Bear
Someone who believes the prices/market will decline.
Bear Market
A market in which prices decline sharply against a background of
widespread pessimism (opposite of Bull Market).
Bid
The price that a buyer is prepared to purchase at; the price
offered for a currency.
Bid/Ask Spread
See spread
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 Woods.
Bull
Someone who believes the prices/market will rise.
Bull Market
A market characterized by rising prices.
Broker
An agent who handles investors' orders to buy and sell currency.
For this service, a commission is charged which, depending upon
the broker and the amount of the transaction, may or may not be
negotiated.
C
Cable
Dealers slang for the Sterling/US Dollar exchange rate.
Call Rate
The overnight interbank interest rate.
Cash Market
The market for the purchase and sale of physical currencies.
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 whom a foreign deal is made. The term is
also used in interest and currency swaps markets to refer to a
participant in a swap exchange.
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 Risk
The risk of incurring losses resulting from an adverse change in
exchange rates.
Currency Swap
Contract which commits two counter-parties to exchange streams of
interest payments in different currencies for an agreed period of
time and to exchange principal amounts in different currencies at
a pre-agreed exchange rate at maturity.
Currency Option
Option contract which gives the right to buy or sell a currency
with another currency at a specified exchange rate during a
specified period.
Currency Swaption
OTC Option to enter into a currency swap contract.
Currency Warrant
OTC Option; long-dated (more than one year) currency option.
D
Day Trading
Refers to opening and closing the same position or positions
within one day's trading.
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.
E
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.
European Monetary Union
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. Currently,
the Euro exists only as a banking currency and for paper financial
transactions and foreign exchange. The current members of the EMU
are Germany, France, Belgium, Luxembourg, Austria, Finland,
Ireland, the Netherlands, Italy, Spain and Portugal.
Exchange Rate Risk
See Currency Risk.
F
Federal Reserve (Fed)
The 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.
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).
Foreign Exchange (or Forex or FX)
The simultaneous buying of one currency and selling of another in
an over-the-counter market. Most major FX is quoted against the US
Dollar.
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.
G
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.
H
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.
I
Initial Margin
The required initial deposit of collateral 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.
L
Limit Order
An order to buy at or below a specified price or to sell at or
above a specified price.
Long Position
A market position where the Client has bought a currency he
previously did not hold own. Normally expressed in base currency
terms, e.g., long Dollars (short D.Marks).
M
Margin
Customers must deposit funds as collateral to cover any potential
losses from adverse movements in prices.
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 minimu m 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
book.
Maturity
Date for settlement.
O
Offer
The price, or rate, that a willing seller is prepared to sell at.
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.
Open Position
Any deal which has not been settled by physical payment or
reversed by an equal and opposite deal for the same value date.
Over The Counter (OTC)
Used to describe any transaction that is not conducted over an
exchange.
Overnight Trading
Refers to a purchase or sale between the hours of 9.00 pm and 8.00
am. on the following day.
P
Pip (or Points)
The term used in currency market to represent the smallest
incremental move an exchange rate can make. Depending on context,
normally one basis point (0.0001 in the case of EUR/USD, GBD/USD,
USD/CHF and .01 in the case of USD/JPY).
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.
R
Resistance
A price level at which you would expect selling to take place.
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.
S
Settlement
Actual physical exchange of one currency for another.
Short
To go `short` is to have sold an instrument without actually
owning it, and to hold a short position with expectations that the
price will decline so it can be bought back in the future at a
profit.
Spot
A transaction that occurs immediately, but the funds will usually
change hands within two days after deal is struck.
Spread
The difference between the bid and offer (ask) prices; used to
measure market liquidity. Narrower spreads usually signify high
liquidity.
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.
T
Technical Analysis
An effort to forecast future market activity by analyzing market
data such as charts, price trends, and volume.
Tomorrow to Next
Simultaneous buying and selling of a currency for delivery the
following day and selling for the next day or vice versa.
Two-Way Price
Rates for which both a bid and offer are quoted.
U
US Prime Rate
The rate at which US banks will lend to their prime corporate
customers.
V
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 statistical measure of a market or a security's price movements
over time and is calculated by using standard deviation.
Associated with high volatility is a high degree of risk.
