FX Glossary
Appreciation
Describes a currency strengthening in response to market demand rather than by official action.
Ask Price
Ask is the lowest price acceptable to the buyer.
Back Office
Settlement and related processes.
Bank Rate
The rate at which a central bank is prepared to lend money to its domestic banking system.
Base Currency
The currency in which the operating results of the bank or institution are reported.
Base Rate
A term used in the UK for the rate used by banks to calculate the interest rate to borrowers. Top quality borrowers will pay a small amount over base.
Basis Point
One per cent of one per cent.
Bear
A person who believes that prices will decline.
Bid Price
Bid is the highest price that the seller is offering for the particular currency at a particular moment; the difference between the ask and the bid price is the spread. Together, the two prices constitute a quotation. The bid-ask spread is stated as a percentage cost of transacting in the foreign.
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 indicates a price of 1.5530/40BIS: Bank of International Settlement.
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
A person who believes that prices will rise.
Bull Market
A market characterized by rising prices.
Cable
A term used in the foreign exchange market for the US Dollar/British Pound rate.
Central Bank
A central bank provides financial and banking services for a country's government and commercial banks. It implements the government's monetary policy, as well, by changing interest rates. Reserve Bank of India is the central bank of India which performs the role of maintaining orderly conditions in the forex market by intervention through various instruments like cash reserve ratio, bank rate, open market operations and moralisation.
CHAPS
Clearing House Automated Payment System.
Confirmation
A memorandum to the other party describing all the relevant details of the transaction.
Contract
An agreement to buy or sell a specified amount of a particular currency or option for a specified month in the future.
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.
Counterparty
The customer or bank with which a foreign exchange deal is executed.
Cross Rate
An exchange rate between two currencies, usually constructed from the individual exchange rates of the two currencies, as most currencies are quoted against the dollar.
Currency
The type of money that a country uses. It can be traded for other currencies on the foreign exchange market, so each currency has a value relative to another.
Currency Basket
Various weightings of other currencies grouped together in relation to a basket currency(e.g. ECU or SDR). Sometimes used by currencies to fix their rate often on a trade weighted basket.
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. This is in contrast to brokers who trade only on behalf of their clients.
Deficit
Shortfall in the balance of trade, balance of payments, or government budgets.
Delivery
The settlement of a transaction by receipt or tender of a financial instrument or currency.
Delivery Date
The date of maturity of a contract, when the final settlement of transaction is made by exchanging the currencies. This date is more commonly known as the value date.
Details
All the information required to finalise a foreign exchange transaction, i.e. name, rate, dates, and point of delivery.
Discount
Less than the spot price example: forward discount.
EFT
Electronic Fund Transfer.
EMS
European Monetary System.
European Union
The group formerly known as the European Community.
Exchange Rate Risk
The potential loss that could be incurred from an adverse movement in exchange rates.
Exotic
A less broadly traded currency.
Expiry Date
The last day on which the holder of an option can exercise his right to buy or sell the underlying security.
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 1980s.
Fixed Exchange Rate
Official rate set by monetary authorities for one or more currencies. In practice, even fixed exchange rates are allowed to fluctuate between definite upper and lower bands, leading to intervention by the central bank.
Flat/Square
Where a client has not traded in that currency or where an earlier deal is reversed thereby creating a neutral (flat) position.
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
An abbreviation of 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 Points
The interest rate differential between two currencies expressed in exchange rate points. The forward points are added to or subtracted from the spot rate to give the forward or outright rate (depending on whether the currency is at a forward premium or discount).
Forward Rate
The rate at which a foreign exchange contract is struck today for settlement at a specified future date which is decided at the time of entering into the contract. 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.
Front Office
The activities carried out by the dealer, normal trading activities.
Fundamental Analysis
Analysis based on economic and political factors
FX
Foreign Exchange.
GTC "Good Till Cancelled"
An order left with a dealer to buy or sell at a fixed price. The order remains in place until it is cancelled by the client.
Indicative Quote
A market-maker's price which is not firm.
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.
Interbank Rates
The foreign exchange rates large international banks quote to other large international banks. Normally the public and other businesses do not have access to these rates.
Interest Rate Risk
The potential for losses arising from changes in interest rates
Intervention
Action by a central bank to effect the value of its currency by entering the market. In India the intervention by Reserve Bank of India is confined to the events of extreme volatility.
Kiwi
Slang for the New Zealand dollar.
Leading Indicators
Statistic, that are considered to precede changes in economic growth rates and total business activity, e.g. factory orders.
Liability
In terms of foreign exchange, the obligation to deliver to a counterparty an amount of currency either in respect of a balance sheet holding at a specified future date or in respect of an un-matured forward or spot transaction.
LIBOR (London Inter Bank Offer Rate)
British Bankers' Association average of interbank offered rates for dollar deposits in the London market based on quotations at 16 major banks. Effective rate for contracts entered into two days from date appearing.
LIFFE
London International Financial Futures Exchange.
Limit Order
An order to perform a deal at a superior rate to the current market level. Can be removed on completion (filled) or cancelled at any time (pulled).
Margin
The required initial deposit of collateral to enter into a position or foreign exchange trade. This is held as a deposit on any running contract
Margin Call
A demand for additional funds to cover positions
Market Value
Market value of a foreign exchange position at any time is the amount of the domestic currency that could be purchased at the then market rate in exchange for the amount of foreign currency to be delivered under the foreign exchange Contract.
Maturity
Date for settlement of the transaction which is decided at the time of entering into the contract.
Offer
The rate at which a dealer is willing to sell the base currency. One Cancels Other Order
Where the execution of one order automatically cancels a previous order also referred to as OCO or 'One cancels the other'.
Open Position
Any deal which has not been settled by physical payment or reversed by an equal and opposite deal for the same value date. It can be termed as a high risk, high return proposition.
Over The Counter (OTC)
A market conducted directly between dealers and principals via a telephone and computer network rather than a regulated exchange trading floor. These markets have not been very popular because of the risks both the parties face in case the other party fails to honour the contract. They were never part of the Stock Exchange since they were seen as "unofficial".
Outright Forward
Foreign exchange transaction involving either the purchase or the sale of a currency for settlement at a future date.
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
The netted total exposure 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).
Profit Taking
The unwinding of a position to realise profits.
Range
The difference between the highest and lowest price of a future recorded during a given trading session.
Rate
The price of one currency in terms of another.
Recession
A decline in business activity. Often defined as two consecutive quarters with a real fall in gross national production.
Reserve Currency
A currency held by a central bank on a permanent basis as a store of international liquidity, these are normally Dollar , Euro and Sterling.
Resistance
A price level at which the selling is expected to take place.
Revaluation
Increase in the exchange rate of a currency as a result of official action.
Rollover
Where the settlement of a deal is carried forward to another value date based on the interest rate differential of the two currencies example: next day.
Selling Rate
Rate at which a bank is willing to sell foreign currency.
Settlement
Actual physical exchange of one currency for another.
Settlement Date
It means the business day specified for delivery of the currencies bought and sold under a foreign exchange contract.
Short
A market position where the client has sold a currency they do not already own. Usually expressed in base currency terms.
Spot
(1) The most common foreign exchange transaction.
(2) Spot refers to the buying and selling of the currency where the settlement date is two business days forward.
Spot Price/Rate
The price at which the currency is currently trading in the spot market.
Spread
The difference between the bid and ask price of a currency.
Stable Market
An active market which can absorb large sale or purchases of currency without having any major impact on the interest rates.
Sterling
British pound.
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. Realise profit orders are less common.
Support Levels
A price level at which the buying is expected to take place.
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.
SWIFT
Society for Worldwide Inter-bank Financial Telecommunication is a clearing system for international trading.
Swissy
Market slang for Swiss Franc.
Technical Analysis
The study of the price that reflects the supply and demand factors of a currency. Common methods are flags, trend-lines spikes, bottoms, tops, pennants, patterns and gaps.
Technical Correction
An adjustment to price not based on market sentiment but technical factors such as volume and charting.
Tick
A minimum change in price, up or down.
Trade Date
The date on which a trade occurs.
Transaction
The buying or selling of securities resulting from the execution of an order.
Transaction Date
The date on which a trade occurs.
Value Date
Settlement date of a spot or forward contract. Also know as maturity date
Value Spot
Normally settlement for two working days from the date the contract is entered into. Value Today Transaction executed for same day settlement; sometimes also referred to as "cash transaction."
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.
Working day
A day on which the banks in a currency's principal financial centre are open for business. For Foreign exchange transactions, a working day only occurs if the bank in both (all relevant currency centers in the case of a cross are open).
