission based on the selling price.
Euro Clear
A computerized settlement and depository system for safe custody, delivery of, and payment for Eurobonds.
Eurodollar
US dollar currency deposited in banks outside the USA.
Euromarkets
The markets in which eurocurrencies are traded, the largest being London.
European Central Bank
The bank created to look after the financial affairs of the countries that have joined the euro.
(1) Cash in hand or in the course of being transferred between banks
(2) 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.
European Community/Union
An economic and political alliance designed to foster trade and co-operation among its members.
European Currency Unit
A weighted average of European Community currencies with weighting proportional to a country's economy. The ecu was superseded by the euro.
European Economic Community
The original economic community set up in 1957 by the 6 founder members (France, West Germany, Belgium, Luxembourg, Holland and Italy) and more commonly known as the Common Market. The since expanded Community is currently known as the European Union.
European Monetary System
EMS was the monetary system of the EU which attempted to reduce the currency variations between members. The EMS became operational on March 13th, 1979, as the successor to the 'snake in a tunnel'. Its aim was to create a zone of monetary stability in Europe. Its general principles were outlined at the Bremen Summit in July 1978, and the system was presented in detail at the Brussels Summit in December. The EMS consists of three mechanisms: the ERM; accounting and transaction mechanisms related to the ECU; and credit mechanisms to enable central banks to intervene in the currency markets. All the EU countries belonged to the EMS, although not all of them participated in the ERM. It was superseded by the ECU and the Euro.
European Union
The group formerly known as the European Community.
Exchange Controls
Regulations designed to prevent or restrict certain foreign currency transactions usually to protect a country’s financial position or the value of its currency.
Exchange Rate
The expression of value of one currency in terms of another. For example, in the exchange rate AUD/USD0.9191, one Australian dollar is equal to 91.91 US cents (AUD1.0000 = USD0.9191).
Exchange Rate Mechanism
The mechanism by which members of the EC formerly operated their currency exchange rates within given upper and lower limits. In January 1999 certain members of the EC adopted the euro for their currency and the ERM effectively ceased to exist.
Exercise Price (Strike Price)
The price at which an option can be exercised.
Exotic - Exotic Currencies
A less broadly traded currency.
Expiration Date
The date at which an option transaction is expired which is usually 2 business days before the settlement date.
Expiry Date
The last date on which an option can be bought or sold.
Exposure
The amount of money at risk due to Foreign Exchange movements. The total amount of money loaned to a borrower or country. Banks set rules to prevent overexposure to any single borrower. In trading operations, it is the potential for running a profit or loss from fluctuations in market prices.
Fast Market
Rapid movement in a market caused by strong interest by buyers and/or sellers. In such circumstances price levels may be omitted and bid and offer quotations may occur too rapidly to be fully reported.
Fed
The United States Federal Reserve. 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.
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.
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.
Financial Times Indices
A wide range of indices including shares, stocks and fixed interest securities published in the Financial Times and on www.ft.com. The indices serve as indicators of trends of prices on the global and London markets. All bar the FT30 stock index are run by FTSE international.
Financial Year
Every company has an accounting reference date. This is a date which it chooses itself, and which determines its financial year. It must produce accounts showing how it has performed during the year which ends on that date, and file them with Companies House. The format of the accounts depends on whether it is a private company or a public listed company. Note that a company's financial year can be quite independent of both the calendar year (1st Jan to 31st Dec) and the tax year (6th April to 5th April).
Firmer
Indicates that a currency is strengthening or is stronger than previously quoted.
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 - 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.
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
Currencies issued by foreign countries.
Foreign Exchange Market
Market where currencies are traded internationally. About 3 trillion (3 million million) dollars-worth of foreign exchange is traded globally every day, making forex larger than all bond markets put together. Currency markets exist in the form of spot, forward, futures and options markets. Foreign exchange transactions are made up of: Trade flows Only 5% to 10% of total forex transactions. Imports usually need to be paid for in the currency of the country from which they originate. Exports are usually paid for in one's own currency. A trade deficit therefore causes a currency to depreciate. Flow-ons Created when a large trade is split up into several smaller trades. Capital flows Cross-border investment. Speculation Short-term investment based on expected currency movements. This accounts for the lion's share of forex market volume.
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
An abbreviation of foreign exchange
Forward
A transaction with a settlement date that is more than 2 business days after the trade date.
Forward Contract
Sometimes used as synonym for "forward deal". More specifically for arrangements with the same effect as a forward deal between a bank and a customer. A contract to exchange a specific amount of one currency for another on a future date at a predetermined rate. A deposit is normally required for forward contracts.
Forward Points
The interest rate differential between two currencies expressed in exchange rate points. The forward points are added to or subtracted from the spot rate to give the forward or outright rate depending on whether the currency is at a forward premium or discount. and the forward rate. The difference between the spot rate
Forward Rate
The rate at which a foreign exchange contract is struck today for settlement at a specified future date which is decided at the time of entering into the contract. The decision to subtract or add points is determined by the differential between the deposit rates for both currencies concerned in the transaction. 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. Therefore 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.
Forward Settlement 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.
FTSE
A company jointly owned by the London Stock Exchange and FT which creates and compiles financial indices showing the performance of stock markets.
Fundamental Analysis
Analysis based on economic and political factors.
Funds
A term for USD/CAD/Fungibles Instruments that are equivalent, substitutable and interchangeable in law. May apply to certain exchange traded currency contracts offered on a number of exchanges.
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.
FX
Foreign Exchange.
Girobank Plc
Girobank was established in 1968 and known then as the National Girobank. It was set up by the Post Office and provided a public banking facility for people without bank accounts. An additional advantage was that the number of post offices around the country was greater than the number of banks. Nowadays Girobank provides similar services to the other high street banks.
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.
GTC
Good Till Cancelled: - A GTC foreign exchange order will be left in the market until executed or cancelled by you/ 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.
Hard Currency
A currency whose value is expected to remain stable or increase in terms of other currencies.
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. A strategy used to offset market risk, whereby one position protects another.
Historical Rate Rollover
A swap based on a spot rate on a spot rate equal to the historic to avoid cash flows at the spot date.
Holiday Insurance
A policy that covers the insured and usually his/her family for the duration of their holiday. Items covered normally include travel delays, unavoidable cancellation, baggage loss and damage, loss of personal items including cash and credit cards, personal accident and medical expenses abroad etc.
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.
ICCH
International Commodities Clearing House Limited, a clearing house based in London operating world wide for many futures markets.
IFA Association
An association formed in September 1994 by a merger of the National Federation of Independent Financial Advisers (NFIFA) and the financial services arm of the British Insurance and Investment Brokers Association (BIIBA). It formed the premier trade association to represent IFA firms irrespective of their size or how their business is obtained.
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.
Implied Rates
In-the-Money
A call option is in-the-money if the price of the underlying instrument is higher than the exercise/strike price. A put option is in-the-money if the price of the underlying instrument is below the exercise/strike price.
Inconvertible Currency
Currency which cannot be exchanged for other currencies either because it is forbidden by the foreign exchange regulations or the currency witnesses extreme volatility that it is not perceived to be a safe haven for parking the funds.
Indicative Quote
A market-maker's price which is not firm for dealing.
Indirect quote
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.
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. The bid and offer rates at which international banks place deposits with each other. The basis of the Interbank market.
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. Concerted intervention refers to action by a number of central banks to control exchange
Intra Day Limit
Limit set by bank management on the size of each dealer's Intra Day Position.
Intra Day Position
Open positions run by a dealer within the day. Usually squared by the close.
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.
Kiwi
Slang for the New Zealand dollar.
LDC
Less developed countries, often used with respect to secondary debt market.
Leading Indicators
Statistics that are considered to precede changes in economic growth rates and total business activity, e.g. factory orders.
Leads and Lags
The effect on foreign trade payments of an anticipated move in the exchange rate, normally a devaluation. The importers speeden up the payment for the imports and exporters delay receiving payment for the exports.
Left-hand Side
Taking the left hand side of a two way quote i.e. selling the quoted currency. AUD/USD = .9310/15, you would sell on the LHS at .9310.
Leverage
The use of borrowed funds at a fixed rate of interest in an effort to boost the rate of return from an investment. Increased leverage also causes the risk on an investment to increase.
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.
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.
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 Company
A company whose shareholders maximum liability is limited to their share capital in the event of winding up.
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.
Listed Company
A company that has satisfied the requirements for its shares to be listed on a recognised investment exchange (RIE), such as NYSE or Euronext. In the case of the London Stock Exchange, a company that has obtained permission for its shares is admitted to the Daily Official List.
London Metal Exchange
A leading international market, located in London, for the trading of non-ferrous metals, namely copper, primary aluminium, aluminium alloy, lead, nickel, tin and zinc, primarily for industrial use. LMEs origins can be traced as far back as the opening of the Royal Exchange in 1571 where metal traders first began to meet on a regular basis. In 1877, the London Metal Market and Exchange Company was formed as a direct result of the industrial revolution that led to a massive increase in the UKs consumption of metal, in turn requiring the import of enormous tonnages from abroad. Trading now can be by open outcry, telephone and electronically. Its prime function is hedging with the bulk of turnover originating from trade clients. Other dealings include futures and options contracts and arbitrage trading. The LME is a recognised investment exchange (RIE), and the market participants are regulated by the Financial Services Authority (FSA).
London Stock Exchange
The world's third largest stock exchange by market capitalisation of domestic stocks listed, after the New York Stock Exchange and Tokyo Stock Exchange. The LSE also lists foreign companies, and its turnover of foreign shares is the largest in the world.
* Over 7,000 securities are bought and sold, including shares, Treasury stocks (gilts) and bonds.
* In order for a company to be admitted to the Exchange it must make application for a place on the 'Official List'. This involves providing extensive data regarding its financial status and trading history etc.
* As well as the Official List of large companies, the LSE also regulates the Alternative Investment Market (AIM) for smaller companies.
*Trading in securities is done through the The Stock Exchange Electronic Trading System (SETS) and the Stock Exchange Automated Quotation system (SEAQ).http://www.londonstockexchange.com
Long
A market position where the Client has bought a currency they previously did not own. For example: long Dollars.
Long Position
Excess of purchases over sales or of foreign currency assets over liabilities.
Macroeconomics
The study of aggregate economic behaviour using such elements as output, unemployment, price levels, government spending, interest rates, national productivity and the influence of government policy on them.
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 Currency
A currency whose rate is not determined solely by market forces, but also by intervention from the monetary authorities, such as the central bank or finance ministry.
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
In general, the difference between the cost price of a product and the selling price. More specifically, in trading, it is the amount deposited with a broker in order to obtain credit for purchase of shares or futures. The margin is the price of a security less credit advanced by the broker.
Margin Call
A demand for additional funds to cover positions – forward contracts.
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 Maker
A market maker is a dealer who acts as a wholesaler (i.e. quotes buy and sell prices to brokers and other clients) for the shares in which he is registered to trade as a principal, creating a marketplace for shares to match supply and demand. The market maker makes a profit by committing his company's capital, aiming to buy low and sell high.
Market Price
The price for a security. As far as stocks are concerned, there is not one market price but two: The price half-way between the two prices, or the average of both buying and selling prices offered by the market makers.
Mastercard
An international payment services and card scheme.
Maturity
The length of time between the issue of a security and the date on which it becomes payable. Sometimes also the capital repayment date of a bond. Most bonds are issued with fixed repayment dates but some, called irredeemables or perpetuals, are not. Can also refer to the end of the term of an endowment assurance policy.
Maturity Date
Date on which, under the contracted agreements, the foreign exchange is to be delivered or received.
Mio
One million. 1,000,000.
MITI
Japanese Ministry of International Trade & Industry.
MM
Money Markets
Monetarism
A theory that advocates the strict control of the money supply as a key tool of economic policy in the fight against inflation. It was popular in the 1980s when developed countries were trying to reduce their rates of inflation.
Monetary Easing
A modest loosening of monetary constraint by changing interest rate, money supply, deposit ratios.
Monetary Policy
The control of the money supply and interest rates by a government in order to achieve its economic objectives, in particular the restraining of inflation.A central bank's management of a country's money supply. Economic theory underlying monetary policy suggests that controlling the growth of the amount of money in the economy is the key to controlling prices and therefore inflation. However, central banks' monetary capability is severely limited by global money movements. This forces them to use the indirect tool of exchange rate manipulation.
Money Market
A market consisting of financial institutions and dealers in money or credit who wish to either borrow or lend.
Money Supply
The amount of money in the economy, which can be measured in a number of ways.
Money Transmission
The process of transferring funds and making payments.
Moving Average
A way of smoothing a set of data, widely used in price time series.
Mutual fund
An open-end investment company. Equivalent to unit trust.
NASDAQ
The first electronic stock market, which uses computers and telecommunications to trade shares rather than a traditional trading floor. NASDAQ is owned and operated by the National Association of Securities Dealers (NASD). It is the fastest growing major stock market in the world with well over 5,000 companies listed. Market makers compete to buy and sell NASDAQ-listed stocks of US and non-US based companies via a worldwide computer network for large and small investors.
Nickel
US term for five basis points.
Non-farm Payrolls
The official US monthly report on labour market trends closely followed by the markets.
Nostro Account
A foreign currency current account maintained with another bank. The account is used to receive and pay currency assets and liabilities denominated in the currency of the country in which the bank is resident.
Note
A financial instrument consisting of a promise to pay rather than an order to pay or a certificate of indebtedness.
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.
Old Lady
Old lady of Threadneedle Street, a term for the Bank of England.
Ombudsman
An independent official who investigates the complaints of individuals against companies or public authorities. Ombudsmen do not have any formal power to reverse decisions but they have substantial moral authority over companies or national or local government agencies. Within financial services, there are different Ombudsmen for banking, building societies, insurance, pensions, and investments. If you have a complaint about your treatment by a financial services company, the first thing you should do is make the complaint directly to the compliance officer or senior management of the company. If the outcome is unsatisfactory, you can then take it to the Ombudsman who will investigate and consider all the facts of the case, and make a recommendation. The company will not always follow the Ombudsman's recommendation, but usually will.
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.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.
Option Class
All options of the same type - calls or puts -listed on the same underlying instrument.
Option Series
Order
You can leave an "order" with us to transact on your behalf if a particular exchange rate is reached.
Oscillators
Quantitative methods designed to provide signals regarding the overbought and oversold conditions.
Out-of-the-Money
A put option is out-of-the-money if the exercise/strike price is below the price of the underlying instrument. A call option is out-of-the money if the exercise/strike price is higher than the price of the underlying instrument.
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.
Overdraft
A facility (usually at a bank or other financial institution) enabling an account holder to borrow up to an agreed amount and often for an agreed time.
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.
Paper
A loose term referring to any securities.
Par
Is the term applied when the forward price of the purchase or sale of a currency is the same as the spot price.
Parity
Foreign exchange dealer's slang for your price is the correct market price.
Pip
See point
Point
100th part of a per cent, normally 10,000 of any spot rate. Movement of exchange rates are usually in terms of points. Or, one percent on an interest rate e.g. from 8-9%.
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).
PPI
Producer Price Indices. See wholesale price indices.
Profit & Loss or "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 Taking
The unwinding of a position to realize profits.
Quantitative Analysis
The process of determining the value of a security by examining its numerical, measurable characteristics such as sales, margins and market share.
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
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 price recognised by technical analysts as a price which is likely to result in resistance but if broken through is likely to result in a significant price movement. As well as the 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.
Resistance Point or Level
A price recognised by technical analysts as a price which is likely to result in resistance but if broken through is likely to result in a significant price movement.
Retail Price Index
A UK index of the prices of a basket of consumer goods and services used to measure the rate of inflation and index various benefits, savings products and other contracts. The equivalent in many other countries, including the US, is the consumer price index (CPI). The UK has also introduced a CPI, similar to the RPI, but based on the harmonised EU measure, for monetary policy targeting.
Right-hand Side
Taking the right hand side of a two way quote i.e. buying the quoted currency. AUD/USD = .9310/15, you would buy on the RHS at .9310.
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.
Securitisation
The creation of financial assets by combining other similar assets, ranging from mortgages to royalties, and selling them in the new, tradable form to investors.
Selling Rate
Rate at which a bank is willing to sell foreign currency.
Settlement
Actual physical exchange of one currency for another.
Settlement Date
It means the business day specified for delivery of the currencies bought and sold under a forex contract.
Short
A market position where the client has sold a currency he does not already own. Usually expressed in base currency terms.
Short Position
Excess of sales over purchases or of foreign currency liabilities over assets.
Soft Market
More potential sellers than buyers, which creates an environment where rapid price falls are likely.
Spot
Foreign exchange bought and sold for delivery two business days after the deal is firmed.
(1) The most common foreign exchange transaction.
(2) 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.
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.
Sterling
British pound
Stop Loss
An arrangement whereby a position is automatically closed out when it reaches a certain loss or when exchange rates reach specified values.
Swap
Traditionally the exchange of one security for another to change the maturities of a bond portfolio or the quality of the issues in a stock or bond portfolio, or because investment objectives have changed.
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.
Telegraphic Transfer
A method of transferring money abroad from one bank to another by telegraphy.
Term
The period from and including the trade date to and including the settlement date.
Terms of Trade
The ratio between export and import price indices.
Thin Market
A market in which trading volume is low and in which consequently bid and ask quotes are wide and the liquidity of the instrument traded is low.
TIBOR
Tokyo Inter-bank Offered Rate.
Tick
A minimum change in price, up or down
Transaction
The buying or selling of securities resulting from the execution of an order.
Treasury Bill.
Two-Way Quotation
Up-Trick
A transaction executed at a price greater than the previous transaction.
Value Date
For exchange contracts it is the day on which the two contracting parties exchange the currencies which are being bought or sold.
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.
Vertical Integration
The inclusion within one company of several stages in the production or distribution of goods with the aim of increasing its market power.
Volatility
A measure of the extent to which the exchange rate changes over a given period. 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.
Volume
The number, or value, of securities traded during a specific period.
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.
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.