Appreciation
- A currency is said to 'appreciate ' when it strengthens in
price in response to market demand. 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
Rate - The rate at which a trader is willing to buy a
currency. 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. Choice Market
- A market with no spread. All trades buys and sells occur at
that one price 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'. Collateral - Something
given to secure a loan or as a guarantee of performance. 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. End Of Day Order (EOD)
- An order to buy or sell at a specified price. This order remains
open until the end of the trading day which is typically 5PM
ET. 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 - The
required equity that an investor must deposit to collateralize
a position. 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. 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.
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.
