FOREX Glossary of Terms

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Appreciation

Describes a currency strengthening in response to market demand rather than by official action.

Ask

The price at which the currency or instrument is offered.

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.

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Base currency

In general terms the base currency is the currency in which an investor or issuer maintains its book of accounts. In FX markets 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. The primary exceptions to this rule are the British Pound, the Euro and the Australian Dollar.

Bid/Ask Spread

The distance, usually in pips, between the Bid and the Ask price. A tighter spread is better for the trader!

Basis point

For most currencies, denotes the fourth decimal place in exchange rate and represents 1/100 of one percent (.01%).

Bid

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

Big Figure

Dealer expression 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. 0.30/0.35 ”.

Buying Rate

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

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Cable

A term used in the foreign exchange market for the US Dollar/British Pound rate. So called because the rate was originally transmitted via a transatlantic cable beginning in the mid 1800s. This is an example of a reciprocal currency.

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.

Closed position

A transaction which leaves the trade with a zero net commitment to the market with respect to a particular currency.

Conversion

The process by which an asset or liability denominated in one currency is exchanged for an asset or liability denominated in another currency.

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.

Cross rates

The exchange rates between any two currencies that are considered non-standard in the country where the currency pair is quoted. For example, in the US, a GBP/JPY quote would be considered a cross rate, whereas in the UK or Japan it would be one of the primary currency pairs traded.

Currency Futures

Futures contracts traded on an exchange, most typically the Chicago Mercantile Exchange (CME). Always quoted in terms of the currency value with respect to the US Dollar. Parameters of the futures contract are standardized by the exchange

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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.

Depreciation

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

Devaluation

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

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Economic Indicator

A statistic which indicates current economic growth rates and trends such as retail sales and employment.

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.

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.

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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.

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.

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

The pre-specified exchange rate for a foreign exchange contract settling at some agreed future date, based upon the interest rate differential between the two currencies involved. Forward rates are quoted in terms of forward points, which represent 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. Therefor 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.

FX

Foreign Exchange.

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G7

The seven leading industrial countries, being US, Germany, Japan, France, UK, Canada, Italy.

G10

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

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Hard currency

Any one of the major world currencies that is well traded and easily converted into other currencies.

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Implied Rates

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

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. The basis of the Interbank market.

Intervention

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

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Leading Indicators

Statistic that are considered to precede changes in economic growth rates and total business activity, e.g. factory orders.

Leverage

The amount, expressed as a multiple, by which the notional amount traded exceeds the margin required to trade. For example, if the notional amount traded (also referred to as the “lot size” or “contract value”) is $100,000 and the required margin is $2,000, the trader can trade with 50 times leverage ($100,000/$2,000).

Limit order

A request to deal as a buyer or seller for a foreign currency transaction at a specified price, or at a better price, if obtainable.

Liquidation

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

Liquidity

The ability of a market to accept large transactions.

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Margin call

A claim by one's broker or dealer for additional good faith performance monies usually issued when an investor's account suffers adverse price movements.

Margin

The amount of money or collateral that must be, in the first instance, provided or thereafter, maintained, to ensure against losses on open positions. Initial margin must be placed before a trade is entered into. Maintenance or Variation margin must be added to initial to maintain against losses on open positions.

Mark to market

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

Market order

An order to buy or sell a financial instrument immediately at the best possible price.

Mid-price or middle rate

The price half-way between the two prices, or the average of both buying and selling prices offered by the market makers.

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Net Position

The amount of currency bought or sold which have not yet been offset by opposite transactions.

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Offer

The price at which a seller is willing to sell. The best offer is the lowest such price available.

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Pip

One unit of price change in the bid/ask price of a currency or the smallest price increment in a currency. For most currencies, it denotes the fourth decimal place in an exchange rate and represents 1/100 of one percent (.01%).

Position

The netted total commitments 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).

Premium

(also “interest” or “Cost of Carry”): The cost, often quoted in terms of dollars or pips per day, of holding an open position.

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Quote

An indicative price. The price quoted for information purposes but not to deal.

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Reciprocal currency

A currency that is normally quoted as dollars per unit of currency rather than the normal quote method of units of currency per dollar. Sterling is the most common example.

Revaluation

Increase in the exchange rate of a currency as a result of official action.

Rollover

An overnight swap, specifically the next business day against the following business day (also called Tomorrow Next, abbreviated to Tom-Next).

Round trip

Buying and selling of a specified amount of currency.

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Settlement date

The date upon which foreign exchange contracts settle.

Short sale

The sale of a specified amount of currency not owned by the seller at the time of the trade. Short sales are usually made in expectation of a decline in the price.

Short-term interest rates

Normally the 90-day rate.

Slippage

Refers to the negative (or depreciating) pip value between where a stop loss order becomes a market order and where that market order may be filled.

Soft Market

More potential sellers than buyers, which creates an environment where rapid price falls are likely.

Spot FX

(1) The most common foreign exchange transaction generally traded on margin and often referred to as the “interbank” market. (2) Spot or Spot date refers to the spot transaction value date that requires settlement within two business days, subject to value date calculation.

Spot next

The overnight swap from the spot date to the next business day.

Spot price/rate

The price at which the currency is currently trading in the spot market. Spread (l) The difference between the bid and ask price of a currency. (2) The difference between the price of two related futures contracts.

Sterling

British pound, otherwise known as cable.

Stop-Loss order

Order to buy or sell at the best available price when a given price threshold has been reached.

Support levels

When an exchange rate depreciates or appreciates to a level where (1) Technical analysis techniques suggest that the currency will rebound, or not go below; (2) the monetary authorities intervene to stop any further down ward movement.

Swap price

A price as a differential between two dates of the swap.

Swap

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.

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Tick

A minimum change in price, up or down.

Tomorrow next (Tom next)

Simultaneous buying of a currency for delivery the following day and selling for the spot day or vice versa.

Tradeable amount

Smallest transaction size acceptable.

Two Tier market

A dual exchange rate system where normally only one rate is open to market pressure, e.g. South Africa.

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Uncovered

Another term for an open position.

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Value Date

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. The only exception to this general rule is the spot day in the quoting centre coinciding with a banking holiday in the country(ies) of the foreign currency(ies). The value date then moves forward a day.

Value Spot

Normally settlement for two working days from today. See value date.