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Forex Glossary
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Definitions and terms commonly used in the foriegn exchange market
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Aggregate Risk
Total amount of exposure a bank has with a customer for both spot and forward contracts.
American Option
An option which may be exercised at any valid business date through out the life of the option.
Appreciation
Describes a currency strengthening in response to market demand rather than by official action.
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 in these markets.
Around
Used in quoting forward "premium / discount".
Ask Price
Ask is the lowest price acceptable to the buyer.
Asset
In the context of foreign exchange is the right to receive from a counterparty an amount of currency
either in respect of a balance sheet asset (e.g. a loan) or at a specified future date in respect of an unmatched forward Forward or spot deal.
At Best
An instruction given to a dealer to buy or sell at the best rate that is currently available in the market.
At or Better
An order to deal at a specific rate or better.
At-the-Money
An option whose strike/exercise price is equal to or near the current market price of the underlying instrument.
At Par Forward Spread
When the forward price is equivalent to the spot price.
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 for government auctions it is the yield rather than the price which is bid.
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".
Back Office
Settlement and related processes.
Back to Back
(1) Transaction where all the obligations and liabilities in one transaction are mirrored in a second transaction.
(2) Transaction where a loan is made in one currency in one country against a loan in another country in another currency.
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.
Balance of Trade
The value of exports less imports. Invisibles are normally excluded, and is otherwise referred to as mercantile or physical trade.
Figures can be quoted on FoB/ FaS , customs cleared, or Fob export, FoB export.
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 Notese
Bank notes are paper issued by the central or issuing bank and are legal tender, but are not usually
considered to be part of the FX market. However bank notes can be converted, in some counties, into FX. Bank notes are normally priced at a
premium to the current spot rate for a currency.
Bank Rate
The rate at which a central bank is prepared to lend money to its domestic banking system.
Barrier Option
A family of path dependent options whose pay-off pattern and survival to the expiration date depend not only
on the final price of the underlying currency but also on whether or not the underlying currency breaks a predetermined price level at
any time during the life of the option. See Down and Out call/put, Down and in call/put, Up and out call/put, Up and in call/put.
Base Currency
The currency in which the operating results of the bank or institution are reported.
Base Rate
A term used in the UK for the rate used by banks to calculate the interest rate to borrowers.
Top quality borrowers will pay a small amount over base.
Basis Point
One per cent of one per cent.
Basis Price
The price expressed in terns of yield maturity or annual rate of return.
Basis Convergence
The process whereby the basis tends towards zero as the contract expiry approaches.
Basis Trading
Taking opposite positions in the cash and futures market with the intention of profiting from favorable movements in the basis.
Basis
The difference between the cash price and futures price.
Basket
A group of currencies normally used to manage the exchange rate of a currency. Sometimes referred to as a unit of account.
Bear
A person who believes that prices will decline.
Bear Market
A market in which prices decline sharply against a background of widespread pessimism (opposite of Bull Market).
Bid Price
Bid is the highest price that the seller is offering for the particular currency at the moment; the difference between the ask
and the bid price is the spread. Together, the two prices constitute a quotation; the difference between the two is the spread.
The bid-ask spread is stated as a percentage cost of transacting in the foreign.
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 indicates a price of 1.5530/40BIS: Bank of International Settlement.
Bilateral Clearing
A system used where foreign currency is limited. Payments are usually routed through the central banks,
and sometimes require that the trade balance is equaled every year.
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, if the call expires in the money.
Black-Scholes Model
An option pricing formula initially derived by Fisher Black and Myron Scholes for securities options and later
refined by Black for options on futures. It is widely used in the currency markets.
Booked
The recording of a transaction outside the country where the transaction is itself negotiated.
Boris
Slang for Russian trading.
Break Even Point
The price of a financial instrument at which the option buyer recovers the premium, meaning that he makes
neither a loss or gain. In the case of a call option, the break even point is the exercise price plus the premium.
Break Out
In the options market, undoing a conversion or a reversal to restore the option buyer's original position.
Bretton Woods
The site of the conference which in 1944 led to the establishment of the post war foreign exchange system
that remained intact until the early 1970s. The conference resulted in the formation of the IMF. The system fixed currencies in a fixed
exchange rate system with 1% fluctuations of the 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.
BUBA
Bundesbank, the reserve bank of Germany.
Bull
A person who believes that prices will rise.
Bull Market
A market characterized by rising prices.
Bulldogs
Sterling bonds issued in the UK by foreign institutions.
Bundesbank
Central Bank of Germany.
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.
Cable Transfer
Telegraphic transfer of funds from one centre to another. Now synonymous with inter bank electronic fund transfer.
Cable Transfer
Telegraphic transfer of funds from one centre to another. Now synonymous with inter bank electronic fund transfer.
Cable
A term used in the foreign exchange market for the US Dollar/British Pound rate.
Call Option
A call option confers the right but not the obligation to buy stock, shares or futures at a specified price.
Call
An option that gives the holder the right to buy the underlying instrument at a specified price during a fixed period.
Capital Account
Juxtaposition of the long and short term capital imports and exports of a country.
Carry
The interest cost of financing securities or other financial instruments held.
Carry-Over Charge
A finance charge associated with the storing of commodities (or foreign exchange contracts) from one delivery date to another.
Cash
normally refers to an exchange transaction contracted for settlement on the day the deal is struck. This term 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
CBOE
Chicago Board Options Exchange.
CBOT or CBT
Chicago Board of Trade.
CD
Certificate of Deposit.
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. Reserve Bank of India is the central bank of India
which performs the role of maintaining orderly conditions in the forex market by intervention through various instruments like cash reserve ratio,
bank rate, open market operations and moralsuation.
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.
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.
CFTC
The Commodity Futures Trading Commission, the US Federal regulatory agency for futures traded on commodity markets, including financial futures.
CHAPS
Clearing House Automated Payment System.
Chartist
An individual who studies graphs and charts of historic data to find trends and predict trend reversals which include
the observance of certain patterns and characteristics of the charts to derive resistance levels, head and shoulders patterns, and double bottom
or double top patterns which are thought to indicate trend reversals.
CHIPS
The New York clearing house clearing system. (Clearing House Interbank Payment System).
Most Euro transactions are cleared and settled through this system.
CIBOR
Copenhagen Interbank Rate, the rate at which the banks lend the Danish Krone on an unsecured basis.
The rate is calculated daily by the Danmarks Nationalbank (the Danish Central Bank), based on rules set out by the Danish Banker's Association.
Closed Position
A transaction which leaves the trade with a zero net commitment to the market with respect to a particular currency.
Closing Purchase Transaction
The purchase of an option identical to one already sold to liquidate a position.
CME
Chicago Mercantile ExchangeCock Dates (see broken dates).
Coincident Indicator
An economic indicator that generally moves in line with the general business cycle such as industrial production.
Comex
Commodity Exchange of New York.
Commission
The fee that a broker may charge clients for dealing on their behalf.
Compound Option
An option on an option, the dates and price of such option being fixed.
Confirmation
A memorandum to the other party describing all the relevant details of the transaction.
CPI
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.
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.
Contract Month
The month in which a futures contract matures or becomes deliverable if not liquidated or traded out before the date specified.
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).
Correspondent Bank
The foreign banks representative who regularly performs services for a bank which has no branch in the relevant centre,
e.g. to facilitate the transfer of funds. In the US this often occurs domestically due to inter state banking restrictions.
Cost of Carry
The interest rate parity, where the forward price is determined by the cost of borrowing money in order to hold the position.
Cost of Living Index
Broadly equivalent to Retail Price Index or Consumer price.
Counterparty
The customer or bank with which a foreign exchange deal is executed.
Counterparty Risks
Foreign Currency Inter-bank Exchange (FOREX) instruments are Positions (Buys and/or Sell) between the Client
and its Counterparty and, unlike exchange-traded foreign exchange instruments which are, in effect, guaranteed by a clearing organization affiliated
with the exchange on which the instruments are traded, are not guaranteed by a clearing organization. Thus, when the Customer purchases an OTC
foreign exchange instrument, it relies on the Counterparty from which it has purchased the instrument to fulfill the contract. Failure of a Counterparty
to fulfill a Position could result in losses of any prior payment made pursuant to the Positions well as the loss of the expected benefit of the transaction.
Country Risk
Factors that affect currency trading unique to the specific country include political, regulatory, legal and holiday risks.
Coupon Value
The annual rate of interest of a bond.
Coupon
(1) On bearer stocks, the detachable part of the hide behind nominee status. Certificate exchangeable for dividends.
Cover
(1) To take out a forward foreign exchange contract.
Covered Interest Rate Arbitrage
An arbitrage approach which consists of borrowing currency A, exchanging it for currency B, investing currency B
for the duration of the loan, and, after taking off the forward cover on maturity, showing a profit on the entire set of deals. It is based on the theorem
of interest rate parity (one of the key theoretical economic relationship) which says that the return on a hedged foreign investment will just equal
the domestic interest rate on investments of identical risk. When the covered interest rate differential between the two money market is zero, there is no
arbitrage incentive to move funds from one market to another.
CPSS
Committee on Payment and Settlement Systems.
Crawling Peg (Adjustable Peg)
An exchange rate system where a country's exchange rate is "pegged" (i.e. fixed) in relation to another currency.
The official rate may be changed from time to time.
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 Deal
A foreign exchange deal entered into involving two currencies, neither of which is the base currency.
Cross Hedge
A technique using financial futures to hedge different but related cash instruments based on the view that the price movements
between the instruments move in concert.
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.
Cross-Trade
A cross-trade transaction is a transaction where either the buy broker and the sell broker are the same,
or the buy broker and the sell broker belong to the same firm.
Currency
The type of money that a country uses. It can be traded for other currencies on the foreign exchange market,
so each currency has a value relative to another.
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 payment arising from exports and imports together with unilateral
transfers such as aid and migrant remittances. It excludes capital flows.
Current Balance
The value of all exports (goods plus services) less all imports of a country over a specific period of time,
equal to the sum of trade and invisible balances plus net receipt of interest, profits and dividends from abroad.
Cycle
The set of expiration dates applicable to different classes of option.
Day Order
An order that if not executed on the specific day is automatically canceled.
Day Trading
A Day Trading deal is a currency exchange deal which renew 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:
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 in contrast to the 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.
Deficit
Shortfall in the balance of trade, balance of payments, or government budgets.
Delivery
The settlement of a transaction by receipt or tender of a financial instrument or currency.
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 Risk
A term to describe when a counterparty will not be able to complete his side of the deal. This risk is very high in case
of over the counter transactions where there is no exchange which can stand as a guarantee to the trade between the two parties to the contract.
Delta
The change in the value of the option premium made fully paid by the capitalisation of reserves and given relative
to the instantaneous change in the value of the; underlying instrument, expressed as a coefficient.
Delta Hedging
A method used by option writers to hedge risk exposure of written options by purchase or sale of the underlying instrument in proportion to the delta.
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.
Depo
Deposit
Derivatives
A broad term relating to risk management instruments such as futures, options, swaps, etc.. The contract value moves in relation
to the underlying instrument or currency. The issue of derivatives and their control following large losses by banks and corporates has been subject of much debate.
Desk
Term referring to a group dealing with a specific currency or currencies.
Details
All the information required to finalize a foreign exchange transaction, i.e. name, rate, dates, and point of delivery.
Devaluation
Deliberate downward adjustment of a currency against its fixed parities or bands which is normally accompanied by formal announcement.
Direct Quotation
Quoting in fixed units of foreign currency against variable amounts of the domestic currency.
Discount
Less than the spot price example: forward discount.
Discount Rate
The rate at which a bill is discounted. Specifically it refers to the rate at which a central bank is prepared to discount certain
bills for financial institutions as a means of easing their liquidity, and is more accurately referred to as the official discount rate
Domestic Rates
The interest rates applicable to deposits domiciled in the country of origin. Value and values may vary from Eurodeposits
due to taxation and varying market practices.
Economic Exposure
Reflects the impact of foreign exchange changes on the future competitive position of a company in the sense of the
impact it can have on the future cash flows of the company.
Economic Indicator
A statistics which indicates current economic growth rates and trends such as retail sales and employment.
ECU - European Currency Unit
A basket of the member currencies. As a composite unit, the ECU consists of all the European Community currencies,
which are individually weighted. It was created by the European Monetary System with the eventual goal of replacing the individual European member currencies.
Effective Exchange Rate
An attempt to summarize the effects on a country's trade balance of its currency's changes against other currencies.
EFT
Electronic Fund Transfer.
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.
EMS
European Monetary System.
EOE
European Options Exchange.
Epsilon
The change in the price of an option associated with a 1% change in implied volatility (technically the first derivative
of the option price with respect to volatility). Also referred to as eta, vega, omega and kappa.
ERM
Exchange Rate Mechanism.
Euro Clear
A computerized settlement and depository system for safe custody, delivery of, and payment for Eurobonds.
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 Price (Strike Price)
The price at which an option can be exercised.
Exotic
A less broadly traded currency.
Expiry Date
The last day on which the holder of an option can exercise his right to buy or sell the underlying security.
Expiration Date
(1) Options - the last date after which the option can no longer be exercised.
Expiration Month
The month in which an option expires.
Expiry Date
The last date on which an option can be bought or sold.
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
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.
Fed Funds
Cash balances held by banks with their local Federal Reserve Bank. The normal transaction with these fund is an inter bank sale
of a Fed fund deposit for one business day. Straight deals are where the funds are traded overnight on a unsecured basis.
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 regulation relating to day-to-day transactions in foreign exchange
in India. The FEDAI has commonly recognised 38 currencies for dealing.
Federal National Mortgage Association
A privately owned but US government sponsored corporation that trades in residential mortgages.
Its activities are funded by the sale of instruments commonly known as Fannie Maes.
Federal Reserve Board
The board of the Federal Reserve System, appointed by the US President for 14 year terms, one of whom is appointed for four years as chairman.
Federal Reserve System
The central banking system of the US comprising 12 Federal Reserve Banks controlling 12 districts under the Federal Reserve Board.
Membership of the Fed is compulsory for banks chartered by the Comptroller of Currency and optional for state chartered banks.
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.
Fixing
A method of determining rates by normally finding a rate that balances buyers to sellers. Such a process occurs either once or twice
daily at defined times. Used by some currencies particularly for establishing tourist rates . The system is also used in the London Bullion market.
Flat/Square
Where a client has not traded in that currency or where an earlier deal is reversed thereby creating a neutral (flat) position.
Example: you bought $500,000 then sold $500,000 = FLAT .
Float
(1) see Floating exchange rate.
Floating Exchange Rate
When the value of a currency is decided by the market forces dictating the demand and supply of that particular currency.
Floor
(1) An agreement with a counterparty that sets a lower limit to interest rates for the floor buyer for a stated time.
FOMC
Federal Open Market Committee, the committee that sets money supply targets in the US 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.
Foreign Position
It means a position under which one party hereto agrees to purchase from or sell to the other party hereto an agreed amount of foreign currency.
Forex
An abbreviation of foreign exchange
Forex Deal
The purchase or sale of a currency against sale or purchase of another currency. The maximum time for a deal is defined
when the deal opens, the deal can be closed at any moment until the expiry date and time. A deal cannot be closed on its first 3 minutes, due to technical reasons.
Forward Contract
Sometimes used as synonym for "forward deal" or "future". More specifically for arrangements
with the same effect as a forward deal between a bank and a customer.
Forward Cover Taking
forward contracts to protect against movements in the exchange rate.
Forward Deal
A deal with a value date greater than the spot value date.
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
The rate at which a foreign exchange contract is struck today for settlement at a specified future date which is decided at the time
of entering into the contract. 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.
Therefor 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.
Free Reserves
Total reserves held by a bank less the reserves required by the authority.
Front Office
The activities carried out by the dealer , normal trading activities.
Fundamental Analysis
Analysis based on economic and political factors
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.
Funds
A term for USD/CAD/FungiblesInstruments that are equivalent, substitutable and interchangeable in law. May apply to certain
exchange traded currency contracts offered on a number of exchanges.
Futures Contract
A contract traded on a futures exchange which requires the delivery of a specified quality and quantity of a commodity, currency
or financial instruments a specified future month, if not liquidated before the contract matures.
Futures Exchange-Traded Contracts
They are firm agreements to deliver (or take delivery of) a standardized amount of something on a certain date at a predetermined price.
Futures exist in currencies, money market deposits, bonds, shares and commodities. They are traded on an exchange with the clearing corporation gauranteeing
the contract and moreover the trade is done on a mark to market basis.
FX
Foreign Exchange.
G5
The seven leading industrial countries, being US , Germany, Japan, France, UK, Canada, Italy.
G10
G7 plus Belgium, Netherlands and Sweden, a group associated with IMF discussions.
Switzerland is sometimes peripherally involved.
Gamma
The rate at which a delta changes over time or for one unit change in the price of the underlying asset.
GNP Deflator
Removes inflation from the GNP figure. Usually expressed as a percentage and based on an index figure.
GNP Gap
The difference between the actual real GNP and the potential real GNP. If the gap is negative an economy is overheated.
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.
Gold Standard
The original system for supporting the value of currency issued. This system was in vogue before 1973 when the fixed exchange rates were prevalent.
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.
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 chartist consider indicates 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 a 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 or futures or options market.
Hedging
A hedging transaction is one whose main aim is to protect an asset or liability against a fluctuation in the foreign exchange rate
rather than profit from the exchange rate fluctuations.
Hyperinflation
Very high and self sustaining inflation levels. One definition being the period while inflation exceeds 50% until it has drops
below that level for 12 months.
ICCH
International Commodities Clearing House Limited, a clearing house based in London operating world wide for many futures markets.
IFEMA
International Foreign Exchange Master Agreement.
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 helps its members to tide over the balance of payments problems with supplying the necessary loans.
IMM
International Monetary Market part of the Chicago Mercantile Exchange that lists a number of currency and financial futures
Implied volatilityA 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
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.
Inconvertible Currency
Currency which cannot be exchanged for other currencies either because it is forbidden by the foreign exchange regulations
or the currency witnesses extreme volatility that it is not percieved to be a safe haven for parking the funds.
Indicative Quote
A market-maker's price which is not firm.
Indirect quote
See reciprocal currency.
IPI
Industrial Production Index. A coincident indicator measuring physical output of manufacturing, mining and utilities.
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.
Info Quote
Rate given for information purposes only.
Initial Margin
The deposit required by the Broker before a client can trade/transact a deal to have some cushion in the event of default by the party.
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 Risk
The potential for losses arising from changes in interest rates
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 reciept) are exchanged.
Intervention
Action by a central bank to effect the value of its currency by entering the market. In India
the intervention by Reserve Bank of India is confined to the events of extreme volatility.
Intra Day Limit
Limit set by bank management on the size of each dealer's Intra Day Position.
Intra Day Position
Open positions run by a dealer within the day. Usually squared by the close.
IOM
Index and Options Market part of the Chicago Mercantile Exchange.
ISDA (International Securities Dealers Association)
Organization which foreign currency exchange banks have formed to regulate inter-bank markets and exchanges.
J Curve
A term describing the expected effect of a devaluation on a country's trade balance. It is anticipated that import bills rise
before export orders and receipts increase.
Kiwi
Slang for the New Zealand dollar.
Knock In
A process where a barrier option (European) becomes active as the underlying spot price is in the money.
Knock Out
has a corresponding meaning although the option may permanently cease to exist.
Lay Off
To carry out a transaction in the market to offset a previous transaction and return to a square position.
LDC
Less developed countries, often used with respect to secondary debt market.
Leading Indicators
Statistic that are considered to precede changes in economic growth rates and total business activity, e.g. factory orders.
Leads and Lags
The effect on foreign trade payments of an anticipated move in the exchange rate, normally a devaluation.
The importers speeden up the payment for the imports and exporters delay recieving payment for the exports.
Liability
In terms of foreign exchange, the obligation to deliver to a counterparty an amount of currency either in respect of a balance sheet
holding at a specified future date or in respect of an un-matured forward or spot transaction.
LIBOR (London Inter Bank Offer Rate)
British Bankers' Association average of interbank offered rates for dollar deposits in the London market based on quotations
at 16 major banks. Effective rate for contracts entered into two days from date appearing.
LIFFE
London International Financial Futures Exchange.
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 the foreign institutional investors also 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.
Liquidity
The ability of a market to accept large transactions without having any major impact on the interest rates.
Long
A market position where the Client has bought a currency he previously did not own. For example: long Dollars.
M0
Cash in circulation . Only used by the UK.
M1
Cash in circulation plus demand deposits at commercial banks. There are variations between the precise definitions used by
national financial authorities.
M2
Includes demand deposits time deposits and money market mutual funds excluding large CDs.
M3
In the UK it is M1 plus public and private sector time deposits and sight deposits held by the public sector.
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.
Managed Float
When the monetary authorities intervene regularly in the market to stabilise the rates or to push the exchange rate in a required direction.
It is also called the dirty float which we have in India.
Margin
(1)Difference between the buying and selling rates, also used to indicate the discount or premium between spot or forward.
Margin Call
A demand for additional funds to cover positions
Marginal Risk
The 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 case there has been a favorable movement in the prices.
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.
MITI
Japanese ministry of International Trade & Industry.
MM
Money Markets
Money Supply
The amount of money in the economy, which can be measured in a number of ways. In India we have four measures of money
supply i.e M1, M2, M3, M4.
Mutual fund
An open-end investment company. Equivalent to unit trust.
Nickel
US term for five basis points.
Nostro Account
A foreign currency current account maintained with another bank. The account is used to receive and pay currency assets and liabilities
denominated in the currency of the country in which the bank is resident.
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.
Note
A financial instrument consisting of a promise to pay rather than an order to pay or a certificate of indebtedness.
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.
Off-Shore
The operations of a financial institution which although physically located in a country, has little connection with that country's financial
systems. In certain countries a bank is not permitted to do business in the domestic market but only with other foreign banks. This is known as an off shore banking unit.
Old Lady
Old lady of Threadneedle Street, a term for the Bank of England.
One Cancels Other Order
Where the execution of one order automatically cancels a previous order also referred to as OCO or 'One cancels the other'.
Open Market Operations
The central bank operations in the markets to influence exchange and interest rates.
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.
It can be termed as a high risk, high return proposition.
Option Class
All options of the same type - calls or puts -listed on the same underlying instrument.
Option Series
All options of the same class having the same exercise/strike price and expiration date.
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.
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 honour the contract.
They were never part of the Stock Exchange since they were seen as "unofficial".
Out-of-the-Money
A put option is out-of-the-money if the exercise/strike price is below the price of the underlying instrument.
A call option is out-of-the money if the exercise/strike price is higher than the price of the underlying instrument.
Outright Deal
A forward deal that is not part of a swap operation.
Outright Forward
Foreign exchange transaction involving either the purchase or the sale of a currency for settlement at a future date.
Outright Rate
The forward rate of a foreign exchange deal based on spot price plus forward discount/premium.
Overheated (Economy)
Is an economy on a high growth rate trajectory placing pressure on the production capacity resulting in increased inflationary
pressures and higher interest rates.
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.
Package Deal
When a number of exchange and /or deposit orders have to be fulfilled simultaneously.
Par
(1) The nominal value of a security or instrument.
Parities
The value of one currency in terms of another.
Parity
(1) Foreign exchange dealer's slang for your price is the correct market price.
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.
Pip
See point. (0.0001 of a unit).
Point
(1) 100th part of a per cent, normally 10,000 of any spot rate. Movement of exchange rates are usually in terms of points.
Political Risk
The potential for losses arising from a change in government policy or due to the risk of expropriation (nationalisation by the government ).
Position
The netted total exposure 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).
PPI
Producer Price Indices. See wholesale price indices.
Premium
(1) The amount by which a forward rate exceeds a spot rate.
Prime Rate
(1) The rate from which lending rates by banks are calculated in the US.
Principal
A dealer who buys or sells stock for his/her own account.
Profit Taking
The unwinding of a position to realize profits.
Purchasing Power Parity
Model of exchange rate determination stating that the price of a good in one country should equal the price of the same good
in another country after adjusting for the changes in the price due to the change in exchange rate. Also known as the law of one price.
Put Call Parity
The equilibrium relationship between premiums of call and put options of the same strike and expiry.
Put Option
A put option confers the right but not the obligation to sell currencies, instruments or futures at the option exercise price
within a predetermined time period.
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