A
American Option:
An option, which may be exercised at any valid business date through out the life of the option.
Ask:
The price at which the currency or instrument is offered.
Average Rate Option:
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".
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B
Back Office
Settlement and related processes
Base Currency:
The currency in which the operating results of the bank or institution are reported.
Break-Even Point:
The price of a financial instrument at which the option buyer recovers the premium.
Bid - Offer spread:
The difference between the rate at which a bank is willing to buy a currency and the rate at which it is willing to sell the same currency.
Bid price:
The price that a bank is willing to pay for a particular base currency, quoted in terms of units of counter currency per unit of base currency.
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C
Cable/Sterling:
A term used in the foreign exchange market for the US Dollar/British Pound rate.
Call Option:
An option that gives the holder the right, but not the obligation, to buy a currency at a specified price during a fixed time period or on a fixed date in the future.
Correlation:
A statistical measure referring to the relationship between two or more variables (events, occurrences etc.). A correlation between two variables suggests some causal relationship between these variables. Typically the CHF is closely correlated with the EURO.
Cross:
The exchange rate between two currencies that can be obtained by exchanging both currencies for a third currency.
Current account:
A government record of imports and exports, including both goods and services other than invisibles, eg interest payments. The current account balance represents the difference between national income and national expenditure.
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D
Deal Confirmation:
All foreign exchange deals must be confirmed by both counterparts. The confirmation of the transactions is executed by the 'back-office'. For safety and soundness reasons, the back office operates independently of the trading room. Treasury best practice recommends that the person in a corporation that transacted the deal should not be the person who confirms it.
Delivery:
The settlement of a futures contract by receipt or tender of a financial instrument or currency.
Devaluation:
Formal action by a central bank to reduce the external value of their currency.
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E
Euribor:
The benchmark rate at which euro interbank term deposits within the eurozone are offered by one prime bank to another prime bank.
Exercise Price (Strike Price):
The price at which an option may be exercised.
Expiry Date:
The last day on which the holder of an option can exercise his right to buy or sell the underlying security.
Exposure:
The total amount of money loaned to a borrower or country. Banks set rules to prevent overexposure to any single borrower. In trading operations, it is the potential for running a profit or loss from fluctuations in market prices.
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F
Foreign-exchange rate:
The price at which one currency can be converted into another currency.
Foreign-exchange risk:
The risk that the functional currency value of an asset, liability, cash flow (or forecasted values of
same) may change due to movements in the foreign exchange rate.
Foreign Exchange Swap:
The simultaneous purchase and sale of a currency for two different dates, one of which is the spot delivery date
(or before) and the other occurring after this date. Funds are exchanged on each date.
Forward Rate Agreement:
A Forward Rate agreement is an agreement between the bank and a customer which effectively fixes an interest rate for a deposit / loan, for a defined term (i.e. 6 months), which will arise at a future date. The FRA is based on a notional principal amount.
FX Order:
An FX order is a request by a company to buy or sell a specific amount of a currency at a specific rate. The company has empowered the bank to enter the inter-bank market and execute the trade at the specified 'strike' price. The order will be accompanied by instructions such as 'GTC - good till cancelled' or 'good till 5.00pm'. This second order will not be passed to other trading zones, but the GTC order will remain live until cancelled or amended by the customer.
Forward Outright contract:
Purchase or sale of a quantity of a foreign currency at a forward rate agreed today (spot rate adjusted for forward points), with delivery and settlement on a specified future date. No funds are exchanged until the future settlement date.
Forward Forward Contract:
The simultaneous purchase and sale of a currency for two different dates, each of which occur after the current spot delivery date. Funds are exchanged on each date.
Forward points:
The points adjustment to the spot rate, which must be made to fix a price for future delivery of a currency. The number of points is primarily dependent on the interest rate differential between the countries of the two currencies in question. The greater the interest rate differential, the greater the points adjustment and vice versa.
Futures:
Exchange-traded contracts. They are firm agreements to deliver (or take delivery of) a standardized amount of something on a certain date at a predetermined price. Futures exist in currencies, money market deposits, bonds, shares and commodities. The Chicago Board of Trade's Treasury bond future is the world's most actively traded derivative contract. The Chicago Mercantile Exchange's Eurodollar contract has the world's largest open interest.
Functional Currency:
The currency of record for a discreet entity.
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G
G7:
The seven leading industrial countries: The United States, Germany, Japan, France, United Kingdom, Canada, and Italy.
Good Until Cancelled:
An instruction to a broker that an order does not expire, unless, the order is executed or cancelled by the customer.
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I
Interbank market:
A generic term to describe the global trading activity that takes place between banks in foreign exchange and interest rate products.
Interest Rate Options:
An agreement permitting a party to obtain a particular interest rate, issued both OTC and by exchanges.
Interest Rate Cap:
An agreement that provides the buyer of a cap with a maximum interest rate for future borrowing requirements.
Interest Rate Collar:
A combination of a cap and a floor to provide maximum and minimum interest rates for borrowing or lending.
Interest Rate Floor:
An agreement, which provides the buyer of the floor with a minimum interest rate for future lending requirements.
Interest Rate Swaps:
An agreement to swap interest rate exposures from floating to fixed or vice versa. There is no exchange of the principal. It is the interest cash flows be they payments or receipts that are exchanged.
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L
LIBOR:
The London Interbank Offered Rate, the rate charged by one bank to another for lending money.
Liquidity:
The ability of a market to accept large transactions.
Liquid market:
A liquid market, as opposed to a thin market, is one in which volume is large, trading is active and highly competitive, and spreads between bid and offer prices are narrow.
Long:
The holding of an excess of a particular currency.
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M
Mark to Market:
The daily adjustment of an account to reflect accrued profits and losses often required to calculate variations of margins.
Money Market:
A market consisting of financial institutions and dealers in money or credit who wish to either borrow or lend.
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N
Netting:
A process, which enables institutions to settle only the net positions with one another at the end of the day, in a single transaction, not trade by trade.
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O
Offer:
Price that a bank is willing to sell a particular currency, quoted in terms of units of counter currency per unit of base currency.
Option Premium:
The price paid to purchase an option. On currency options the premium is due 2 days after the deal date.
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P
Point:
- 100th part of a percent, normally 1/10,000 of any spot rate. Movement of exchange rates are usually in terms of points.
- One percent on an interest rate e.g. from 8% -9%.
- Minimum fluctuation or smallest increment of price movement.
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:
- The amount by which a forward rate exceeds a spot rate.
- The amount by which the market price of a bond exceeds its par value.
- Options, the price a put or call buyer must pay to a put or call seller for an option contract.
- The margin paid above the normal price level.
Prime:
The overdraft rate for top tier corporate borrowers
Producer Price Index:
An economic indicator which gauges the average changes on prices received by domestic producers for their output at all stages of processing.
Purchasing Power Parity:
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, exchanged at the current rate. Also known as the law of one price.
Put Option:
An option that gives the holder the right, but not the obligation, to sell a currency at a specified price during a fixed time period or on a specified date in the future.
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R
Range:
The difference between the highest and lowest price of a future recorded during a given trading session.
Retail Price Index:
Measurement of the monthly change in the average level of prices at retail, normally of a defined group of goods.
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S
Settlement Date:
The date on which an executed order or transaction must be settled by the transference of instruments
or currencies and funds between buyer and seller.
Settlement Instructions:
On deal maturity, instructions must be added to the deal in order to direct
currency payments to the correct counterparts. These are known as settlement instructions. Frequently used instructions or repetitive payments are known as 'Standard Settlement Instructions'.
Stop Loss Order:
A 'stop loss' is an FX order placed in advance by a customer to protect their downside in the event of an adverse move in foreign exchange rates.
Spot market:
Market for immediate as opposed to forward delivery. In the spot market for foreign exchange, settlement is two businesses days ahead
Spot rate:
The price at which a currency can be purchased or sold for delivery in two business days.
SWIFT:
Society for World-wide Interbank Telecommunications is a Belgian based company that provides the global electronic
network for settlement of most foreign exchange transactions.
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T
Take Profit Order:
A 'take profit' is an FX order placed in advance by a customer to avail of an advantageous rate if the market moves in their favor.
Technical Analysis:
Is concerned with past price and volume trends and often with the help of chart analysis in a market in order to be able to make forecasts about future price developments of the commodity being traded.
Thin market:
A foreign exchange market in which volume is light, trading activity is sporadic and the spread between the bid and offer prices is wide or wider than usual.
Treasury Bills:
Short-term obligations of a Government issued for periods of one year or less. Treasury bills do not carry a rate of interest and are issued at a discount on the par value. Treasury bills are repaid at par on the due date. In the UK they are normally for 91 days, and are offered at weekly tenders. In the US they are auctioned.
Transaction exposure:
Variability in the domestic currency value of a known future receipt of foreign currency.
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V
Value date:
In the foreign exchange market, the value date refers to the date on which the foreign exchange deal is due to mature. (See also Settlement Date)
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.
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Z
Zero-Cost FX Option:
A customer uses this product to offset, either partially or in full, the premium cost for a bought
FX option. The customer sells the bank an option, which if the bank exercises it, has the effect of covering out the customer's
underlying exposure. The customer offsets the cost of the bought option against the income from the sold option. The mechanics are
similar to that of an Interest Rate Collar.
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