Forex Glossary
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
In options, when the strike price equals the price of the underlying contract
A person who believes that prices will decline
Bear Market
A market characterized by declining prices
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
A person who believes that prices will rise
Bull Market
A market characterized by rising prices
Dealers' slang for the UK sterling/US dollar exchange rate
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
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
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
Financial instruments, such as futures and options, which derive their value from underlying securities including bonds, bills, currencies, and equities
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
European Monetary System
Exchange Rate Mechanism
Marketable debt security issued outside the country in whose currency the debt is denominated
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
A financial risk facing a business, which can be categorized according to its cause or source. Currency exposures are exposures to exchange rate risk
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
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
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
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
A hedging transaction is one which protects an asset or liability against a fluctuation in the foreign exchange rate
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 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
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)
Cash or guarantee deposited by a client wishing to trade
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
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
The right, but not the obligation, to buy or sell an asset, such as currency, on or before a set future date
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
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
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
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
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
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
Where the settlement of a deal is rolled forward to another value date based on the interest rate differential of the two currencies
Actual exchange of base currency and currency between principal and client
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
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 means that the settlement date of a deal is two business days forward
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
Price level at which you expect buying to take place. See resistance
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
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
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