Forex Glossary


  • 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.
  • Around – Dealer jargon used 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.
  • Ask Rate – The rate at which a financial instrument
    if offered for sale (as in bid/ask spread).
  • Asset Allocation – Investment practice that divides
    funds among different markets to achieve diversification for risk management
    purposes and/or expected returns consistent with an investor’s objectives.
  • 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 – 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 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.
  • 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.
  • 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’.
  • 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 trading.
  • 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 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 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) 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.
  • 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 future performance.
  • Interbank rates – The Foreign Exchange rates
    at which large international banks quote other large international banks.
  • 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.
  • 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 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.
  • 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 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.
  • 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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