MINI FOREX DICTIONARY

 Arbitrage - The simultaneous purchase and sale on different markets, of the same or equivalent financial instruments to profit from price or currency differentials. The exchange rate differential or Swap points. May be derived from Deposit Rate differentials.

Ask - The price at which the currency or instrument is offered.

At best - An instruction given to a dealer, by a trader, to buy or sell at the best rate that can be obtained at that time.

At or Better - An order to deal at a specific rate or better.

Authorized Dealer - A financial institution or bank authorized to deal in foreign exchange.

Back Office - Settlement and related processes.

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: (a) balance of payments on "current account" or (b) the current account plus certain (longer 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.

Bank Rate - The rate at which a central bank is prepared to lend money to its domestic clients.

Base currency - The currency in which the operating results of the bank or institution are reported.

Base Rate – The minimum interest rate that a bank can charge on borrowings,

Basis - The difference between the cash price and futures price.

Basis point - One per cent of one per cent.

Basket - A group of currencies normally used to manage the exchange rate of a currency. Sometimes referred to as a unit of account.

Bear market - A prolonged period of generally falling prices.

Bear - An investor who believes that prices are going to fall.

Bid - The price at which a buyer has offered to purchase the currency or instrument.

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 market - A prolonged period of generally rising prices.

Bull - An investor who believes that prices are going to rise.

Buying Rate - Rate at which the market and a market maker in particular is willing to buy the currency. Sometimes called bid rate.

Cable - A term used in the foreign exchange market for the US Dollar/British Pound rate.

Carry - The interest cost of financing securities or other financial instruments held.

Cash Delivery - Same day settlement.

Cash market - The market in the actual financial instrument on which a futures or options contract is based.

Central Bank - A bank that is responsible for controlling a countries monetary policy. It is normally the issuing bank and controls bank licensing, and any foreign exchange control regime.

Central Rate - 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.

Closed position - A transaction that leaves the trade with a zero net commitment to the market with respect to a particular currency.

Commission - The fee that a broker may charge clients for dealing on their behalf.

Contract - 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).

Counterparty -The other organisation (or party or person) with whom the exchange deal is being transacted.

Countervalue - Where a person buys a currency against the dollar, it is the dollar value of the transaction.

Cover - To close out a short position by buying currency or securities which have been sold.

Cross rate - The rates between two currencies, neither of which is the US Dollar.

Current Account - 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.

Day trader – A speculator who take positions in commodities or currencies that are then liquidated prior to the close of the same trading day.

Deal date - The date on which a transaction is agreed upon.

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.

Depreciation - A fall in the value of a currency due to market forces rather than due to official action.

Desk - Term referring to a group dealing with a specific currency or currencies.

Details - All the information required to finalize a foreign exchange transaction, i.e. name, rate, dates, and point of delivery.

Devaluation - Deliberate downward adjustment of a currency against its fixed parities or bands, normally by formal announcement.

Direct quotation - Quoting in fixed units of foreign currency against variable amounts of the domestic currency.

Draw down – The amount of money put at risk to fund a trade.

Easing - Modest decline in price.

Economic Indicator - A statistic that indicates current economic growth rates and trends such as retail sales and employment.

ECU - European Currency Unit.

EDI - Electronic Data Interchange.

Effective Exchange Rate - An attempt to summarize the effects on a country's trade balance of its currency's changes against other currencies.

EFT - Electronic Fund Transfer.

EMS - European Monetary System.

Entry Order – A delayed order to enter the market at a pre-defined price.

European Monetary System - A system designed to stabilize if not eliminate exchange risk between member states of the EMS as part of the economic convergence policy of the EU. It permits currencies to move in a measured fashion (divergence indicator) within agreed bands (the parity grid) with respect to the ECU and consequently with each other.

Exchange control - A system of controlling inflows and out flows of foreign exchange, devices include licensing multiple currencies, quotas, auctions, limits, levies and surcharges.

Exotic - A less broadly traded currency.

Exposure - (i) Net working capital - The current assets in a foreign currency minus current liabilities in the currency; (ii) Net financial method The current assets in a foreign currency minus current liabilities and long term debt in the currency; (iii) Monetary/non-monetary method - Monetary assets and liabilities in the foreign currency are valued at present exchange rates, while non-monetary items are entered at the relevant historic rates.

Fast market - 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 U.S.Fedral funds. This is a closely watched short term interest rate as it signals the Feds view as to the state of the money supply.

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 80s.

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.

Fixed exchange rate - Official rate set by monetary authorities. Often the fixed exchange rate permits fluctuation within a band.

Flexible exchange rate - Exchange rates with a fixed parity against one or more currencies with frequent revaluation's. A form of managed float.

Floating exchange rate - An exchange rate where the value is determined by market forces. Even floating currencies are subject to intervention by the monetary authorities. When such activity is frequent the float is known as a dirty float.

FOMC - Federal Open Market Committee, the committee that sets money supply targets in the U.S. that 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 - Foreign Exchange.

Forex Club - Groups formed in the major financial centres to encourage educational and social contacts between foreign exchange dealers, under the umbrella of the Association Cambiste International.

Forward margins - Discounts or premiums between spot rate and the forward rate for a currency. Normally quoted in points.

Forward Operations - Foreign exchange transactions, on which the fulfilment of the mutual delivery obligations is made on a date later than the second business day after the transaction was concluded.

Forward Outright - A commitment to buy or sell a currency for delivery on a specified future date or period. The price is quoted as the Spot rate minus or plus the forward points for the chosen period.

Forward Rate - Forward rates are quoted in terms of forward points , which represents the difference between the forward and spot rates. In order to obtain the forward rate from the actual exchange rate the forward points are either added or subtracted from the exchange rate. 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 judged 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.

Free Reserves - Total reserves held by a bank less the reserves required by the authority.

Front Office - The activities carried out by the dealer, normal trading activities.

Fundamentals - 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.

FX - Foreign Exchange.

G7 - The seven leading industrial countries, being U.S., Germany, Japan, France, UK, Canada, Italy.

G10 - G7 plus Belgium, Netherlands and Sweden, a group associated with IMF discussions. Switzerland is sometimes peripherally involved.

Gap - A mismatch between maturities and cash flows in a bank or individual dealers position book. Gap exposure is effectively interest rate exposure.

Going long - The purchase of a stock, commodity, or currency for investment or speculation.

Going short - The selling of a stock, commodity, or currency not owned by the seller.

Good ‘til cancelled (GTC) - An instruction to a broker that unlike normal practice the order does not expire at the end of the trading day, although normally terminates at the end of the trading month.

Grid - Fixed margin within which, exchange rates are allowed to fluctuate.

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.

Hard currency - A currency, the value of which, is expected to remain stable, or increase, in respect to 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 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 an indication to sell.

Hedge - 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.

Hit the bid - Acceptance of purchasing at the offer or selling at the bid.

IMF - International Monetary Fund, established in 1946 to provide international liquidity on a short and medium term and encourage liberalization of exchange rates. The IMF supports countries with balance of payments problems with the provision of loans.

IMM - International Monetary Market part of the Chicago Mercantile Exchange that lists a number of currency and financial futures Implied volatility. A measurement of the market's expected price range of the underlying currency futures based on the traded option premiums.

Implied Rates - The interest rate determined by calculating the difference between spot and forward rates.

Indicative quote - A market maker's price that 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.

Initial margin - The margin required by a Foreign Exchange firm to initiate the buying or selling of a determined amount of currency.

Inter-bank rates - The bid and offer rates at which international banks place deposits with each other. This is the basis of the Inter-bank market.

Interest Arbitrage - Switching into another currency by buying spot and selling forward, and investing proceeds in order to obtain a higher interest yield. Interest arbitrage can be inward, i.e. from foreign currency into the local one or outward, i.e. from the local currency to the foreign one. Sometimes better results can be obtained by not selling the forward interest amount. In that case some treat it as no longer being a complete arbitrage, as if the exchange rate moved against the arbitrageur, the profit on the transaction may create a loss.

Interest parity - One currency is in interest parity with another when the difference in the interest rates is equalized by the forward exchange margins. For instance, if the operative interest rate in Japan is 3% and in the UK 6%, a forward premium of 3% for the Japanese Yen against sterling would bring about interest parity.

Interest rate Swaps - An agreement to swap interest rate exposures from floating to fixed or vice versa. There is no swap of the principal. It is the interest cash flows be they payments or receipts that are exchanged.

Intervention - Action by a central bank to affect the value of its currency by entering the market. Concerted intervention refers to action by a number of central banks to control exchange rates.

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 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 - An order to buy or sell (or take profit) a specified amount of a currency at a specified price or better.

Liquidation - Any transaction that offsets or closes out a previously established position.

Liquidity - The ability of a market to accept large transactions.

Maintenance margin - The minimum amount of money (margin) that an investor must keep on deposit in a margin account at all times in respect of each open contract.

Make a market - A dealer is said to make a market when he or she quotes bid and offer prices at which he or she stands ready to buy and sell.

Managed float - When the monetary authorities intervene regularly in the market to stabilize the rates or to aim the exchange rate in a required direction.

Margin call - A demand for additional funds to be deposited in a margin account to meet margin requirements because of adverse future price movements.

Margin - For currencies a deposit made to the forex firm on establishing a futures position account.

Mark to market - The daily adjustment of an account to reflect accrued profits and losses often required to calculate variations of margins.

Market maker - A market maker is a person or firm authorized to create and maintain a market in an instrument.

Market order - An order, to immediately buy or sell a currency or stock, at the best possible price.

Micro-economics - The study of economic activity as it applies to individual firms or well defined small groups of individuals or economic sectors.