Appreciation
- A currency is said to ‘appreciate ‘
when it's price increases against a specific currency
or group of currencies in response to market demand.
Arbitrage - The purchase or
sale of an instrument and simultaneous taking
of an equal and opposite position in a related
market, in order to take advantage of small price
differentials between markets.
Around - Jargon used by dealers
in quoting when the forward premium/discount is
near parity. For example, “two-two around”
would translate into 2 points to either side of
the present spot price.
Ask Rate - The rate at which
a financial instrument if offered for sale (as
in bid/ask spread).
Asset Allocation - Division
of funds among different markets, instruments
or investments to diversify risk and/or create
exposure to areas considered attractive, consistent
with an investor’s objectives.
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Back Office
- The departments and processes related to the
settlement of financial transactions.
Balance of Trade - The value
of a country’s exports minus its imports.
Base Currency - The base currency
is usually 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
main exceptions to this rule are the Sterling,
the Euro and the Australian Dollar.
Bear Market - A market in which
prices decline.
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 liquidity.
Big Figure - The first few digits
of an exchange rate, as referred to by dealers
for simplicity. These digits change relatively
slowly, and are omitted in dealer quotes, especially
in times of high market activity when time is
tight. 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, the ‘book’ is the net
positions of a dealing desk.
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.
Bretton Woods Agreement of 1944 -
The 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 in which
prices rise.
Bundesbank - Germany’s
Central Bank.
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Cable - Trader
slang referring to the Sterling/US Dollar exchange
rate. So called because the rate was originally
transmitted via a transatlantic cable beginning
in the mid 1800s.
Candlestick Chart - A chart
indicating the trading range for the period 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 - Someone who uses
charts and graphs and interprets historical data
to find trends to predict future movements. Also
referred to as Technical Trader.
Clearing - The process of settling
a trade.
Contagion - The tendency of
an economic situation to spread from one market
to another.
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 the parties to a transaction that states the
terms of said transaction.
Contract - The standard unit
of trading.
Counterparty - A participant
in a financial transaction.
Country Risk – Risk associated
with an international transaction, including but
not limited to legal and political conditions.
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 for trade.
Currency Risk - the likelihood
of an adverse change in exchange rates.
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Day Trading
- Refers to taking positions which are opened
and closed on the same trading day.
Dealer - Someone who acts as
a principal or counterparty to a transaction,
hoping to earn a spread (profit) by closing out
the position in a subsequent trade. In contrast,
a broker is an individual or firm that acts as
an intermediary, putting together buyers and sellers
for a fee or commission.
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 against another currency or
group of currencies.
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.
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Economic Indicator
- A government-issued statistic on the state of
an economy, which might affect market prices.
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.
European Monetary Union (EMU)
- The EMU created the single European currency
called the Euro, which replaced the national currencies
of the member EU countries in 2002. 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.
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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) position.
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
currencies involved.
Forward points - The pips added
to or subtracted from the current exchange rate
to calculate a forward price.
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.
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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.
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Hedge - A position
or combination of positions that reduces the risk
of your primary position.
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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 future performance.
Interbank rates - The Foreign
Exchange rates at which large international banks
quote other large international banks.
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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.
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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.
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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.
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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.
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.
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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.
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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 business days.
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 below 155.49.
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 exchange rate.
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Technical Analysis
- An effort to forecast prices by analysing 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.
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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
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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 date.
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 unfavourable
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.
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