Arbitrage -
The purchase or sale of an instrument and simultaneous
taking of an equal and opposite position in
a related market, in order to take advantage
of small price differentials between markets.
Around -
Dealer jargon used in quoting when the forward
premium/discount is near parity. For example,
"two-two around" would translate into 2 points
to either side of the present spot.
Ask Rate
- The rate at which a financial instrument
if offered for sale (as in bid/ask spread).
Asset Allocation
- Investment practice that divides funds
among different markets to achieve diversification
for risk management purposes and/or expected
returns consistent with an investor's objectives.
Back Office
- The departments and processes related
to the settlement of financial transactions.
Balance of Trade
- The value of a country's exports minus
its imports.
Base Currency
- In general terms, the base currency is
the currency in which an investor or issuer
maintains its book of accounts. In the FX markets,
the US Dollar is normally considered the 'base'
currency for quotes, meaning that quotes are
expressed as a unit of $1 USD per the other
currency quoted in the pair. The primary exceptions
to this rule are the British Pound, the Euro
and the Australian Dollar.
Bear Market
- A market distinguished by declining prices.
Bid/Ask Spread:
The difference between the bid and offer price,
and the most widely used measure of market liquidity.
Big Figure
- Dealer expression referring to the first
few digits of an exchange rate. These digits
rarely change in normal market fluctuations,
and therefore are omitted in dealer quotes,
especially in times of high market activity.
For example, a USD/Yen rate might be 107.30/107.35,
but would be quoted verbally without the first
three digits i.e. "30/35".
Book -
In a professional trading environment, a 'book'
is the summary of a trader's or desk's total
positions.
Broker -
An individual or firm that acts as an intermediary,
putting together buyers and sellers for a fee
or commission. In contrast, a 'dealer' commits
capital and takes one side of a position, hoping
to earn a spread (profit) by closing out the
position in a subsequent trade with another
party.
Bretton Woods Agreement
of 1944 - An agreement that established
fixed foreign exchange rates for major currencies,
provided for central bank intervention in the
currency markets, and pegged the price of gold
at US $35 per ounce. The agreement lasted until
1971, when President Nixon overturned the Bretton
Woods agreement and established a floating exchange
rate for the major currencies.
Bull Market
- A market distinguished by rising prices.
Bundesbank
- Germany's Central Bank.
Cable -
Trader jargon referring to the Sterling/US Dollar
exchange rate. So called because the rate was
originally transmitted via a transatlantic cable
beginning in the mid 1800's.
Candlestick Chart
- A chart that indicates the trading range
for the day as well as the opening and closing
price. If the open price is higher than the
close price, the rectangle between the open
and close price is shaded. If the close price
is higher than the open price, that area of
the chart is not shaded.
Central Bank
- A government or quasi-governmental organization
that manages a country's monetary policy. For
example, the US central bank is the Federal
Reserve, and the German central bank is the
Bundesbank.
Chartist -
An individual who uses charts and graphs and
interprets historical data to find trends and
predict future movements. Also referred to as
Technical Trader.
Clearing -
The process of settling a trade.
Contagion:
The tendency of an economic crisis to spread
from one market to another. In 1997, political
instability in Indonesia caused high volatility
in their domestic currency, the Rupiah. From
there, the contagion spread to other Asian emerging
currencies, and then to Latin America, and is
now referred to as the 'Asian Contagion'.
Commission
- A transaction fee charged by a broker.
Confirmation
- A document exchanged by counterparts to
a transaction that states the terms of said
transaction.
Contract -
The standard unit of trading,
Counterparty
- One of the participants in a financial
transaction.
Country Risk
- Risk associated with a cross-border transaction,
including but not limited to legal and political
conditions.
Cross Rate - The
exchange rate between any two currencies that
are considered non-standard in the country where
the currency pair is quoted. For example, in
the US, a GBP/JPY quote would be considered
a cross rate, whereas in UK or Japan it would
be one of the primary currency pairs traded.
Currency - Any
form of money issued by a government or central
bank and used as legal tender and a basis for
trade.
Currency Risk
- the probability of an adverse change in exchange
rates.
Day Trading -
Refers to positions which are opened and closed
on the same trading day.
Dealer - An individual
who acts as a principal or counterpart to a
transaction. Principals take one side of a position,
hoping to earn a spread (profit) by closing
out the position in a subsequent trade with
another party. In contrast, a broker is an individual
or firm that acts as an intermediary, putting
together buyers and sellers for a fee or commission.
Deficit - A negative
balance of trade or payments.
Delivery - An
FX trade where both sides make and take actual
delivery of the currencies traded.
Depreciation -
A fall in the value of a currency due to market
forces.
Derivative - A
contract that changes in value in relation to
the price movements of a related or underlying
security, future or other physical instrument.
An Option is the most common derivative instrument.
Devaluation -
The deliberate downward adjustment of a currency's
price, normally by official announcement.
Economic Indicator
- A government issued statistic that indicates
current economic growth and stability. Common
indicators include employment rates, Gross Domestic
Product (GDP), inflation, retail sales, etc.
European Monetary Union
(EMU) - The principal goal of the EMU
is to establish a single European currency called
the Euro, which will officially replace the
national currencies of the member EU countries
in 2002. On Janaury1, 1999 the transitional
phase to introduce the Euro began. The Euro
now exists as a banking currency and paper financial
transactions and foreign exchange are made in
Euros. This transition period will last for
three years, at which time Euro notes an coins
will enter circulation. On July 1,2002, only
Euros will be legal tender for EMU participants,
the national currencies of the member countries
will cease to exist. The current members of
the EMU are Germany, France, Belgium, Luxembourg,
Austria, Finland, Ireland, the Netherlands,
italy, Spain and Portugal.
EURO - the currency
of the European Monetary Union (EMU). A replacement
for the European Currency Unit (ECU).
European Central Bank
(ECB) - the Central Bank for the new
European Monetary Union.
Federal Deposit Insurance
Corporation (FDIC) - The regulatory agency
responsible for administering bank depository
insurance in the US.
Federal Reserve (Fed)
- The Central Bank for the United States.
Flat/square -
Dealer jargon used to describe a position that
has been completely reversed, e.g. you bought
$500,000 then sold $500,000, thereby creating
a neutral (flat) position.
Foreign Exchange
- (Forex, FX) - the simultaneous buying of one
currency and selling of another.
Forward - The
pre-specified exchange rate for a foreign exchange
contract settling at some agreed future date,
based upon the interest rate differential between
the two currencies involved.
Forward points
- The pips added to or subtracted from the current
exchange rate to calculate a forward price.
Fundamental analysis
- Analysis of economic and political information
with the objective of determining future movements
in a financial market.
Futures Contract
- An obligation to exchange a good or instrument
at a set price on a future date. The primary
difference between a Future and a Forward is
that Futures are typically traded over an exchange
(Exchange- Traded Contacts - ETC), versus forwards,
which are considered Over The Counter (OTC)
contracts. An OTC is any contract NOT traded
on an exchange.
Good 'Til Cancelled Order
(GTC) - An order to buy or sell at a
specified price. This order remains open until
filled or until the client cancels.
Hedge - A position
or combination of positions that reduces the
risk of your primary position.
Inflation - An
economic condition whereby prices for consumer
goods rise, eroding purchasing power.
Initial margin
-The initial deposit of collateral required
to enter into a position as a guarantee on future
performance.
Interbank rates
- The Foreign Exchange rates at which large
international banks quote other large international
banks.
Leading Indicators
- Statistics that are considered to predict
future economic activity.
LIBOR - The London
Inter-Bank Offered Rate. Banks use LIBOR when
borrowing from another bank.
Limit order -
An order with restrictions on the maximum price
to be paid or the minimum price to be received.
As an example, if the current price of USD/YEN
is 102.00/05, then a limit order to buy USD
would be at a price below 102. (ie 101.50)
Liquidity - The
ability of a market to accept large transaction
with minimal to no impact on price stability.
Liquidation -The
closing of an existing position through the
execution of an offsetting transaction.
Long position
- A position that appreciates in value if market
prices increase.
Margin call -
A request from a broker or dealer for additional
funds or other collateral to guarantee performance
on a position that has moved against the customer.
Market Maker -
A dealer who regularly quotes both bid and ask
prices and is ready to make a two-sided market
for any financial instrument.
Market Risk -
Exposure to changes in market prices.
Mark-to-Market
- Process of re-evaluating all open positions
with the current market prices. These new values
then determine margin requirements.
Maturity - The
date for settlement or expiry of a financial
instrument.
Momentum investor
- A market participant who increase market exposure
when the market is rising and decreases exposure
or goes short when the market is declining.
Offer - The rate
at which a dealer is willing to sell a currency.
Offsetting transaction
- A trade with which serves to cancel or offset
some or all of the market risk of an open position.
One Cancels the Other
Order (OCO) - A designation for two orders
whereby one part of the two orders is executed
the other is automatically cancelled.
Open order - An
order that will be executed when a market moves
to its designated price. Normally associated
with Good 'til Cancelled Orders.
Open position
- A deal not yet reversed or settled with a
physical payment.
Over the Counter (OTC)
- Used to describe any transaction that is not
conducted over an exchange.
Overnight - A
trade that remains open until the next business
day.
Pips - Digits
added to or subtracted from the fourth decimal
place, i.e. 0.0001. Also called Points.
Political Risk
- Exposure to changes in governmental policy
which will have an adverse effect on an investor's
position.
Position - The
netted total holdings of a given currency.
Premium - In the
currency markets, describes the amount by which
the forward or futures price exceed the spot
price.
Price Transparency
- Describes quotes to which every market participant
has equal access
Quote - An indicative
market price, normally used for information
purposes only.
Rate - The price
of one currency in terms of another, typically
used for dealing purposes.
Resistance - A
term used in technical analysis indicating a
specific price level at which analysis concludes
people will sell.
Revaluation -
An increase in the exchange rate for a currency
as a result of central bank intervention. Opposite
of Devaluation.
Risk - Exposure
to uncertain change, most often used with a
negative connotation of adverse change.
Risk Management
- the employment of financial analysis and trading
techniques to reduce and/or control exposure
to various types of risk.
Roll-Over - Process
whereby the settlement of a deal is rolled forward
to another value date. The cost of this process
is based on the interest rate differential of
the two currencies.
Settlement - The
process by which a trade is entered into the
books and records of the counterparts to a transaction.
The settlement of currency trades may or may
not involve the actual physical exchange of
one currency for another.
Short Position
- An investment position that benefits from
a decline in market price.
Spot Price - The
current market price. Settlement of spot transactions
usually occurs within two business days.
Spread - The difference
between the bid and offer prices.
Sterling - slang
for British Pound.
Stop Loss Order
- Order type whereby an open position is automatically
liquidated at a specific price. Often used to
minimize exposure to losses if the market moves
against an investor's position. As an example,
if an investor is long USD at 156.27, they might
wish to put in a stop loss order for 155.49,
which would limit losses should the dollar depreciate,
possibly below 155.49.
Support Levels
- A technique used in technical analysis that
indicates a specific price ceiling and floor
at which a given exchange rate will automatically
correct itself. Opposite of resistance.
Swap - A currency
swap is the simultaneous sale and purchase of
the same amount of a given currency at a forward
exchange rate.
Swissy - Slang
for Swiss Franc.
Technical Analysis
- An effort to forecast prices by analyzing
market data, i.e. historical price trends and
averages, volumes, open interest, etc.
Tomorrow Next (Tom/Next)
- Simultaneous buying and selling of a currency
for delivery the following day.
Transaction Cost
- the cost of buying or selling a financial
instrument.
Transaction Date
- The date on which a trade occurs.
Turnover - The
total money value of all executed transactions
in a given time period; volume.
Two-Way Price
- When both a bid and offer rate is quoted for
a FX transaction.
Uptick - a new
price quote at a price higher than the preceding
quote.
Uptick Rule -
In the U.S., a regulation whereby a security
may not be sold short unless the last trade
prior to the short sale was at a price lower
than the price at which the short sale is executed.
US Prime Rate
- The interest rate at which US banks will lend
to their prime corporate customers
Value Date - The
date on which counterparts to a financial transaction
agree to settle their respective obligations,
i.e., exchanging payments. For spot currency
transactions, the value date is normally two
business days forward. Also known as maturity
date.
Variation Margin -
Funds a broker must request from the client
to have the required margin deposited. The term
usually refers to additional funds that must
be deposited as a result of unfavorable price
movements.
Volatility (Vol)
- A statistical measure of a market's price
movements over time.
Whipsaw - slang
for a condition of a highly volatile market
where a sharp price movement is quickly followed
by a sharp reversal.
Yard - Slang for
a billion.
