Saturday, March 24, 2007

glossary


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.
Actualize
The underlying assets or instruments which are traded in the cash market.
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.
Adjustment
Official action normally by either change in the internal economic policies to correct a payment imbalance or in the official currency rate or.
Agent Bank
A bank acting for a foreign bank.
In the Euro market - the agent bank is the one appointed by the other banks in the syndicate to handle the administration of the loan.
Aggregate Demand
Total demand for goods and services in the economy. It includes private and public sector demand for goods and services within the country and the demand of consumers and and firms in other countries for good and services.
Aggregate Risk
Total amount of exposure a bank has with a 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.
Aggressor
A trader dealing on an existing price in the market.
Appreciation
A currency is said to 'appreciate' when it strengthens in price in response to market demand.
Describes a currency strengthening in response to market demand rather than by official action.
Arbitrage
Profiting from differences in the price of a single currency pair that is traded on more than one market.
Arbitrage Channel
The range of prices within which there will be no possibility to arbitrage between the cash and futures market.
Around
Used in quoting forward "premium/discount". "Five-five around" would mean five points on either side of the present spot value.
Ask Price
Sometimes called the Offer Price, this is the market price for traders to buy currencies. Ask Prices are shown on the right side of a quote - e.g. EUR/USD 1.1965 / 68 - means that one euro can be bought for 1.1968 US dollars.
Asset
An item having commercial or exchange value.
Asset Location
Dividing instrument funds among markets to achieve diversification or maximum return.
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.
Authorized Dealer
A financial institution or bank authorized to deal in foreign exchange.
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
The office location, or department, where the processing of financial transactions takes place.
Balance of Trade
The value of a country's exports minus its imports.
Bank Notes
Paper issued by the central bank, redeemable as money and considered to be full legal tender.
Bank Rate
The rate at which a central bank is prepared to lend money to its domestic banking system.
Bar Chart
A type of chart used in Technical Analysis. Each time division on the chart is displayed as a vertical bar which show the following information - the top of the bar is the high price, the bottom of the bar is the low price, the horizontal line on the left of the bar shows the opening price and the horizontal line on the right of bar shows the closing price.
Base Currency
In terms of foreign exchange trading, currencies are quoted in terms of a currency pair. The first currency in the pair is the base currency. The base currency is the currency against which exchange rates are generally quoted in a given country. Examples: USD/JPY, the US Dollar is the base currency; EUR/USD, the EURO is the base currency.
Bear Market
An extended period of general price decline in an individual security, an asset, or a market.
Bid Price
is the price a trader can sell currencies. The Bid Price is shown on the left side of a quote - e.g. EUR/USD 1.1923 / 68 - means that one euro can be sold for 1.1923 US dollars.
Bid/Ask Spread
is the difference between the bid price and the ask price in any currency quotation. The spread represents the broker's fee, and varies from broker to broker.
Big Figure
The first two or three digits of a foreign exchange price or rate. Examples: USD/JPY rate of 108.05/10 the big figure is 108. EUR/USD price of .8325/28 the big figure is .83
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.
Bull Market
A market which is on a consistent upward trend.
Bundesbank
Central Bank of Germany.
Buy On Margin
The process of buying a currency pair where a client pays cash for part of the overall value of the position. The word margin refers to the portion the investor puts up rather than the portion that is borrowed.
Buy Limit Order
An order to execute a transaction at a specified price (the limit) or lower.
Candlestick Chart
A chart that displays the daily trading price range (open, high, low and close). A form of Japanese charting that has become popular in the West. A narrow line (shadow) shows the day's price range. A wider body marks the area between the open and the close. If the close is above the open, the body is white (not filled); if the close is below the open, the body is black (filled).
Central Bank
A bank, administered by a national government, which regulates the behavior of financial institutions within its borders and carries out monetary policy.
Chartist
A person who attempts to predict prices by analyzing past price movements as recorded on a chart.
Closing a Position
The process of selling or buying a foreign exchange position resulting in the liquidation (squaring up) of the position.
Commission
The fee that a broker may charge clients for dealing on their behalf.
Cross Currency
A currency pair that does not include US dollars - e.g. EUR/GBP.
Currency
Money issued by a government. Coins and paper money. It is a form of money used as a unit of exchange within a country.
Currency Pair
Two currencies involved in a Forex transaction - e.g. EUR/USD.
Currency Risk
The risk that shifts in foreign exchange rates may undermine the dollar or any other foreign currency value of overseas investments.
Day Trade
A trade opened and closed on the same trading day.
Day Trading
Refers to a style or type of trading where trade positions are opened and closed during the same day.
Day Trader
A trader who buys and sells on the basis of small short-term price movements.
Dealer
An individual or firm that buys and sells assets from their portfolio, acting as a principal or counterpart to a transaction.
Depreciation
A fall in the value of a currency due to market forces.
Desk
Term referring to a group dealing with a specific currency or currencies.
Devalution
The act by a government to reduce the external value of its currency.
Direct Quotation
Quoting in fixed units of foreign currency against variable amounts of the domestic currency.
Discretionary Account
An account in which the customer permits a trading institution to act on the customer's behalf in buying and selling currency pairs. The institution has discretion as to the choice of currency pairs, prices, and timing-subject to any limitations specified in the agreement.
Economic Indicator
A statistical report issued by governments or academic institutions indicating economic conditions within a country.
Euro (EUR)
The single currency of the European Economic and Monetary Union (EMU) introduced in January 1999. This is the amalgamation of the following currencies, after Jan. 1, 2002 these currencies will be considered legacy currencies. Germany Deutsche Marks, Italy Lira, Austria Schillings, France Franc, Belgium Francs, Netherlands (Dutch) Guilders, Finland Markka, Portugal Escudo, Greece Drachmas, Ireland Punt, Luxembourg Francs, Spanish Pesetas.
European Central Bank (ECU)
The Central Bank for the new European Monetary Union.
Execution
The Process of completing an order or deal.
First In First Out (FIFO)
refers to the order open orders are liquidated. The first orders to be liquidated are the first that were opened.
Foreign Exchange (Forex, FX)
Simultaneously buying one currency and selling another.
Fundamental Analysis
Analysis of political and economic conditions that can affect currency prices.
Gann Trading
W.D. Gann is considered by many to be the greatest trader of all time. There's no doubt his analysis of market cycles and price behaviour is without equal. Gann is believed to have profited by over 50 million dollars trading all the markets.
Hedging Transaction
A hedging transaction is one that protects an asset or liability against fluctuation in the foreign exchange rates.
Leverage or Margin
The ratio of the value of a transaction to the required deposit. A common margin for Forex trading is 100:1 - you can trade currency worth 100 times the amount of your deposit.
Limit Order
An order to buy or sell when the price reaches a specified level.
Liquidity
A function of volume and activity in a market. It is the efficiency and cost effectiveness with which positions can be traded and orders executed. A more liquid market will provide more frequent price quotes at a smaller bid/ask spread.
Lot
The size of a Forex transaction. Standard lots are worth about 100,000 US dollars.
Major Currency
The euro, German mark, Swiss franc, British pound, and the Japanese yen are the major currencies.
Margin
The minimum amount of funds required in a trader's brokerage account in order to open a position (enter a trade) or to maintain an open position. See Leverage.
Margin Call
An automatic closing of the position by the broker if the margin falls below the required minimum during a trade. The result of this is you need to place more funds in your trading account before entering further trades.
Market Order
An order to buy at the current Ask price.
Minor Currency
The Canadian dollar, the Australian dollar, and the New Zealand dollar are the minor currencies.
Monetary Policy
Generally associated with the setting of interest rate levels in an economy to try and stimulate or stifle borrowing and thus control consumer demand/spending. Conventional wisdom states that if interest rates move in an upward direction in one nation (under normal economic circumstances) then the currency in that nation should move up in value against foreign currencies. The rational is that the rate of return on interest bearing deposits become more attractive and the foreign demand for that currency should increase.
Offer (Ask)
The rate at which a dealer is willing to sell a currency.
Offer Price
The rate quoted by the broker for selling the first of a particular pair of currencies.
Offsetting transaction
A trade with which serves to cancel or offset some or all of the market risk of an open position.
One Cancels the Other (OCO)
A combination of a linked limit order and a stop loss orders at predetermined market levels, where if one is executed the other order is automatically cancelled. It is used to encapsulate foreign exchange risk within known parameters i.e. to try to achieve a favourable rate whilst also giving protection against adverse market moves. It is lodged with a Bank or Broker and offers 24 hour protection and will float until either cancelled or hit. It is free of charge to use and provides an excellent vehicle for companies to transact their currencies at the best point in a range, whilst protecting themselves from negative movements.
Open Order
An order that will be executed when a market moves to its designated price. Normally associated with Good 'til Cancelled Orders.
Open Position
An active trade that has not been closed.
An active trade with corresponding unrealized Profit and Loss, which has not been offset by an equal and opposite deal.
Option Trading
An option is defined as the right, but not an obligation, to buy or sell an asset (such as stock or currency) at a fixed price before a predetermined date.
Order
A customer's instructions to buy or sell currencies.
Over the Counter (OTC)
Used to describe any transaction that is not conducted over an exchange.
Overnight Position
Trader's long or short position in a currency at the end of a trading day.
Pips or Points
The smallest unit a currency can be traded in.
The smallest unit of price for any foreign currency. Digits added to or subtracted from the fourth decimal place, i.e. 0.0001.
Pip Spread
The pip difference between the Bid and Ask price. Typically 3 or more pips, varying also by currency pairs. Some brokers offer fixed spreads; others will change the spread (variable spread) depending on market activity.
Pip Value
With the USD as the base currency, pip values are $10 for standard trades and $1 for mini trades. For other base currencies such as for the GBP/USD or EUR/JPY pairs, a pip has a different US dollar value which needs to be calculated.
Political Risk
Exposure to changes in governmental policy which will have an adverse effect on an investor's position.
Price
The price at which the underlying currency can be bought or sold.
Price Transparency
The ability of all market participants to "see" or deal at the same price.
Describes quotes to which every market participant has equal access.
Principle Value
The original amount invested by the client.
Profit /Loss or "P/L" or Gain/Loss
The actual "realized" gain or loss resulting fromtrading activities on Closed Positions, plus the theoretical "unrealized" gain or loss on Open Positions that have been Mark-to-Market.
Quote Currency
The second currency in a currency pair. In the currency pair USD/EUR the euro is the quote currency.
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.
Rate
Price at which a currency can be purchased or sold against another currency.
The price of one currency in terms of another, typically used for dealing purposes.
Resistance
Price level at which technical analysts note persistent selling of a currency.
A term used in technical analysis indicating a specific price level at which analysis concludes people will sell.
Revaluation
Daily calculation of potential profits or losses on open positions based on the difference between the settlement price of the previous trading day and the current trading day.
An increase in the exchange rate for a currency as a result of central bank intervention. Opposite of "Devaluation".
Risk (Forex Risk)
The risk that the exchange rate on a foreign currency will move against the position held by an investor such that the value of the investment is reduced.
Exposure to uncertain change, most often used with a negative connotation of adverse change.
Risk Management
The employment of financial analysis and use of trading techniques to reduce and/or control exposure to financial risk.
Rollover (Roll-Over)
The process of extending the settlement value date on an open position forward to the next valid value date.
Settlement
The process by which a trade is entered into the books and records of the counterparts to a transaction. The settlement of currency trades may or may not involve the actual physical exchange of one currency for another.
Short Position
An investment position that benefits from a decline in market price. When the base currency in the pair is sold, the position is said to be short.
Slippage
The difference in pips between the order price approved by the client and the price at which the order is actually executed. Slippage can occur when a trade is not immediately available at the requested price, or when prices are changing rapidly. Unless a range is stipulated, the broker needs to confirm a different price for approval by the client (trader) who can accept or refuse the new entry price.
Spot Market
Market where people buy and sell actual financial instruments (currencies) for two-day delivery.
Spot Price
The current market price of a currency that normally settles in 2 business days (1 day for Dollar/Canada).
The current market price. Settlement of spot transactions usually occurs within two business days.
Spread
This point or pip difference between the bid and ask price of a currency pair.
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.
The difference between the bid and offer prices.
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.
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 (The Pound - GBP)
Another term for the British currency, "The Pound".
Stop
An order to buy or to sell a currency when the currency's price reaches or passes a specified level.
Stop Loss Order
Order to buy or sell when a given price is reached or passed to liquidate part or all of an existing position.
Order type whereby an open position is automatically liquidated at a specific price. Often used to minimize exposure to losses if the market moves against an investor's position. As an example, if an investor is long USD at 156.27, they might wish to put in a stop loss order for 155.49, which would limit losses should the dollar depreciate, possibly below 155.49.
Support Levels
A price at which a currency or the currency market will receive considerable buying pressure.
A technique used in technical analysis that indicates a specific price ceiling and floor at which a given exchange rate will automatically correct itself. Opposite of "resistance".
Swap
A transaction which moves the maturity date of an open position to a future date.
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.
Swap Price
A price as a differential between two dates of the swap.
Swing Trading
A trade made usually in stocks (but also in forex) and held for between several days and up to a few weeks. A swing trade might be completed in less than a week, or if the stock consolidates it might take several weeks. While a swing trader will watch the market very closely, this trading style does not require constant monitoring. A swing trader will typically aim for a 10-15% average profit on trades. While the stock market is much smaller than the forex, it is more 'physical'; predictions of price movement can be more reliable, depending on the source of information.
Swiss
Market slang for Swiss Franc.
Take Profit Order
A customer's instructions to buy or sell a currency pair which, when executed, will result in the reduction in the size of the existing position and show a profit on said position.
Technical Analysis
This is the study of market action, primarily through the use of charts, for the purposes of forecasting future prices and trends, support and resistance levels. It can be used to further identify trends and indicate trend reversals. Technical analysis is widely used by the main market players (traders, mainly banks, whose large trades can influence (but not control) price levels. Technical analysis has become arguably the most popular form of analysis in tracking and forecasting currency movements.
Technical Correction
An adjustment to price not based on market sentiment but technical factors such as volume and charting.
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.
Thursday/Friday Dollars
A US foreign exchange technicality. If a foreign bank buys dollars on Tuesday for Thursday delivery. If the bank leaves the funds overnight and transfers them on Friday by means of a clearing house cheque then clearance is not until Monday, the next working day. Higher interest rates for this period are thus available.
Tick
The smallest possible change in a price, either up or down.
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.
Top
A market top is an area where prices in an upward trend encountered heavy resistance, was unable to progress any higher, and either reversed (i.e. went into a bear trend) or traded sideways.
Trade Date
The date on which a trade occurs.
Tradeable Amount
Smallest transaction size acceptable.
Transaction
The buying or selling of currencies resulting from the execution of an order.
Transaction Cost
The cost of a Forex transaction - typically the spread between bid and ask prices.
Transaction Date
The date on which a trade occurs.
Turnover
The total volume of all executed transactions in a given time period.
Two Tier Market
A dual exchange rate system where normally only one rate is open to market pressure, e.g. South Africa.
Two-Way Price
A quote in the foreign exchange market that indicates a bid and an offer.
Two-Way Quotation
When a dealer quotes both buying and selling rates for foreign exchange transactions.
Uncovered
Open position.
Under-Valuation
An exchange rate is normally considered to be undervalued when it is below its purchasing power parity.
Unrealized Gain/Loss
The theoretical gain or loss on Open Positions valued at current market rates, as determined by the broker in its sole discretion. Unrealized Gains' Losses become Profits/Losses when position is closed.
Uptick
A new price quote at a price higher than the preceding quote.
A transaction executed at a price greater than the previous transaction.
Uptick Rule
In the US, a regulation whereby a security may not be sold short unless the last trade prior to the short sale was at a price lower than the price at which the short sale is executed.
US Prime Rate
The interest rate at which US banks will lend to their prime corporate customers.
US Treasury
The United States Department of the Treasury is the government department responsible for issuing all Treasury bonds, notes, and bills.
Value Data
The maturity date of the currency for settlement, usually two business days (one day for Canada) after the trade has occurred.
Value Date
The date on which counterparts to a financial transaction agree to settle their respective obligations, i.e., exchanging payments. For spot currency transactions, the value date is normally two business days forward. Value Date is also known as "maturity" date.
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.
Value Spot
Normally settlement for two working days from today. See value date.
Variation Margin
Funds, which are required to bring the equity in an account back up to the initial margin level, calculated on a day-to-day basis.
Funds a broker must request from the client to have the required margin deposited. The term usually refers to additional funds that must be deposited as a result of unfavorable price movements.
Volatility (VOL)
Statistical measure of the change in price of a financial currency pair over a given time period.
A statistical measure of a market's price movements over time.
A measure of the amount by which an asset price is expected to fluctuate over a given period.
Vostro Account
A local currency account maintained with a bank by another bank. The term is normally applied to the counterparty's account from which funds may be paid into or withdrawn, as a result of a transaction.
Wash Trade
A matched deal which produces neither a gain nor a loss.
Whipsaw
Slang for a condition of a highly volatile market where a sharp price movement is quickly followed by a sharp reversal.
Withholding Tax
Income tax withheld from employees' wages and paid directly to the government by the employer.
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 financial centre's are open for business (all relevant currency centers in the case of a cross are open).
Yard
A slang word used in the currency industry meaning "billion".
X
A Nasdaq stock symbol specifying that it is a mutual fund.
Z-Score
A statistical measure that quantifies the distance (measured in standard deviations) a data point is from the mean of a data set. In a more financial sense, Z-score is the output from a credit-strength test that gauges the likelihood of bankruptcy.