FOREX GLOSSARY

Actuals - The underlying assets or instruments that are traded in the cash market. Adjustable peg - Term for an exchange rate regime where a country's exchange rate is "pegged" (i.e. fixed) in relation to another currency, often the dollar or French franc, but where the rate may be changed from time to time. This was the basis of the Bretton Woods system. See peg, and crawling peg. Appreciation - Describes a currency strengthening in response to market demand rather than by official action.

Arbitrage - The simultaneous purchase and sale on different markets, of the same or equivalent financial instruments to profit from price or currency differential, the exchange rate differential or swap points.

Ask - The price at which the currency or instrument is offered.

At-the-money - An option contract with a strike price at (or very close to) the underlying rate; also, the closest strike price to the underlying rate.

Authorized dealer - A financial institution or bank authorized to deal in foreign exchange.

Backwardation - Term referring to the amount that the spot price exceeds the forward price.

Band - The range in which a currency is permitted to move. A system used in the ERM.

Bank line - Line of credit granted by a bank to a customer, also known as a "line."

Bank rate - The rate at which a central bank is prepared to lend money to its domestic banking system.

Base currency - The currency in which the operating results of the bank or institution are reported.

Basis - The difference between the cash price and futures price.

Basis trading - Taking opposite positions in cash and futures market with the intention of profiting from favorable movements in the basis.

Bear market - A prolonged period of generally falling prices.

Bid - The price at which a buyer has offered to purchase the currency or instrument.

Book - The summary of currency positions held by a dealer, desk or room. A total of the assets and liabilities. If the average maturity of the book is less than that of the assets, the bank is said to be running a short and open book. Passing the Book normally refers to transferring the trading of the bank's positions to another office at the close of the day, e.g. from London to New York.

Broker - 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.

Bull market - A prolonged period of generally rising prices.

Bundesbank - Central Bank of Germany.

Buying Rate – The Rate at which, the market and a market maker in particular is willing to buy the currency. Sometimes called bid rate.

Cable - A term used in the foreign exchange market for the U.S. Dollar/British pound rate.

Capital risk - The risk arising from a bank having to pay to the counter party without knowing whether the other party will or is able to meet its side of the bargain.

Carry - The interest cost of financing securities or other financial instruments held.

Cash delivery - Same day settlement.

Cash market - The market in the actual financial instrument on which a futures or options contract is based.

Cash - Normally refers to an exchange transaction contracted for settlement on the day the deal is struck. Cash, 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.

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.

Cash settlement - A procedure for settling futures contract where the cash difference between the future and the market price is paid instead of physical delivery.

Central bank - A bank, which is responsible for controlling a country's monetary policy. It is normally the issuing bank and controls bank licensing and any foreign exchange control regime.

Central rate - 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.

Clean float - An exchange rate that is not materially affected by official intervention.

Closed position - A transaction which leaves the trade with a zero net commitment to the market with respect to a particular currency.

Commission - The fee that a broker may charge clients for dealing on their behalf.

Confirmation - A memorandum, to the other party, describing all relevant details of the transaction.

Contract - 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).

Conversion - The process by which an asset or liability denominated in one currency is exchanged for an asset or liability denominated in another currency.

Conversion arbitrage - A transaction where the asset is purchased and buys a put option and sells a call option on the asset purchased, each option having the same exercise price and expiry.

Convertible currency - A currency that can be freely exchanged for another currency (and/or gold) without special authorization from the central bank.

Counterparty - The other organization or party with whom the exchange deal is being transacted.

Countervalue - Where a person buys a currency against the dollar, it is the dollar value of the transaction.

Country risk - The risk attached to a borrower by virtue of its location in a particular country. This involves examination of economic, political and geographical factors. Various organizations generate country risk tables.

Cover - (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 arbitrage - Arbitrage between financial instruments denominated in different currencies, using forward cover to eliminate exchange risk.

Covered margin - The interest rate margin between two instruments denominated in different currencies after taking account of the cost of forward cover.

Credit risk - The risk that a debtor will not repay; more specifically the risk that the counterparty does not have the currency promised to be delivered.

Cross rates - Rates between two currencies, neither of which is the U.S. dollar.

Current account - 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.

Day trader - Speculators who take positions in commodities which are then liquidated prior to the close of the same trading day.

Deal date - The date on which a transaction is agreed upon.

Deal ticket - The primary method of recording the basic information relating to a transaction.

Dealer - 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.

Delivery date - The date of maturity of the contract, when the exchange of the currencies is made. This date is more commonly known as the value date in the FX or money markets.

Delta - The change in price of an option relative to a change in the underlying fx spot rate.

Delivery risk - A term to describe when a counterparty will not be able to complete his side of the deal, although willing to do so.

Depreciation - A fall in the value of a currency due to market forces rather than due to official action.

Desk - Term referring to a group dealing with a specific currency or currencies.

Devaluation - Deliberate downward adjustment of a currency against its fixed parities or bands, normally by formal announcement.

Dirty float - Floating a currency when the rate is controlled by intervention by the monetary authorities.

Easing - Modest decline in price.

Economic indicator - A statistic that indicates current economic growth rates and trends, such as retail sales and employment.

ECU - European Currency Unit.

European Monetary System (EMS) - A system designed to stabilize, if not eliminate, exchange risk between member states of the EMS as part of the economic convergence policy of the EU. It permits currencies to move in a measured fashion (divergence indicator) within agreed bands (the parity grid) with respect to the ECU and consequently with each other.

Exotic - A less broadly traded currency.

Exposure - (i) Net working capital - The current assets in a foreign currency minus current liabilities in the currency; (ii) Net financial method - The current assets in a foreign currency minus current liabilities and long term debt in the currency; (iii) Monetary/non-monetary method - Monetary assets and liabilities in the foreign currency are valued at present exchange rates, while non-monetary items are entered at the relevant historic rates.

Extrinsic Value - Commonly referred to as the "time" value and is defined as the value of an option beyond the intrinsic value.

Fast market - 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 Fed's view as to the state of the money supply.

Fed - The United States Federal Reserve. Federal Deposit Insurance Corporation Membership is compulsory for Federal Reserve members. The corporation had deep involvement in the Savings and Loans crisis of the late 80s.

Federal Reserve system - The central banking system of the U.S. comprising 12 Federal Reserve Banks controlling 12 districts under the Federal Reserve Board. Membership in the Fed is compulsory for banks chartered by the Comptroller of Currency and optional for state-chartered banks.

Fixed exchange rate - Official rate set by monetary authorities. Often the fixed exchange rate permits fluctuation within a band.

Flexible exchange rate - Exchange rates with a fixed parity against one or more currencies with frequent revaluations. A form of managed float.

Floating exchange rate - An exchange rate where the value is determined by market forces. Even floating currencies are subject to intervention by the monetary authorities. When such activity is frequent, the float is known as a dirty float.

FOMC - Federal Open Market Committee, the committee that sets money supply targets in the U.S. which tend to be implemented through Fed Fund interest rates etc.

Foreign exchange - The purchase or sale of a currency against sale or purchase of another.

Forex - Foreign Exchange.

Forward margins - Discounts or premiums between spot rate and the forward rate for a currency. Normally quoted in points.

Forward operations - Foreign exchange transactions, on which the fulfillment of the mutual delivery obligations is made on a date later than the second business day after the transaction was concluded.

Forward outright - A commitment to buy or sell a currency for delivery on a specified future date or period. The price is quoted as the spot rate minus or plus the forward points for the chosen period.

Forward rate - Forward rates are quoted in terms of forward points, which represents the difference between the forward and spot rates. In order to obtain the forward rate from the actual exchange rate the forward points are either added or subtracted from the exchange rate. 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.

Fundamentals - 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.

Futures - Currency (and other commodity) contracts traded through a regulated exchange such as the Chicago Mercantile Exchange (CME).

FX - Foreign Exchange.

G7 - The seven leading industrial countries, specifically U.S., Germany, Japan, France, UK, Canada and Italy.

G10 - G7 plus Belgium, Netherlands and Sweden, a group associated with IMF discussions. Switzerland is sometimes peripherally involved.

Going long - The purchase of a stock, commodity or currency for investment or speculation.

Going short - The selling of a currency or instrument not owned by the seller.

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.

Hard currency - A currency whose value is expected to remain stable or increase in terms of other currencies.

Head and shoulders - A pattern in price trends which chartists consider indicating 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 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.

Hedge - 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, futures or options market.

IMF - International Monetary Fund, established in 1946 to provide international liquidity on a short and medium term and encourage liberalization of exchange rates. The IMF supports countries with balance of payments problems with the provision of loans.

IMM - International Monetary Market, part of the Chicago Mercantile Exchange that lists a number of currency and financial futures' implied volatility. A measurement of the market's expected price range of the underlying currency futures based on the traded-option premiums.

Implied rates - The interest rate determined by calculating the difference between spot and forward rates.

In-the-money - An option contract that has intrinsic value.

Indicative quote - A market-maker's price which is not firm.

Inflation - 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.

Initial margin - The margin required by a Foreign Exchange firm to initiate the buying or selling of a determined amount of currency.

Interbank rates - The bid and offer rates at which international banks place deposits with each other. The basis of the Interbank market.

Interest arbitrage - Switching into another currency by buying spot and selling forward, and investing proceeds in order to obtain a higher interest yield. Interest arbitrage can be inward, i.e. from foreign currency into the local one or outward, i.e. from the local currency to the foreign one. Sometimes better results can be obtained by not selling the forward interest amount. In that case, some treat it as no longer being a complete arbitrage, as if the exchange rate moved against the arbitrageur, the profit on the transaction may create a loss.

Interest rate swaps - An agreement to swap interest rate exposures from floating to fixed or vice versa. There is no swap of the principal. It is the interest cash flows, whether payments or receipts are exchanged.

Intervention - Action by a central bank to affect the value of its currency by entering the market. Concerted intervention refers to action by a number of central banks to control exchange rates.

Intrinsic Value - The difference between the strike price and the underlying fx spot contract rate (American Style Options) or the fx forward rate (European Style Options). The intrinsic value represents the actual value of the option if exercised. Please note that the intrinsic value must be zero (0) or above - if an option has no intrinsic value, then the option is simply referred to as having no (or zero) intrinsic value (the intrinsic value is never represented as a negative number).

Kiwi - Slang for the New Zealand dollar.

Leading indicators - Statistics that are considered to precede changes in economic growth rates and total business activity, e.g. factory orders.

Liability - In terms of foreign exchange, the obligation to deliver to a counterparty an amount of currency either with respect to a balance sheet holding at a specified future date or in respect of an un-matured forward or spot transaction.

Limit order - An order to buy or sell a specified amount of a currency at a specified price or better.

Liquidation - Any transaction that offsets or closes out a previously established position.

Liquidity - The ability of a market to accept large transactions.

Maintenance margin - The minimum margin which an investor must keep on deposit in a margin account at all times with respect to each open contract.

Make a market - A dealer is said to make a market when he or she quotes bid and offer prices at which he or she stands ready to buy and sell.

Managed float - When the monetary authorities intervene regularly in the market to stabilize the rates or to aim the exchange rate in a required direction.

Margin call - A demand for additional funds to be deposited in a margin account to meet margin requirements because of adverse future price movements.

Margin - For currencies, a deposit made to the forex firm on establishing a futures position account.

Mark to market - The daily adjustment of an account to reflect accrued profits and losses often required to calculate variations of margins.

Market maker - A person or firm authorized to create and maintain a market in an instrument.

Market order - An order to buy or sell a financial instrument immediately at the best possible price.

Minimum price fluctuation - The smallest increment of market price movement possible in a given futures contract.

Moving average - A way of smoothing a set of data, widely used in price time series.

Net Position - The amount of currency bought or sold which have not yet been offset by opposite transactions.

Offer - The price at which a seller is willing to sell. The best offer is the lowest such price available.

Offset - The closing-out or liquidation of a futures position.

Option Contract - A financial contract giving the buyer the right, but not the obligation, to purchase or sell a specific forex contract (the underlying) at a specific price (the strike price) on or before a specific date (the expiration date). The amount the buyer pays to the seller for the contract rights is called the "premium."

Option Premium - The amount the buyer pays to the seller for the rights of an option contract.

Out-of-the-money - An option contract having no intrinsic value.

Overnight limit - 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.

Parity - The equivalent value of one currency in terms of another; also, sometimes used as a synonym for currency pair.

Pegged - A system where a currency moves in line with another currency. Some pegs are strict while others have bands of movement.

Pip - Minimum fluctuation or smallest increment of price movement.

Position - The netted total commitments 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).

Profit taking - The unwinding of a position to realize profits.

Quote - An indicative price. The price quoted for information purposes but not to deal.

Rally - A recovery in price after a period of decline.

Range - The difference between the highest and lowest price of a future recorded during a given trading session.

Rate - (1) The price of one currency in terms of another, normally against USD. (2) Assessment of the credit worthiness of an institution.

Resistance point or level - A price recognized by technical analysts as a price which is likely to result in a rebound, but if broken through, is likely to result in a significant price movement.

Revaluation - Increase in the exchange rate of a currency as a result of official action.

Revaluation rate - The rate for any period or currency which is used to revalue a position or book.

Risk management - The identification and acceptance or offsetting of the risks threatening the profitability or existence of an organization. With respect to foreign exchange, involves consideration of market, sovereign, country, transfer, delivery, credit and counterparty risk.

Risk position - An asset or liability, which is exposed to fluctuations in value through changes in exchange rates or interest rates.

Rollover - An overnight swap, specifically the next business day against the following business day (also called Tomorrow Next, abbreviated to Tom-Next).

Round trip - Buying and selling of a specified amount of currency.

Same day transaction - A transaction that matures on the day the transaction takes place.

Selling rate - Rate at which a bank is willing to sell foreign currency.

Settlement date - The date by which an executed order must be settled by the transference of instruments or currencies and funds between buyer and seller.

Settlement risk - Risk associated with the non-settlement of the transaction by the counter party.

Short sale - The sale of a specified amount of currency not owned by the seller at the time of the trade. Short sales are usually made in expectation of a decline in the price.

Short-term interest rates - Normally the 90-day rate.

Soft Market - More potential sellers than buyers, which creates an environment where rapid price falls are likely.

Spot - (1) The most common foreign exchange transaction. (2) Spot or spot date refers to the spot transaction value date that requires settlement within two business days, subject to value date calculation.

Spot next - The overnight swap from the spot date to the next business day.

Spot price/rate - The price at which the currency is currently trading in the spot market.

Spread - (1) The difference between the bid and ask price of a currency. (2) The difference between the price of two related futures contracts.

Square - Purchase and sales are in balance and thus the dealer has no open position.

Squeeze - Action by a central bank to reduce supply in order to increase the price of money.

Stable market - An active market which can absorb large sales or purchases of currency without major moves.

Sterilization - Central Bank activity in the domestic money market to reduce the impact on money supply of its intervention activities in the FX market.

Sterling - British pound, otherwise known as cable.

Stop loss order - Order given to ensure that, should a currency weaken by a certain percentage, a short position will be covered even though this involves taking a loss. Realize profit orders are less common.

Support levels - When an exchange rate depreciates or appreciates to a level where (1) Technical analysis techniques suggest that the currency will rebound, or not go below; (2) the monetary authorities intervene to stop any further downward movement. See resistance point.

Swap price - A price as a differential between two dates of the swap.

Swap - 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.

Swissy - Market slang for Swiss franc.

Technical correction - An adjustment to price not based on market sentiment but on technical factors such as volume and charting.

Thin market - A market in which trading volume is low and in which bid and ask quotes are wide and the liquidity of the instrument traded is low.

Tick - A minimum change in price, up or down.

Time Value - see "Extrinsic Value."

Trade date - The date on which a trade occurs.

Tradeable amount - Smallest transaction size acceptable.

Transaction date - The date on which a trade occurs.

Transaction - The buying or selling of currencies resulting from the execution of an order.

Two-Way quotation - When a dealer quotes both buying and selling rates for foreign exchange transactions.

Uncovered - Another term for an open position.

Under-valuation - An exchange rate is normally considered to be undervalued when it is below its purchasing power parity.

Uptick - A transaction executed at a price greater than the previous transaction.

Value date - 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. The only exception to this general rule is the spot day in the quoting center coinciding with a banking holiday in the country(ies) of the foreign currency(ies). The value date then moves forward a day.

Value spot - Normally settlement for two working days from today.

Volatility - A measure of the amount by which an asset price is expected to fluctuate over a given period.

Wash trade - A matched deal which produces neither a gain nor a loss.

Whipsaw - Term for where a trader takes a position, then experiences a move against it, triggering stop loss limits and liquidation of positions, followed by a reversal and move in the original direction. Normally occurs in volatile markets.