Accrual - The Apportionment of premiums and discounts on forward exchange transactions that relate directly to deposit swap (Interest Arbitrage) deals, over the period of each deal.
Actualize - The underlying assets or instruments which are traded in the cash market.
Adjustable Peg - Term for an exchange rate regime where a country's exchange rate is "pegged" (i.e. fixed) in relation to another currency, often the dollar or French Franc, but where the rate may be changed from time to time. This was the basis of the Bretton Woods system. See peg, and crawling peg.
Adjustment - Official action normally by either change in the internal economic policies to correct a payment imbalance or in the official currency rate or.
Agent Bank - (1) A bank acting for a foreign bank. (2) In the Euro market - the agent bank is the one appointed by the other banks in the syndicate to handle the administration of the loan.
Aggregate Demand - Total demand for goods and services in the economy. It includes private and public sector demand for goods and services within the country and the demand of consumers and firms in other countries for goods and services.
Aggregate risk - Size of exposure of a bank to a single customer for both spot and forward contracts.
Aggregate Supply - Total supply of goods and services in the economy from domestic sources (including imports) available to meet aggregate demand.
Agio - Difference in the value between currencies. Also used to describe percentage charges for conversion from paper money into cash, or from a weak into a strong currency.
Appreciation - Describes a currency strengthening in response to market demand rather than by official action.
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.
Arbitrage channel - The range of prices within which there will be no possibility to arbitrage between the cash and futures market.
Around - Used in quoting forward "premium / discount". "Five-five around" would mean five point on either side of the present spot value.
Asset Allocation - Dividing instrument funds among markets to achieve diversification or maximum return.
Ask - The price at which the currency or instrument is offered.
Asset - In the context of foreign exchange 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.
At best - An instruction given to a dealer to buy or sell at the best rate that can be obtained.
At or Better - An order to deal at a specific rate or better.
Authorized Dealer - A financial institution or bank authorized to deal in foreign exchange.
Back Office - Settlement and related processes.
Backwardation - Term referring to the amount that the spot price exceeds the forward price.
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.
Band - The range in which a currency is permitted to move. A system used in the ERM.
Bank line - Line of credit granted by a bank to a customer, also known as a " line".
Bank Rate - The rate at which a central bank is prepared to lend money to its domestic banking system.
Base currency - United States Dollars. The currency to which each transaction shall be converted at the close of each position.
Basis - The difference between the cash price and futures price.
Basis point - For most currencies, denotes the fourth decimal place in exchange rate and represents 1/100 of one percent (.01%). For such currencies as the Japanese Yen, a basis point is the second decimal place when quoted in currency terms or the sixth and seventh decimal places, respectively, when quoted in reciprocal terms.
Basis trading - Taking opposite positions in the cash and futures market with the intention of profiting from favorable movements in the basis.
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.
Book - The summary of currency positions held by a dealer, desk, or room. A total of the assets and liabilities. If the average maturity of the book is less than that of the assets, the bank is said to be running a short and open book. Passing the Book refers normally to transferring the trading of the Banks positions to another office at the close of the day, e.g. from London to New York.
Bretton Woods - 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.
Broker - Brings buyers and sellers together for a commission paid by the initiator of the transaction. Brokers do not take market positions.
Bull market - A prolonged period of generally rising prices.
Bull - An investor who believes that prices are going to rise.
Bundesbank - Central Bank of Germany.
Cable - A term used in the foreign exchange market for the US Dollar/British Pound rate.
Capital Risk - The risk arising from a bank having to pay to the counter party with out knowing whether the other party will or is able to meet its side of the bargain. see Herstatt.
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.
Cash - 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.
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.
Cash Settlement - A procedure for settling futures contract where the cash difference between the future and the market price is paid instead of physical delivery.
Central Bank - A nations main regulatory bank. Traditionally, its primary responsibility is development and implementation of monetary policy.
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.
Chartist - 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.
Clean float - An exchange rate that is not materially affected by official intervention.
Closed position - A transaction which 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.
Confirmation - A memorandum to the other party describing all the relevant details of the transaction.
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).
Conversion Account - A general ledger account representing the uncovered position in a particular currency. Such accounts are referred to as Position Accounts.
Conversion - The process by which an asset or liability denominated in one currency is exchanged for an asset or liability denominated in another currency.
Conversion arbitrage - A transaction where the asset is purchased and buys a put option and sells a call option on the asset purchased, each option having the same exercise price and expiry.
Convertible currency - A currency that can be freely exchanged for another currency (and or gold) without special authorization from the central bank.
Copey - Slang for the Danish krone.
Correspondent Bank - 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 restrictions.
Counterparty - The other organization or party 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.
Country risk - The risk attached to a borrower by virtue of its location in a particular country. This involves examination of economic, political and geographical factors. Various organizations generate country risk tables.
Cover - (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 Arbitrage - Arbitrage between financial instruments denominated in different currencies, using forward cover to eliminate exchange risk.
Covered Margin - The interest rate margin between two instruments denominated in different currencies after taking account of the cost of forward cover.
Crawling peg - A method of exchange rate adjustment; the rate is fixed/ pegged, but adjusted at certain intervals in line with certain economic or market indicators.
Credit Risk - Risk of loss that may arise on outstanding contracts should a counter party default on its obligations.
Cross deal - A foreign exchange deal entered into involving two currencies, neither of which is the base currency.
Cross rates - 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 - Speculators who take positions in commodities which are then liquidated prior to the close of the same trading day.
Deal date - The date on which a transaction is agreed upon.
Deal Ticket - The primary method of recording the basic information relating to a transaction.
Dealer - One who, as opposed to a broker, acts as a principle in all transactions, buying and selling for its own accounts?
Deflator - Difference between real and nominal Gross National Product, which is equivalent to the overall inflation rate.
Delivery date - The date of maturity of the contract, when the exchange of the currencies is made this date is more commonly known as the value date in the FX or Money markets.
Delivery Risk - A term to describe when counterparty will not be able to complete his side of the deal, although willing to do so.
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.
Dirty Float - Floating a currency when the rate is controlled by intervention by the monetary authorities.
Easing- Modest decline in price.
Economic Indicator- A statistics which 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.
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- Rules used to preserve or protect the value of a countries currency.
Exotic- A less broadly traded currency.
Exposure- In foreign exchange, a potential for gain or loss because of movement in foreign exchange rate. There are three primary types of exposure:
Economic: The change in future earning power and cash flow arising from a change in exchange rates. In effect, it represents a change in the value of a company holding foreign currency.
Transnational: A potential gain or loss arising from transactions that will definitely occur in the future, are currently in progress, or could have already been completed. A signed but not shipped sales contract, a receivable or foreign currency payment collected but not converted to local currency would all be examples of transaction exposure.
Translation: The potential for change in reported earnings and/or the book value of the consolidated company equity accounts, as the result of a change in foreign exchange rates used to translate the foreign currency statements of subsidiaries and affiliates known as accounting exposure.
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 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.
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 in the United States.
Fill or Kill- An order which must be entered for trading, normally in a pit three times, if not filled is immediately canceled.
Fisher Effect- The relationship that exists between interest rates and exchange rate movements, so that in an ideal situation interest rate differentials would be exactly off set by exchange rate movements. See interest rate parity.
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 revaluations. 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 US which 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- Term commonly used when referring to the foreign exchange market.
Forex Club- Groups formed in the major financial centers to encourage educational and social contacts between foreign exchange dealers, under the umbrella of 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 fulfillment 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 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.
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.