Dictionary

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

Appreciation

A currency is said to 'appreciate' when it strengthens in price in response to market demand.

All or None 

A limit price order that requires the entire order to be filled at the stated price or not at all.

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.

Ask (Offer) Price

The price at which the market is prepared to sell a specific Currency Accrual - The apportionment of premiums and discounts on forward exchange transactions that relate directly to deposit swap (Interest Arbitrage) deals, over the period of each deal.

Base Currency

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

Basis 

The spot price minus the futures price.

Best Effort

An order to be executed at the best available price. Discretion is given to the dealer as to when to execute the order.

Bear Market

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

Broker

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

Bundesbank

Germany’s Central Bank.

Cable 

A market term used for the British Pound Sterling.

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 which 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.

Covered Interest Rate Arbitrage

A transaction that consists of borrowing in currency A, in exchange for currency B, investing currency B and covering in the forward market. The transaction takes advantage of interest rate differentials. 

Credit Line

The amount of foreign currency exposure a firm will allow a client to take.

Credit Risk

The idea that an outstanding currency position will not be repaid as agreed by the counter party, either voluntarily or not. Also known as counter party risk.

Cross-Rate

Often referred to as the exchange rate between any two currencies not involving the u.s. dollar. In reality, however, all rates are technically cross rates. 

Cost of Carry

The cost of borrowing money in order to maintain a position. It is based on the interest parity that determines the forward price.

Daylight Position Limit

Position limits on a currency or aggregate on a series of currencies that a trader can carry during regular trading hours.

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.

Direct Dealing

An approach whereby dealers contact each other to transact without a broker.

Discount Forward Spread

The forward points that is subtracted from the spot to arrive at the forward price. This means that the foreign interest rate is lower than the u.s. rate for the period. Also known as swap points.

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. 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.

Exotic Currency

A currency with little liquidity and limited dealing, which is neither a major or minor currency.

Federal Reserve (Fed)

AnalysThe Central Bank of the United States.

Fixed Exchange Rate

Official rate set by monetary authorities for one or more currencies. In practice, even fixed exchange rates are allowed to fluctuate between definite upper and lower bands, leading to intervention.

Forward Outright

A foreign exchange deal with maturity beyond the spot delivery date.

Forward Spread

Refers to the forward premium or discount that the forward price trades at. The forward price is calculated with the spot price, interest rate differential, and days to delivery.

GTC

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

Hedging 

The practice of undertaking one investment activity in order to protect against loss in another, e.g. selling short to nullify a previous purchase, or buying long to offset a previous short sale. While hedges reduce potential losses, they also tend to reduce potential profits.

High/Low

Usually the highest traded price and the lowest traded price for the underlying instrument for the current trading day.

Initial Margin

The margin paid initially to trade currency futures or margined Forex. A trader’s loss may not exceed this margin per contract/lot. 

Interbank Rates

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

LIBOR 

London Interbank Offered Rate. This is the rate at which banks will lend to each other, set at 11:00 a.m. London time.

Major Currency

The Euro, Swiss franc (Swissie), British pound, and Japanese yen.

Market Maker

One that consistently makes two way prices, providing both a bid and an offer. Unlike brokers, market makers trade their capital, although they will hedge.

Mark-to-Market

A system by which futures contracts and other markets are revalued using closing market prices to determine cash flow requirements for margin purposes.

Matching Systems

An electronic system that attempts to duplicate the brokers market. Bids and offers are available to any bank for execution. EBS is a matching system.

Negative Carry

A market position whereby the currency owned pays a lower rate of interest than that of the currency borrowed resulting in a negative cash flow.

Offer

The price for which a willing seller will sell the asset.

Overnight Position Limit

Position limits on a currency or aggregate on a series of currencies that a trader can carry during overnight trading hours. These limits are usually smaller than day light position limits.

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.

Overnight Trading

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

Over the Counter (OTC) 

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

Overnight Trading

Refers to a purchase or sale between the hours of 9.00 pm and 8.00 am. on the following day.

Pip

The term used in the currency markets to denote the smallest incremental move an exchange rate can make. 

Positive Carry

A market position whereby the currency owned pays a higher rate of interest than that of the currency borrowed, resulting in a positive cash flow.

Premium Forward Spread

The forward points that is added to the spot price to determine a forward price. A forward premium means that the foreign interest rate is higher than the u.s. rate for the period.

Purchasing Power Parity

This states that the price for a good in one nation should be equal to the price of the same good in any other nation, all things being equal, exchanged at the current rate.

Quotation American Terms

A quotation that reflects the number of USD units per foreign currency.

Quotation European Terms

A quotation that reflects the number of foreign currency units per us dollars.

Rollover 

A transaction designed for spot deals whereby the delivery is extended and "exchanged" from the old spot delivery date to the current spot delivery date. Swap points are either subtracted or added reflecting either a positive cost of carry of negative.

Spot Deal

A forex deal whereby a party will deliver a certain currency against receiving a certain amount of another currency based on an agreed rate from another party, within a certain amount of business days.

Spot Next

Forex deal which matures one business day past the spot date, thus, 3 business days to maturity.

Swap Deal

Forex deal, which consists of a simultaneous purchase and sale for different maturity dates with the same counter party.

Tom Next

Tomorrow Next, is a forex deal, which matures one day prior to a regular spot deal, thus maturity is the next business day.

Two-Way Price

A quotation with both the bid and offer price.

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.

Whipsaw 

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

Yard 

Slang for a billion.