Lexicon

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Accrual 

The apportionment of premiums and discounts on forward exchange transactions that relate directly to deposit swap (Interest Arbitrage) deals , over the period of each deal.

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

The currency against which other currencies are quoted. Example, the primary base currency is the u.s. dollar. 

Bear Market

A market in which prices decline sharply against a background of widespread pessimism (opposite of Bull Market). Bear Markets are generally shorter in duration than Bull Markets.

Bid

The rate at which a dealer is willing to buy the base currency.

Book 

In a professional trading environment, a ‘book’ is the summary of a trader or desk’s total positions.

Bull Market

A market characterized by rising prices.

Bretton Woods Accord of 1944

An agreement that established fixed foreign exchange rates for major currencies, provided for central bank intervention in the currency markets, and set the price of gold at US $35 per ounce. The agreement lasted until 1971. See More on Bretton.

Broker

An agent who handles investors' orders to buy and sell currency.

Bundesbank

Germany’s Central Bank.

Cable 

Dealers slang for the Sterling/US Dollar exchange rate.

Call Rate

The overnight interbank interest rate.

Candlestick Chart

A chart that indicates the trading ranges 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.

Cash Market

The market for the purchase and sale of physical currencies.

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.

Convertible Currency

Currency, which can be freely exchanged for other currencies or gold without special authorization from the appropriate central bank.

Counter Party 

The customer or bank with which a foreign exchange deal is executed.

Country Risk

Risk associated with a cross-border transaction, including but not limited to legal and political conditions.

Cross-Rate

An exchange rate between two currencies, usually constructed from the individual exchange rates of the two currencies, measured against the United States dollar. 

Currency 

Any form of money issued by a government or central bank and used as legal tender and a basis for trade.

Day Trading

Refers to opening and closing the same position or positions before the close of that day's trading (3:00p.m. EST).

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.

Dollar Rate

When a variable amount of a foreign currency is quoted against one US Dollar, regardless of where the dealer is located or in what currency he is requesting a quote. The exception is the Sterling/US Dollar rate (cable), which is quoted as variable amount of US Dollars to one Sterling.

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 January 1st, 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 and 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). 

EMS 

Abbreviation for European Monetary System, an agreement between member nations of the European Union to maintain an alignment between the exchange rates of their respective currencies.

Federal Reserve (Fed)

AnalysThe Central Bank of the United States.

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.

Flat / Square

To be neither long nor short is the same as to be flat or square. One would have a flat book if he has no positions or if all the positions cancel each other out. 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.

Floating Rate Interest

As opposed to a fixed rate, the interest rate on this type of deal will fluctuate with market rates or benchmark rates. One example of a floating rate interest is a standard mortgage.

Foreign Exchange Swap

Transaction which involves the actual exchange of two currencies (principal amount only) on a specific date at a rate agreed at the time of the conclusion of the contract (short leg), at a date further in the future at a rate agreed at the time of the contract (the long leg).

Forward 

A deal that will commence at an agreed date in the future. Forward trades in FX are usually expressed as a margin above (premium) or below (discount) the spot rate. To obtain the actual forward FX price, one adds the margin to the spot rate. The rate will reflect what the FX rate has to be at the forward date so that if funds were re-exchanged at that rate there would be no profit or loss (i.e. a neutral trade). The rate is calculated from the relevant deposit rates in the 2 underlying currencies and the spot FX rate. Unlike in the futures market, forward trading can be customized according to the needs of the two parties and involves more flexibility. Also, there is no centralized exchange.

Fundamental Analysis

Thorough analysis of economic and political data with the goal of determining future movements in a financial market.

Forex

An abbreviation of foreign exchange.

Fundamental Analysis

Analysis based on economic factors.

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.

GTC

"Good Till Cancelled." An order left with a Dealer to buy or sell at a fixed price. The order remains in place until it is cancelled by the client.

Hedging 

The practice of undertaking one investment activity in order to protect against loss in another, e.g. selling short to nullify a previous purchase, or buying long to offset a previous short sale. While hedges reduce potential losses, they also tend to reduce potential profits. 
High/Low - Usually the highest traded price and the lowest traded price for the underlying instrument for the current trading day.

Inflation 

An economic condition whereby prices for consumer goods rise, eroding purchasing power.

Initial Margin

The required initial deposit of collateral to enter into a position as a guarantee on future performance.

Interbank Rates

The FX rates large international banks quote other large international banks. Normally the public and other businesses do not have access to these rates.

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 given which has restrictions upon its execution, where the client may specify a price and the order can be executed only if the market reaches that price.

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

A market position where the Client has bought a currency he previously did not own. Normally expressed in base currency terms. For example: long Dollars (short Japanese Yen).

Margin

Margin is a cash deposit provided by clients as collateral to cover possible future losses that may result from the clients Foreign Exchange trades.

Margin Call

A demand for additional funds. A requirement by a clearing house that a clearing member (or by a brokerage firm that a client) brings margin deposits up to a required minimum level to cover an adverse movement in price in the market.

Market Maker

A dealer who supplies prices and is prepared to buy or sell at those stated bid and ask prices. A market maker runs a trading.

Market Risk

Exposure to changes in market prices.

Mark-to-Market

Process of reevaluating all open positions with the current market prices. These new values then determine margin requirements.

Maturity 

The date for settlement or expiration 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.

One Cancels Other Order (O.C.O. Order)

A contingent order where the execution of one part of the order automatically cancels the other part.

Over The Counter (OTC)

Used to describe any transaction that is not conducted over an exchange.

Offer

The rate at which a Dealer is willing to sell the base currency.

Offsetting Transaction

A trade with which serves to cancel or offset some or all of the market risk of an open position.

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

Any deal which has not been offset or reversed by an equal and opposite deal.

Overnight Trading

Refers to positions held open between 3p.m. EST and 7p.m. EST. 

Over the Counter (OTC) 

Used to describe any transaction that is not conducted over an exchange.

Pip or Points

Depending on context, normally one basis point, i.e. 0.0001.

Political Risk

The uncertainty in return on an investment due to the possibility that a government might take actions, which are detrimental to the investor’s, interests.

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 price level at which you would expect selling to take place.

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.

Risk Capital

The amount of money that an individual can afford to invest, which, if lost would 
not affect their lifestyle.

Rollover 

Where the settlement of a deal is rolled forward to another value date based on the interest rate differential of the two currencies.

Settlement 

Actual physical exchange of one currency for another. 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

A market position where the Client has sold a currency he does not already own. Normally expressed in base currency terms, example, short Dollars (long D. Marks).

Spot 

A transaction that occurs immediately, but the funds will usually change hands within two days after deal is struck.

Spread

The difference in prices between bid and offer rates.

Sterling

Slang for British Pound.

Stop Loss Order

An order to buy or sell at the market when a particular price is reached, either above or below the price that prevailed when the order was given.

Support Levels

A price level at which you would expect buying to take place.

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

Analysis based on market action through chart study, moving averages, volume, open interest, formations, and other technical indicators.

Tomorrow to Next

Simultaneous buying and selling of a currency for delivery the following day and selling for the next day or vice versa.

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

Rates for which both a bid and offer are quoted.

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

Settlement date of a spot or forward deal.

Variation Margin

An additional margin requirement that a broker will need from a client due to market fluctuation.

Volatility

A measure of price fluctuations.

Whipsaw 

Slang for a condition of a highly volatile market where a sharp price movement is quickly followed by a sharp reversal.

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