Arbitrage Dealing in two or more markets at the same time (or in similar products in the same market) to take advantage of temporary mispricing in order to make a profit At-the-money In options, when the strike price equals the price of the underlying contract Bear A person who believes that prices will decline Bear Market A market characterized by declining prices Bid The rate at which a dealer is willing to buy the base currency Big Figure The first three digits of an exchange rate, e.g. USD 1.62 per pound or DEM 1.49 per dollar Bull A person who believes that prices will rise Bull Market A market characterized by rising prices Cable Dealers' slang for the UK sterling/US dollar exchange rate Call An option that gives the buyer the right to long a position in the underlying contract at a specific price; the call writer (seller) may be assigned a short position in the underlying contract if the buyer exercises his call Call Rate The overnight interest rate Cash Market The market for the purchase and sale of physical currencies Convertible Currency Currency which can be exchanged for other currencies or gold without authorization from the central bank Counterparties The parties on either side of a transaction Cross Rate Exchange rate that does not involve the US dollar Currency Clause A clause in an export contract in which the sum payable is denominated in the buyer's currency; but the amount payable will vary with the exchange rate for the buyer's currency against the seller's currency Day Trading Refers to opening and closing the same position or positions within one day's trading Delta For options, also called the neutral hedge ratio. Expresses the expected change in the option price, given a one-unit change in the price of the underlying contract Derivative Financial instruments, such as futures and options, which derive their value from underlying securities including bonds, bills, currencies, and equities Discount Cheaper than the spot price, e.g., forward discount Dollar Rate When a variable amount of a foreign currency is quoted against one unit of the US dollar, regardless of where the dealer is located or in what currency he is requesting a quote. The major exception is the UK sterling/US dollar rate cable which is quoted as units of the US dollar to UK sterling EMS European Monetary System ERM Exchange Rate Mechanism Eurobond Marketable debt security issued outside the country in whose currency the debt is denominated Eurodollar A dollar deposit acquired by a person or bank not residing in the United States and held outside the United States and therefore not subject to US reserve restrictions European Currency Unit The currency unit in the EMS, where the unit is defined by the sum of quantities of each of the national currencies of the members of the EMS, so the value of the ECU changes in terms of third currencies, such as e.g. the US dollar Exchange Control Government regulations restricting or forbidding certain types of foreign currency transactions including purchases from abroad, payment abroad of interest or dividends, and investing abroad Exchange Rate Depreciation Currency which loses in value against one or more other currencies, especially if this happens in response to natural supply rather than by an official devaluation Exchange Rate Risk The potential loss that could be incurred from a movement in exchange rates Exposure A financial risk facing a business, which can be categorized according to its cause or source. Currency exposures are exposures to exchange rate risk Fed Abbreviation for Federal Reserve System of the United States. In the domestic context Fed usually refers to its board of governors or to the Federal Reserve Bank of New York; in the foreign exchange context it usually refers to the latter Federal Open Market Committee (FOMC) Key decision making committee of the Federal Reserve System. The minutes of its meetings are published about a month later, and show the current stance of US monetary policy Figure Dealers' slang meaning "00" and denoting an exchange rate level. If the D-mark is quoted at 1.7300/1.7310 per dollar the rate may be quoted "figure/ten" (leaving 1.73 understood) 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 intervention points Flat / Square Where a client has not traded in that currency or where an earlier deal is reversed thereby creating a neutral (flat) position Floating Exchange Rate When the value of a currency is decided by supply and demand Forex An abbreviation for foreign exchange, also FX Forward Points The interest rate differential between two currencies expressed in exchange rate points. These forward points are added to or subtracted from the spot rate to give the forward or outright rate Forward Rate The rate at which a foreign exchange contract is struck today for settlement at a specified future date Fundamental Analysis Analysis based on economic factors Futures Contracts giving the obligation to buy or sell an asset at a set date in the future GTC "Good Till Cancelled" An order left with a dealer to buy or sell at a fixed price. It holds until cancelled Hard Currency A currency whose value is expected to remain stable or increase in terms of other currencies Hedging A hedging transaction is one which protects an asset or liability against a fluctuation in the foreign exchange rate IMF International Monetary Fund Initial Margin The deposit required before a client can transact a deal Interest Parity The interest parity theory is if there are two financial instruments in different currencies but identical in risk and maturity (e.g. three month UK gilts and US Treasury bills), then a difference in the interest rate on the instruments will be reflected in the premium or discount for the forward exchange rate In-the-Money In call options, when the strike price is below the price of the underlying contract. In put options, when the strike price is above the price of the underlying contract. In-the-money options are the most expensive options because the premium includes intrinsic value Intrinsic Value For in-the-money call and put options, the difference between the strike price and the underlying contract price Leads and Lags Process of accelerating (leads) or slowing up (lags) foreign exchange payments or receipts when a change in exchange rates is expected Leverage Facility whereby a small margin deposit can control a much larger total contract value, a mechanism which determines the ability to make extraordinary profits at the same time as keeping the risk capital to a minimum Limit Order An order given which has restrictions upon its execution. The client specifies a price and the order can be executed only if the market reaches that price Lombard Rate German term for the rate of interest charged for loans against the security of pledged paper. Particularly used by Bundesbank, which normally maintains its Lombard rate at about 1/2% above its discount rate London Interbank Offered Rate (LIBOR) The interest rate at which banks in London are prepared to lend funds to first-class banks Long Position A position where the client has bought a currency he does not already own. Normally expressed in base currency terms, e.g. long US dollars (short Deutsch marks) Margin Cash or guarantee deposited by a client wishing to trade Maturity Date for settlement Not Held Basis Order An order whereby the price may trade through or even better than the client's desired level, but the principal is not held responsible if the order is not executed Offer The rate at which a dealer is willing to sell the base currency One Cancels Other (OCO) Order Where the execution of one order automatically cancels a previous order Open Position Any deal which has not been settled by physical payment or reversed by an equal and opposite deal for the same value date Option The right, but not the obligation, to buy or sell an asset, such as currency, on or before a set future date Out-of-the-Money Option calls with strike prices above the price of the underlying contracts, and puts with strike prices below the price of the underlying contracts Outright Forward Foreign exchange transaction involving either the purchase or the sale of a currency for settlement at a future date Outright Rate The forward rate of a foreign exchange deal Overnight Trading Refers to a purchase or sale between 9.00 pm and 7.00 am Over-the-Counter Transaction (OTC) A transaction arranged by direct negotiation, usually by telephone, rather than on an exchange Point 0.0001 of a unit; for instance, if the GBP/USD is 1.6220, then 1.6219 is one point lower Political Risk The potential for losses arising from a change in government policy Premium In options, the price of a call or a put, which the buyer initially pays to the option writer (seller) Price Risk (Market Risk) The risk of a fall in the market value of a foreign investment (as measured in the domestic currency of the investor) due to an adverse change in the value of the currency of the investment Principal The counterparty that sells and buys currencies for his own account as opposed to a broker who introduces a buyer to a seller and vice versa Purchasing Power Parity The proposition that over the long term, changes in the exchange rate between two currencies are the result of differences in the relative rate of inflation in the two countries concerned Put In options, the buyer of a put has the right to acquire a short position in the underlying contract at the strike price until the option expires; the seller (writer) of a put obligates himself to take a long position in the contract at the strike price if the buyer exercises his put Resistance A price level at which you would expect selling to take place due to technical analysis. The resistance level of one currency is the support level for the other Risk Neutrality An attitude that risks should neither be sought nor avoided, but should be accepted whenever they arise Rollover Where the settlement of a deal is rolled forward to another value date based on the interest rate differential of the two currencies Settlement Actual exchange of base currency and currency between principal and client Short A market position where the client has sold a currency he does not already own. Normally expressed in base currency terms, e.g. short US dollars (long Deutsch marks) Soft Currency A currency which is expected to devalue or depreciate against other currencies, or whose exchange rate must be supported by central bank intervention or exchange controls Speculation Buying or selling currency in expectation of an exchange rate movement, so as to make a profit, either in the same market or between two different markets, e.g. forex cash markets and derivatives markets Spot Spot means that the settlement date of a deal is two business days forward Spread The difference in prices between bid and offer rates Stop Loss Order (or Stop) An order to buy or sell when a particular price is reached, either above or below the price that prevailed when the order was given Strike Price For call options, the specified price at which the buyer has the right to purchase the underlying contract Structural Hedging The process of reducing or eliminating currency exposure by matching receivables and payables in each currency or currency bloc to minimise the net exposure Support Price level at which you expect buying to take place. See resistance Swap An agreement between two parties to exchange a series of future payments. In a currency swap, the exchange of payments (cash flows) are in two currencies, one of which is often the US dollar Swift The Society for Worldwide International Fund Transfers is a multinational facility for fund transfers based in Belgium and the Netherlands Technical Analysis Analysis based on market action through chart study, moving averages, volume, open interest, oscillators, formations, stochastics and other technical indicators Thin Trading When the volumes of currency bought and sold are low Time Value In options, the value of the premium is based on the amount of time left before the contract expires and the volatility of the underlying contract. Time value represents that portion of the premium in excess of intrinsic value. Time value diminishes as the expiration of the option draws near and/or if the underlying contract's price development becomes less volatile Two-Way Price Rates for which both a bid and offer are quoted US Prime Rate The rate at which US banks will lend to their prime corporate customers Value Date Settlement date of a spot or forward deal Volatility A measure of price fluctuation
PRIME RATE: The base rate on corporate loans posted by at lease 75% of the nation's 30 largest Banks.
DISCOUNT RATE: The charge on loans to depository institution by the Federal Reserve Banks.
FEDERAL FUNDS: Reserves traded among commercial banks for overnight use in amounts of $1million or more. Source: Prebon yamane (U.S.A) Inc.
CALL MONEY: The charge on loans to brokers on stock exchange collateral. Source: Tolerate.
COMMERCIAL PAPER: placed directly by General Electric Capital Corp. 30 to 270 days.
COMMERCIAL PAPER: High-grade unsecured notes sold through dealers by major corporations: 30 days; 60 days 90 days.
CERTIFICATES OF DEPOSIT: Average of top rates paid by major New York banks on primary new issues of negotiable CDs usually on amounts of 1 million and more. The minimum unit is $100,000..
BANKERS ACCEPTANCES: Offered rates of negotiable, bank-backed business credit instruments typically financing an import order.
LONDON INTER-BANK OFFERED RATES: 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.
FOREIGN PRIME RATES: These rate indications are not directly comparable lending practices vary widely by Location.
TREASURY BILLS: Results of the Monday, auction of short-term U.S. government bills, sold at a discount from face value in units of $10,000 to $1 million.
OVERNIGHT REPURCHASE RATE: Dealer financing rate for overnight sale and repurchase of treasury securities source: Tolerate.
FEDERAL HOME LOAN MORTGAGE CORP. (Freddie Mac): Posted yields on 30-year mortgage commitments. Delivery within 30 days, 60 days, standard conventional fixed-rate mortgages; and rate capped one-year adjustable rate mortgages. Source. Tolerate.
FEDERAL NATIONAL MORTGAGE ASSOCIATION (Fannie Mae): Posted yields on 30 year mortgage commitments (price at par) for delivery within 30 days 6.90%, 60 days 6.94%, standard conventional fixed rate-mortgages; and 6/2 rate capped one -year adjustable rate mortgages. Source: Tolerate