Dealing in two or more markets at the same time (or in similar products
in the same market) to take advantage of temporary mispricing in order
to make a profit.
In options, when the strike price equals the price of the underlying
A person who believes that prices will decline.
A market characterized by declining prices.
The rate at which a dealer is willing to buy the vase currency.
The first three digits of an exchange rate, e.g. USD 1.62 per pound
or DEM 1.49 per dollar.
A person who believes that prices will rise.
A market characterized by rising prices.
Dealer's slang for the UK sterling/US dollar exchange rate.
An option that gives the buyer the right to long a position in the
underlying contract at a specific price; the call writer (seller) may
be assigned a short position in the underlying contract if the buyer exercises
The overnight interest rate.
The market for the purchase and sale of physical currencies.
Currency which can be exchanged for other currencies of gold without
authorization from the central bank.
The parties on either side of a transaction.
Exchange rate that does not involve the US dollar.
A clause in an export contract in which the sum payable is denominated
in the buyer's currency; but the amount payable will vary with the exchange
rate for the buyer's currency against the seller's currency.
Refers to opening and closing the same position or positions within
one day's trading.
For options, also called the neutral hedge ratio. Expresses
the expected change in the option price, given a one-unit change in the
price of the underlying contract.
Financial instruments, such as futures and options, which derive their
value from underlying securities including bonds, bills, currencies, and
Cheaper than the spot price, e.g. forward discount.
When a variable amount of a foreign currency is quoted against one
unit of the US dollar, regardless of where the dealer is located or in
what currency he is requesting a quote. The major exception is the
UK sterling/US dollar rate cable which is quoted as units of the US dollar
to UK sterling.
European Monetary System
Exchange Rate Mechanism
Marketable debt security issued outside the country in whose currency
the debt is denominated.
A dollar deposit acquired by a person or bank not residing in the
United States and held outside the United States and therefore not subject
to US reserve restrictions.
European Currency Unit
The currency unit in the EMS, where the unit is defined by the sum
of quantities of each of the national currencies of the members of the
EMS, so the value of the ECU changes in terms of third currencies,
such as e.g. the US dollar.
Government regulations restricting or forbidding certain types of
foreign currency transactions including purchases from abroad, payment
abroad of interest or dividends, and investing abroad.
Exchange Rate Depreciation
Currency which loses in value against one or more other currencies,
especially if this happens in response to natural supply rather than by
an official devaluation.
Exchange Rate Risk
The potential loss that could be incurred from a movement in exchange
A financial risk facing a business, which can be categorized according
to its cause or source. Currency exposures are exposures to exchange
Abbreviation for Federal Reserve System of the United States.
In the domestic context Fed usually refers to its board of governors or
to the Federal Reserve Bank of New York; in the foreign exchange context
it usually refers to the latter.
Federal Open Market Committee
Key decision making committee of the Federal Reserve System.
The minutes of its meeting are published about a month later, and show
the current stance of US monetary policy.
Dealers' slang meaning "00" and denoting and.
Fixed Exchange rate
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 intervention points.
Where a client has not traded in that currency or where an earlier
deal is reversed thereby creating a neutral (flat) position.
Floating Exchange Rate
When the value of a currency is decided by supply and demand.
An abbreviation for foreign exchange also FX.
The interest rate differential between two currencies expressed in
exchange rate points. These forward points are added to or subtracted
from the spot rate to give the forward or outright rate.
The rate at which a foreign exchange contract is struck today for
settlement at a specified future date.
Analysis based on economic factors.
A contract giving the obligation to buy or sell an asset at a set
date in the future.
GTC "Good Till Cancelled"
An order left with a dealer to buy or sell at a fixed price.
It holds until cancelled.
A currency whose value is expected to remain stable or increase in
terms of other currencies.
A hedging transaction is one which protects an asset or liability
against a fluctuation in the foreign exchange rate.
International Monetary Fund
The deposit required before a client can transact a deal.
The interest parity theory is if there are two financial instruments
in different currencies but identical in risk and maturity (e.g. three
month UK gilts and Us Treasury bills), then a difference in the interest
rate on the instruments will be reflected in the premium or discount for
the forward exchange rate.
In call options, when the strike price is below the price of the underlying
contract. In put options, when the strike price is above the price
of the underlying contract. In-the-Money options are the most expensive
options because the premium includes intrinsic value.
For in-the-money call and put options, the difference between the
strike price and the underlying contract price.
Leads and Lags
Process of accelerating (leads) or slowing up (lags) foreign exchange
payments or receipts when a change in exchange rates is expected.
Facility whereby a small margin deposit can control a much larger
total contract value, a mechanism which determines the ability to make
extraordinary profits at the same time as keeping the risk capital to
An order given which has restrictions upon its execution. The
client specifies a price and the order can be executed only if the market
reaches that price.
German term for the rate of interest charged for loans against the
security of pledged paper. Particularly used by Bundesbank, which
normally maintains its Lombard rate at about 1/2% above its discount rate.
London Interbank Offered Rate (LIBOR)
The interest rate at which banks in London are prepared to lend funds
to first-class banks.
A position where the client has bought a currency he does not already
own. Normally expressed in base currency terms, e.g. long US dollars
(short Deutsch marks).
Cash or guarantee deposited by a client wishing to trade.
Date for settlement
Not Held Basis Order
An order whereby the price may trade through or even better than the
client's desired level, but the principal is not held responsible if the
order is not executed.
The rate at which a dealer is willing to sell the base currency.
One Cancels Other (OCO) Order
Where the execution of one order automatically cancels a previous
Any deal which has not been settled by physical payment or reversed
by an equal and opposite deal for the same value date.
The right, but not the obligation, to buy or sell an asset, such as
currency, on or before a set of future date.
Option calls with strike prices above the price of the underlying
contracts, and puts with strike prices below the price of the underlying
Foreign Exchange transaction involving either the purchase or the
sale of a currency for settlement at a future date.
The forward rate of a foreign exchange deal.
Refers to a purchase or sale between 9:00 pm and 7:00 am.
Over-the-Counter Transaction (OTC)
A transaction arranged by direct negotiation, usually by telephone,
rather than on an exchange.
0.0001 of a unit; for instance, if the GBP/USD is 1.5220, then 1.5219
is one point lower
The potential for losses arising from a change in government policy.
In options, the price of a call or a put, which the buyer initially
pays to the option writer.
Price Risk (Market Risk)
The risk of a fall in the market value of a foreign investment (as
measured in the domestic currency of the investor) due to an adverse change
in the value of the currency of the investment.
The counterparty that sells and buys currencies for his own account
as opposed to a broker who introduces a buyer to a seller and vice versa.
Purchasing Power Parity
The proposition that over the long term, changes in the exchange rate
between two currencies are the result of differences in the relative rate
of inflation in the two countries concerned.
In options, the buyer of a put has the right to acquire a short position
in the underlying contract at the strike price until the option expires;
the seller (writer) of a put obligates himself to take a long position
in the contract at the strike price if the buyer exercises his put.
A price level at which you would expect selling to take place due
to technical analysis. The resistance level of one currency is the
support level for the other.
An attitude that risks should neither be sought nor avoided, but should
be accepted whenever they arise.
Where the settlement of a deal is rolled forward to another value
date based on the interest rate differential of the two currencies.
Actual exchange of base currency and currency between principal and
A market position where the client has sold a currency he does not
already own. Normally expressed in base currency terms, e.g. short
US dollars (long Deutsch marks).
A currency which is expected to devalue or depreciate against other
currencies, or whose exchange rate must be supported by central bank intervention
or exchange controls.
Buying or selling currency in expectation of an exchange rate movement,
so as to make a profit, either in the same market or between two different
markets, e.g. forex cash markets and derivatives markets.
Spot means that the settlement date of a deal is two business days
The difference in prices between bid and offer rates.
Stop Loss Order (or Stop)
An order to buy or sell when a particular price is reached, either
above or below the price that prevailed when the order was given.
For call options, the specified price at which the buyer has the right
to purchase the underlying contract.
The process of reducing or eliminating currency exposure by matching
receivables and payables in each currency or currency bloc to minimise
the net exposure.
Price level at which you expect buying to take place. See resistance.
An agreement between two parties to exchange a series of future payments.
In a currency swap, the exchange of payments (cash flow) are in two currencies,
one of which is often the US dollar.
The society for Worldwide International Fund Transfers is a multinational
facility for fund transfers based in Belgium and the Netherlands.
Analysis based on market action through chart study, moving averages,
volume, open interest, oscillators, formations, stochastics and other
When the volumes of currency bought and sold are low.
In options, the value of the premium is based on the amount of time
left before the contract expires and the volatility of the underlying
contract. Time value represents that portion of the premium in excess
of intrinsic value. Time value diminishes as the expiration of the
option draws near and/or if the underlying contract's price development
becomes less volatile.
Rates for which both a bid and offer are quoted.
US Prime Rate
The rate at which US banks will lend to their prime corporate customers.
Settlement date of a spot or forward deal.
A measure of price fluctuation.
Recommended further reading:
Who participate in Forex Trading?
Main Forex Markets
Trading with a Strategy
Risks inherent to Forex