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Market 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.
Adjustment - Official action normally
by either change in the internal economic
policies to correct a payment imbalance
or in the official currency rate
or. Adjustment - Official action normally
by either change in the internal economic
policies to correct a payment imbalance
or in the official currency
rate or.
Appreciation - A currency is said to
'appreciate' when it strengthens in price
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.
Ask (Offer) Price - The price at which
the market is prepared to sell a specific
Currency in a Foreign Exchange Contract
or Cross Currency Contract. At
this price, the trader can buy the base
currency. In the quotation, it is shown
on the right side of the quotation. For
example, in the quote USD/CHF
1.2627/32, the ask price is 1.2632; meaning
you can buy one US dollar for 1.2632 Swiss
francs.
At Best - An instruction given to a dealer
to buy or sell at the best rate that can
be obtained.
At or Better - An order to deal at a
specific rate or better.
B
Balance of Trade - The value of a country's
exports minus its imports.
Bar Chart - A type of chart which consists
of four significant points: the high and
the low prices, which form the vertical
bar, the opening price, which
is marked with a little horizontal line
to the left of the bar, and the closing
price, which is marked with a little horizontal
line of the right of the bar.
Base Currency - The first currency in
a Currency Pair. It shows how much the base
currency is worth as measured against the
second currency. For
example, if the USD/CHF rate equals 1.2615
then one USD is worth CHF 1.2615 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 Price - The bid is the the price
at which the market is prepared to buy a
specific Currency in a Foreign Exchange
Contract or Cross Currency
Contract. At this price, the trader can
sell the base currency. It is shown on the
left side of the quotation. For example,
in the quote USD/CHF 1.2627/32,
the bid price is 1.2627; meaning you
can sell one US dollar for 1.2627 Swiss
francs.
Bid/Ask Spread - The difference between
the bid and offer price. Big Figure Quote
- Dealer expression referring to the first
few digits of an exchange
rate. These digits are often omitted
in dealer quotes.. For example, a USD/JPY
rate might be 117.30/117.35, 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 positions.
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.
C
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.
Cash Market - The market in the actual
financial instrument on which a futures
or options contract is based.
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.
Cleared Funds - Funds that are freely
available, sent in to settle a trade.
Closed Position - Exposures in Foreign
Currencies that no longer exist. The process
to close a position is to sell or buy a
certain amount of currency to
offset an equal amount of the open position.
This will 'square' the postion.
Clearing - The process of settling a
trade.
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'.
Collaterall - 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 trading.
Counter Currency - The second listed
Currency in a Currency Pair.
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 political conditions.
Cross Currency Pairs or Cross Rate -
A foreign exchange transaction in which
one foreign currency is traded against a
second foreign currency. For
example; EUR/GBP
Currency Symbols
AUD - Australian Dollar
CAD - Canadian Dollar
EUR - Euro
JPY - Japanese Yen
GBP - British Pound
CHF - Swiss Franc
Currency - Any form of money issued by
a government or central bank and used as
legal tender and a basis for trade.
Currency Pair - The two currencies that
make up a foreign exchange rate.
For Example, EUR/USD
Currency Risk - the probability of an
adverse change in exchange rates.
D
Day Trader - Speculators who take positions
in commodities which are then liquidated
prior to the close of the same trading day.
Dealer - An individual or firm that 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.
E
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.
F
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.
First In First Out (FIFO) - Open positions
are closed according to the FIFO accounting
rule. All positions opened within a particular
currency pair are
liquidated in the order in which they
were originally opened.
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.
FX - Foreign Exchange.
G
G7 - The seven leading industrial countries,
being US , Germany, Japan, France, UK, Canada,
Italy.
Going Long - The purchase of a stock,
commodity, or currency for investment or
speculation.
Going Short - The selling of a currency
or instrument not owned by the seller.
Gross Domestic Product - Total value
of a country's output, income or expenditure
produced within the country's physical borders.
Gross National Product - Gross domestic
product plus income earned from investment
or work abroad.
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.
H
Hedge - A position or combination of
positions that reduces the risk of your
primary position.
"Hit the bid" - Acceptance
of purchasing at the offer or selling at
the bid.
I
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.
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.
K
Kiwi - Slang for the New Zealand dollar.
L
Leading Indicators - Statistics that
are considered to predict future economic
activity.
Leverage - Also called margin. The ratio
of the amount used in a transaction to the
required security deposit.
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 117.00/05, then a limit order
to buy USD would be at a price below 102.
(ie 116.50)
Liquidation - The closing of an existing
position through the execution of an offsetting
transaction.
Liquidity - The ability of a market to
accept large transaction with minimal to
no impact on price stability.
Long position - A position that appreciates
in value if market prices increase. When
the base currency in the pair is bought,
the position is said to be
long.
Lot - A unit to measure the amount of
the deal. The value of the deal always corresponds
to an integer number of lots.
M
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.
N
Net Position - The amount of currency
bought or sold which have not yet been offset
by opposite transactions.
O
Offer (ask) - The rate at which a dealer
is willing to sell a currency. See Ask (offer)
price
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 - An active trade with
corresponding unrealized P&L, which
has not been offset by an equal and opposite
deal.
Over the Counter (OTC) - Used to describe
any transaction that is not conducted over
an exchange.
Overnight Position - A trade that remains
open until the next business day.
Order - An instruction to execute a trade
at a specified rate.
P
Pips - The smallest unit of price for
any foreign currency. 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.
Profit /Loss or "P/L" - 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.
Q
Quote - An indicative market price, normally
used for information purposes only.
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.
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.
Round trip - Buying and selling of a
specified amount of currency.
S
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.
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.
Square - Purchase and sales are in balance
and thus the dealer has no open position.
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.
Swissy - Market slang for Swiss Franc.
T
Technical Analysis - An effort to forecast
prices by analyzing market data, i.e. historical
price trends and averages, volumes, open
interest, etc.
Tick - A minimum change in price, up
or down.
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.
U
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.
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.
V
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 unfavorable
price movements.
Volatility (Vol) - A statistical measure
of a market's price movements over time.
W
Whipsaw - slang for a condition of a
highly volatile market where a sharp price
movement is quickly followed by a sharp
reversal.
Y
Yard - Slang for a billion.
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