Forex Glossary

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 is 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.

At Best

An instruction given to a dealer to buy or sell at the
best rate that is currently available in the market.

At the Price Stop-Loss Order

A stop-loss order that must be executed at the requested
level regardless of market conditions.

Average Rate Option

A contract where the exercise price is based on the difference
between the strike price and the average spot rate over
the contract period. Sometimes called an “Asian option”.

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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.

Bar Chart

A charting method which consists of four significant points:
the high and the low prices, which form the vertical bar,
the opening price, which is marked with a horizontal line
to the left of the bar, and the closing price, which is
marked with a little horizontal line to the right of the
bar.

Base Currency

In general terms, the base currency is the currency in
which an investor or issuer maintains its book of accounts.
In the FX markets, the US Dollar is normally considered
the ‘base’ currency for quotes, meaning that quotes are
expressed as a unit of $1 USD per the other currency quoted
in the pair. The primary exceptions to this rule are the
British Pound, the Euro and the Australian Dollar.

Bear Call Spread

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

Bear Market

A market distinguished by declining prices.

Bid/Ask Spread

The difference between the bid and offer price, and the
most widely used measure of market liquidity.

Big Figure

Dealer expression referring to the first few digits of
an exchange rate. These digits rarely change in normal
market fluctuations, and therefore are omitted in dealer
quotes, especially in times of high market activity. For
example, a USD/Yen rate might be 107.30/107.35, but would
be quoted verbally without the first three digits i.e.
“30/35”.

Book

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

Bretton Woods Agreement of 1944

An agreement that established fixed foreign exchange rates
for major currencies, provided for central bank intervention
in the currency markets, and pegged the price of gold
at US $35 per ounce. The agreement lasted until 1971,
when President Nixon overturned the Bretton Woods agreement
and established a floating exchange rate for the major
currencies.

Broker

An individual or firm that acts as an intermediary, putting
together buyers and sellers for a fee or commission. In
contrast, a ‘dealer’ commits capital and takes one side
of a position, hoping to earn a spread (profit) by closing
out the position in a subsequent trade with another party.

Bull Market

A market distinguished by rising prices.

Bundesbank

Germany’s Central Bank.

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Cable

Trader jargon referring to the Sterling/US Dollar exchange
rate. So called because the rate was originally transmitted
via a transatlantic cable beginning in the mid 1800’s.

Candlestick Chart

A chart that indicates the trading range for the day as
well as the opening and closing price. If the open price
is higher than the close price, the rectangle between
the open and close price is shaded. If the close price
is higher than the open price, that area of the chart
is not shaded.

Central Bank

A government or quasi-governmental organization that manages
a country’s monetary policy. For example, the US central
bank is the Federal Reserve, and the German central bank
is the Bundesbank.

Chartist

An individual who uses charts and graphs and interprets
historical data to find trends and predict future movements.
Also referred to as Technical Trader.

Clearing

The process of settling a trade.

Commission

A transaction fee charged by a broker.

Confirmation

A document exchanged by counterparts to a transaction
that states the terms of said transaction.

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’.

Contract

The standard unit of trading.

Counterparty

One of the participants in a financial transaction.

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

Cross Rate
The exchange rate between any two currencies
that are considered non-standard in the country where
the currency pair is quoted. For example, in the US, a
GBP/JPY quote would be considered a cross rate, whereas
in UK or Japan it would be one of the primary currency
pairs traded.

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

Currency Risk
The probability of an adverse change in
exchange rates.

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Day Trading

Refers to positions which are opened and closed on the
same trading day.

Dealer

An individual who acts as a principal or counterpart to
a transaction. Principals take one side of a position,
hoping to earn a spread (profit) by closing out the position
in a subsequent trade with another party. In contrast,
a broker is an individual or firm that acts as an intermediary,
putting together buyers and sellers for a fee or commission.

Deficit

A negative balance of trade or payments.

Delivery

An FX trade where both sides make and take actual delivery
of the currencies traded.

Depreciation

A fall in the value of a currency due to market forces.

Derivative

A contract that changes in value in relation to the price
movements of a related or underlying security, future
or other physical instrument. An Option is the most common
derivative instrument.

Devaluation

The deliberate downward adjustment of a currency’s price,
normally by official announcement.

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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.

EURO

the currency of the European Monetary Union (EMU). A replacement
for the European Currency Unit (ECU).

European Central Bank (ECB)

the Central Bank for the new European Monetary Union.

European Monetary Union (EMU)

The principal goal of the EMU is to establish a single
European currency called the Euro, which will officially
replace the national currencies of the member EU countries
in 2002. On Janaury1, 1999 the transitional phase to introduce
the Euro began. The Euro now exists as a banking currency
and paper financial transactions and foreign exchange
are made in Euros. This transition period will last for
three years, at which time Euro notes an coins will enter
circulation. On July 1,2002, only Euros will be legal
tender for EMU participants, the national currencies of
the member countries will cease to exist. The current
members of the EMU are Germany, France, Belgium, Luxembourg,
Austria, Finland, Ireland, the Netherlands, italy, Spain
and Portugal.

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Federal Deposit Insurance Corporation (FDIC)

The regulatory agency responsible for administering bank
depository insurance in the US. Federal Reserve (Fed)

The Central Bank for the United States.

Flat/square

Dealer jargon used to describe a position that has been
completely reversed, e.g. you bought $500,000 then sold
$500,000, thereby creating a neutral (flat) position.

Foreign Exchange – (Forex, FX)

the simultaneous buying of one currency and selling of
another.

Forward

The pre-specified exchange rate for a foreign exchange
contract settling at some agreed future date, based upon
the interest rate differential between the two currencies
involved.

Forward points

The pips added to or subtracted from the current exchange
rate to calculate a forward price.

Fundamental analysis

Analysis of economic and political information with the
objective of determining future movements in a financial
market.

Futures Contract

An obligation to exchange a good or instrument at a set
price on a future date. The primary difference between
a Future and a Forward is that Futures are typically traded
over an exchange (Exchange- Traded Contacts – ETC), versus
forwards, which are considered Over The Counter (OTC)
contracts. An OTC is any contract NOT traded on an exchange.

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Good ‘Til Cancelled Order (GTC)

An order to buy or sell
at a specified price. This order remains open until filled
or until the client cancels.

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Hedge

A position or combination of positions that reduces the
risk of your primary position.

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Inflation

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

Initial margin

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

Interbank rates

The Foreign Exchange rates at which large international
banks quote other large international banks.

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Leading Indicators

Statistics that are considered to predict future economic
activity.

LIBOR

The London Inter-Bank Offered Rate. Banks use LIBOR when
borrowing from another bank.

Limit order

An order with restrictions on the maximum price to be
paid or the minimum price to be received. As an example,
if the current price of USD/YEN is 102.00/05, then a limit
order to buy USD would be at a price below 102. (ie 101.50)

Liquidation

The closing of an existing position through the execution
of an offsetting transaction.

Liquidity

The ability of a market to accept large transaction with
minimal to no impact on price stability.

Long position

A position that appreciates in value if market prices
increase.

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Margin call

A request from a broker or dealer for additional funds
or other collateral to guarantee performance on a position
that has moved against the customer.

Market Maker

A dealer who regularly quotes both bid and ask prices
and is ready to make a two-sided market for any financial
instrument.

Market Risk

Exposure to changes in market prices.

Mark-to-Market

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

Maturity

The date for settlement or expiry of a financial instrument.

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.

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Offer

The rate at which a dealer is willing to sell a currency.

Offsetting transaction

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

One Cancels the Other Order (OCO)

A designation for two orders whereby one part of the two
orders is executed the other is automatically cancelled.

Open order

An order that will be executed when a market moves to
its designated price. Normally associated with Good ’til
Cancelled Orders.

Open position

A deal not yet reversed or settled with a physical payment.

Over the Counter (OTC)

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

Overnight

A trade that remains open until the next business day.

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Pips

Digits added to or subtracted from the fourth decimal
place, i.e. 0.0001. Also called Points.

Political Risk

Exposure to changes in governmental policy which will
have an adverse effect on an investor’s position.

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.

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Quote

An indicative market price, normally used for information
purposes only.

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Rate

The price of one currency in terms of another, typically
used for dealing purposes.

Resistance

A term used in technical analysis indicating a specific
price level at which analysis concludes people will sell.

Revaluation

An increase in the exchange rate for a currency as a result
of central bank intervention. Opposite of Devaluation.

Risk

Exposure to uncertain change, most often used with a negative
connotation of adverse change.

Risk Management

the employment of financial analysis and trading techniques
to reduce and/or control exposure to various types of
risk.

Roll-Over

Process whereby the settlement of a deal is rolled forward
to another value date. The cost of this process is based
on the interest rate differential of the two currencies.

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Settlement

The process by which a trade is entered into the books
and records of the counterparts to a transaction. The
settlement of currency trades may or may not involve the
actual physical exchange of one currency for another.

Short Position

An investment position that benefits from a decline in
market price.

Spot Price

The current market price. Settlement of spot transactions
usually occurs within two business days.

Spread

The difference between the bid and offer prices.

Sterling

slang for British Pound.

Stop Loss Order

Order type whereby an open position is automatically liquidated
at a specific price. Often used to minimize exposure to
losses if the market moves against an investor’s position.
As an example, if an investor is long USD at 156.27, they
might wish to put in a stop loss order for 155.49, which
would limit losses should the dollar depreciate, possibly
below 155.49.

Support Levels

A technique used in technical analysis that indicates
a specific price ceiling and floor at which a given exchange
rate will automatically correct itself. Opposite of resistance.

Swap

A currency swap is the simultaneous sale and purchase
of the same amount of a given currency at a forward exchange
rate.

Swissy

Slang for Swiss Franc.

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Technical Analysis

An effort to forecast prices by analyzing market data,
i.e. historical price trends and averages, volumes, open
interest, etc.

Tomorrow Next (Tom/Next)

Simultaneous buying and selling of a currency for delivery
the following day.

Transaction Cost

The cost of buying or selling a financial instrument.

Transaction Date

The date on which a trade occurs.

Turnover

The total money value of all executed transactions in
a given time period; volume.

Two-Way Price

When both a bid and offer rate is quoted for a FX transaction.

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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

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Value Date

The date on which counterparts to a financial transaction
agree to settle their respective obligations, i.e., exchanging
payments. For spot currency transactions, the value date
is normally two business days forward. Also known as maturity
date.

Variation Margin

Funds a broker must request from the client to have the
required margin deposited. The term usually refers to
additional funds that must be deposited as a result of
unfavorable price movements.

Volatility (Vol)

A statistical measure of a market’s price movements over
time.

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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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Yard

Slang for a billion.