Total amount of exposure a bank has with a customer for both spot and forward contracts.
An option which may be exercised at any valid business date throughout the life of the option.
Describes a currency strengthening in response to market demand rather than by official action.
A type of trading where the same instrument is bought and sold simultaneously in two different markets in order to cash in on the difference in these markets.
Used in quoting forward "premium / discount".
Ask is the lowest price acceptable to the buyer.
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.
An instruction given to a dealer to buy or sell at the best rate that is currently available in the market.
At Par Forward Spread
When the forward price is equivalent to the spot price.
At or Better
An order to deal at a specific rate or better.
At the Price Stop Loss Order
A stop loss order that must be executed at the requested level regardless of market conditions.
An option whose strike/exercise price is equal to or near the current market price of the underlying instrument.
Sale of an item to the highest bidder. (1) A method commonly used in exchange control regimes for the allocation of foreign exchange. (2) A method for allocating government paper, such as US Treasury Bills. Small investors are given preferential access to the bills. The average issuing price is then computed on the basis of the competitive bids accepted. In some circumstances for government auctions it is the yield rather than the price which is bid.
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".
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.
The range in which a currency is permitted to move. A system used in the ERM.
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.
The rate at which a central bank is prepared to lend money to its domestic banking system.
Bank of England
Central Bank of the United Kingdom.
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.
The currency in which the operating results of the bank or institution are reported.
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.
The process whereby the basis tends towards zero as the contract expiry approaches.
One per cent of one per cent.
The price expressed in terms of yield maturity or annual rate of return.
Taking opposite positions in the cash and futures market with the intention of profiting from favourable movements in the basis.
The difference between the cash price and futures price.
A group of currencies normally used to manage the exchange rate of a currency. Sometimes referred to as a unit of account.
A market in which prices decline sharply against a background of widespread pessimism (opposite of Bull Market).
A person who believes that prices will decline.
Bid is the highest price that the seller is offering for the particular currency/commodity 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.
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 indicate a price of 1.5530/40BIS: Bank of International Settlement.
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.
A type of option in which the payoff is structured to be either a fixed amount of compensation if the option expires in the money, or nothing at all if the option expires out of the money.
An option pricing formula initially derived by Fisher Black and Myron Scholes for securities options and later refined by Black for options on futures. It is widely used in the currency markets.
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 they make neither a loss nor a gain. In the case of a call option, the break even point is the exercise price plus the premium.
In the options market, undoing a conversion or a reversal to restore the option buyer's original position.
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.
A market characterised by rising prices.
A person who believes that prices will rise.
Sterling bonds issued in the UK by foreign institutions.
(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
Chicago Board Options Exchange.
CBOT or CBT
Chicago Board of Trade.
Certificate of Deposit.
The Commodity Futures Trading Commission, the US Federal regulatory agency for futures traded on commodity markets, including financial futures.
Clearing House Automated Payment System.
The New York clearing house clearing system. (Clearing House Interbank Payment System). Most Euro transactions are cleared and settled through this system.
Chicago Mercantile Exchange.
Contracts for Difference (CFD)
An arrangement made in a futures contract whereby differences in settlement are made through cash payments, rather than the delivery of physical goods or securities.
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.
Committee on Payment and Settlement Systems.
Telegraphic transfer of funds from one centre to another. Now synonymous with interbank electronic fund transfer.
A term used in the foreign exchange market for the British Pound / US Dollar rate.
A call option confers the right but not the obligation to buy stock, shares or futures at a specified price.
An option that gives the holder the right to buy the underlying instrument at a specified price during a fixed period.
A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public and private international investments flowing in and out of a country.
A finance charge associated with the storing of commodities (or foreign exchange contracts) from one delivery date to another.
The interest cost of financing securities or other financial instruments held.
A procedure for settling futures contract where the cash difference between the future and the market price is paid instead of physical delivery.
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.
Normally refers to an exchange transaction contracted for settlement on the day the deal is struck. This term is mainly used in the North American markets and those countries which rely for foreign exchange services on these markets because of time zone preference i.e. Latin America. In Europe and Asia, cash transactions are often referred to as value same day deals.
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.
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.
An individual who studies graphs and charts of historic data to find trends and predict trend reversals which include the observance of certain patterns and characteristics of the charts to derive resistance levels, head and shoulders patterns, and double bottom or double top patterns which are thought to indicate trend reversals.
Executing a security transaction that is the exact opposite of an open position, thereby nullifying it and eliminating the initial exposure. Closing a long position in a security would entail selling it, while closing a short position in a security would involve buying it back.
Closing Purchase Transaction
The purchase of an option identical to one already sold to liquidate a position.
An economic indicator that generally moves in line with the general business cycle such as industrial production.
Commodity Exchange of New York.
The fee that a broker may charge clients for dealing on their behalf.
An option on an option, the dates and price of such option being fixed.
A memorandum to the other party describing all the relevant details of the transaction.
Contract Expiration Date
The date on which a currency must be delivered to fulfill the terms of the contract. For options, the last day on which the option holder can exercise his right to buy or sell the underlying instrument or currency.
The month in which a futures contract matures or becomes deliverable if not liquidated or traded out before the date specified.
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).
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.
The customer or bank with which a foreign exchange deal is executed.
The risk to each party of a contract, that the counterparty will not live up to its contractual obligations. Counterparty risk as a risk to both parties and should be considered when evaluating a contract.
Factors that affect currency trading unique to the specific country include political, regulatory, legal and holiday risks.
The annual rate of interest of a bond.
(1) On bearer stocks, the detachable part of the hide behind nominee status. A certificate exchangeable for dividends.
(2) Denotes the rate of interest on a fixed interest security.
(1) To take out a forward foreign exchange contract.
(2) To close out a short position by buying currency or securities which have been sold.
Covered Interest Rate Arbitrage
An arbitrage approach which consists of borrowing currency A, exchanging it for currency B, investing currency B for the duration of the loan, and, after taking off the forward cover on maturity, showing a profit on the entire set of deals. It is based on the theorem of interest rate parity (one of the key theoretical economic relationships) which says that the return on a hedged foreign investment will just equal the domestic interest rate on investments of identical risk. When the covered interest rate differential between the two money markets is zero, there is no arbitrage incentive to move funds from one market to another.
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.
The risk that a debtor will not repay; more specifically the risk that the counterparty does not have the currency promised to be delivered.
A foreign exchange deal entered into involving two currencies, neither of which is the base currency.
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.
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.
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.
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.
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.
The net balance of a country's international payment arising from exports and imports together with unilateral transfers such as aid and migrant remittances. It excludes capital flows.
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.
The set of expiration dates applicable to different classes of options.
An order that if not executed on the specific day is automatically canceled.
A Day Trading deal is a currency exchange deal which renews automatically every night at 22:00 (GMT time) starting the day the deal was made and until it ends. The deal ends in one of the following events:
As long as the deal is open, it is charged a renewal fee every night at 22:00 (GMT time).
The date on which a transaction is agreed upon.
The primary method of recording the basic information relating to a transaction.
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.
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.
Shortfall in the balance of trade, balance of payments, or government budgets.
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.
The settlement of a transaction by receipt or tender of a financial instrument or currency.
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.
A ratio spread of options established as a neutral position by using the deltas of the options concerned to determine the hedge ratio.
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".
A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterised by high leverage.
Term referring to a group dealing with a specific currency or currencies.
All the information required to finalise a foreign exchange transaction, i.e. name, rate, dates, and point of delivery.
Deliberate downward adjustment of a currency against its fixed parities or bands which is normally accompanied by formal announcement.
Quoting in fixed units of foreign currency against variable amounts of the domestic currency.
Less than the spot price. For example, forward discount.
The interest rates applicable to deposits domiciled in the country of origin. Value may vary from Euro deposits due to taxation and varying market practices.
The European Central Bank.
Electronic Fund Transfer.
European Monetary System.
European Monetary Union.
European Options Exchange.
Exchange Rate Mechanism.
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.
A data release which indicates current economic growth rates and trends such as retail sales and employment.
Effective Exchange Rate
An attempt to summarise the effects on a country's trade balance of its currency's changes against other currencies.
Exchange Rate Risk
The potential loss that could be incurred from an adverse movement in exchange rates.
Is a politico-economic union of 28 member states that are located primarily in Europe.
Exercise Price (Strike Price)
The price at which an option can be exercised.
A foreign exchange term for a thinly traded currency. Exotic currencies are illiquid, lack market depth and trade at low volumes. Trading an exotic currency can be expensive, as the bid-ask spread is usually large. Examples: Thai baht, Nok, Mexico peso.
(1) Options - the last date after which the option can no longer be exercised.
(2) Bonds - the date on which a bond matures.
The month in which an option expires.
The last date on which an option can be bought or sold.
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.
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.
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 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.
Cash balances held by banks with their local Federal Reserve Bank. The normal transaction with these funds is an interbank sale of a Fed fund deposit for one business day. Straight deals are where the funds are traded overnight on an unsecured basis.
The United States Federal Reserve. Federal Deposit Insurance Corporation Membership is compulsory for Federal Reserve members.
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.
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.
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.
(1) see Floating exchange rate.
(2) Cash in hand or in the course of being transferred between banks.
(3) 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.
Floating Exchange Rate
When the value of a currency is decided by the market forces dictating the demand and supply of that particular currency.
(1) An agreement with a counterparty that sets a lower limit to interest rates for the floor buyer for a stated time.
(2) A term for an exchanges trading area (cf. screen based trading), normally the trading area is referred to as a pit in the commodities and futures markets.
The purchase or sale of a currency against the sale or purchase of another.
A position under which one party agrees to purchase from or sell to the other party an agreed amount of foreign currency.
The purchase or sale of a currency against the sale or purchase of another currency. The maximum time for a deal is defined when the deal opens, the deal can be closed at any moment until the expiry date and time. A deal cannot be closed in its first 3 minutes, due to technical reasons.
An abbreviation of foreign exchange.
Sometimes used as synonym for "forward deal" or "future". More specifically, for arrangements with the same effect as a forward deal between a bank and a customer.
A deal with a value date greater than the spot value date.
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.
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.
Fractional pips are a new pricing feature which allows you to see more price action detail and will help you to make more informed trading decisions. A fractional pip is a tenth of a pip and the addition of this feature to your account allows you to take advantage of smaller price increments and moves in the market.
Total reserves held by a bank less the reserves required by the authority.
Analysis based on economic and political factors.
The macro economic factors that are accepted as forming the foundation for the relative value of a currency, these include inflation, growth, trade balance, government deficit, and interest rates.
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.
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.
Futures Exchange-Traded Contracts
They are firm agreements to deliver (or take delivery of) a standardised amount of a product or asset on a certain date at a predetermined price. Futures exist in currencies, money market deposits, bonds, shares and commodities. They are traded on an exchange with the clearing corporation guaranteeing the contract and moreover the trade is done on a mark to market basis.
G7 plus Belgium, Netherlands and Sweden, a group associated with IMF discussions. Switzerland is sometimes peripherally involved.
The five leading industrial countries - US, Germany, Japan, France, UK.
The seven leading industrial countries, being US , Germany, Japan, France, UK, Canada, Italy.
Removes inflation from the GNP figure. Usually expressed as a percentage and based on an index figure.
The difference between the actual real GNP and the potential real GNP. If the gap is negative an economy is overheated.
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.
Head and Shoulders
A pattern in price trends which chartist consider indicates a price trend reversal. The price has risen for some time, at the peak of the left shoulder, profit taking has caused the price to drop or level. The price then rises steeply again to the head before more profit taking causes the price to drop to around the same level as the shoulder. A further modest rise or level will indicate that a further major fall is imminent. The breach of the neckline is the indication to sell.
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.
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.
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.
International Foreign Exchange Master Agreement.
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.
International Monetary Market part of the Chicago Mercantile Exchange that lists a number of currency and financial futures.
Index and Options Market part of the Chicago Mercantile Exchange.
Industrial Production Index. A coincident indicator measuring physical output of manufacturing, mining and utilities.
ISDA (International Securities Dealers Association)
Organisation which foreign currency exchange banks have formed to regulate interbank markets and exchanges.
The interest rate determined by calculating the difference between spot and forward rates.
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.
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.
A market-maker's price which is not firm.
Where the foreign currency is a variable amount and the domestic currency is fixed at one unit.
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.
Rate given for information purposes only.
The deposit required by the Broker before a client can trade/transact a deal to have some cushion in the event of default by the party.
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.
Interest Rate Risk
The potential for losses arising from changes in interest rates.
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 receipt) are exchanged.
Action by a central bank to effect the value of its currency by entering the market.
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.
Slang for the New Zealand dollar.
A process where a barrier option (European) becomes active as the underlying spot price is in the money.
Has a corresponding meaning to Knock In although the option may permanently cease to exist.
Less developed countries, often used with respect to secondary debt market.
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.
London International Financial Futures Exchange.
To carry out a transaction in the market to offset a previous transaction and return to a square position.
Statistics that are considered to precede changes in economic growth rates and total business activity, e.g. factory orders.
In terms of foreign exchange, the obligation to deliver to a counter party 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.
Limit Order – Reserved Day Trading Deal
See Pending Order.
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.
Any transaction that offsets or closes out a previously established position.
The ability of a market to accept large transactions without having any major impact on the interest rates.
A market position where the Client has bought a currency they previously did not own. For example: long Dollars.
Slang for the Canadian dollar.
Cash in circulation plus demand deposits at commercial banks. There are variations between the precise definitions used by national financial authorities.
Includes demand deposits, time deposits and money market mutual funds excluding large CDs.
In the UK it is M1 plus public and private sector time deposits and sight deposits held by the public sector.
In the US it is M2 plus negotiable CDs.
Japanese Ministry of International Trade & Industry.
The currencies against which most other world currencies are valued.
British Pound (GBP)
United States dollar (USD)
Japanese yen (JPY)
Swiss Franc (CHF)
A dealer or company is said to make a market when they quote both the bid and offer prices at which they are ready to buy and sell.
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.
A demand for additional funds to cover positions.
Collateral that the holder of a position in securities, options, forex or futures contracts, has to deposit to cover the credit risk of his counterparty. Other definitions to MARGIN, used in other areas are:
(1) Difference between the buying and selling rates, also used to indicate the discount or premium between spot or forward.
(2) For options, the sum required as collateral from the writer of an option.
(3) For futures, a deposit made to the clearing house on establishing a futures position account.
(4) The percentage reserve required by the US Federal Reserve to make an initial credit transaction.
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 favourable movement in the prices.
Market value of a forex position at any time is the amount of the domestic currency that could be purchased at the then market rate in exchange for the amount of foreign currency to be delivered under the forex Contract.
Date for settlement of the transaction which is decided at the time of entering into the contract.
The amount of money in the economy, which can be measured in a number of ways.
An open-end investment company. Equivalent to unit trust.
US term for five basis points.
Not Held Basis Order
An order whereby the price may trade through or better than the client's desired level, but the principal is not held responsible if the order is not executed.
A financial instrument consisting of a promise to pay rather than an order to pay or a certificate of indebtedness.
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.
The rate at which a dealer is willing to sell the base currency.
Official Settlements Account
A US balance of payments measure based on movement of dollars in foreign official holdings and US reserves. Also referred to as reserve transaction account.
Old lady of Threadneedle Street, a term for the Bank of England.
One Cancels Other Order
Where the execution of one order automatically cancels a previous order also referred to as OCO or "One cancels the other".
Open Market Operations
The central bank operations in the markets to influence exchange and interest rates.
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.
All options of the same type - calls or puts - listed on the same underlying instrument.
All options of the same class having the same exercise/strike price and expiration date.
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.
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.
A forward deal that is not part of a swap operation.
Foreign exchange transaction involving either the purchase or the sale of a currency for settlement at a future date.
The forward rate of a foreign exchange deal based on spot price plus forward discount/premium.
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.
Is an economy on a high growth rate trajectory placing pressure on the production capacity resulting in increased inflationary pressures and higher interest rates.
Net long or short position in one or more currencies that a dealer can carry over into the next dealing day. Passing the book to other bank dealing rooms in the next trading time zone reduces the need for dealers to maintain these unmonitored exposures.
Producer Price Indices. See wholesale price indices.
When a number of exchange and /or deposit orders have to be fulfilled simultaneously.
(1) The nominal value of a security or instrument.
(2) The official value of a currency.
The value of one currency in terms of another.
(1) Foreign exchange dealer's slang for your price is the correct market price.
(2) Official rates in terms of SDR or other pegging currency.
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 pending 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. Also referred to as a ‘limit’ order.
A foreign currency which is freely convertible i.e. a currency which is permitted by the rules and regulations of the country concerned to be converted into major reserve currencies and for which a fairly active and liquid market exists for dealing against the major currencies.
See point. (0.0001 of a unit).
(1) 100th part of a per cent, normally 10,000 of any spot rate. Movement of exchange rates are usually in terms of points.
(2) One percent on an interest rate e.g. from 8-9%.
(3) Minimum fluctuation or smallest increment of price movement.
The potential for losses arising from a change in government policy or due to the risk of expropriation (nationalisation by the government).
The netted total exposure 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).
(1) The amount by which a forward rate exceeds a spot rate.
(2) The amount by which the market price of a bond exceeds its par value.
(3) Options, the price a put or call buyer must pay to a put or call seller for an option contract.
(4) The margin paid above the normal price level.
(1) The rate from which lending rates by banks are calculated in the US.
(2) The rate of discount of prime bank bills in the UK.
A dealer who buys or sells stock for his/her own account.
The unwinding of a position to realise profits.
Purchasing Power Parity
Model of exchange rate determination stating that the price of a good in one country should equal the price of the same good in another country after adjusting for the changes in the price due to the change in exchange rate. Also known as the law of one price.
Put Call Parity
The equilibrium relationship between premiums of call and put options of the same strike and expiry.
A put option confers the right but not the obligation to sell currencies, instruments or futures at the option exercise price within a predetermined time period.
An indicative price. The price quoted for information purposes but not to deal.
The difference between the highest and lowest price of a future recorded during a given trading session.
The price of one currency or asset in terms of another. It has the same meaning as the term parities.
A decline in business activity. Often defined as two consecutive quarters with a real fall in GNP.
A currency held by a central bank on a permanent basis as a store of international liquidity, these are normally Dollar and Sterling.
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.
A price level at which the selling is expected to take place.
Retail Price Index
Measurement of the monthly change in the average level of prices at retail, normally of a defined group of goods.
Increase in the exchange rate of a currency as a result of official action.
Additional sum payable or return to compensate a party for adopting a particular risk.
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.
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 are: market, exchange, interest rate, yield curve, volatility, liquidity, forced sale, counter party, credit, and country risk.
The substituting of a far option for a near option of the same underlying stock at the same strike/exercise price.
Where the settlement of a deal is carried forward to another value date based on the interest rate differential of the two currencies e.g. the next day. On some instruments there may be fee charged.
Standard International Trade Classification. A system for reporting trade statistics in a common manner.
Rate at which a bank is willing to sell foreign currency.
It means the business day specified for delivery of the currencies bought and sold under a forex contract.
Actual physical exchange of one currency or asset for another.
A market position where the client has sold a currency or asset he does not already own. Usually expressed in base currency terms.
More potential sellers than buyers, which creates an environment where rapid price falls are likely.
The overnight swap from the spot date to the next business day.
The price at which the currency is currently trading in the spot market.
(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.
(1) The difference between the bid and ask price of a currency.
(2) The difference between the price of two related futures contracts.
(3) For options, transactions involving two or more option series on the same underlying currency.
An active market which can absorb large sale or purchases of currency without having any major impact on the interest rates.
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.
Central Bank activity in the domestic money market to reduce the impact on money supply of its intervention activities in the forex market.
Stop Loss Order
An order placed with a broker or market maker to close a position when it reaches a specified price in the market lower than the current rate. The intention being to limit the amount of loss made.
Stop Out Price
US term for the lowest accepted price for Treasury Bills at auction.
The simultaneous purchase/sale of both call and put options for the same share, exercise/strike price and expiry date.
Also called exercise price. The price at which an option holder can buy or sell the underlying instrument.
A combination of two puts and one call.
Unemployment levels inherent in an economic structure.
A price level at which the buying is expected to take place.
The simultaneous purchase and sale of the same amount of a given currency for two different dates, against the sale and purchase of another. A swap can be a swap against a forward. In essence, swapping is somewhat similar to borrowing one currency and lending another for the same period. However, any rate of return or cost of funds is expressed in the price differential between the two sides of the transaction.
Society for Worldwide Interbank Financial Telecommunication is a clearing system for international trading.
Market slang for Swiss Franc.
An order placed with a broker or market maker to close a position once it reaches a specified rate in the market above the current rate. The intention being to lock in a specific profit amount.
Tokyo Inter Bank Offered Rate.
Tokyo International Financial Futures Exchange.
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.
An adjustment to price not based on market sentiment but technical factors such as volume and charting.
Terms of Trade
The ratio between export and import price indices.
A measure of the sensitivity of the price of an option to a change in its time to expiry.
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.
A minimum change in price, up or down.
Tomorrow Next (Tom next)
Simultaneous buying and selling of a currency for delivery the following day and selling for the next day or vice versa.
The date on which a trade occurs.
A portion of a deal or structured financing, specifically used for borrowings from the IMF.
The date on which a trade occurs.
Potential profit and loss generated by current foreign exchange transactions.
The buying or selling of securities resulting from the execution of an order.
For exchange contracts it is the day on which the two contracting parties exchange the currencies which are being bought or sold. For a spot transaction it is two business banking days forward in the country of the bank providing quotations which determine the spot value date.
An exchange rate is normally considered to be undervalued when it is below its purchasing power parity.
Normally settlement is for two working days from the date the contract is entered into. Value Today Transaction is executed for same day settlement; sometimes also referred to as "cash transaction".
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.
Funds required to be deposited by a client when a price movement has caused funds to fall below the stipulated percentage of the value of the contract.
Expresses the price change of an option for a one per cent change in the implied volatility.
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.
Money borrowed in large amounts from banks and institutions rather than from small investors.
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.
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.
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.
The seller of a position. Also known as the grantor of the trade. "Writing a Currency" is to sell it.
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.
Certificate issued by the Bank of England to "discount houses" in lieu of stock certificates to facilitate their dealing in the short dated gilt edge securities.
Zero Coupon Bond
A bond that pays no interest. The bond is initially offered at a discount to its redemption value.