of Trade - The value of a country's exports minus its imports.
Base Currency - In general terms,
the base currency is the currency in which an investor or issuer
maintains its book of accounts. In the FX markets, the US Dollar
is normally considered the 'base' currency for quotes, meaning that
quotes are expressed as a unit of $1 USD per the other currency
quoted in the pair. The primary exceptions to this rule are the
British Pound, the Euro and the Australian Dollar.
Bear Market - A market distinguished
by declining prices.
Bid Rate - The rate at which a trader
is willing to buy a currency.
Bid/Ask Spread - The difference
between the bid and offer price, and the most widely used measure
of market liquidity.
Big Figure - Dealer expression referring
to the first few digits of an exchange rate. These digits rarely
change in normal market fluctuations, and therefore are omitted
in dealer quotes, especially in times of high market activity. For
example, a USD/Yen rate might be 107.30/107.35, but would be quoted
verbally without the first three digits i.e. "30/35".
Book - In a professional trading
environment, a 'book' is the summary of a trader's or desk's total
Broker - An individual or firm that
acts as an intermediary, putting together buyers and sellers for
a fee or commission. In contrast, a 'dealer' commits capital and
takes one side of a position, hoping to earn a spread (profit) by
closing out the position in a subsequent trade with another party.
Bretton Woods Agreement of 1944
- An agreement that established fixed foreign exchange rates for
major currencies, provided for central bank intervention in the
currency markets, and pegged the price of gold at US $35 per ounce.
The agreement lasted until 1971, when President Nixon overturned
the Bretton Woods agreement and established a floating exchange
rate for the major currencies.
Bull Market - A market distinguished
by rising prices.
Bundesbank - Germany's Central Bank.
Cable - Trader jargon referring
to the Sterling/US Dollar exchange rate. So called because the rate
was originally transmitted via a transatlantic cable beginning in
the mid 1800's.
Candlestick Chart - A chart that
indicates the trading range for the day as well as the opening and
closing price. If the open price is higher than the close price,
the rectangle between the open and close price is shaded. If the
close price is higher than the open price, that area of the chart
is not shaded.
Central Bank - A government or quasi-governmental
organization that manages a country's monetary policy. For example,
the US central bank is the Federal Reserve, and the German central
bank is the Bundesbank.
Chartist - An individual who uses
charts and graphs and interprets historical data to find trends
and predict future movements. Also referred to as Technical Trader.
Choice Market - A market with no
spread. All trades buys and sells occur at that one price
Clearing - The process of settling
Contagion - The tendency of an economic
crisis to spread from one market to another. In 1997, political
instability in Indonesia caused high volatility in their domestic
currency, the Rupiah. From there, the contagion spread to other
Asian emerging currencies, and then to Latin America, and is now
referred to as the 'Asian Contagion'.
Collateral - Something given to
secure a loan or as a guarantee of performance.
Commission - A transaction fee charged
by a broker.
Confirmation - A document exchanged
by counterparts to a transaction that states the terms of said transaction.
Contract - The standard unit of
Counterparty - One of the participants
in a financial transaction.
Country Risk - Risk associated with
a cross-border transaction, including but not limited to legal and
Cross Rate - The exchange rate between
any two currencies that are considered non-standard in the country
where the currency pair is quoted. For example, in the US, a GBP/JPY
quote would be considered a cross rate, whereas in UK or Japan it
would be one of the primary currency pairs traded.
Currency - Any form of money issued
by a government or central bank and used as legal tender and a basis
Currency Risk - the probability
of an adverse change in exchange rates.
Day Trading - Refers to positions
which are opened and closed on the same trading day.
Dealer - An individual who acts
as a principal or counterpart to a transaction. Principals take
one side of a position, hoping to earn a spread (profit) by closing
out the position in a subsequent trade with another party. In contrast,
a broker is an individual or firm that acts as an intermediary,
putting together buyers and sellers for a fee or commission.
Deficit - A negative balance of
trade or payments.
Delivery - An FX trade where both
sides make and take actual delivery of the currencies traded.
Depreciation - A fall in the value
of a currency due to market forces.
Derivative - A contract that changes
in value in relation to the price movements of a related or underlying
security, future or other physical instrument. An Option is the
most common derivative instrument.
Devaluation - The deliberate downward
adjustment of a currency's price, normally by official announcement.
Economic Indicator - A government
issued statistic that indicates current economic growth and stability.
Common indicators include employment rates, Gross Domestic Product
(GDP), inflation, retail sales, etc.
End Of Day Order (EOD) - An order
to buy or sell at a specified price. This order remains open until
the end of the trading day which is typically 5PM ET. European Monetary
Union (EMU) - The principal goal of the EMU is to establish a single
European currency called the Euro, which will officially replace
the national currencies of the member EU countries in 2002. On Janaury1,
1999 the transitional phase to introduce the Euro began. The Euro
now exists as a banking currency and paper financial transactions
and foreign exchange are made in Euros. This transition period will
last for three years, at which time Euro notes an coins will enter
circulation. On July 1,2002, only Euros will be legal tender for
EMU participants, the national currencies of the member countries
will cease to exist. The current members of the EMU are Germany,
France, Belgium, Luxembourg, Austria, Finland, Ireland, the Netherlands,
italy, Spain and Portugal. EURO - the currency of the European Monetary
Union (EMU). A replacement for the European Currency Unit (ECU).
European Central Bank (ECB) - the
Central Bank for the new European Monetary Union.
Federal Deposit Insurance Corporation (FDIC)
- The regulatory agency responsible for administering bank depository
insurance in the US.
Federal Reserve (Fed) - The Central
Bank for the United States.
Flat/square - Dealer jargon used
to describe a position that has been completely reversed, e.g. you
bought $500,000 then sold $500,000, thereby creating a neutral (flat)
Foreign Exchange - (Forex, FX) -
the simultaneous buying of one currency and selling of another.
Forward - The pre-specified exchange
rate for a foreign exchange contract settling at some agreed future
date, based upon the interest rate differential between the two
Forward points - The pips added
to or subtracted from the current exchange rate to calculate a forward
Fundamental analysis - Analysis
of economic and political information with the objective of determining
future movements in a financial market.
Futures Contract - An obligation
to exchange a good or instrument at a set price on a future date.
The primary difference between a Future and a Forward is that Futures
are typically traded over an exchange (Exchange- Traded Contacts
- ETC), versus forwards, which are considered Over The Counter (OTC)
contracts. An OTC is any contract NOT traded on an exchange.
Good 'Til Cancelled Order (GTC)
- An order to buy or sell at a specified price. This order remains
open until filled or until the client cancels.
Hedge - A position or combination
of positions that reduces the risk of your primary position.
Inflation - An economic condition
whereby prices for consumer goods rise, eroding purchasing power.
Initial margin - The initial deposit
of collateral required to enter into a position as a guarantee on
Interbank rates - The Foreign Exchange
rates at which large international banks quote other large international
Leading Indicators - Statistics
that are considered to predict future economic activity.
LIBOR - The London Inter-Bank Offered
Rate. Banks use LIBOR when borrowing from another bank.
Limit order - An order with restrictions
on the maximum price to be paid or the minimum price to be received.
As an example, if the current price of USD/YEN is 102.00/05, then
a limit order to buy USD would be at a price below 102. (ie 101.50)
Liquidity - The ability of a market
to accept large transaction with minimal to no impact on price stability.
Liquidation - The closing of an
existing position through the execution of an offsetting transaction.
Long position - A position that
appreciates in value if market prices increase.
Margin - The required equity that
an investor must deposit to collateralize a position.
Margin call - A request from a broker
or dealer for additional funds or other collateral to guarantee
performance on a position that has moved against the customer.
Market Maker - A dealer who regularly
quotes both bid and ask prices and is ready to make a two-sided
market for any financial instrument.
Market Risk - Exposure to changes
in market prices.
Mark-to-Market - Process of re-evaluating
all open positions with the current market prices. These new values
then determine margin requirements.
Maturity - The date for settlement
or expiry of a financial instrument.
Offer - The rate at which a dealer
is willing to sell a currency.
Offsetting transaction - A trade
with which serves to cancel or offset some or all of the market
risk of an open position.
One Cancels the Other Order (OCO)
- A designation for two orders whereby one part of the two orders
is executed the other is automatically cancelled.
Open order - An order that will
be executed when a market moves to its designated price. Normally
associated with Good 'til Cancelled Orders.
Open position - A deal not yet reversed
or settled with a physical payment.
Over the Counter (OTC) - Used to
describe any transaction that is not conducted over an exchange.
Overnight - A trade that remains
open until the next business day.
Pips - Digits added to or subtracted
from the fourth decimal place, i.e. 0.0001. Also called Points.
Political Risk - Exposure to changes
in governmental policy which will have an adverse effect on an investor's
Position - The netted total holdings
of a given currency.
Premium - In the currency markets,
describes the amount by which the forward or futures price exceed
the spot price.
Price Transparency - Describes quotes
to which every market participant has equal access.
Quote - An indicative market price,
normally used for information purposes only.
Rate - The price of one currency
in terms of another, typically used for dealing purposes.
Resistance - A term used in technical
analysis indicating a specific price level at which analysis concludes
people will sell.
Revaluation - An increase in the
exchange rate for a currency as a result of central bank intervention.
Opposite of Devaluation.
Risk - Exposure to uncertain change,
most often used with a negative connotation of adverse change.
Risk Management - The employment
of financial analysis and trading techniques to reduce and/or control
exposure to various types of risk.
Roll-Over - Process whereby the
settlement of a deal is rolled forward to another value date. The
cost of this process is based on the interest rate differential
of the two currencies.
Settlement - The process by which
a trade is entered into the books and records of the counterparts
to a transaction. The settlement of currency trades may or may not
involve the actual physical exchange of one currency for another.
Short Position - An investment position
that benefits from a decline in market price.
Spot Price - The current market
price. Settlement of spot transactions usually occurs within two
Spread - The difference between
the bid and offer prices.
Sterling - slang for British Pound.
Stop Loss Order - Order type whereby
an open position is automatically liquidated at a specific price.
Often used to minimize exposure to losses if the market moves against
an investor's position. As an example, if an investor is long USD
at 156.27, they might wish to put in a stop loss order for 155.49,
which would limit losses should the dollar depreciate, possibly
Support Levels - A technique used
in technical analysis that indicates a specific price ceiling and
floor at which a given exchange rate will automatically correct
itself. Opposite of resistance.
Swap - A currency swap is the simultaneous
sale and purchase of the same amount of a given currency at a forward
Technical Analysis - An effort to
forecast prices by analyzing market data, i.e. historical price
trends and averages, volumes, open interest, etc.
Tomorrow Next (Tom/Next) - Simultaneous buying and selling of a
currency for delivery the following day.
Transaction Cost - the cost of buying
or selling a financial instrument.
Transaction Date - The date on which
a trade occurs.
Turnover - The total money value
of all executed transactions in a given time period; volume.
Two-Way Price - When both a bid
and offer rate is quoted for a FX transaction.
Uptick - a new price quote at a
price higher than the preceding quote.
Uptick Rule - In the U.S., a regulation
whereby a security may not be sold short unless the last trade prior
to the short sale was at a price lower than the price at which the
short sale is executed.
US Prime Rate - The interest rate
at which US banks will lend to their prime corporate customers
Value Date - The date on which counterparts
to a financial transaction agree to settle their respective obligations,
i.e., exchanging payments. For spot currency transactions, the value
date is normally two business days forward. Also known as maturity
Variation Margin - Funds a broker
must request from the client to have the required margin deposited.
The term usually refers to additional funds that must be deposited
as a result of unfavorable price movements.
Volatility (Vol) - A statistical
measure of a market's price movements over time.
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.