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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 include 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), Employment 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 through 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.

Please note: This information 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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