A
Aggregate Demand
It includes private and public sector demand for goods and services within the country and the demand of consumers and firms in other countries for goods and services.
Aggregate Risk
Size of exposure of a bank toa single customer for both spot and forward contracts.
Aggregate Supply
Total supply of goods and services in the economy from domestic sources (including imports) available to meet aggregate demand.
Agio
Difference in the value between currencies. Also used to describe percentage charges for conversion from paper money into cash, or from a weak into a strong currency.
American Option
An option which may be exercised at any time prior to expiration. Compared with a European option that can only be exercised on a specific date.
Arbitrage
The simultaneous purchase and sale on different markets, of the same or equivalent financial instruments to profit from price or currency differentials. The exchange rate differential or Swap points. May be derived from Deposit Rate differentials.
Ask
The price at which the currency or instrument is offered.
Association Cambiste International
The international society of foreign exchange dealers consisting of national "Forex clubs" affiliated on a world wide basis.
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.
B
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.
Balance of Trade
The value of exports less imports. Invisibles are normally excluded, and is otherwise referred to as mercantile or physical trade.
Bank Line
Line of credit granted by a bank to a customer, also known as a "line"..
Bank Notes
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 countries, 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.
Banking Day
see trading day and value date.
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.
Basis Point
One per cent of one per cent.
Basis
The difference between the cash price and futures price.
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.
Bear Market
A prolonged period of generally falling prices.
Bear
An investor who believes that prices are going to fall.
Bid
The price at which a buyer has offered to purchase the currency or instrument.
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 1.5530/40
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.
Break Even Point
The price of a financial instrument at which the option buyer recovers the premium, meaning that he makes neither a loss nor a 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.
Broken Dates or Period
Deals that are undertaken for value dates that are not standard periods e.g. 1 month. The standard periods are 1 week, 2 weeks, 1, 2, 3, 6 and 12 months. Terms also used are odd dates, or cock dates, broken dates or broken period.
Broker-Dealer
See Dealer.
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 Market
A prolonged period of generally rising prices.
Bull (call or put) Spread
An option position composed of both long and short options of the same type, either calls or puts, designed to be profitable in a declining market. An option with a lower strike price is bought and one with a higher strike price is sold.
Bull
An investor who believes that prices are going to rise.
Bullion
A term for gold bars, not coin.
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. (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.
Buyer/Taker
The purchaser of an option, whether a call or put option. The buyer may also be referred to as the option holder. Option buyers receive the right, but not the obligation, to enter a futures/securities market position.
Buying Rate
Rate at which the market and a market maker in particular is willing to buy the currency. Sometimes called bid rate.
Buying The Spread
To buy the nearby contract and simultaneously sell the deferred contract. Also referred to as a bull spread.
C
Cable
A term used in the foreign exchange market for the US Dollar/British Pound rate.
Calendar Spread
An option position comprised of 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.
Call
A (1) An option that gives the holder the right to buy the underlying instrument at a specified price during a fixed period. (2) A period of trading. (3) The right of a bond issuer to pre pay debt and demand the surrender of its bonds.
Cambiste
French term for foreign exchange dealer.
Cash Delivery
Same day settlement.
CBOE
Chicago Board Options Exchange.
CBOT or CBT
Chicago Board of Trade.
CD
Certificate of Deposit.
Central Bank
A bank which is responsible for controlling a country's monetary policy. 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.
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.
Clearing
The process of setting a number of items against one another and making fund transfers on the net balance only as part of the settlement process.
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 Exchange.
Comex
Commodity Exchange of New York.
Commission
The fee that a broker may charge clients for dealing on their behalf.
Comptant
French term for spot settlement in foreign exchange.
Confirmation
A memorandum to the other party describing all the relevant details of the transaction.
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 expectation 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.
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).
Cover
Calls are sold on the underlying currency with strikes which are higher than the market price. The strike price limits the profit that can be realized from the position.
Covered Call
A term used in the foreign exchange market for the US Dollar/British Pound rate.
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 Living Index
Broadly equivalent to Retail Price Index or Consumer price.
Counter Party
The other organisation or party with whom the exchange deal is being transacted.
Counter Value
Where a person buys a currency against the dollar it is the dollar value of the transaction.
Cours du Change
Exchange rate.
Cours Libre
Free exchange rate.
Cours Officiel
Official exchange rate.
Court
French for "short" as in une position courte.
Courtier
French term for broker.
Cours Officiel
Official exchange rate.
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 account of the cost of forward cover.
CPSS
Committee on Payment and Settlement Systems.
Cours Officiel
Official exchange rate.
CPSS
Committee on Payment and Settlement Systems.
Credit Lombard
See Lombard rate.
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 Rates
Rates between two currencies, neither of which is the US Dollar.
Crossed Market
The situation which exists when a broker's bid is higher than the lowest offer of another broker.
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.
Currency Swaps
See swaps.
D
Day Order
An order that if not executed on the specific day is automatically canceled.
Day Trader
Speculators who take positions which are then liquidated prior to the close of the same trading day.
Daylight Exposure Limit
see intra day position.
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.
Dealing Board
The panel of communications equipment forming part of a dealer's desk.
Declaration Date
The latest day or time by which the buyer of an option must indicate to the seller his intention to execute the option.
Deficit
Shortfall in the balance of trade, balance of payments, or government budgets.
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 exchange of the currencies is made. This date is more commonly known as the value date in the FX or Money markets.
Delivery Month
The calendar month in which a futures contract comes to maturity and becomes deliverable.
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.
Delivery
The settlement of a futures contract by receipt or tender of a financial instrument or currency.
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
Deport
French term for discount.
Deposit Dealings
Money Market operations.
Depreciation
A fall in the value of a currency due to market forces rather than due to official action.
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, normally by formal announcement.
Devisen, Devises
Foreign exchange in German and French respectively.
Devisenkassamarkt
German for spot exchange market.
Devisenterminmarkt
German for forward 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 forward Rate. Forward rate is lower than spot rate (2) an option that is trading for less than its intrinsic value.
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.
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 hardgoods. Durable Goods Orders are a major indicator of manufacturing sector trends because most industrial production is done to order.
E
Easing
Modest decline in price
Economic Indicator
A statistic which indicates current economic growth rates and trends such as retail sales and employment.
End/End
Indicates that both the spot and forward maturity, or two forward maturities in a swap transaction, fall due on the last business day of appropriate calendar months.
Euro Clear
A computerized settlement and depository system for safe custody, delivery of, and payment for Eurobonds.
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.
Eurocurrency
A currency domiciled outside its country of origin normally held by non residents.
Eurodollars
US dollars deposited in a bank (US or non US) located outside the USA.
Eurofranc
Swiss Franc or Belgian Francs traded on the Eurocurrency market. Normally Swiss Francs are the more common currency.
Euromark
Deutschmarks traded on the Eurocurrency market.
European Option
An option that can be exercised only on its expiration date rather than before that date.
European Union
The group formerly known as the European Community.
Exchange Control
A system of controlling inflows and outflows of foreign exchange, devices include licensing multiple currencies, quotas, auctions, limits, levies and surcharges.
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 Limit
A limit on the number of options contracts a holder may exercise within a specific period.
Exercise Price
See Strike 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..
Exotic
A less broadly traded currency.
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.
Expiration Month
The month in which an option expires.
Expiry Date
The last date on which an option can be bought or sold.
Exposure
see Position and Mismatch. Various methods of calculating an exposure exist (i) Net working capital - The current assets in a foreign currency minus current liabilities in the currency; (ii) Net financial method - The current assets in a foreign currency minus current liabilities and long term debt in the currency; (iii) Monetary/non-monetary method - Monetary assets and liabilities in the foreign currency are valued at present exchange rates, while non-monetary items are entered at the relevant historic rates.
F
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.
Fed Funds
Cash balances held by banks with their local Federal Reserve Bank. The normal transaction with these funds is an inter bank sale of a Fed fund deposit for one business day. Straight deals are where the funds are traded overnight on an unsecured basis.
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.
Federal Open Market Committee
See FOMC.
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 Controller of Currency and optional for state chartered banks.
Financial Future
A futures contract based on a financial instrument.
Fine Rate
(1) A quote with a narrow spread. (2) The most favorable rate charged to a high quality borrower.
Firm Quotation
The price given in response to a request for a rate at which the quoting party is willing to execute a deal for a reasonable amount for spot settlement. Screen quotes are indicative. Quotes on matching systems are normally firm depending on systems requirement to reconfirm rate prior to completing matching.
Fixed Dates
he monthly calendar dates similar to the spot. There are two exceptions. For detailed description see value dates.
Fixed Exchange Rate
Official rate set by monetary authorities. Often the fixed exchange rate permits fluctuation within a band.
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.
Flexible Exchange Rate
Exchange rates with a fixed parity against one or more currencies with frequent revaluation. A form of managed float.
Floating Exchange Rate
An exchange rate where the value is determined by market forces. Even floating currencies are subject to intervention by the monetary authorities. When such activity is frequent the float is known as a dirty float.
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.
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.
Forex
Foreign Exchange.
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 Forward
A forward / forward deal is one where both legs of the deal have value dates greater than the current spot value date.
Forward Margins
Discounts or premiums between spot rate and the forward rate for a currency. Normally quoted in points.
Forward Maturities
Trading days on which days contracts can be transacted later than the spot date.
Forward Operations
Foreign exchange transactions, on 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 Outright
A commitment to buy or sell a currency for delivery on a specified future date or period. The price is quoted as the Spot rate minus or plus the forward points for the chosen period.
Forward Rate Agreements
The FRA is an agreement between two parties that determine the interest rate that will apply to a notional future loan or deposit of an agreement.
Forward Rate
Forward rates are quoted in terms of forward points, which represents the difference between the forward and spot rates. In order to obtain the forward rate from the actual exchange rate the forward points are either added or subtracted from the exchange rate. 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. Therefore 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.
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 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.
FX
Foreign Exchange.
G
G5
The Group of Five. The five leading industrial countries, being US, Germany, Japan, France, UK.
G7
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.
Gap
A mismatch between maturities and cash flows in a bank or individual dealers position book. Gap exposure is effectively interest rate exposure.
GLOBEX
A system for global after hours electronic trading in futures and options developed by Reuters for CME and CBOT for use in conjunction with various exchanges around the world.
Going Long
The purchase of a stock or commodity for investment or speculation.
Going Short
The selling of a currency or instrument not owned by the seller.
Gold Standard
A monetary system that backs its currency with a reserve of gold, and allows currency holders to convert their currency into gold. The U.S. went off the gold standard in 1971.
Good Until Canceled
(GTC) An instruction to a broker that unlike normal practice the order does not expire at the end of the trading day, although normally terminates at the end of the trading month.
Gross
(GTC) Before deduction of tax.
Gross Domestic Product
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 the governments.
Gross National Product
(GNP) Gross domestic product plus "factor income from abroad" - income earned from investment or work abroad.
GNP Deflator
Removes inflation from the GNP figure. Usually expressed as a percentage and based on an index figure.
GTC
See Good until canceled.
H
Head and Shoulders
SA pattern in price trends which chartists 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 price to drop to around the same level as the shoulder. A further modest rise or level will indicate 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.
HIBOR
Hong Kong Inter-bank Offered Rate.
Historical Volatility
The annualized standard deviation of percentage changes in futures prices over a specific period. It is an indication of past volatility in the marketplace.
Hit the Bid
Acceptance of purchasing at the offer or selling at the bid.
Holder
Same as buyer.
Housing Starts
Housing Starts are a measure of the number of residential units on which construction is begun each month.
Hyperinflation
Very high and self sustaining inflation levels. One definition being the period while inflation exceeds 50% until it has dropped below that level for 12 months.
I
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 supports countries with balance of payments problems with the provision of loans.
IMM
International Monetary Market part of the Chicago Mercantile Exchange that lists a number of currency and financial futures.
Implied Volatility
A measurement of the market's expected price range of the underlying currency futures based on the traded option premiums.
Implied Volatility Skews
The implied volatility varies for different strikes of an option.
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. See Out-of-the-money.
Inconvertible Currency
Currency which cannot be exchanged for other currencies, because this is forbidden by the foreign exchange regulations.
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.
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 margin is a returnable deposit required to be lodged by buyers and sellers with the clearing house to secure a new futures or options position.
Inter-Bank Rates
The bid and offer rates at which international banks place deposits with each other. The basis of the Interbank market.
Interest Rate Options
An agreement permitting a party to obtain a particular interest rate, issued both OTC and by exchanges.
Interest Rate Floor
An agreement which provides the buyer of the floor with a minimum interest rate for future lending requirements.
Interest Rate Floor
An agreement which provides the buyer of the floor with a minimum interest rate for future lending requirements.
Interest Rate Swaps
An agreement to swap interest rate exposures from floating to fixed or vice versa. There is no swap of the principal. It is the interest cash flows be they payments or receipts that are exchanged.
Intervention
Action by a central bank to effect the value of its currency by entering the market. Concerted intervention refers to action by a number of central banks to control exchange rates.
In the Money
A call option is in the money when the strike price is less than the current price of the underlying instrument. A put is when the strike price is greater.
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.
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.
J
K
Key Currency
Small countries, which are highly dependent on exports, orientates their currencies to their major trading partners, the constituents of a currency basket.
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.
L
Last Trading Day
The day on which trading ceases for an expiring contract.
Leading Indicators
Statistics that are considered to precede changes in economic growth rates and total business activity, e.g. factory orders.
Leverage
In options terminology, this expresses the disproportionately large change in the premium in terms of the relative price movement of the underlying instrument.
LIBID
The London Interbank Bid Rate. The rate charged by one bank to another for a deposit.
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
An order to buy or sell a specified amount of a security at a specified price or better.
Limit Up
The maximum price advance from the previous trading day's settlement price permitted in one trading session.
Limit
(1)The maximum price fluctuation permitted by an exchange from the previous session's settlement price for a given contract. (2) In international banking the limit a bank is willing to lend in a country. (3) The amount that one bank is prepared to trade with another. (4) The amount that a dealer is permitted to trade in a given currency.
Lines
An arrangement by which a bank agrees to lend to the line holder during some specified period any amount up to the full amount of the line.
Liquidation
Any transaction that offsets or closes out a previously established position.
Liquidity
The ability of a market to accept large transactions.
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
The holding of an excess of a particular currency.
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.
M
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.
Maintenance Margin
The minimum margin which an investor must keep on deposit in a margin account at all times in respect of each open contract.
Margin Call
A demand for additional funds to be deposited in a margin account to meet margin requirements because of adverse future price movements.
Margin
(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 risk 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 Up
Premium.
Market Amount
The minimum amount conventionally dealt for between banks.
Market Maker
A market maker is a person or firm authorized to create and maintain a market in an instrument.
Market Order
An order to buy or sell a financial instrument immediately at the best possible price.
MATIF
Marche a Terme International de France..
Maturity Date
(1) The last trading day of a futures contract. (2) Date on which a bond matures, at which time the face value will be returned to the purchaser. Sometimes the maturity date is not one specified date but a range of dates during which the bond may be repaid.
Micro Economics
The study of economic activity as it applies to individual firms or well defined small groups of individuals or economic sectors.
Mid Office
The control of the trading activity including position keeping.
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.
Milliard
European term for 1,000 million..
Mine
Expression used to indicate that the contacting party is willing to buy at the rate offered by the quoting bank..
Minimum Price Fluctuation
The smallest increment of market price movement possible in a given futures contract..
Minimum Reserve
Reserves required to be deposited at central banks by commercial banks and other financial institutions. Sometimes referred to as Registered Reserves.
Mio
Million.
MM
Money Markets..
Money Market
A market consisting of financial institutions and dealers in money or credit who wish to either borrow or lend.
Money Market Operations
Comprises the acceptance and re-lending of deposits on the money market.
Money Supply
The amount of money in the economy, which can be measured in a number of ways. See definitions of M0-M4.
Moving Average
A way of smoothing a set of data, widely used in price time series.
Multiple Exchange Rates
Different exchange rates for different types of transaction. The South African Rand is an example.
Mutual Fund
An open-end investment company. Equivalent to unit trust.
N
Nearby Month
The nearest actively traded delivery month, a.k.a. current delivery month, lead month.
Net Position
The number of futures contracts bought or sold which have not yet been offset by opposite transactions.
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.
Note
A financial instrument consisting of a promise to pay rather than an order to pay or a certificate of indebtedness.
O
OECD
An international organization helping governments tackle the economic, social and governance challenges of a globalised economy.
Offer
The price at which a seller is willing to sell. The best offer is the lowest such price available.
Offered Market
Temporary situation where offers exceed bid.
Offset
The closing-out or liquidation of a futures position.
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.
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 Committee
See Federal Open Market Committee.
Open Market Operations
Central Bank operations in the markets to influence exchange and interest rates.
Open Position
The difference between assets and liabilities in a particular currency. This may be measured on a per currency basis or the position of all currencies when calculated in base currency.
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 expiry.
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.
Original Margin
See Initial Margin.
OTC
Over the Counter, the term used to describe futures and options not traded on an exchange. Trade is directly between buyers and sellers and there is no standardization of strikes or expirations.
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. See In-the-money.
Outright Deal
A forward deal that is not part of a swap operation.
Over Bought or Over Sold
See long and short.
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.
Overnight
A deal from today until the next business day.
Over the Counter
See OTC
P
Parity
(1) Foreign exchange dealer's slang for your price is the correct market price. (2) Official rates in terms of SDR or other pegging currency
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.
Payroll Employment
Payroll employment is a measure of the number of people being paid as employees by non-farm business establishments and units of government. Monthly changes in payroll employment reflect the number of net new jobs created or lost during the month and changes are widely followed as an important indicator of economic activity. Large increases in payroll employment are seen as signs of strong economic activity that could eventually lead to higher interest rates that are supportive of the currency at least in the short term.
Plaza Accord
The 1985 Plaza Hotel agreement by the G5 to lower the dollar.
Petrodollars
Foreign exchange reserves of oil producing nations arising from oil sales.
PIBOR
Paris Inter-bank Offered Rate.
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. (2) One percent on an interest rate e.g. from 8-9%. (3) Minimum fluctuation or smallest increment of price movement.
Position Limit
The maximum position, either net long or net short, in one future or in all futures of one currency or instrument combined which may be held or controlled by one person.
Position
The netted total commitments 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).
Producer Price Indices
See Wholesale Price Indices.
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) 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.
Prime Rate
(1) The rate from which lending rates by banks are calculated in the US. (2) The rate of discount of prime bank bills in the UK.
Producer Price Index (PPI)
PPI is a measure of the average level of prices of a fixed basket of goods received in primary markets by producers. A rising PPI is normally expected to lead to higher CPI and thereby to potentially higher short term interest rates.
Profit Taking
The unwinding of a position to realize profits.
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.
Q
Quote
An indicative price. The price quoted for information purposes but not to deal
Quota
(1) A limit on imports or exports. (2) A country's subscription to the IMF.
R
Rally
A recovery in price after a period of decline.
Range
The difference between the highest and lowest price of a future recorded during a given trading session.
Ratio Spread
Buying a specific quantity of options and selling a larger quantity of out of the money options.
Ratio Calendar Spread
Selling more near-term options than longer maturity options at the same strike price.
Reaction
A decline in prices following an advance.
Real
A price, interest rate or statistic that has been adjusted to eliminate the effect of inflation.
Recession
A decline in business activity. Often defined as two consecutive quarters with a real fall in GNP.
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.
Repo Rate
See Repurchase Agreement.
Repurchase Agreement
Agreements by a borrower where they sell securities with a commitment to repurchase them at the same rate with a specified interest rate.
Reserves
Funds held against future contingencies, normally a combination of convertible foreign currency, gold, and SDRs. Official reserves are to ensure that a government can meet near term obligations. They are an asset in the balance of payments.
Reserve Requirement
The ratio of reserves to deposits, expressed as a fraction prescribed by national banking authorities including USA.
Reserve Tranche
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 Point or Level
A price recognized by technical analysts as a price which is likely to result in a rebound but if broken through is likely to result in a significant price movement.
Retail Price Index
Measurement of the monthly change in the average level of prices at retail, normally of a defined group of goods.
Retail Sales
Retail Sales are a measure of the total receipts of retail stores. Monthly percentage changes reflect the rate of change of such sales and are widely followed as an indicator of consumer spending. Rising in Retail Sales are often associated with a strong economy and therefore an expectation of higher short term interest rates that are often supportive to a currency in at least the short term.
Reuter Dealing
A system for screen based trading that has been in operation since the early 1980s now has a matching optional enhancement known as Dealing 2000-2.
Reversal
Process of changing a call into a put.
Revaluation
Increase in the exchange rate of a currency as a result of official action.
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 Position
An asset or liability, which is exposed to fluctuations in value through changes in exchange rates or interest rates.
Risk Reversal
A combination of purchasing put options with the sale of call options. The put limits downside, while the call limits the upside.
Rolling Over
The substituting of a far option for a near option of the same underlying stock at the same strike/exercise price.
Rollover
An overnight swap, specifically the next business day against the following business day (also called Tomorrow Next, abbreviated to Tom-Next).
Running a Position
Keeping open positions in the hope of a speculative gain.
S
Same Day Transaction
A transaction that matures on the day the transaction takes place.
Sandwich Spread
Same as a butterfly spread.
Scalping
A strategy of buying at the bid and selling at the offer as soon as possible.
SDR
Special Drawing Right. A standard basket of five major currencies in fixed amounts as defined by the IMF.
Selling Rate
Rate at which a bank is willing to sell foreign currency.
Series
All options of the same class which share a common strike price and expiration date.
Settlement Date
The date by which an executed order must be settled by the transference of instruments or currencies and funds between buyer and seller.
Settlement Price
The official closing price for a future set by the clearing house at the end of each trading day.
Settlement Risk
Risk associated with the non settlement of the transaction by the counter party.
Short / Short Position
A shortage of assets in a particular currency. See Short Sale.
Short Contracts
Contracts with up to six months to delivery.
Short Covering
Buying to unwind a shortage of a particular currency or asset.
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 Sale
The sale of a currency futures not owned by the seller at the time of the trade. Short sales are usually made in expectation of a decline in the price.
Short-Term Interest Rates
Normally the 90 day rate.
Shorts
See Short Forward Date/Rate.
SITC
Standard International Trade Classification. A system for reporting trade statistics in a common manner.
SOFFEX
Swiss Options and Financial Futures Exchange, a fully automated and integrated trading and clearing system.
Soft Market
More potential sellers than buyers, which creates an environment where rapid price falls are likely.
Split Date
See Broken Date.
Spot
(1) The most common foreign exchange transaction. (2) Spot or Spot date refers to the spot transaction value date that requires settlement within two business days, subject to value date calculation.
Spot Next
The overnight swap from the spot date to the next business day.
Spot Month
The contract month closest to delivery.
Spot Price/Rate
The price at which the currency is currently trading in the spot market.
Spot Week
A standard period of one week swap measured from the current value date of the currency spot rate.
Spread
(l)The difference between the bid and ask price of a currency. (2) The difference between the price of two related futures contracts. (3) For options, transactions involving two or more option series on the same underlying currency.
Square
Purchase and sales are in balance and thus the dealer has no open position.
Squawk Box
A speaker connected to a phone often used in broker trading desks.
Squeeze
Action by a central bank to reduce supply in order to increase the price of money.
Stable Market
An active market which can absorb large sale or purchases of currency without major moves.
Standard
A term referring to certain normal amounts and maturities for dealing.
Standard and Poors
A US firm engaged in assessing the financial health of borrowers. The firm also has generated certain stock indices i.e. S & P 500.
Sterilization
Central Bank activity in the domestic money market to reduce the impact on money supply of its intervention activities in the FX market.
Sterling
British pound, otherwise known as Cable.
Stocky
Market slang for Swedish Krona.
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.
Stagflation
Recession or low growth in conjunction with high inflation rates.
Straight
A bond with unquestioned right to repayment of principal and interest at the specified dates with no additional further rights or bonuses.
Straight Date
See fixed dates.
Strap
A combination of two calls and one put.
Strike Price
Also called Exercise Price. The price at which an options holder can buy or sell the underlying instrument.
Strip
A combination of two puts and one call.
Support Levels
When an exchange rate depreciates or appreciates to a level where (1) Technical analysis techniques suggest that the currency will rebound, or not go below; (2) The monetary authorities intervene to stop any further downward movement. See Resistance Point.
Swap Price
A price as a differential between two dates of the swap.
Swap Rate
See Forward Margin.
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.
Swaption
An option to enter into a swap contract.
SWIFT
Society for World-wide Interbank Telecommunications is a Belgian based company that provides the global electronic network for settlement of most foreign exchange transactions.
Swissy
Market slang for Swiss Franc.
Switch
See Deposit Swap.
Synthetics
Options or futures that create a position that is able to be achieved directly but is generated by a combination of options and futures in the relevant market. In foreign exchange a SAFE combines two forward contracts into a single transaction where settlement only involves the difference in values.
T
T-Bill
See Treasury Bill.
Tau
Expresses the price change of an option for a percentage change in the implied volatility.
Technical Analysis
Is concerned with past price and volume trends - often with the help of chart analysis - in a market, in order to be able to make forecasts about future price developments of the commodity being traded.
Technical Correction
An adjustment to price not based on market sentiment but technical factors such as volume and charting.
Tender
(1) A formal offer to supply or purchase goods or services. (2) In the UK the term for the weekly Treasury Bill issue.
Terme
French for period.
Theta
A measure of the sensitivity of the price of an option to a change in its time to expiry.
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.
Ticket
See Deal Slip
Time Value
That part of an option premium which reflects the length of time remaining in the option prior to expiration. The longer the time remaining until expiration, the higher the time value.
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.
Tomorrow Next (Tom Next)
Simultaneous buying of a currency for delivery the following day and selling for the spot day or vice versa.
Trade Balance
The Trade Balance is a measure of the difference between imports and exports of tangible good and services. The level of the trade balance and changes in exports and imports are widely followed by foreign exchange markets.
Trade Date
The date on which a trade occurs.
Trade Deficit/Surplus
The difference between the value of imports and exports. Often only reported in visible trade terms.
Tradeable Amount
Smallest transaction size acceptable.
Trade Ticket
See Deal Ticket.
Transaction Date
The date on which a trade occurs.
Transaction
The buying or selling of securities resulting from the execution of an order.
Translation Loss/Profit
The calculation of loss or profit resulting from the valuation of foreign assets and liabilities for balance sheet purposes, when consolidating into the base currency.
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 and 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 Bonds
Government obligations with maturities of ten years or more.
Treasury Notes
Government obligations with maturities more than one year but less than ten years.
Treasury Stock
Previously issued stock that has been repurchased by, or donated to, or otherwise are acquired by the issuing firm. Treasury stocks pay no dividends and have no voting privileges.
Troc, Troquer
French FX term for swap.
Turnover
The total money value of currency contracts traded is calculated by multiplying size by the number of contracts traded.
Two-Way Quotation
When a dealer quotes both buying and selling rates for foreign exchange transactions.
U
Ultimo
Continental term for month or year end.
Uncovered
Another term for an open position.
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.
Under-Valuation
An exchange rate is normally considered to be undervalued when it is below its purchasing power parity.
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.
Unit of Account
A device designed to provide a consistent value with varying currencies. e.g. ECU and SDR.
Up Tick
A transaction executed at a price greater than the previous transaction.
V
Valeur Compensee
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 Date
For exchange contracts it is the day on which the two contracting parties exchange the currencies which are being bought or sold. For complete description see the chapter on trading. For a spot transaction it is two business banking days forward in the country of the bank providing quotations which determine the spot value date. The only exception to this general rule is the spot day in the quoting centre coinciding with a banking holiday in the country(ies) of the foreign currency(ies). The value date then moves forward a day. The enquirer is the party who must make sure that his spot day coincides with the one applied by the respondent. The forward months maturity must fall on the corresponding date in the relevant calendar month. If the one month date falls on a non-banking day in one of the centers then the operative date would be the next business day that is common. The adjustment of the maturity for a particular month does not effect the other maturities that will continue to fall on the original corresponding date if they meet the open day requirement. If the last spot date falls on the last business day of a month, the forward dates will match this date by also falling due on the last business day. Also referred to as Maturity Date.
Value Spot
Normally settlement for two working days from today. See Value Date.
Value Today
Transaction executed for same day settlement; sometimes also referred to as "cash transaction"
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.
Variation Margin
Profits or losses on open positions in futures and options contracts which are paid or collected daily.
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.
Volatility
A measure of the amount by which an asset price is expected to fluctuate over a given period. Normally measured by the annual standard deviation of daily price changes (historic). Can be implied from futures pricing implied volatility.
W
Wholesale Price Index
It measures changes in prices in the manufacturing and distribution sector of the economy and tends to lead the consumer price index by 60 to 90 days. The index is often quoted separately for food and industrial products.
Working Balance
Discretionary element in the monetary reserves of a central bank.
Working Day
A day on which the banks in a currency's principal financial centre are open for business. For FX transactions, a working day only occurs if the bank in both (all relevant currency centers in the case of a cross are open) currencies is working.
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.
X
Y
Yard
Slang for milliard, one thousand million.
Yield Curve
The graph showing changes in yield on instruments depending on time to maturity. A system originally developed in the bond markets is now broadly applied to various financial futures. A positive sloping curve has lower interest rates at the shorter maturities and higher at the longer maturities. A negative sloping curve has higher interest rates at the shorter maturities.
Z
Zero Coupon Bond
A bond that pays no interest. The bond is initially offered at a discount to its redemption value.
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