Market & Trading Term Glossary

Total amount of exposure a bank has with a customer for both spot and forward contracts.

An option which may be exercised at any valid business date throughout the life of the option.

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

A type of trading where the same instrument is bought and sold simultaneously in two different markets in order to cash in on the difference in these markets.

Ask is the lowest price acceptable to the buyer.

In the context of foreign exchange it 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.

When the forward price is equivalent to the spot price.

An option whose strike/exercise price is equal to or near the current market price of the underlying instrument.

A contract where the exercise price is based on the difference between the strike price and the average spot rate over the contract period. Sometimes called an "Asian option".

Bank notes are paper issued by the central or issuing bank and are legal tender, but are not usually considered to be part of the FX market. However bank notes can be converted, in some counties, into FX. Bank notes are normally priced at a premium to the current spot rate for a currency.

Central Bank of the United Kingdom.

The rate at which a central bank is prepared to lend money to its domestic banking system.

A family of path dependent options whose pay-off pattern and survival to the expiration date depend not only on the final price of the underlying currency but also on whether or not the underlying currency breaks a predetermined price level at any time during the life of the option.

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

A term used in the UK for the rate used by banks to calculate the interest rate to borrowers. Top quality borrowers will pay a small amount over base.

The process whereby the basis tends towards zero as the contract expiry approaches.

One per cent of one per cent.

The price expressed in terms of yield maturity or annual rate of return.

The difference between the cash price and futures price.

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

A market in which prices decline sharply against a background of widespread pessimism (opposite of Bull Market).

A person who believes that prices will decline.

Bid is the highest price that the seller is offering for the particular currency/commodity at the moment; the difference between the ask and the bid price is the spread. Together, the two prices constitute a quotation; the difference between the two is the spread. The bid-ask spread is stated as a percentage cost of transacting in foreign exchange.

A type of option in which the payoff is structured to be either a fixed amount of compensation if the option expires in the money, or nothing at all if the option expires out of the money.

An option pricing formula initially derived by Fisher Black and Myron Scholes for securities options and later refined by Black for options on futures. It is widely used in the currency markets.

The price of a financial instrument at which the option buyer recovers the premium, meaning that they make neither a loss nor a gain. In the case of a call option, the break even point is the exercise price plus the premium.

In the options market, undoing a conversion or a reversal to restore the option buyer's original position.

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.

A market characterised by rising prices.

A person who believes that prices will rise.

Sterling bonds issued in the UK by foreign institutions.

(1) A futures butterfly spread is a spread trade in which multiple futures months are traded simultaneously at a differential. The trade basically consists of two futures spread transactions with either three or four different futures months at one differential.
(2) An options butterfly spread is a combination of a bear and bull spread trade in which multiple options months and strike prices are traded simultaneously at a differential. The trade basically consists of two options spread transactions with either three or four different options months and strikes at one differential

Chicago Board Options Exchange.

Chicago Board of Trade.

The Commodity Futures Trading Commission, the US Federal regulatory agency for futures traded on commodity markets, including financial futures.

Chicago Mercantile Exchange.

An arrangement made in a futures contract whereby differences in settlement are made through cash payments, rather than the delivery of physical goods or securities.

Consumer Price Index. Monthly measure of the change in the prices of a defined basket of consumer goods including food, clothing, and transport. Countries vary in their approach to rents and mortgages.

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

A call option confers the right but not the obligation to buy stock, shares or futures at a specified price.

An option that gives the holder the right to buy the underlying instrument at a specified price during a fixed period.

A central bank provides financial and banking services for a country's government and commercial banks. It implements the government's monetary policy, as well, by changing interest rates.

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.

Commodity Exchange of New York.

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

An option on an option, the dates and price of such option being fixed.

The date on which a currency must be delivered to fulfill the terms of the contract. For options, the last day on which the option holder can exercise his right to buy or sell the underlying instrument or currency.

The month in which a futures contract matures or becomes deliverable if not liquidated or traded out before the date specified.

The annual rate of interest of a bond.

(1) On bearer stocks, the detachable part of the hide behind nominee status. A certificate exchangeable for dividends.
(2) Denotes the rate of interest on a fixed interest security.

A foreign exchange deal entered into involving two currencies, neither of which is the base currency.

An exchange rate between two currencies, usually constructed from the individual exchange rates of the two currencies, as most currencies are quoted against the dollar.

Various weightings of other currencies grouped together in relation to a basket currency (e.g. ECU or SDR). Sometimes used by currencies to fix their rate often on a trade weighted basket.

A Day Trading deal is a currency exchange deal which renews automatically every night at 22:00 (GMT time) starting the day the deal was made and until it ends. The deal ends in one of the following events:

1. Termination initiated by you.
2. The day trading rate has reached the Stop-Loss or Take Profit rate you predefined.
3. The deal end date.

As long as the deal is open, it is charged a renewal fee every night at 22:00 (GMT time).

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 in contrast to the brokers who trade only on behalf of their clients.

The ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative. Also referred as the "hedge ratio".

A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterised by high leverage.

Less than the spot price. For example, forward discount.

The European Central Bank.

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

An attempt to summarise the effects on a country's trade balance of its currency's changes against other currencies.

The potential loss that could be incurred from an adverse movement in exchange rates.

The price at which an option can be exercised.

A foreign exchange term for a thinly traded currency. Exotic currencies are illiquid, lack market depth and trade at low volumes. Trading an exotic currency can be expensive, as the bid-ask spread is usually large. Examples: Thai baht, Nok, Mexico peso.

(1) Options - the last date after which the option can no longer be exercised.
(2) Bonds - the date on which a bond matures.

The month in which an option expires.

The last date on which an option can be bought or sold.

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.

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.

Cash balances held by banks with their local Federal Reserve Bank. The normal transaction with these funds is an interbank sale of a Fed fund deposit for one business day. Straight deals are where the funds are traded overnight on an unsecured basis.

The United States Federal Reserve. Federal Deposit Insurance Corporation Membership is compulsory for Federal Reserve members.

Use of taxation as a tool in implementing monetary policy.

Official rate set by monetary authorities for one or more currencies. In practice, even fixed exchange rates are allowed to fluctuate between definite upper and lower bands, leading to intervention by the central bank.

When the value of a currency is decided by the market forces dictating the demand and supply of that particular currency.

(1) An agreement with a counterparty that sets a lower limit to interest rates for the floor buyer for a stated time.
(2) A term for an exchanges trading area (cf. screen based trading), normally the trading area is referred to as a pit in the commodities and futures markets.

The purchase or sale of a currency against the sale or purchase of another.

The purchase or sale of a currency against the sale or purchase of another currency. The maximum time for a deal is defined when the deal opens, the deal can be closed at any moment until the expiry date and time. A deal cannot be closed in its first 3 minutes, due to technical reasons.

An abbreviation of foreign exchange.

Sometimes used as synonym for "forward deal" or "future". More specifically, for arrangements with the same effect as a forward deal between a bank and a customer.

A deal with a value date greater than the spot value date.

The interest rate differential between two currencies expressed in exchange rate points. The forward points are added to or subtracted from the spot rate to give the forward or outright rate depending on whether the currency is at a forward premium or discount.

The rate at which a foreign exchange contract is struck today for settlement at a specified future date which is decided at the time of entering into the contract. 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.

Fractional pips are a new pricing feature which allows you to see more price action detail and will help you to make more informed trading decisions. A fractional pip is a tenth of a pip and the addition of this feature to your account allows you to take advantage of smaller price increments and moves in the market.

Analysis based on economic and political factors.

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.

A contract traded on a futures exchange which requires the delivery of a specified quality and quantity of a commodity, currency or financial instruments a specified future month, if not liquidated before the contract matures.

Total value of a country's output, income or expenditure produced within the country's physical borders.

Gross domestic product plus "factor income from abroad" - income earned from investment or work abroad.

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 the indication to sell.

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.

A hedging transaction is one whose main aim is to protect an asset or liability against a fluctuation in the foreign exchange rate rather than profit from the exchange rate fluctuations.

Very high and self sustaining inflation levels. One definition being the period while inflation exceeds 50% until it drops below that level for 12 months.

International Monetary Fund, established in 1946 to provide international liquidity on a short and medium term and encourage liberalization of exchange rates. The IMF helps its members to tide over the balance of payments problems with supplying the necessary loans.

A call option is in-the-money if the price of the underlying instrument is higher than the exercise/strike price. A put option is in-the-money if the price of the underlying instrument is below the exercise/strike price.

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.

The deposit required by the Broker before a client can trade/transact a deal to have some cushion in the event of default by the party.

The potential for losses arising from changes in interest rates.

Action by a central bank to effect the value of its currency by entering the market.

Open positions run by a dealer within the day. Usually squared by the close.

Slang for the New Zealand dollar.

London International Financial Futures Exchange.

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

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.

See Pending Order.

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

The ability of a market to accept large transactions without having any major impact on the interest rates.

A market position where the Client has bought a currency they previously did not own. For example: long Dollars.

Slang for the Canadian dollar.

Japanese Ministry of International Trade & Industry.

Money Markets

The currencies against which most other world currencies are valued.

Major currencies:
British Pound (GBP)
United States dollar (USD)
Japanese yen (JPY)
Swiss Franc (CHF)
Euro (EUR)

A dealer or company is said to make a market when they quote both the bid and offer prices at which they are ready to buy and sell.

A demand for additional funds to cover positions.

Collateral that the holder of a position in securities, options, forex or futures contracts, has to deposit to cover the credit risk of his counterparty. Other definitions to MARGIN, used in other areas are:
(1) Difference between the buying and selling rates, also used to indicate the discount or premium between spot or forward.
(2) For options, the sum required as collateral from the writer of an option.
(3) For futures, a deposit made to the clearing house on establishing a futures position account.
(4) The percentage reserve required by the US Federal Reserve to make an initial credit transaction.

Market value of a forex position at any time is the amount of the domestic currency that could be purchased at the then market rate in exchange for the amount of foreign currency to be delivered under the forex Contract.

Date for settlement of the transaction which is decided at the time of entering into the contract.

An open-end investment company. Equivalent to unit trust.

A financial instrument consisting of a promise to pay rather than an order to pay or a certificate of indebtedness.

The rate at which a dealer is willing to sell the base currency.

The central bank operations in the markets to influence exchange and interest rates.

Any deal which has not been settled by physical payment or reversed by an equal and opposite deal for the same value date. It can be termed as a high risk, high return proposition.

All options of the same type - calls or puts - listed on the same underlying instrument.

A contract conferring the right but not the obligation to buy (call) or to sell (put) a specified amount of an instrument at a specified price within a predetermined time period.

A put option is out-of-the-money if the exercise/strike price is below the price of the underlying instrument. A call option is out-of-the money if the exercise/strike price is higher than the price of the underlying instrument.

A market conducted directly between dealers and principals via a telephone and computer network rather than a regulated exchange trading floor.

Producer Price Indices. See wholesale price indices.

(1) The nominal value of a security or instrument.
(2) The official value of a currency.

An order to perform a Day Trading deal at a rate pre-defined by the customer, when and if such rate comes up in real market time. The pending rate is superior to the existing rate at the time of reservation. The reservation order lasts for a period defined by the customer, and is associated by the necessary collaterals to facilitate the potential Day Trading deal, when and if activated, under the pre-defined terms. Also referred to as a ‘limit’ order.

See point. (0.0001 of a unit).

(1) 100th part of a per cent, normally 10,000 of any spot rate. Movement of exchange rates are usually in terms of points.
(2) One percent on an interest rate e.g. from 8-9%.
(3) Minimum fluctuation or smallest increment of price movement.

The netted total exposure 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).

(1) The amount by which a forward rate exceeds a spot rate.
(2) The amount by which the market price of a bond exceeds its par value.
(3) Options, the price a put or call buyer must pay to a put or call seller for an option contract.
(4) The margin paid above the normal price level.

Model of exchange rate determination stating that the price of a good in one country should equal the price of the same good in another country after adjusting for the changes in the price due to the change in exchange rate. Also known as the law of one price.

The equilibrium relationship between premiums of call and put options of the same strike and expiry.

A put option confers the right but not the obligation to sell currencies, instruments or futures at the option exercise price within a predetermined time period.

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

The difference between the highest and lowest price of a future recorded during a given trading session.

The price of one currency or asset in terms of another. It has the same meaning as the term parities.

A decline in business activity. Often defined as two consecutive quarters with a real fall in GNP.

A price level at which the selling is expected to take place.

Measurement of the monthly change in the average level of prices at retail, normally of a defined group of goods.

The identification and acceptance or offsetting of the risks threatening the profitability or existence of an organisation. With respect to foreign exchange involves, among others, consideration of market, sovereign, country, transfer, delivery, credit, and counterparty risk.

There are risks associated with any market. It means variance of the returns and the possibility that the actual return might not be in line with the expected returns. The risks associated with trading are: market, exchange, interest rate, yield curve, volatility, liquidity, forced sale, counter party, credit, and country risk.

The substituting of a far option for a near option of the same underlying stock at the same strike/exercise price.

Where the settlement of a deal is carried forward to another value date based on the interest rate differential of the two currencies e.g. the next day. On some instruments there may be fee charged.

Rate at which a bank is willing to sell foreign currency.

A market position where the client has sold a currency or asset he does not already own. Usually expressed in base currency terms.

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

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

The price at which the currency is currently trading in the spot market.

(1) The most common foreign exchange transaction.
(2) Spot refers to the buying and selling of the currency where the settlement date is two business days forward.

(1) The difference between the bid and ask price of a currency.
(2) The difference between the price of two related futures contracts.
(3) For options, transactions involving two or more option series on the same underlying currency.

An active market which can absorb large sale or purchases of currency without having any major impact on the interest rates.

Recession or low growth in conjunction with high inflation rates.

A US firm engaged in assessing the financial health of borrowers. The firm also has generated certain stock indices i.e. S&P 500.

British pound.

An order placed with a broker or market maker to close a position when it reaches a specified price in the market lower than the current rate. The intention being to limit the amount of loss made.

US term for the lowest accepted price for Treasury Bills at auction.

The simultaneous purchase/sale of both call and put options for the same share, exercise/strike price and expiry date.

Also called exercise price. The price at which an option holder can buy or sell the underlying instrument.

A combination of two puts and one call.

Unemployment levels inherent in an economic structure.

A price level at which the buying is expected to take place.

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.

Market slang for Swiss Franc.

An order placed with a broker or market maker to close a position once it reaches a specified rate in the market above the current rate. The intention being to lock in a specific profit amount.

Treasury Bill.

Tokyo International Financial Futures Exchange.

The study of the price that reflects the supply and demand factors of a currency. Common methods are flags, trend-lines spikes, bottoms, tops, pennants, patterns and gaps.

A measure of the sensitivity of the price of an option to a change in its time to expiry.

A market in which trading volume is low and in which consequently bid and ask quotes are wide and the liquidity of the instrument traded is low.

A minimum change in price, up or down.

Potential profit and loss generated by current foreign exchange transactions.

The buying or selling of securities resulting from the execution of an order.

An exchange rate is normally considered to be undervalued when it is below its purchasing power parity.

For exchange contracts it is the day on which the two contracting parties exchange the currencies which are being bought or sold. 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.

Normally settlement is for two working days from the date the contract is entered into. Value Today Transaction is executed for same day settlement; sometimes also referred to as "cash transaction".

A simple option whose terms and conditions do not include any provisions other than exercise style, expiry and strike. To compare with exotic options which have additional terms.

Funds required to be deposited by a client when a price movement has caused funds to fall below the stipulated percentage of the value of the contract.

Expresses the price change of an option for a one per cent change in the implied volatility.

A measure of the amount by which an asset price is expected to fluctuate over a given period. Normally measured by the annual standard deviation of daily price changes (historic). Can be implied from futures pricing, implied volatility.

A bank made up of members of the IMF whose aim is to assist in the development of member states by making loans where private capital is not available.

The graph showing changes in yield on instruments depending on time to maturity. A system originally developed in the bond markets is now broadly applied to various financial futures. A positive sloping curve has lower interest rates at the shorter maturities and higher at the longer maturities. A negative sloping curve has higher interest rates at the shorter maturities.

A bond that pays no interest. The bond is initially offered at a discount to its redemption value.