Aggregate (Risk)

Total exposure a bank has with a customer for both spot and forward contracts.

Aggregate Supply

Total supply of goods and services in the economy (including imports) available to meet aggregate demand.

American Option

An option which may be exercised on any valid business date throughout the life of the option. A European option can only be exercised on a specific date.

Arbitrage

A risk-free type of trading where the same instrument is bought and sold simultaneously in two different markets in order to cash in on the difference between the markets.

Ask Price

The price at which the currency or instrument is offered. Ask is the lowest price acceptable to the buyer.

Association Cambiste International

The international society of foreign exchange dealers consisting of national "Forex clubs" affiliated on a worldwide basis.

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.

Auction

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, such as government auctions, it is the yield rather than the price which is bid.

Back Office

Settlement and related processes.

Balance of Payments

A systematic record of the economic transactions during a given period for a country. (1) The term is often used to mean either: (i) balance of payments on current account; or (ii) the current account plus certain long term capital movements. (2) The combination of the trade balance, current balance, capital account and invisible balance, which together make up the balance of payments total. Prolonged balance of payment deficits tend to lead to restrictions in capital transfers, and or decline in currency values.

Band

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

Bank Notes

Bank notes are paper issued by the central or issuing bank. They are legal tender, but are not usually considered to be part of the FX market. However bank notes can be converted, in some countries, into FX. Bank notes are normally priced at a premium to the current spot rate for a currency.

Banking Day

See trading day and value date.

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 Point

One per cent of one per cent.

Basis Trading

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

Bear

A person (investor) who believes that prices will decline.

Bear Put Spread

A spread designed to exploit falling exchange rates by purchasing a put option with a high exercise price and selling one with a low exercise price.

Big Figure

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.

Binary Options

A binary call (or step up) is like a standard European call option except that the pay off at expiry is fixed at one unit of the counter currency when the call expires in the money.

Booked

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 either a loss or gain is made. In the case of a call option, the break even point is the exercise price plus the premium.

Bretton-Woods

The site of the 1944 conference which led to the establishment of the post war foreign exchange system that remained intact until the early 1970s. The conference also resulted in the formation of the IMF. The fixed exchange rate system established at Bretton-Woods allowed 1% fluctuations of a given currency to gold or the dollar.

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.

Brokerage

Commission charged by a broker.

Bull

A person (investor) who believes that prices will rise.

Bull Market

A market characterized by rising prices.

Bullion

A term for gold bars, not coin.

Butterfly Spread

(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.

Buying Rate

Rate at which the market and a market maker in particular are willing to buy the currency. Sometimes called bid rate.

Cable

A term used in the foreign exchange market for the US Dollar/British Pound rate.

Calendar Spread

An option position comprising the purchase and sale of two option contracts of the same type with different expiration dates at the same exercise price.

Call Option

A call option confers the right but not the obligation to buy stock, shares or futures at a specified price.

Capital Account

Juxtaposition of the long and short term capital imports and exports of a country.

Carry-Over Charge

A finance charge associated with the storing of commodities (or foreign exchange contracts) from one delivery date to another.

Cash and Carry

The buying of an asset today and selling of 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.

CBOT or CBT

Chicago Board of Trade.

Central Bank

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. It is normally the issuing bank and controls bank licensing, and any foreign exchange control regime.

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.

CHAPS

Clearing House Automated Payment System.

CHIPS

The New York clearing house clearing system. (Clearing House Interbank Payment System). Most euro transactions are cleared and settled through this system.

Clearing

The process of setting a number of items against one another and making fund transfers only on the net balance as part of the settlement process.

Closing Purchase Transaction

The purchase of an option identical to one already sold to liquidate a position.

Coincident Indicator

An economic indicator that generally moves in line with the general business cycle such as industrial production.

Commission

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

Comptant

French term for spot settlement in foreign exchange.

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. Rising CPI is normally associated with expectations of higher short term interest rates and may therefore be supportive for a currency in the short term. Nevertheless, a longer term inflation problem will eventually undermine confidence in the currency and weakness will follow.

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.

Correspondent Bank

The bank that regularly performs services on behalf of a foreign bank that has no branch in the relevant centre, e.g. to facilitate the transfer of funds. In the US, this often occurs domestically due to interstate banking restrictions.

Cost of Living Index

Broadly equivalent to Retail Price Index or Consumer price.

Counterparty

The other side to a deal (customer, or bank) with which a foreign exchange deal is executed.

Country Risk

Factors that affect currency trading unique to the specific country including political, regulatory, legal and holiday risks.

Coupon Value

The annual rate of interest of a bond.

Cours Libre

(French) Free exchange rate.

Court

French for "short" as in une position courte.

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 Call Write

A strategy of writing call options against a long position in the underlying asset. A covered put write being based on a short position in the asset.

Covered Margin

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

CPSS

Committee on Payment and Settlement Systems.

Credit Lombard

See Lombard rate.

Cross Deal

A foreign exchange deal entered into involving two currencies, neither of which is the base currency.

Cross Rate

. 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.

Crossed Market

The situation which exists when a broker’s bid is higher than the lowest offer of another broker

Currency Basket

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.

Current Account

The net balance of a country’s international payments arising from exports and imports together with unilateral transfers such as aid and migrant remittances. It excludes capital flows.

Cycle

The set of expiration dates applicable to different classes of options.

Day Order

An order that if not executed on the specific day, is automatically cancelled.

Day Trading

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: 1. Termination initiated by the trader. 2. The day trading rate has reached the Stop-Loss rate (or Take-Profit rate) you predefined. 3. The deal end date. As long as the deal is open, it is charged a renewal fee every night at 22:00 (GMT time).

Deal Date

The date on which a transaction is agreed upon.

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, in contrast to brokers, who do trade only on behalf of their clients.

Declaration Date

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.

Deflator

Difference between real and nominal Gross National Product, which is equivalent to the overall inflation rate.

Delivery Date

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.

Delivery Points

Those locations designated by futures exchanges at which the currency represented by a futures contract may be delivered in fulfillment of the contract.

Delta

The change in the value of the option premium made fully paid by the capitalization of reserves, and given relative to the instantaneous change in the value of the underlying instrument, expressed as a coefficient.

Delta Spread

A ratio spread of options established as a neutral position by using the deltas of the options concerned to determine the hedge ratio.

Deport

(French) Discount.

Depreciation

Describes a currency weakening in response to market demand as opposed to increasing in value as a result of 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, which is normally accompanied by formal announcement.

Devisenkassamarkt

German for spot exchange market.

Diagonal (bull or bear) Spread

The purchase of a longer maturity option and the sale of a shorter maturity, lower exercise price option. The choice of calls or puts will determine its bear or bull character.

Discount

(1) See also forward rate. Less than the spot price. Example: forward discount. Forward rate is lower than spot rate. (2) An option that is trading for less than its intrinsic value.

Disposable Income

Earnings after tax.

Durable Goods Orders

Durable Goods Orders are a measure of the new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods. Durable Goods Orders are a major indicator of manufacturing sector trends because most industrial production is done to order.

Easing

Modest decline in price.

Economic Indicator

A statistic which indicates current economic growth rates and trends such as retail sales and employment.

Effective Exchange Rate

An attempt to summarize the effects on a country’s trade balance of its currency’s changes against other currencies.

Either Way Market

In the Euro Interbank deposit market where both bid and offer rates for a particular period are the same.

EMU

European Monetary Union.

EOE

European Options Exchange.

ERM

Exchange Rate Mechanism.

Eurobonds

A long-term loan issued in a currency other than that of the country or market in which it is issued. Interest is paid without the deduction of tax.

Eurodollars

US dollars deposited in a bank (US or non US) located outside the USA.

Euromark

Deutschmarks traded on the Eurocurrency market.

European Union

The group formerly known as the European Community.

Exchange Rate Risk

The potential loss that could be incurred from an adverse movement in exchange rates.

Exercise Notice

The formal notification that the holder of a call (or put) option wishes to buy (or sell) the underlying security at the exercise price.

Exercise Value

For a call option, this is the amount by which the strike price is below the underlying investment; for a put option, it is the amount by which the strike price is above the underlying investment.

Expiration Date

(1) Options – the last date after which the option can no longer be exercised. (2) Bonds – the date on which a bond matures.

Expiry Date

The last day on which the holder of an option can exercise his right to buy or sell the underlying security.

Exposure

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.

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 Feds view as to the state of the money supply.

FEDAI

Foreign Exchange Dealers Association of India is an association of all dealers in foreign exchange which sets the ground rules for fixation of commissions and other charges and also determines the rules and regulations relating to day-to-day transactions in foreign exchange in India. The FEDAI has recognized 38 currencies for dealing.

Federal Open Market Committee

See FOMC.

Federal Reserve System

The central banking system of the US 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.

Fine Rate

(1) A quote with a narrow spread. (2) The most favorable rate charged to a high quality borrower.

Fiscal Policy

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.

Flat/Square

Where a client has not traded in that currency, or where an earlier deal is reversed thereby creating a neutral (flat) position. For example, you bought $500,000 then sold $500,000 = FLAT .

Float

(1) See Floating exchange rate. (2) Cash in hand or in the course of being transferred between banks. (3) The Federal Reserve Float exists because checks sent to the Federal Reserve Banks are sometimes credited in advance of the depositing bank loosing the reserve.

Floor

(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.

Foreign Exchange

The purchase or sale of a currency against the sale or purchase of another.

Forex

An abbreviation of foreign exchange.

Forward / Forward

A forward / forward deal is one where both legs of the deal have value dates greater than the current spot value date.

Forward Cover Taking

Forward contracts intended to protect against movements in the exchange rate.

Forward Margins

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

Forward Operations

Foreign exchange transactions for 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 Points

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.

Forward Rate Agreements

The FRA is an agreement between two parties that determines the interest rate that will apply to a notional future loan or deposit of an agreement.

Front Office

The activities carried out by the dealer, normal trading activities.

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 Contract

A contract traded on a futures exchange that requires the delivery of a specified quality and quantity of a commodity, currency or financial instruments within a specified future month, if not liquidated before the contract matures.

FX

Foreign Exchange.

G10

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

G7

The seven leading industrial countries, being US , Germany, Japan, France, UK, Canada, Italy.

Gap

A mismatch between maturities and cash flows in a bank, or individual dealer's position book. Gap exposure is effectively interest rate exposure.

GNP Deflator

Removes inflation from the GNP figure. Usually expressed as a percentage and based on an index figure.

Going Long

The purchase of a stock or commodity for investment or speculation.

Gold Standard

The original system for supporting the value of currency issued. Accordingly, the monetary system backs its currency with a reserve of gold, and allows currency holders to convert their currency into gold. This system was in vogue before 1973 when the fixed exchange rates were prevalent.

Gross Domestic Product

Total value of a country’s output, income or expenditure produced within the country’s physical borders. GDP is the broadest measure of aggregate economic activity available. Reported quarterly, GDP growth is widely followed as the primary indicator of the strength of economic activity. GDP represents the total value of a country's production during the period and consists of the purchases of domestically produced goods and services by individuals, businesses, foreigners and governments.

GTC

See Good until cancelled.

Hard Currency

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

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 markets.

HIBOR

Hong Kong Inter-bank Offered Rate.

Hit the Bid

Acceptance of purchasing at the offer, or selling at the bid.

Housing Starts

Housing starts are a measure of the number of residential units on which construction has begun each month.

ICCH

International Commodities Clearing House Limited, a clearing house based in London operating worldwide for many futures markets.

IMF

International Monetary Fund, established in 1946 to provide international liquidity on a short and medium term, and to encourage liberalization of exchange rates. The IMF helps its members to tide over the balance of payments problems by supplying the necessary loans.

Implied Rates

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

Implied Volatility Skews

The implied volatility variances for different strikes of an option.

In-the-Money

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.

Indicative Quote

A market-maker’s price which is not firm.

Industrial Production Index

A coincident indicator measuring physical output of manufacturing, mining and utilities.

Info Quote

Rate given for information purposes only.

Interbank Rates

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 Options

An agreement permitting a party to obtain a particular interest rate, issued both OTC and by exchanges.

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.

Intra Day Limit

Limit set by bank management on the size of each dealer’s Intra Day Position.

Intrinsic Value

The amount by which an option is in-the-money. The intrinsic value is the difference between the exercise/strike price and the price of the underlying security.

IPI

Industrial Production Index. A coincident indicator measuring physical output of manufacturing, mining and utilities.

J Curve

A term describing the expected effect of devaluation on a country’s trade balance. It is expected that import bills will rise before export orders and receipts increase.

Key Currency

Small countries, which are highly dependent on exports, orient their currencies to their major trading partners, the constituents of a currency basket.

Knock In

A process where a barrier option (European) becomes active as the underlying spot price is in-the-money.

Last Trading Day

The day on which trading ceases for an expiring contract.

LDC

Less developed countries, often used with respect to a secondary debt market.

Leads and Lags

The effect on foreign trade payments of an anticipated move in the exchange rate, normally devaluation. The importers speed up the payment for the imports, and exporters delay receiving payment for the exports.

Liability

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

LIBOR

The London Interbank Offered Rate, the rate charged by one bank to another for lending money.

LIFFE

London International Financial Futures Exchange.

Limit Down

The maximum price decline from the previous trading day’s settlement price permitted in one trading session.

Limit Order Reserved  Day Trading Deal

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 Limit 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.

Limited Convertibility

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 foreign institutional investors have the liberty to buy and sell shares on the stock exchange of that country.

Liquidation

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

Lombard Rate

One of the key commercial interest rates, normally referring to Germany although such rates exist in France, Belgium, and Switzerland. An interest rate for a loan against the security of pledged paper.

Long Hedge

The purchase of futures contracts for price protection purposes, as a defensive position against an increase in cash prices or falling interest rates.

M0

Cash in circulation. Only used by the UK.

M2

Includes demand deposits, time deposits and money market mutual funds excluding large CDs.

M4

In the US, it is M2 plus negotiable CDs.

Make a Market

A dealer is said to make a market when he quotes both the bid and offer prices at which he stands ready to buy and sell.

Margin

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.

Marginal Risk

The possibility that a customer goes bankrupt after entering into a forward contract. In such an event, the issuer must close the commitment, running the risk of having to pay the marginal movement on the contract.

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 the event there has been a favorable movement in the prices.

Market Maker

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

Market Value

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.

Maturity

Date for settlement of the transaction which is decided at the time of entering into the contract.

Micro Economics

The study of economic activity as it applies to individual firms or well defined small groups of individuals or economic sectors.

Mid-Price or Middle Rate

The price half-way between the two prices, or the average of both buying and selling prices offered by the market makers.

Mine

Expression used to indicate that the contracting party is willing to buy at the rate offered by the quoting bank.

Minimum Reserve

Reserves required to be deposited at central banks by commercial banks and other financial institutions, sometimes referred to as Registered Reserves.

MITI

Japanese ministry of International Trade & Industry.

Money Market

A market consisting of financial institutions and dealers in money or in credit, who wish to either borrow or lend.

Money Supply

The amount of money in the economy, which can be measured in a number of ways. In India there are four measures of money supply i.e. M1, M2, M3, M4.

Multiple Exchange Rates

Different exchange rates for different types of transaction. The South African Rand is an example.

Nearby Month

The nearest actively traded delivery month, a.k.a. current delivery month, lead month.

Nickel

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.

OECD

Organization for Economic Cooperation and Development, an international organization helping governments tackle the economic, social and governance challenges of a globalized economy.

Offer

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

Old lady of Threadneedle Street, a term for the Bank of England.

Open Interest

The total number of outstanding option or futures contracts that have not been closed out by offset or fulfilled by delivery.

Open Market Operations

Central bank operations in the markets to influence exchange and interest rates.

Option

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.

Option Series

All options of the same class having the same exercise/strike price and expiration date.

OTC

See Over the Counter.

Outright Deal

A forward deal that is not part of a swap operation.

Outright Rate

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. These markets have not been very popular because of the risks both the parties face in case the other party fails to honor the contract. They have never been part of the Stock Exchange since they were seen as "unofficial".

Overnight

A deal from today until the next business day.

Package Deal

When a number of exchange and /or deposit orders have to be fulfilled simultaneously.

Parities

The value of one currency in terms of another.

Payment Date

The date on which a dividend or bond interest payment is scheduled to be delivered.

Permitted Currency

It means 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.

PIBOR

Paris Inter-bank Offered Rate.

Plaza Accord

The 1985 Plaza Hotel agreement by the G5 to lower the dollar.

Political Risk

The potential for losses arising from a change in government policy or due to the risk of expropriation (nationalization by the government).

Position Limit

The maximum position, either net long or net short, in one future or in all futures of one currency or instrument one person is permitted to hold or control.

Premium

(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) In regard to 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.

Principal

A dealer who buys or sells stock for his/her own account.

Profit Taking

The unwinding of a position to realize profits.

Put Call Parity

The equilibrium relationship between premiums of call and put options of the same strike and expiry.

Quota

(1) A limit on imports or exports. (2) A country’s subscription to the IMF.

Rally

A recovery in price after a period of decline.

Rate

The price of one currency in terms of another. It has the same meaning as the term parities.

Ratio Spread

Buying a specific quantity of options and selling a larger quantity of out-of-the-money options.

Real

A price, interest rate or statistic that has been adjusted to eliminate the effect of inflation.

Reinvestment Rate

The rate at which interest earned on a loan can be reinvested. The rate may not attract the same level of interest as the principal amount.

Report

French term for premium.

Reserve Currency

A currency held by a central bank on a permanent basis as a store of international liquidity. Reserve currencies are typically Dollar, Deutschemark, and sterling.

Reserve Tranche

(French) The 25% of its quota to which a member of the IMF has unconditional access, and for which there is no obligation to repay.

Resistance

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.

Reuter Dealing

A system for screen based trading that has been in operation since the early 1980s. Reuter Dealing now has a matching optional enhancement known as Dealing 2000-2.

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 among others consideration of market, sovereign, country, transfer, delivery, credit, and counterparty risk.

Risk Premium

Additional sum payable, or return, to compensate a party for adopting a particular risk.

Risks

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 foreign currencies are: market, exchange, interest rate, yield curve, volatility, liquidity, forced sale, counter party, credit, and country risk.

Rollover

(1) Where the settlement of a deal is carried forward to another value date, based on the interest rate differential of the two currencies example: next day. (2) An overnight swap, specifically the next business day against the following business day (also called Tomorrow Next, abbreviated to Tom-Next).

Same Day Transaction

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

Scalping

A strategy of buying at the bid and selling at the offer as soon as possible.

Selling Rate

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

Settlement

Actual physical exchange of one currency for another.

Settlement Price

The official closing price for a future set by the clearing house at the end of each trading day.

Short

A market position where the client has sold a currency he does not already own, usually expressed in base currency terms.

Short Contracts

Contracts with up to six months to deliver.

Short Forward Date/Rate

The term short forward refers to a period of up to two months, although it is more commonly used with respect to maturities of less than one month.

Short-Term Interest Rates

Normally the 90 day rate.

SITC

Standard International Trade Classification. A system for reporting trade statistics in a common manner.

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 refers to the buying and selling of the currency where the settlement date is two business days forward.

Spot Next

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

Spot Week

A standard period of one week swap measured from the current value date of the currency spot rate.

Square

Purchases 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.

Stagflation

Recession or low growth (stagnation) 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 lends its name to the S&P 500 Stock Index.

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.

Straddle

The simultaneous purchase/sale of both call and put options for the same share, exercise/strike price and expiry date.

Straight Date

See fixed dates.

Strike Price

Also called exercise price. The price at which an option holder can buy or sell the underlying instrument.

Structural Unemployment

Unemployment levels inherent in an economic structure.

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.

Swap Rate

See Forward Margin.

Swift

Society for Worldwide Interbank Financial Telecommunications is a Belgian based company that provides the global electronic network for settlement of most foreign exchange transactions.

Switch

See Deposit Swap.

T-Bill

Treasury Bill.

Technical Analysis

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.

Tender

(1) A formal offer to supply or purchase goods or services. (2) In the UK, the term for the weekly Treasury Bill issue.

Terms of Trade

The ratio between export and import price indices.

Thin Market

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.

Tick

A minimum change in price, up or down.

TIFFE

Tokyo International Financial Futures Exchange.

Today/Tomorrow

Simultaneous buying of a currency for delivery the following day and selling for the spot day, or vice versa. Also referred to as overnight.

Tradable Amount

Smallest transaction size acceptable.

Trade Date

The date on which a trade occurs.

Trade Ticket

See Deal Ticket.

Transaction

The buying or selling of securities resulting from the execution of an order.

Transaction Exposure

Potential profit or loss generated by current foreign exchange transactions.

Treasury Bills

Short-term obligations of a Government issued for periods of one year or less. Treasury bills do not carry a rate of interest, but are issued at a discount on the par value. Treasury bills are repaid at par on the due date. In the UK they are normally for 91 days, and are offered at weekly tenders. In the US they are auctioned.

Treasury Notes

Government obligations with maturities more than one year, but less than ten years.

Troc, Troquer

(French) FX term for swap.

Two-Way Quotation

When a dealer quotes both buying and selling rates for foreign exchange transactions.

Ultimo

Continental term for month or year end.

Under Reference (Order)

Before finalizing a transaction all the details should be submitted for approval to the order giver, who has the right to turn down the proposal.

Undo

A colloquial term for reversing a transaction. e.g. a spot sale by means of a forward purchase or, if done in error, a spot purchase.

Up Tick

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

Valeur Compensee

(French) Payments are said to be "valeur compensee" when payment by one party in one centre, and settlement by the other party in another centre, takes place on the same day.

Value Spot

Normally settlement for two working days from the date the contract is entered into.

Vanilla

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.

Vega

Expresses the price change of an option for a one per cent change in the implied volatility.

Vertical (Bear or Bull) Spread

The sale of an option with a high exercise price and the purchase (in the case of a bull), or the sale (in the case of a bear), of an option with a lower exercise price. Both options will have the same expiration date.

Vostro Account

A local currency account maintained with a bank by another bank. The term is normally applied to the counterparty’s account from which funds may be paid into or withdrawn as a result of a transaction.

Wholesale Money

Money borrowed in large amounts from banks and institutions rather than from small investors.

Working Balance

Discretionary element in the monetary reserves of a central bank.

World Bank

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.

Yard

Slang for milliard, one thousand million (1 European milliard = 1 US billion = 1,000 million).

Z-Certificate

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.