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Education Center |
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Foreign Exchange Terms
Account - Record of all transactions.
Account Balance - Same as balance.
Agent - An individual employed to act on behalf
of another (the principal).
Aggregate Demand - The sum of government
spending, personal consumption expenditures, and
business expenditures.
All or None - A limit price order that instructs
the broker to fill the whole order at the stated price
or not at all.
Appreciation - A currency is said to appreciate
when price rises in response to market demand; an
increase in the value of an asset.
Arbitrage - Taking advantage of countervailing
prices in different markets by the purchase or sale of
an instrument and simultaneous taking of an equal and
opposite position in a related market to profit from
small price differentials.
Ask Size - The amount of shares being offered for
sale at the ask rate.
Ask Rate - The lowest price at which a financial
instrument is offered for sale (as in bid/ask spread).
Asset Allocation - Investment practice that
distributes funds among different markets (forex,
stocks, bonds, commodity, real estate) to achieve
diversification for risk management purposes and/or
expected returns consistent with the outlook of the
investor, or investment manager.
Attorney in Fact - Person who is allowed to
transact business and execute documents on behalf of
another person because one holds power of attorney.
Back Office - The departments and processes
related to the settlement of financial transactions
(i.e. written confirmation and settlement of trades,
record keeping).
Balance - Amount of money in an account.
Balance of Payments - A record of a nation’s
claims of transactions with the rest of the world over a
particular time period. These inlcude merchandise,
services and capital flows.
Base Currency - The currency in which an investor
or issuer maintains its book of accounts; the currency
that other currencies are quoted against. In the forex
market, 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.
Basis - The difference between the spot price and
the futures price.
Basis Point - One hundredth of a percent.
Bear - An investor who believes that prices/the
market will decline.
Bear Market - A market distinguished by a
prolonged period of declining prices accompanied with
widespread pessimism.
Bid - The price that a buyer is prepared to
purchase at; the price offered for a currency.
Bid/Ask Spread - See spread
Big Figure - Dealer phrase 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".
Bonds - Bonds are tradable instruments (debt
securities) which are issued by a borrower to raise
capital. They pay either fixed or floating interest,
known as the coupon. As interest rates fall, bond prices
rise and vice versa.
Book - In a professional trading environment, a
book is the summary of a trader`s or a desk`s total
positions.
Bretton Woods Accord of 1944 - An agreement that
established fixed foreign exchange rates for major
currencies, provided for central bank intervention in
the currency markets, and set the price of gold at US
$35 per ounce. The agreement lasted until 1971. See More
on Bretton Woods.
Broker - An individual, or firm, that acts as an
intermediary, putting together buyers and sellers
usually 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.
Bull - An investor who believes that prices/the
market will rise.
Bull Market - A market distinguished by a
prolonged period of rising prices. (Opposite of bear
market)
Bundesbank - The central bank of Germany
Cable - Trader jargon for the British Pound
Sterling referring to the Sterling/US Dollar exchange
rate. Term began due to the fact that the rate was
originally transmitted via a transatlantic cable
starting in the mid 1800`s.
Candlestick Charts - A chart that indicates the
trading ranges for the day as well as the opening and
closing price. If the close price is lower than the open
price, the rectangle is shaded or filled. If the open
price is higher than the close price, the rectangle is
not filled.
Capital Markets - Markets for medium to long term
investment (usually over 1 year). These tradable
instruments are more international than the ‘money
market’ (i.e. Government Bonds and Eurobonds).
Central Bank - A government or quasi-governmental
organization that manages a country`s monetary policy a
prints a nation’s currency. For example, the US central
bank is the Federal Reserve, others include the ECB, BOE,
BOJ.
Chartist - An individual who uses charts and
graphs and interprets historical data to find trends and
predict future movements, as well as, aid in technical
analysis.
Clearing - The process of settling a trade.
Close a Position (Position Squaring) - To
eliminate an investment from one’s portfolio by either
buying back a short position or selling a long position.
Commission - Fee broker charges for a
transaction.
Confirmation - A document exchanged by
counterparts to a transaction that confirms the terms of
said transaction.
Contagion - The tendency of an economic crisis to
spread from one market to another. In 1997, financial
instability in Thailand caused high volatility in its
domestic currency, the Baht, which triggered a contagion
into other East Asian emerging currencies, and then to
Latin America. It is now referred to as the Asian
Contagion.
Contract (Unit or Lot) - The standard unit of
trading on certain exchanges.
Convertible Currency - A currency which can be
exchanged freely for other currencies at market rates,
or gold.
Cost of Carry - The cost associated with
borrowing money in order to maintain a position. It is
based on the interest parity, which determines the
forward price.
Counter party - The participant, either a bank or
customer, with whom the financial transaction is made.
Country Risk - The risk associated with
government intervention (does not include central bank
intervention). Examples are legal and political events
such as war, or civil unrest.
Credit Checking - Due to the large size of
certain financial transactions that change hands, it is
essential to check that the counter parties have room
for the trade. Once the price has been agreed the credit
is checked. If the credit is bad then no trade takes
place. Credit is very important when trading, both in
the Inter-bank market and between banks and their
customers.
Credit Netting - Arrangements that exist to
maximize free credit and speed the dealing process by
reducing the need to constantly re-check credit. Large
banks and trading institutions may have agreements to
net outstanding deals.
Cross Rates - An exchange rate between two
currencies. The cross rate is said to be non-standard in
the country where the currency pair is quoted. For
example, in the US, a GBP/CHF quote would be considered
a cross rate, whereas in the UK or Switzerland it would
be one of the primary currency pairs traded
Currency - A country’s unit of exchange issued by
their government or central bank whose value is the
basis for trade.
Currency Risk - The risk of incurring losses
resulting from an adverse change in exchange rates.
Day Trading - Opening and closing the same
position or positions within the same trading session.
Dealer - One who acts as a principal or
counterpart to a transaction; places the order to buy or
sell.
Deficit - A negative balance of trade (or
payments); expenditures are greater than income/revenue.
Delivery - An actual delivery where both sides
transfer possession of the currencies traded.
Deposit - The borrowing and lending of cash. The
rate that money is borrowed/lent at is known as the
deposit rate (or depo rate). Certificates of Deposit (CD`S)
are also tradable instruments.
Depreciation - A decline in the value of a
currency due to market forces.
Derivatives - Trades that are constructed or
derived from another security (stock, bond, currency, or
commodity). Derivatives can be both exchange and
non-exchange traded (known as Over the Counter or OTC).
Examples of derivative instruments include Options,
Interest Rate Swaps, Forward Rate Agreements, Caps,
Floors and Swap options.
Devaluation - The deliberate downward adjustment
of a currency`s value versus the value of another
currency normally caused by official announcement.
Economic Indicator - A statistic that indicates
current economic growth and stability issued by the
government or a non-government institution (i.e. Gross
Domestic Product (GDP), Employement Rates, Trade
Deficits, Industrial Production, and Business
Inventories).
Efficient Market - A market in which the current
price reflects all available information from past
prices and volumes.
End Of Day (or Mark to Market) - Traders account
for their positions in two ways: accrual or
mark-to-market. An accrual system accounts only for cash
flows when they occur, hence, it only shows a profit or
loss when realized. The mark-to-market method values the
trader`s book at the end of each working day using the
closing market rates or revaluation rates. Any profit or
loss is booked and the trader will start the next day
with a net position.
Estimated Annual Income - Projected yearly
earnings.
Euro - The currency of the European Monetary
Union (EMU) which replaced the European Currency Unit
(ECU).
European Central Bank - The Central Bank for the
European Monetary Union.
European Monetary Unit - 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.
Currently, the Euro exists only as a banking currency
and for paper financial transactions and foreign
exchange. The current members of the EMU are Germany,
France, Belgium, Luxembourg, Austria, Finland, Ireland,
the Netherlands, Italy, Spain and Portugal.
Exchange Rate Risk - See Currency Risk.
Economic Exposure - The risk on a company’s cash
flow stemming from foreign exchange fluctuations.
Federal Deposit Insurance Corporation (FDIC) -
The regulatory agency responsible for administering bank
depository insurance in the US.
Federal Reserve (Fed) - The Central Bank of the
United States.
Fixed Exchange Rate - An official exchange rate
set by monetary authorities for one or more currencies.
In practice, even fixed exchange rates fluctuate between
definite upper and lower bands, leading to intervention.
Fixed Interest - This type of transaction pays an
agreed interest rate that remains constant for the term
of the deal. Fixed interests are many times found in
bonds, as well as, a fixed rate mortgage.
Flat (or Square) - To be neither long nor short
is the same as to be flat or square. One would have a
flat book if he has no positions or if all the positions
cancel each other out.
Floating Rate Interest - As opposed to a fixed
rate, the interest rate on this type of deal will
fluctuate with market rates or benchmark rates. One
example of a floating rate interest is a standard
mortgage.
Foreign Exchange (or Forex or FX) - The
simultaneous buying of one currency and selling of
another in an over-the-counter market. Most major FX is
quoted against the US Dollar.
Foreign Exchange Risk - See Currency Risk
Forward - A deal that will commence at an agreed
date in the future. Forward trades in FX are usually
expressed as a margin above (premium) or below
(discount) the spot rate. To obtain the actual forward
FX price, one adds the margin to the spot rate. The rate
will reflect what the FX rate has to be at the forward
date so that if funds were re-exchanged at that rate
there would be no profit or loss (i.e. a neutral trade).
The rate is calculated from the relevant deposit rates
in the 2 underlying currencies and the spot FX rate.
Unlike in the futures market, forward trading can be
customized according to the needs of the two parties and
involves more flexibility. Also, there is no centralized
exchange.
Forward Points - The pips added to or subtracted
from the current exchange rate to calculate a forward
price.
Forward Rate Agreements (FRA`s) - FRA`s are
transactions that allow one to borrow/lend at a stated
interest rate over a specific time period in the future.
Front and Back Office - The front office usually
comprises of the trading room and other main business
activities.
Fundamental Analysis - Thorough analysis of
economic and political data with the goal of determining
future movements in a financial market.
Futures - A way of trading financial instruments,
currencies or commodities for a specific price on a
specific date in the future. Unlike options, futures
give the obligation (not the option) to buy or sell
instruments at a later date. They can be used to both
protect and to speculate against the future value of the
underlying product.
GTC - Good-Till-Cancelled. An order left with a
Dealer to buy or sell at a fixed price. The GTC will
remain in place until executed or cancelled.
Hedge - An investment position or combination of
positions that reduces the volatility of your portfolio
value. One can take an offsetting position in a related
security. Instruments used are varied and include
forwards, futures, options, and combinations of all of
them.
High/Low - Usually the highest traded price and
the lowest traded price for the underlying instrument
for the current trading day.
Inflation - An economic condition where there is
an increase in the price of consumer goods, thereby
eroding purchasing power.
Initial Margin - The required initial deposit of
collateral 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
Interest Rate Swaps (IRS) - An exchange of two
debt obligations that have different payment streams.
The transaction usually exchanges two parallel loans;
one fixed the other floating.
Interest Rate Swap Points - Interest rates may be
determined by a simple rule using the bid and offer
spread on an fx rate. If the rate quoted is in foreign
(non US) terms and the offered price is higher than the
bid, then the interest rate in that nation is higher
than the rate in the base nation for the particular time
in question. If quoted in American terms, the opposite
is true. Example – USD/ JPY quoted 105.75 to 105.65.
Because the offered price is lower than the bid, then
you know that rates are lower in Japan than in the US.
ISDA - The body that sets terms and conditions
for derivative trades is The International Swaps and
Derivatives Association.
Leading Indicators - Economic variables that are
considered to predict future economic activity (i.e.
Unemployment, Consumer Price Index, Producer Price
Index, Retail Sales, Personal Income, Prime Rate,
Discount Rate, and Federal Funds Rate).
LIBOR - Stands for London Interbank Offer Rate.
The interest rate that the largest international banks
will lend to each other.
LIFFE - The London International Financial
Futures Exchange. Consists of the three largest UK
futures markets.
Limit Order - An order to buy at or below a
specified price or to sell at or above a specified
price.
Liquid and Illiquid Markets - The ability of a
market to buy and sell at ease with no impact on price
stability. A market is described as liquid if the spread
between the bid and the offer is small. Another measure
of liquidity is the presence of buyers and seller, with
more players creating tighter spreads. Illiquid markets
have few players, hence, wider dealing spreads.
Liquidation - To close an open position throgh
the execution of an offsetting transaction.
Liquid Assets - Assets that can be easily
converted into cash. Examples: money market fund shares,
US Treasury Bills, bank deposits, etc.
Long - A position to purchase more of an
instrument than is sold, hence, an appreciation in value
if market prices increase.
Margin - Customers must deposit funds as
collateral to cover any potential losses from adverse
movements in prices.
Margin Call - A requirement from a broker or
dealer for additional funds or other collateral to bring
the margin up to a required level to guarantee
performance on a position that has moved against the
customer.
Mark to Market (or End Of Day) - Traders account
for their positions in two ways: accrual or
mark-to-market. An accrual system accounts only for cash
flows when they occur, hence, it only shows a profit or
loss when realized. The mark-to-market method values the
trader`s book at the end of each working day using the
closing market rates or revaluation rates. Any profit or
loss is booked and the trader will start the next day
with a net position.
Market Maker - A dealer who supplies prices and
is prepared to buy or sell at those stated bid and ask
prices. A market maker runs a trading book.
Market Order - An order to buy/sell at the best
price available when the order reaches the market.
Market Risk - Risk relating to the market in
general and cannot be diversified away by hedging or
holding a variety of securities.
Maturity - The date a debt becomes due for
payment.
Mine and Yours - To announce that a trader wants
to buy he/she may say or type Mine. This would also be
known as taking the offer. To sell he will use Yours.
This would be known as `hitting the bid`.
Money Markets - Refers to investments that are
short-term (i.e. under one year) and whose participants
include banks and other financial institutions. Examples
include Deposits, Certificates of Deposit, Repurchase
Agreements, Overnight Index Swaps and Commercial Paper.
Short-term investments are safe and highly liquid.
Net Worth - Amount of assets which exceed
liabilities; May also be known as stockholders equity or
net assets. For an individual -- the total value of all
possessions such as houses, stocks, bonds, and other
securities, minus all outstanding debts, such as
mortgage and loans.
Off Balance Sheet - Products such as Interest
Rate Swaps and Forward Rate Agreements are examples of
`off balance sheet’ products. Also, financing from other
sources other than equity and debt are listed.
Offer - The price, or rate, that a willing seller
is prepared to sell at.
Offsetting Transaction - A trade that serves to
cancel or offset some or all of the market risk of an
open position.
One Cancels Other Order (O.C.O. Order) - A
contingent order where the execution of one part of the
order automatically cancels the other part.
Open Order - An order to buy or sell when a
market moves to its designated price.
Open Position - A deal not yet reversed or
settled and the investor is subject to exchange rate
movements.
Options - An agreement that allows the holder to
have the option to buy/sell a specific security at a
certain price within a certain time. Two types of
options – call and put. A call is the right to buy while
a put is the right to sell. One can write or buy call
and put options.
Order - An order is an instruction, from a client
to a broker to trade. An order can be placed at a
specific price or at the market price. Also, it can be
good until filled or until close of business.
Overnight - A trade that remains open until the
next business day.
Over The Counter (OTC) - Used to describe any
transaction that is not conducted over an exchange.
Pegging - A form of price stabilization;
typically used to stabilize a country’s currency by
making it fixed to the exchange rate with another
country.
Pip (or Points) - The term used in currency
market to represent the smallest incremental move an
exchange rate can make. Depending on context, normally
one basis point (0.0001 in the case of EUR/USD, GBD/USD,
USD/CHF and .01 in the case of USD/JPY).
Political Risk - Changes in a country’s
governmental policy, which may have an adverse effect on
an investor`s position.
Position - A position is a trading view expressed
by buying or selling. It can refer to the amount of a
currency either owned or owed by an investor.
Premium - In the currency markets, it is the
amount of points added to the spot price to determine a
forward or futures price.
Price Transparency - Every market participant has
equal access to the description of quotes.
Quote - An indicative market price; shows the
highest bid and/or lowest ask price available on a
security at any given time.
Rate - The price of one currency in terms of
another.
Realized and Unrealized Profit and Loss - One
using an accrual type accounting system has an
“unrealized profit” until he sells his shares. Upon the
sale of one’s shares, the profit becomes “realized.”
Re-purchase (or Repo) - This type of trade
involves the sale and later re-purchase of an
instrument, at a specified time and date. Occurs in the
short-term money market.
Resistance - A term used in technical analysis
indicating a specific price level at which a currency
will have the inability to cross above. Recurring
failure for the price to move above that point produces
a pattern that can usually be shaped by a straight line.
Revaluation Rates - The revaluation rates are the
market rates used when a trader runs an end-of-day to
establish profit and loss for the day.
Risk - Exposure to uncertain change, the
variability of returns significantly the likelihood of
less-than-expected returns.
Risk Capital- The amount of money that an
individual can afford to invest, which, if lost would
not affect their lifestyle.
Risk Management - To hedge one’s risk they will
employ financial analysis and trading techniques.
Rollover - The settlement of a deal is rolled
forward to another value date with the cost of this
process based on the interest rate differential of the
two currencies.
Settlement - The finalizing of a transaction, the
trade and the counterparts are entered into the books.
Short - To go `short` is to have sold an
instrument without actually owning it, and to hold a
short position with expectations that the price will
decline so it can be bought back in the future at a
profit.
Short Position - An investment position that
results from short selling. Benefits from a decline in
market price because the position has not been covered
yet.
Spot - A transaction that occurs immediately, but
the funds will usually change hands within two days
after deal is struck.
Stop Order - An order to buy/sell at an agreed
price. One could also have a pre-arranged stop order,
whereby an open position is automatically liquidated
when a specified price is reached or passed.
Spot Price - The current market price. Spot
transaction settlements usually occurs within two
business days.
Spread - The difference between the bid and offer
(ask) prices; used to measure market liquidity. Narrower
spreads usually signify high liquidity.
Support Levels - A term used in technical
analysis indicating a specific price level at which a
currency will have the inability to cross below.
Recurring failure for the price to move below that point
produces a pattern that can usually be shaped by a
straight line.
Swaps - A swap occurs when one currency is
temporarily exchanged for another, then the currency is
held and exchanged later after a fixed period of time.
To calculate the swap take the interest rate
differential between the two underlying currencies, thus
it may be used for speculative purposes to exploit
anticipated movement in the interest rates.
Sterling - Another term for the Great British
Pound.
Technical Analysis - An effort to forecast future
market activity by analyzing market data such as charts,
price trends, and volume.
Tick - Minimum price move.
Ticker - Shows current and/or recent history of a
currency either in the format of a graph or table.
Tomorrow Next (Tom/Next) - Simultaneous buying
and selling of a currency for delivery the following
day.
Transaction Cost - The cost associated with
buying or selling of a financial instrument.
Transaction Date - The date on which the trade
occurs.
Turnover - The volume traded, or level of
trading, over a specified period, usually daily or
yearly.
Two Way Price - Both the bid and offer rate is
quoted for a Forex transaction.
Uptick - A new price quote that is higher than
the preceding quote for the same currency.
Uptick Rule - In the U.S., a regulation which
states that a security may not be sold short unless the
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 that both parties of a
transaction agree to exchange payments.
Variation Margin - An additional margin
requirement that a broker will need from a client due to
market fluctuation.
Volatility - A statistical measure of a market or
a security’s price movements over time and is calculated
by using standard deviation. Associated with high
volatility is a high degree of risk.
Volume - The number, or value, of securities
traded during a specific period.
Warrants - Warrants are a form of traded option.
They are the right to purchase shares or bonds issued by
a company at a specific price within a specified time
span.
Whipsaw - A term used to describe a condition in
a highly volatile market where a sharp price movement is
quickly followed by a sharp reversal.
Yard - Another term for a billion. |
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Please note: "Education Center" is a
treasure trove of highly informative information designed to
teach beginners about and how to trade the futures markets.
However, before you begin trading on your own, we strongly
advise you to first trade with the assistance of an
experienced professional commodity broker. A broker can
provide you with many valuable functions to suit your
choice. You may only want to have a broker try to make sure
you don’t make costly errors by incorrectly initiating and
exiting a trade (a common error among beginning traders). On
the other hand, you may want the broker to take a more
active role: acting as a sounding board for your trades,
providing his trading recommendations, research reports,
charts, and other helpful trading tools. Or, you may want
the broker to find you a commodity trading advisor that best
meets your investment goals, affordability, and suitability
to professionally manage your account |
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