Total amount of exposure a bank has with a customer for both spot and forward contracts.
An option which may be exercised at any valid business date throughout the life of the option.
Describes a currency strengthening in response to market demand rather than by official action.
A risk-free type of trading where the same instrument is bought and sold simultaneously in two different markets in
order to cash in on the difference in these markets.
Used in quoting forward “premium / discount”.
Ask is the lowest price acceptable to the buyer.
In the context of foreign exchange it is the right to receive from a counterparty an amount of currency either in respect
of a balance sheet asset (e.g. a loan) or at a specified future date in respect of an unmatched forward or spot deal.
An instruction given to a dealer to buy or sell at the best rate that is currently available in the market.
At Par Forward Spread
When the forward price is equivalent to the spot price.
At or Better
An order to deal at a specific rate or better.
At the Price Stop-Loss Order
A stop-loss order that must be executed at the requested level regardless of market conditions.
An option whose strike/exercise price is equal to or near the current market price of the underlying instrument.
Sale of an item to the highest bidder. (1) A method commonly used in exchange control regimes for the allocation of
foreign exchange. (2) A method for allocating government paper, such as US Treasury Bills. Small investors are
given preferential access to the bills. The average issuing price is then computed on the basis of the competitive bids
accepted. In some circumstances for government auctions it is the yield rather than the price which is bid.
Average Rate Option
A contract where the exercise price is based on the difference between the strike price and the average spot rate
over the contract period. Sometimes called an “Asian option”.
Bundesbank, the reserve bank of Germany.
Settlement and related processes.
Back to Back
(1) Transaction where all the obligations and liabilities in one transaction are mirrored in a second transaction. (2)
Transaction where a loan is made in one currency in one country against a loan in another country in another
Balance of Payments
A systematic record of the economic transactions during a given period for a country. (1) The term is often used to
mean either: (i) balance of payments on “current account” or (ii) the current account plus certain long term capital
movements. (2) The combination of the trade balance, current balance, capital account and invisible balance, which
together make up the balance of payments total. Prolonged balance of payment deficits tend to lead to restrictions in
capital transfers, and or decline in currency values.
Balance of Trade
The value of exports less imports. Invisibles are normally excluded, and is otherwise referred to as mercantile or
physical trade. Figures can be quoted on FoB/ FaS , customs cleared, or FoB export.
The range in which a currency is permitted to move. A system used in the ERM.
Line of credit granted by a bank to a customer, also known as a ” line”.
Bank notes are paper issued by the central or issuing bank and are legal tender, but are not usually considered to be
part of the FX market. However bank notes can be converted, in some counties, into FX. Bank notes are normally
priced at a premium to the current spot rate for a currency.
The rate at which a central bank is prepared to lend money to its domestic banking system.
A family of path dependent options whose pay-off pattern and survival to the expiration date depend not only on the
final price of the underlying currency but also on whether or not the underlying currency breaks a predetermined price
level at any time during the life of the option. See Down and Out call/put, Down and in call/put, Up and out call/put,
Up and in call/put.
The currency in which the operating results of the bank or institution are reported.
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.
The process whereby the basis tends towards zero as the contract expiry approaches.
One per cent of one per cent.
The price expressed in terms of yield maturity or annual rate of return.
Taking opposite positions in the cash and futures market with the intention of profiting from favorable movements in
The difference between the cash price and futures price.
A group of currencies normally used to manage the exchange rate of a currency. Sometimes referred to as a unit of
A market in which prices decline sharply against a background of widespread pessimism (opposite of Bull Market).
A person who believes that prices will decline.
Bid is the highest price that the seller is offering for the particular currency at the moment; the difference between the
ask and the bid price is the spread. Together, the two prices constitute a quotation; the difference between the two is
the spread. The bid-ask spread is stated as a percentage cost of transacting in foreign exchange.
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.
A system used where foreign currency is limited. Payments are usually routed through the central banks, and
sometimes require that the trade balance is equaled every year.
A binary “call” (or “step up”) is like a standard European call option except that the pay off at expiry is fixed at one unit
of the counter currency, if the call expires in the money.
An option pricing formula initially derived by Fisher Black and Myron Scholes for securities options and later refined
by Black for options on futures. It is widely used in the currency markets.
The recording of a transaction outside the country where the transaction is itself negotiated.
Slang for Russian trading.
Break Even Point
The price of a financial instrument at which the option buyer recovers the premium, meaning that he makes neither a
loss nor a gain. In the case of a call option, the break even point is the exercise price plus the premium.
In the options market, undoing a conversion or a reversal to restore the option buyer’s original position.
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.
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.
Commission charged by a broker.
A market characterized by rising prices.
A person who believes that prices will rise.
Sterling bonds issued in the UK by foreign institutions.
Central Bank of Germany.
(1) A futures butterfly spread is a spread trade in which multiple futures months are traded simultaneously at a
differential. The trade basically consists of two futures spread transactions with either three or four different futures
months at one differential.
(2) An options butterfly spread is a combination of a bear and bull spread trade in which multiple options months and
strike prices are traded simultaneously at a differential. The trade basically consists of two options spread
transactions with either three or four different options months and strikes at one differential
Chicago Board Options Exchange.
CBOT or CBT
Chicago Board of Trade.
Certificate of Deposit.
The Commodity Futures Trading Commission, the US Federal regulatory agency for futures traded on commodity
markets, including financial futures.
Clearing House Automated Payment System.
The New York clearing house clearing system. (Clearing House Interbank Payment System). Most Euro transactions
are cleared and settled through this system.
Copenhagen Interbank Rate, the rate at which the banks lend the Danish Krone on an unsecured basis. The rate is
calculated daily by the Danmarks Nationalbank (the Danish Central Bank), based on rules set out by the Danish
Chicago Mercantile Exchange.
Consumer Price Index. Monthly measure of the change in the prices of a defined basket of consumer goods including
food, clothing, and transport. Countries vary in their approach to rents and mortgages.
Committee on Payment and Settlement Systems.
Telegraphic transfer of funds from one centre to another. Now synonymous with inter bank electronic fund transfer.
Telegraphic transfer of funds from one centre to another. Now synonymous with inter bank electronic fund transfer.
A term used in the foreign exchange market for the US Dollar/British Pound rate.
A call option confers the right but not the obligation to buy stock, shares or futures at a specified price.
An option that gives the holder the right to buy the underlying instrument at a specified price during a fixed period.
Juxtaposition of the long and short term capital imports and exports of a country.
A finance charge associated with the storing of commodities (or foreign exchange contracts) from one delivery date to
The interest cost of financing securities or other financial instruments held.
A procedure for settling futures contract where the cash difference between the future and the market price is paid
instead of physical delivery.
Cash and Carry
The buying of an asset today and selling a future contract on the asset. A reverse cash and carry is possible by
selling an asset and buying a future.
Normally refers to an exchange transaction contracted for settlement on the day the deal is struck. This term is mainly
used in the North American markets and those countries which rely for foreign exchange services on these markets
because of time zone preference i.e. Latin America. In Europe and Asia, cash transactions are often referred to as
value same day deals.
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.
Exchange rates against the ECU adopted for each currency within the EMS.Currencies have limited movement from
the central rate according to the relevant band.
Certificate of Deposit (CD)
A negotiable certificate in bearer form issued by a commercial bank as evidence of a deposit with that bank which
states the maturity value, maturity rate and interest rate payable. CDs vary in size with maturities ranging from a few
weeks to several years. CDs may normally be redeemed before maturity only by sale on the secondary market but
may also be redeemed back to issuing bank through payment of a penalty.
An individual who studies graphs and charts of historic data to find trends and predict trend reversals which include
the observance of certain patterns and characteristics of the charts to derive resistance levels, head and shoulders
patterns, and double bottom or double top patterns which are thought to indicate trend reversals.
A transaction which leaves the trade with a zero net commitment to the market with respect to a particular currency.
Closing Purchase Transaction
The purchase of an option identical to one already sold to liquidate a position.
An economic indicator that generally moves in line with the general business cycle such as industrial production.
Commodity Exchange of New York.
The fee that a broker may charge clients for dealing on their behalf.
An option on an option, the dates and price of such option being fixed.
A memorandum to the other party describing all the relevant details of the transaction.
Contract Expiration Date
The date on which a currency must be delivered to fulfill the terms of the contract. For options, the last day on which
the option holder can exercise his right to buy or sell the underlying instrument or currency.
The month in which a futures contract matures or becomes deliverable if not liquidated or traded out before the date
An agreement to buy or sell a specified amount of a particular currency or option for a specified month in the future
(See Futures contract).
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
Cost of Carry
The interest rate parity, where the forward price is determined by the cost of borrowing money in order to hold the
Cost of Living Index
Broadly equivalent to Retail Price Index or Consumer price.
Foreign Currency Inter-bank Exchange (FOREX) instruments are Positions (Buys and/or Sell) between the Client and
its Counterparty and, unlike exchange-traded foreign exchange instruments which are, in effect, guaranteed by a
clearing organization affiliated with the exchange on which the instruments are traded, are not guaranteed by a
clearing organization. Thus, when the Customer purchases an OTC foreign exchange instrument, it relies on the
Counterparty from which it has purchased the instrument to fulfill the contract. Failure of a Counterparty to fulfill a
Position could result in losses of any prior payment made pursuant to the Positions as well as the loss of the
expected benefit of the transaction.
The customer or bank with which a foreign exchange deal is executed.
Factors that affect currency trading unique to the specific country include political, regulatory, legal and holiday risks.
The annual rate of interest of a bond.
(1) On bearer stocks, the detachable part of the hide behind nominee status. Certificate exchangeable for dividends.
(2) Denotes the rate of interest on a fixed interest security.
(1) To take out a forward foreign exchange contract.
(2) To close out a short position by buying currency or securities which have been sold.
Covered Interest Rate Arbitrage
An arbitrage approach which consists of borrowing currency A, exchanging it for currency B, investing currency B for
the duration of the loan, and, after taking off the forward cover on maturity, showing a profit on the entire set of deals.
It is based on the theorem of interest rate parity (one of the key theoretical economic relationships) which says that
the return on a hedged foreign investment will just equal the domestic interest rate on investments of identical risk.
When the covered interest rate differential between the two money markets is zero, there is no arbitrage incentive to
move funds from one market to another.
Crawling Peg (Adjustable Peg)
An exchange rate system where a country’s exchange rate is “pegged” (i.e. fixed) in relation to another currency. The
official rate may be changed from time to time.
The risk that a debtor will not repay; more specifically the risk that the counterparty does not have the currency
promised to be delivered.
A foreign exchange deal entered into involving two currencies, neither of which is the base currency.
A technique using financial futures to hedge different but related cash instruments based on the view that the price
movements between the instruments move in concert.,/p>
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.
A cross-trade transaction is a transaction where either the buy broker and the sell broker are the same, or the buy
broker and the sell broker belong to the same firm.
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.
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.
The net balance of a country’s international payment arising from exports and imports together with unilateral
transfers such as aid and migrant remittances. It excludes capital flows.
The value of all exports (goods plus services) less all imports of a country over a specific period of time, equal to the
sum of trade and invisible balances plus net receipt of interest, profits and dividends from abroad.
The set of expiration dates applicable to different classes of option
An order that if not executed on the specific day is automatically canceled.
A Day Trading deal is a currency exchange deal which renews automatically every night at 22:00 (GMT time) starting
the day the deal was made and until it ends. The deal ends in one of the following events:
1.Termination initiated by you.
2.The day trading rate has reached the Stop-Loss or Take Profit rate you predefined.
3.The deal end date.
As long as the deal is open, it is charged a renewal fee every night at 22:00 (GMT time).
The date on which a transaction is agreed upon.
The primary method of recording the basic information relating to a transaction.
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 in contrast to the brokers who trade only on behalf of their clients.
The latest day or time by which the buyer of an option must intimate to the seller his willingness or unwillingness to
exercise the option.
Shortfall in the balance of trade, balance of payments, or government budgets.
The date of maturity of the contract, when the final settlement of transaction is made by exchanging the currencies.
This date is more commonly known as the value date.
A term to describe when a counterparty will not be able to complete his side of the deal. This risk is very high in case
of over the counter transactions where there is no exchange which can stand as a guarantee to the trade between
the two parties to the contract.
The settlement of a transaction by receipt or tender of a financial instrument or currency.
A method used by option writers to hedge risk exposure of written options by purchase or sale of the underlying
instrument in proportion to the delta.
A ratio spread of options established as a neutral position by using the deltas of the options concerned to determine
the hedge ratio.
The ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a
derivative. Also referred as the “hedge ratio”.
A broad term relating to risk management instruments such as futures, options, swaps, etc. The contract value moves
in relation to the underlying instrument or currency. The issue of derivatives and their control following large losses by
banks and corporates has been subject of much debate.
Term referring to a group dealing with a specific currency or currencies.
All the information required to finalize a foreign exchange transaction, i.e. name, rate, dates, and point of delivery.
Deliberate downward adjustment of a currency against its fixed parities or bands which is normally accompanied by
Quoting in fixed units of foreign currency against variable amounts of the domestic currency.
The rate at which a bill is discounted. Specifically it refers to the rate at which a central bank is prepared to discount
certain bills for financial institutions as a means of easing their liquidity, and is more accurately referred to as the
official discount rate
Less than the spot price. For example, forward discount.
The interest rates applicable to deposits domiciled in the country of origin. Value and values may vary from
Eurodeposits due to taxation and varying market practices.
Electronic Fund Transfer.
European Monetary System.
European Monetary Union.
European Options Exchange.
Exchange Rate Mechanism.
Reflects the impact of foreign exchange changes on the future competitive position of a company in the sense of the
impact it can have on the future cash flows of the company.
A statistic which indicates current economic growth rates and trends such as retail sales and employment.
Effective Exchange Rate
An attempt to summarize the effects on a country’s trade balance of its currency’s changes against other currencies.
Either Way Market
In the Euro Interbank deposit market where both bid and offer rates for a particular period are the same.
The change in the price of an option associated with a 1% change in implied volatility (technically the first derivative
of the option price with respect to volatility). Also referred to as eta, vega, omega and kappa.
A computerized settlement and depository system for safe custody, delivery of, and payment for Eurobonds.
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.
Exercise Price (Strike Price)
The price at which an option can be exercised.
A less broadly traded currency.
(1) Options – the last date after which the option can no longer be exercised.
(2) Bonds – the date on which a bond matures.
The month in which an option expires.
The last date on which an option can be bought or sold.
The last day on which the holder of an option can exercise his right to buy or sell the underlying security.
The total amount of money loaned to a borrower or country. Banks set rules to prevent overexposure to any single
borrower. In trading operations, it is the potential for running a profit or loss from fluctuations in market prices.
Foreign Exchange Dealers Association of India is an association of all dealers in foreign exchange which sets the
ground rules for fixation of commissions and other charges and also determines the rules and regulations relating to
day-to-day transactions in foreign exchange in India.
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.
Rapid movement in a market caused by strong interest by buyers and/or sellers. In such circumstances price levels
may be omitted and bid and offer quotations may occur too rapidly to be fully reported.
Fed Fund Rate
The interest rate on Fed funds. This is a closely watched short term interest rate as it signals the Feds view as to the
state of the money supply.
Cash balances held by banks with their local Federal Reserve Bank. The normal transaction with these funds is an
inter bank sale of a Fed fund deposit for one business day. Straight deals are where the funds are traded overnight
on a unsecured basis.
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 80s.
Federal National Mortgage Association
A privately owned but US government sponsored corporation that trades in residential mortgages. Its activities are
funded by the sale of instruments commonly known as Fannie Maes.
Federal Reserve Board
The board of the Federal Reserve System, appointed by the US President for 14 year terms, one of whom is
appointed for four years as chairman.
Federal Reserve System
The central banking system of the US comprising 12 Federal Reserve Banks controlling 12 districts under the Federal
Reserve Board. Membership of the Fed is compulsory for banks chartered by the Comptroller of Currency and
optional for state chartered banks.
Use of taxation as a tool in implementing monetary policy.
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.
A method of determining rates by normally finding a rate that balances buyers to sellers. Such a process occurs
either once or twice daily at defined times. Used by some currencies particularly for establishing tourist rates . The
system is also used in the London Bullion market.
Where a client has not traded in that currency or where an earlier deal is reversed thereby creating a neutral (flat)
position. example: you bought $500,000 then sold $500,000 = FLAT .
(1) see Floating exchange rate.
(2) Cash in hand or in the course of being transferred between banks
(3) Federal Reserve Float arises from the system where cheques sent to the Federal Reserve Banks are credited
sometimes in advance of the depositing bank loosening the reserve.
Floating Exchange Rate
When the value of a currency is decided by the market forces dictating the demand and supply of that particular
(1) An agreement with a counterparty that sets a lower limit to interest rates for the floor buyer for a stated time.
(2) A term for an exchanges trading area (cf. screen based trading), normally the trading area is referred to as a pit in
the commodities and futures markets.
The purchase or sale of a currency against sale or purchase of another.
It means a position under which one party agrees to purchase from or sell to the other party an agreed amount of
The purchase or sale of a currency against sale or purchase of another currency. The maximum time for a deal is
defined when the deal opens, the deal can be closed at any moment until the expiry date and time. A deal cannot be
closed on its first 3 minutes, due to technical reasons.
An abbreviation of foreign exchange
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 Cover Taking
Forward contracts to protect against movements in the exchange rate.
A deal with a value date greater than the spot value date.
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.
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.
Total reserves held by a bank less the reserves required by the authority.
The activities carried out by the dealer, normal trading activities.
Analysis based on economic and political factors.
The macro economic factors that are accepted as forming the foundation for the relative value of a currency, these
include inflation, growth, trade balance, government deficit, and interest rates.
A term for USD/CAD/Fungibles Instruments that are equivalent, substitutable and interchangeable in law. May apply
to certain exchange traded currency contracts offered on a number of exchanges.
A contract traded on a futures exchange which requires the delivery of a specified quality and quantity of a
commodity, currency or financial instruments a specified future month, if not liquidated before the contract matures.
Futures Exchange-Traded Contracts
They are firm agreements to deliver (or take delivery of) a standardized amount of something on a certain date at a
predetermined price. Futures exist in currencies, money market deposits, bonds, shares and commodities. They are
traded on an exchange with the clearing corporation gauranteeing the contract and moreover the trade is done on a
mark to market basis.
G7 plus Belgium, Netherlands and Sweden, a group associated with IMF discussions. Switzerland is sometimes
The five leading industrial countries – US, Germany, Japan, France, UK.
The seven leading industrial countries, being US , Germany, Japan, France, UK, Canada, Italy.
Removes inflation from the GNP figure. Usually expressed as a percentage and based on an index figure.
The difference between the actual real GNP and the potential real GNP. If the gap is negative an economy is
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.
The rate at which a delta changes over time or for one unit change in the price of the underlying asset.
The original system for supporting the value of currency issued. This system was in vogue before 1973 when the
fixed exchange rates were prevalent.
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 ” factor income from abroad” – income earned from investment or work abroad.
A currency whose value is expected to remain stable or increase in terms of other currencies.
Head and Shoulders
A pattern in price trends which chartist consider indicates a price trend reversal. The price has risen for some time, at
the peak of the left shoulder, profit taking has caused the price to drop or level. The price then rises steeply again to
the head before more profit taking causes the the price to drop to around the same level as the shoulder. A further
modest rise or level will indicate that a further major fall is imminent. The breach of the neckline is the indication to
The purchase or sale of options or futures contracts as a temporary substitute for a transaction to be made at a later
date. Usually it involves opposite positions in the cash or futures or options market.
A hedging transaction is one whose main aim is to protect an asset or liability against a fluctuation in the foreign
exchange rate rather than profit from the exchange rate fluctuations.
Very high and self sustaining inflation levels. One definition being the period while inflation exceeds 50% until it drops
below that level for 12 months.
International Commodities Clearing House Limited, a clearing house based in London operating world wide for many
International Foreign Exchange Master Agreement.
International Monetary Fund, established in 1946 to provide international liquidity on a short and medium term and
encourage liberalization of exchange rates. The IMF helps its members to tide over the balance of payments
problems with supplying the necessary loans.
International Monetary Market part of the Chicago Mercantile Exchange that lists a number of currency and financial
Index and Options Market part of the Chicago Mercantile Exchange.
Industrial Production Index. A coincident indicator measuring physical output of manufacturing, mining and utilities.
ISDA (International Securities Dealers Association)
Organization which foreign currency exchange banks have formed to regulate inter-bank markets and exchanges.
The interest rate determined by calculating the difference between spot and forward rates.
A call option is in-the-money if the price of the underlying instrument is higher than the exercise/strike price. A put
option is in-the-money if the price of the underlying instrument is below the exercise/strike price.
Currency which cannot be exchanged for other currencies either because it is forbidden by the foreign exchange
regulations or the currency witnesses extreme volatility that it is not perceived to be a safe haven for parking the
A market-maker’s price which is not firm.
Where the foreign currency is a variable amount and the domestic currency is fixed at one unit.
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.
Rate given for information purposes only.
The deposit required by the Broker before a client can trade/transact a deal to have some cushion in the event of
default by the party.
The forex 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
Interest Rate Swaps
An agreement to exchange interest rate exposures from floating to fixed or vice versa. There is no swap of the
principal. The principal amount is notional as at the end of the tenure only cash flows related with the interest
payments (whether payment or reciept) are exchanged.
Action by a central bank to effect the value of its currency by entering the market.
Intra Day Limit
Limit set by bank management on the size of each dealer’s Intra Day Position.
Intra Day Position
Open positions run by a dealer within the day. Usually squared by the close.
A term describing the expected effect of a devaluation on a country’s trade balance. It is anticipated that import bills
rise before export orders and receipts increase.
Slang for the New Zealand dollar.
A process where a barrier option (European) becomes active as the underlying spot price is in the money.
has a corresponding meaning although the option may permanently cease to exist.
Less developed countries, often used with respect to secondary debt market.
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.
London International Financial Futures Exchange.
To carry out a transaction in the market to offset a previous transaction and return to a square position.
Statistics that are considered to precede changes in economic growth rates and total business activity, e.g. factory
Leads and Lags
The effect on foreign trade payments of an anticipated move in the exchange rate, normally a devaluation. The
importers speeden up the payment for the imports and exporters delay receiving payment for the exports.
In terms of foreign exchange, the obligation to deliver to a counter party 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.
Limit Order – Reserved Day Trading Deal
An order to perform a Day Trading deal at a rate pre-defined by the customer, when and if such rate comes up in real
market time. The Limit rate is superior to the existing rate at the time of reservation. The reservation order lasts for a
period defined by the customer, and is associated by the necessary collaterals to facilitate the potential Day Trading
deal, when and if activated, under the pre-defined terms
When residents of a country are prohibited from buying other currencies even though non-residents may be
completely free to buy or sell the national currency and the foreign institutional investors also have the liberty to buy
and sell shares on the stock exchange of that country.
Any transaction that offsets or closes out a previously established position
The ability of a market to accept large transactions without having any major impact on the interest rates.
A market position where the Client has bought a currency they previously did not own. For example: long Dollars.
Cash in circulation. Only used by the UK.
Cash in circulation plus demand deposits at commercial banks. There are variations between the precise definitions
used by national financial authorities.
Includes demand deposits, time deposits and money market mutual funds excluding large CDs.
In the UK it is M1 plus public and private sector time deposits and sight deposits held by the public sector.
In the US it is M2 plus negotiable CDs
Japanese Ministry of International Trade & Industry.
Make a Market
A dealer is said to make a market when he quotes both the bid and offer prices at which he stands ready to buy and
When the monetary authorities intervene regularly in the market to stabilise the rates or to push the exchange rate in
a required direction. Also called a dirty float.
A demand for additional funds to cover positions
Collateral that the holder of a position in securities, options, Forex or futures contracts, has to deposit to cover the
credit risk of his counterparty. Other definitions to MARGIN, used in other areas are:
(1) Difference between the buying and selling rates, also used to indicate the discount or premium between spot or
(2) For options, the sum required as collateral from the writer of an option.
(3) For futures, a deposit made to the clearing house on establishing a futures position account.
(4) The percentage reserve required by the US Federal Reserve to make an initial credit transaction.
The risk that a customer goes bankrupt after entering into a forward contract. In such an event the issuer must close
the commitment running the risk of having to pay the marginal movement on the contract.
Mark – To – Market
The profits and/or losses are tallied at the end of the session according to the closing prices of the security and the
account is “marked to the market” daily. The party will be called upon to make good the losses if there has been an
adverse movement in the prices and it can book the profits in case there has been a favorable movement in the
Market value of a forex 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 forex Contract.
US term for five basis points
An open-end investment company. Equivalent to unit trust.
US term for five basis points
A foreign currency current account maintained with another bank. The account is used to receive and pay currency
assets and liabilities denominated in the currency of the country in which the bank is resident.
Not Held Basis Order
An order whereby the price may trade through or better than the client’s desired level, but the principal is not held
responsible if the order is not executed.
A financial instrument consisting of a promise to pay rather than an order to pay or a certificate of indebtedness
The operations of a financial institution which although physically located in a country, has little connection with that
country’s financial systems. In certain countries a bank is not permitted to do business in the domestic market but
only with other foreign banks. This is known as an off shore banking unit.
The rate at which a dealer is willing to sell the base currency
Official Settlements Account
A US balance of payments measure based on movement of dollars in foreign official holdings and US reserves. Also
referred to as reserve transaction account.
Old lady of Threadneedle Street, a term for the Bank of England.
One Cancels Other Order
Where the execution of one order automatically cancels a previous order also referred to as OCO or “One cancels
Open Market Operations
The central bank operations in the markets to influence exchange and interest rates.
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.
All options of the same type – calls or puts -listed on the same underlying instrument.
All options of the same class having the same exercise/strike price and expiration date
A contract conferring the right but not the obligation to buy (call) or to sell (put) a specified amount of an instrument at
a specified price within a predetermined time period.
A put option is out-of-the-money if the exercise/strike price is below the price of the underlying instrument. A call
option is out-of-the money if the exercise/strike price is higher than the price of the underlying instrument.
A forward deal that is not part of a swap operation.
Foreign exchange transaction involving either the purchase or the sale of a currency for settlement at a future date
The forward rate of a foreign exchange deal based on spot price plus forward discount/premium.
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”.
Is an economy on a high growth rate trajectory placing pressure on the production capacity resulting in increased
inflationary pressures and higher interest rates.
Net long or short position in one or more currencies that a dealer can carry over into the next dealing day. Passing
the book to other bank dealing rooms in the next trading time zone reduces the need for dealers to maintain these
Producer Price Indices. See wholesale price indices.
When a number of exchange and /or deposit orders have to be fulfilled simultaneously.
(1) The nominal value of a security or instrument.
(2) The official value of a currency.
The value of one currency in terms of another
(1) Foreign exchange dealer’s slang for your price is the correct market price.
(2) Official rates in terms of SDR or other pegging currency.
It means a foreign currency which is freely convertible i.e a currency which is permitted by the rules and regulations
of the country concerned to be converted into major reserve currencies and for which a fairly active and liquid market
exists for dealing against the major currencies.
See point. (0.0001 of a unit).
(1) 100th part of a per cent, normally 10,000 of any spot rate. Movement of exchange rates are usually in terms of
(2) One percent on an interest rate e.g. from 8-9%.
(3) Minimum fluctuation or smallest increment of price movement.
The potential for losses arising from a change in government policy or due to the risk of expropriation (nationalisation
by the government ).
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).
(1) The amount by which a forward rate exceeds a spot rate.
(2) The amount by which the market price of a bond exceeds its par value.
(3) Options, the price a put or call buyer must pay to a put or call seller for an option contract.
(4) The margin paid above the normal price level.
(1) The rate from which lending rates by banks are calculated in the US.
(2) The rate of discount of prime bank bills in the UK.
A dealer who buys or sells stock for his/her own account.
The unwinding of a position to realize profits.
Purchasing Power Parity
Model of exchange rate determination stating that the price of a good in one country should equal the price of the
same good in another country after adjusting for the changes in the price due to the change in exchange rate. Also
known as the law of one price.
Put Call Parity
The equilibrium relationship between premiums of call and put options of the same strike and expiry
A put option confers the right but not the obligation to sell currencies, instruments or futures at the option exercise
price within a predetermined time period.
An indicative price. The price quoted for information purposes but not to deal.
The difference between the highest and lowest price of a future recorded during a given trading session.
The price of one currency in terms of another. It has the same meaning as the term parities.
A decline in business activity. Often defined as two consecutive quarters with a real fall in GNP.
A currency held by a central bank on a permanent basis as a store of international liquidity, these are normally Dollar,
Deutschemark, and Sterling..
Funds held against future contingencies, normally a combination of convertible foreign currency, gold, and SDRs.
Official reserves are to ensure that a government can meet near term obligations. They are an asset in the balance of
A price level at which the selling is expected to take place.
Retail Price Index
Measurement of the monthly change in the average level of prices at retail, normally of a defined group of goods.
A system for screen based trading that has been in operation since the early 1980s. It now has a matching optional
enhancement known as Dealing 2000-2.
Increase in the exchange rate of a currency as a result of official action.
Additional sum payable or return to compensate a party for adopting a particular risk
The identification and acceptance or offsetting of the risks threatening the profitability or existence of an organisation.
With respect to foreign exchange involves, among others, consideration of market, sovereign, country, transfer,
delivery, credit, and counterparty risk.
There are risks associated with any market. It means variance of the returns and the possibility that the actual return
might not be in line with the expected returns. The risks associated with trading foreign currencies are: market,
exchange, Interest rate, yield curve, volatility, liquidity, forced sale, counter party, credit, and country risk.
The substituting of a far option for a near option of the same underlying stock at the same strike/exercise price.
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
Standard International Trade Classification. A system for reporting trade statistics in a common manner.
Swiss Options and Financial Futures Exchange, a fully automated and integrated trading and clearing system.
Rate at which a bank is willing to sell foreign currency
It means the business day specified for delivery of the currencies bought and sold under a forex contract.
Actual physical exchange of one currency for another.
A market position where the client has sold a currency he does not already own. Usually expressed in base currency
More potential sellers than buyers, which creates an environment where rapid price falls are likely.
The overnight swap from the spot date to the next business day.
The price at which the currency is currently trading in the spot market.
(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.
(1) The difference between the bid and ask price of a currency.
(2) The difference between the price of two related futures contracts.
(3) For options, transactions involving two or more option series on the same underlying currency.
An active market which can absorb large sale or purchases of currency without having any major impact on the
Recession or low growth in conjunction with high inflation rates.
Standard and Poors (S&P)
A US firm engaged in assessing the financial health of borrowers. The firm also has generated certain stock indices
i.e. S&P 500.
Central Bank activity in the domestic money market to reduce the impact on money supply of its intervention activities
in the forex market.
British pound, otherwise known as cable.
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. Realize profit orders are less common.
Stop Out Price
US term for the lowest accepted price for Treasury Bills at auction.
The simultaneous purchase/sale of both call and put options for the same share, exercise/strike price and expiry
Also called exercise price. The price at which an option holder can buy or sell the underlying instrument.
A combination of two puts and one call.
Unemployment levels inherent in an economic structure
A price level at which the buying is expected to take place.
A price level at which the buying is expected to take place.
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.
Society for Worldwide Inter-bank Financial Telecommunication is a clearing system for international trading
Market slang for Swiss Franc.
Tokyo Inter-bank Offered Rate
Tokio International Financial Futures Exchange.
The study of the price that reflects the supply and demand factors of a currency. Common methods are flags, trendlines
spikes, bottoms, tops, pennants, patterns and gaps.
An adjustment to price not based on market sentiment but technical factors such as volume and charting.
Terms of Trade
The ratio between export and import price indices.
A measure of the sensitivity of the price of an option to a change in its time to expiry
A market in which trading volume is low and in which consequently bid and ask quotes are wide and the liquidity of
the instrument traded is low.
A minimum change in price, up or down.
Tomorrow Next (Tom next)
Simultaneous buying and selling of a currency for delivery the following day and selling for the next day or vice versa.
The date on which a trade occurs.
A portion of a deal or structured financing, specifically used for borrowings from the IMF.
The date on which a trade occurs.
Potential profit and loss generated by current foreign exchange transactions.
The buying or selling of securities resulting from the execution of an order.
An exchange rate is normally considered to be undervalued when it is below its purchasing power parity.
For exchange contracts it is the day on which the two contracting parties exchange the currencies which are being
bought or sold. For a spot transaction it is two business banking days forward in the country of the bank providing
quotations which determine the spot value date.
Normally settlement is for two working days from the date the contract is entered into. Value Today Transaction is
executed for same day settlement; sometimes also referred to as “cash transaction”.
A simple option whose terms and conditions do not include any provisions other than exercise style, expiry and strike.
To compare with exotic options which have additional terms.
Funds required to be deposited by a client when a price movement has caused funds to fall below the stipulated
percentage of the value of the contract.
Expresses the price change of an option for a one per cent change in the implied volatility.
Velocity of Money
The speed with which money circulates or turnover in the economy. It is calculated as the annual national income:
average money stock in the period.
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.
A local currency account maintained with a bank by another bank. The term is normally applied to the counter-party’s
account from which funds may be paid into or withdrawn, as a result of a transaction.
Money borrowed in large amounts from banks and institutions rather than from small investors.
Wholesale Price Index
It measures changes in prices in the manufacturing and distribution sector of the economy and tends to lead the
consumer price index by 60 to 90 days. The index is often quoted separately for food and industrial products.
A day on which the banks in a currency’s principal financial centre are open for business. For FX transactions, a
working day only occurs if the bank in both (all relevant currency centers in the case of a cross) are open.
A bank made up of members of the IMF whose aim is to assist in the development of member states by making loans
where private capital is not available.
The seller of a position. Also known as the grantor of the trade. “Writing a Currency” is to sell it.
The graph showing changes in yield on instruments depending on time to maturity. A system originally developed in
the bond markets is now broadly applied to various financial futures. A positive sloping curve has lower interest rates
at the shorter maturities and higher at the longer maturities. A negative sloping curve has higher interest rates at the
Certificate issued by the Bank of England to “discount houses” in lieu of stock certificates to facilitate their dealing in
the short dated gilt edge securities.
Zero Coupon Bond
A bond that pays no interest. The bond is initially offered at a discount to its redemption value.