Forex Trading Terminology
Forex Trading Terminology
Forex Trading Terminology
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.
Value Spot
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".
Undervaluation
An exchange rate is normally considered to be undervalued when it is below its purchasing
power parity.
Value Date
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.
Transaction
The buying or selling of securities resulting from the execution of an order.
Transaction Exposure
Potential profit and loss generated by current foreign exchange transactions.
Transaction Date
The date on which a trade occurs.
Tranche
A portion of a deal or structured financing, specifically used for borrowings from the IMF.
Trade Date
The date on which a trade occurs.
Tomorrow Next (Tom next)
Simultaneous buying and selling of a currency for delivery the following day and selling for
the next day or vice versa.
Tick
A minimum change in price, up or down.
Thin Market
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.
Theta
A measure of the sensitivity of the price of an option to a change in its time to expiry.
Terms of Trade
FOREX TERMINOLOGY
Also called exercise price. The price at which an option holder can buy or sell the underlying
instrument.
Straddle
The simultaneous purchase/sale of both call and put options for the same share,
exercise/strike price and expiry date.
Stop Out Price
US term for the lowest accepted price for Treasury Bills at auction.
Stop Loss Order
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.
Sterling
British pound.
Sterilisation
Central Bank activity in the domestic money market to reduce the impact on money supply of
its intervention activities in the forex market.
Standard and Poors (S&P)
A US firm engaged in assessing the financial health of borrowers. The firm also has
generated certain stock indices i.e. S&P 500.
Stagflation
Recession or low growth in conjunction with high inflation rates.
Stable Market
An active market which can absorb large sale or purchases of currency without having any
major impact on the interest rates.
Spread
(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.
Spot
(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.
Spot Price/Rate
The price at which the currency is currently trading in the spot market.
Spot Next
The overnight swap from the spot date to the next business day.
FOREX TERMINOLOGY
Soft Market
More potential sellers than buyers, which creates an environment where rapid price falls are
likely.
Short
A market position where the client has sold a currency or asset he does not already own.
Usually expressed in base currency terms.
Settlement
Actual physical exchange of one currency or asset for another.
Settlement Date
It means the business day specified for delivery of the currencies bought and sold under a
forex contract.
Selling Rate
Rate at which a bank is willing to sell foreign currency.
SITC
Standard International Trade Classification. A system for reporting trade statistics in a
common manner.
Rollover
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.
Rolling over
The substituting of a far option for a near option of the same underlying stock at the same
strike/exercise price.
Risks
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.
Risk Management
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.
Risk Premium
Additional sum payable or return to compensate a party for adopting a particular risk.
Revaluation
Increase in the exchange rate of a currency as a result of official action.
Retail Price Index
FOREX TERMINOLOGY
Measurement of the monthly change in the average level of prices at retail, normally of a
defined group of goods.
Resistance
A price level at which the selling is expected to take place.
Reserves
Funds held against future contingencies, normally a combination of convertible foreign
currency, gold, and SDRs. Official reserves are to ensure that a government can meet near
term obligations. They are an asset in the balance of payments.
Reserve Currency
A currency held by a central bank on a permanent basis as a store of international liquidity,
these are normally Dollar and Sterling.
Recession
A decline in business activity. Often defined as two consecutive quarters with a real fall in
GNP.
Rate
The price of one currency or asset in terms of another. It has the same meaning as the term
parities.
Range
The difference between the highest and lowest price of a future recorded during a given
trading session.
Quote
An indicative price. The price quoted for information purposes but not to deal.
Put Option
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.
Put Call Parity
The equilibrium relationship between premiums of call and put options of the same strike and
expiry.
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 after adjusting for the changes in the
price due to the change in exchange rate. Also known as the law of one price.
Profit Taking
The unwinding of a position to realise profits.
Principal
A dealer who buys or sells stock for his/her own account.
FOREX TERMINOLOGY
Prime Rate
(1) The rate from which lending rates by banks are calculated in the US.
(2) The rate of discount of prime bank bills in the UK.
Premium
(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.
Position
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).
Political Risk
The potential for losses arising from a change in government policy or due to the risk of
expropriation (nationalisation by the government).
Point
(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.
Pip
See point. (0.0001 of a unit).
Permitted Currency
A foreign currency which is freely convertible i.e. a currency which is permitted by the rules
and regulations of the country concerned to be converted into major reserve currencies and
for which a fairly active and liquid market exists for dealing against the major currencies.
Pending Order
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.
Parity
(1) Foreign exchange dealer's slang for your price is the correct market price.
(2) Official rates in terms of SDR or other pegging currency.
Parities
The value of one currency in terms of another.
Par
FOREX TERMINOLOGY
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.
Open Market Operations
The central bank operations in the markets to influence exchange and interest rates.
One Cancels Other Order
Where the execution of one order automatically cancels a previous order also referred to as
OCO or "One cancels the other".
Old Lady
Old lady of Threadneedle Street, a term for the Bank of England.
Official Settlements Account
A US balance of payments measure based on movement of dollars in foreign official holdings
and US reserves. Also referred to as reserve transaction account.
Offer
The rate at which a dealer is willing to sell the base currency.
Off-Shore
The operations of a financial institution which although physically located in a country, has
little connection with that country's financial systems. In certain countries a bank is not
permitted to do business in the domestic market but only with other foreign banks. This is
known as an off shore banking unit.
Note
A financial instrument consisting of a promise to pay rather than an order to pay or a
certificate of indebtedness.
Not Held Basis Order
An order whereby the price may trade through or better than the client's desired level, but the
principal is not held responsible if the order is not executed.
Nickel
US term for five basis points.
Mutual fund
An open-end investment company. Equivalent to unit trust.
Money Supply
The amount of money in the economy, which can be measured in a number of ways.
Maturity
Date for settlement of the transaction which is decided at the time of entering into the
contract.
Market Value
FOREX TERMINOLOGY
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.
Mark - To - Market
The profits and/or losses are tallied at the end of the session according to the closing prices of
the security and the account is "marked to the market" daily. The party will be called upon to
make good the losses if there has been an adverse movement in the prices and it can book the
profits in case there has been a favourable movement in the prices.
Margin
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.
Margin Call
A demand for additional funds to cover positions.
Managed Float
When the monetary authorities intervene regularly in the market to stabilise the rates or to
push the exchange rate in a required direction. Also called a dirty float.
Market Maker
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.
Major Currencies
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)
MM
Money Markets
MITI
Japanese Ministry of International Trade & Industry.
M4
FOREX TERMINOLOGY
LIFFE
London International Financial Futures Exchange.
LIBOR (London Inter Bank Offer Rate)
British Bankers' Association average of interbank offered rates for dollar deposits in the
London market based on quotations at 16 major banks. Effective rate for contracts entered
into two days from date appearing.
LDC
Less developed countries, often used with respect to secondary debt market.
Knock Out
Has a corresponding meaning to Knock In although the option may permanently cease to
exist.
Knock In
A process where a barrier option (European) becomes active as the underlying spot price is in
the money.
Kiwi
Slang for the New Zealand dollar.
Intra Day Position
Open positions run by a dealer within the day. Usually squared by the close.
Intra Day Limit
Limit set by bank management on the size of each dealer's Intra Day Position.
Intervention
Action by a central bank to effect the value of its currency by entering the market.
Interest Rate Swaps
An agreement to exchange interest rate exposures from floating to fixed or vice versa. There
is no swap of the principal. The principal amount is notional as at the end of the tenure only
cash flows related with the interest payments (whether payment or receipt) are exchanged.
Interest Rate Risk
The potential for losses arising from changes in interest rates.
Interbank Rates
The forex rates large international banks quote to other large international banks. Normally
the public and other businesses do not have access to these rates.
Initial Margin
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.
Info Quote
FOREX TERMINOLOGY
Hyperinflation
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.
Hedging
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.
Hedge
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.
Head and Shoulders
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.
Gross National Product
Gross domestic product plus "factor income from abroad" - income earned from investment
or work abroad.
Gross Domestic Product
Total value of a country's output, income or expenditure produced within the country's
physical borders.
GNP Gap
The difference between the actual real GNP and the potential real GNP. If the gap is negative
an economy is overheated.
GNP Deflator
Removes inflation from the GNP figure. Usually expressed as a percentage and based on an
index figure.
G7
The seven leading industrial countries, being US , Germany, Japan, France, UK, Canada,
Italy.
G5
The five leading industrial countries - US, Germany, Japan, France, UK.
G10
G7 plus Belgium, Netherlands and Sweden, a group associated with IMF discussions.
Switzerland is sometimes peripherally involved.
Futures Exchange-Traded Contracts
FOREX TERMINOLOGY
They are firm agreements to deliver (or take delivery of) a standardised amount of a product
or asset on a certain date at a predetermined price. Futures exist in currencies, money market
deposits, bonds, shares and commodities. They are traded on an exchange with the clearing
corporation guaranteeing the contract and moreover the trade is done on a mark to market
basis.
Futures Contract
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.
Funds
A term for USD/CAD/Fungibles Instruments that are equivalent, substitutable and
interchangeable in law. May apply to certain exchange traded currency contracts offered on a
number of exchanges.
Fundamentals
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.
Fundamental Analysis
Analysis based on economic and political factors.
Free Reserves
Total reserves held by a bank less the reserves required by the authority.
Fractional Pips
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.
Forward Rate
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.
Forward Points
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.
Forward Deal
FOREX TERMINOLOGY
A deal with a value date greater than the spot value date.
Forward Contract
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.
Forex
An abbreviation of foreign exchange.
Forex Deal
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.
Foreign Position
A position under which one party agrees to purchase from or sell to the other party an agreed
amount of foreign currency.
Foreign Exchange
The purchase or sale of a currency against the sale or purchase of another.
Floor
(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.
Floating Exchange Rate
When the value of a currency is decided by the market forces dictating the demand and
supply of that particular currency.
Float
(1) see Floating exchange rate.
(2) Cash in hand or in the course of being transferred between banks.
(3) Federal Reserve Float arises from the system where cheques sent to the Federal Reserve
Banks are credited sometimes in advance of the depositing bank loosening the reserve.
Fixing
A method of determining rates by normally finding a rate that balances buyers to sellers.
Such a process occurs either once or twice daily at defined times. Used by some currencies
particularly for establishing tourist rates. The system is also used in the London Bullion
market.
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 bands, leading to
intervention by the central bank.
Fiscal Policy
FOREX TERMINOLOGY
(1) Options - the last date after which the option can no longer be exercised.
(2) Bonds - the date on which a bond matures.
Exotic Currency
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.
Exercise Price (Strike Price)
The price at which an option can be exercised.
European Union
Is a politico-economic union of 28 member states that are located primarily in Europe.
Exchange Rate Risk
The potential loss that could be incurred from an adverse movement in exchange rates.
Effective Exchange Rate
An attempt to summarise the effects on a country's trade balance of its currency's changes
against other currencies.
Economic Indicator
A data release which indicates current economic growth rates and trends such as retail sales
and employment.
Economic Exposure
Reflects the impact of foreign exchange changes on the future competitive position of a
company in the sense of the impact it can have on the future cash flows of the company.
ERM
Exchange Rate Mechanism.
EOE
European Options Exchange.
EMU
European Monetary Union.
EMS
European Monetary System.
EFT
Electronic Fund Transfer.
ECB
The European Central Bank.
Domestic Rates
FOREX TERMINOLOGY
The interest rates applicable to deposits domiciled in the country of origin. Value may vary
from Euro deposits due to taxation and varying market practices.
Discount
Less than the spot price. For example, forward discount.
Direct Quotation
Quoting in fixed units of foreign currency against variable amounts of the domestic currency.
Devaluation
Deliberate downward adjustment of a currency against its fixed parities or bands which is
normally accompanied by formal announcement.
Details
All the information required to finalise a foreign exchange transaction, i.e. name, rate, dates,
and point of delivery.
Desk
Term referring to a group dealing with a specific currency or currencies.
Derivatives
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.
Delta
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".
Delta Spread
A ratio spread of options established as a neutral position by using the deltas of the options
concerned to determine the hedge ratio.
Delta Hedging
A method used by option writers to hedge risk exposure of written options by purchase or
sale of the underlying instrument in proportion to the delta.
Delivery
The settlement of a transaction by receipt or tender of a financial instrument or currency.
Delivery Date
The date of maturity of the contract, when the final settlement of transaction is made by
exchanging the currencies. This date is more commonly known as the value date.
Deficit
Shortfall in the balance of trade, balance of payments, or government budgets.
FOREX TERMINOLOGY
Declaration Date
The latest day or time by which the buyer of an option must intimate to the seller his
willingness or unwillingness to exercise the option.
Dealer
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.
Deal Ticket
The primary method of recording the basic information relating to a transaction.
Deal Date
The date on which a transaction is agreed upon.
Day Trading
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:
As long as the deal is open, it is charged a renewal fee every night at 22:00 (GMT time).
Day Order
An order that if not executed on the specific day is automatically canceled.
Cycle
The set of expiration dates applicable to different classes of options.
Current Balance
The value of all exports (goods plus services) less all imports of a country over a specific
period of time, equal to the sum of trade and invisible balances plus net receipt of interest,
profits and dividends from abroad.
Current Account
The net balance of a country's international payment arising from exports and imports
together with unilateral transfers such as aid and migrant remittances. It excludes capital
flows.
Currency
The type of money that a country uses. It can be traded for other currencies on the foreign
exchange market, so each currency has a value relative to another.
Currency Basket
FOREX TERMINOLOGY
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.
Cross-Trade
A cross-trade transaction is a transaction where either the buy broker and the sell broker are
the same, or the buy broker and the sell broker belong to the same firm.
Cross Rate
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.
Cross Hedge
A technique using financial futures to hedge different but related cash instruments based on
the view that the price movements between the instruments move in concert.
Cross Deal
A foreign exchange deal entered into involving two currencies, neither of which is the base
currency.
Credit Risk
The risk that a debtor will not repay; more specifically the risk that the counterparty does not
have the currency promised to be delivered.
Crawling Peg (Adjustable Peg)
An exchange rate system where a country's exchange rate is "pegged" (i.e. fixed) in relation to
another currency. The official rate may be changed from time to time.
Factors that affect currency trading unique to the specific country include political,
regulatory, legal and holiday risks.
Counterparty Risks
The risk to each party of a contract, that the counterparty will not live up to its contractual
obligations. Counterparty risk as a risk to both parties and should be considered when
evaluating a contract.
Counterparty
The customer or bank with which a foreign exchange deal is executed.
Cost of Carry
The interest rate parity, where the forward price is determined by the cost of borrowing
money in order to hold the position.
Correspondent Bank
The foreign banks representative who regularly performs services for a bank which has no
branch in the relevant centre, e.g. to facilitate the transfer of funds. In the US this often
occurs domestically due to inter state banking restrictions.
Contract
An agreement to buy or sell a specified amount of a particular currency or option for a
specified month in the future (See Futures contract).
Contract Month
The month in which a futures contract matures or becomes deliverable if not liquidated or
traded out before the date specified.
Contract Expiration Date
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.
Confirmation
A memorandum to the other party describing all the relevant details of the transaction.
Compound Option
An option on an option, the dates and price of such option being fixed.
Commission
The fee that a broker may charge clients for dealing on their behalf.
Comex
Commodity Exchange of New York.
Coincident Indicator
An economic indicator that generally moves in line with the general business cycle such as
industrial production.
FOREX TERMINOLOGY
A finance charge associated with the storing of commodities (or foreign exchange contracts)
from one delivery date to another.
Capital Account
A national account that shows the net change in asset ownership for a nation. The capital
account is the net result of public and private international investments flowing in and out of
a country.
Call
An option that gives the holder the right to buy the underlying instrument at a specified price
during a fixed period.
Call Option
A call option confers the right but not the obligation to buy stock, shares or futures at a
specified price.
Cable
A term used in the foreign exchange market for the British Pound / US Dollar rate.
Cable Transfer
Telegraphic transfer of funds from one centre to another. Now synonymous with interbank
electronic fund transfer.
CPSS
Committee on Payment and Settlement Systems.
CPI
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.
Contracts for Difference (CFD)
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.
CME
Chicago Mercantile Exchange.
CHIPS
The New York clearing house clearing system. (Clearing House Interbank Payment System).
Most Euro transactions are cleared and settled through this system.
CHAPS
Clearing House Automated Payment System.
CFTC
The Commodity Futures Trading Commission, the US Federal regulatory agency for futures
traded on commodity markets, including financial futures.
FOREX TERMINOLOGY
CD
Certificate of Deposit.
CBOT or CBT
Chicago Board of Trade.
CBOE
Chicago Board Options Exchange.
Butterfly Spread
(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
Bulldogs
Sterling bonds issued in the UK by foreign institutions.
Bull
A person who believes that prices will rise.
Bull Market
A market characterised by rising prices.
Broker
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.
Break Out
In the options market, undoing a conversion or a reversal to restore the option buyer's original
position.
Break Even Point
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.
Booked
The recording of a transaction outside the country where the transaction is itself negotiated.
Black-Scholes Model
FOREX TERMINOLOGY
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.
Binary Options
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.
Bilateral Clearing
A system used where foreign currency is limited. Payments are usually routed through the
central banks, and sometimes require that the trade balance is equaled every year.
Big Figure
Refers normally to the first three digits of an exchange rate that dealers treat as understood in
quoting. For example a quote of "30/40" on dollar mark could indicate a price of
1.5530/40BIS: Bank of International Settlement.
Bid Price
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.
Bear
A person who believes that prices will decline.
Bear Market
A market in which prices decline sharply against a background of widespread pessimism
(opposite of Bull Market).
Basket
A group of currencies normally used to manage the exchange rate of a currency. Sometimes
referred to as a unit of account.
Basis
The difference between the cash price and futures price.
Basis Trading
Taking opposite positions in the cash and futures market with the intention of profiting from
favourable movements in the basis.
Basis Price
The price expressed in terms of yield maturity or annual rate of return.
Basis Point
One per cent of one per cent.
Basis Convergence
FOREX TERMINOLOGY
The process whereby the basis tends towards zero as the contract expiry approaches.
Base Rate
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.
Base Currency
The currency in which the operating results of the bank or institution are reported.
Barrier Option
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.
Bank of England
Central Bank of the United Kingdom.
Bank Rate
The rate at which a central bank is prepared to lend money to its domestic banking system.
Bank Notes
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.
Band
The range in which a currency is permitted to move. A system used in the ERM.
Balance of Trade
The value of exports less imports. Invisibles are normally excluded, and is otherwise referred
to as mercantile or physical trade. Figures can be quoted on FoB/ FaS, customs cleared, or
FoB export.
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".
Auction
Sale of an item to the highest bidder. (1) A method commonly used in exchange control
regimes for the allocation of foreign exchange. (2) A method for allocating government
paper, such as US Treasury Bills. Small investors are given preferential access to the bills.
The average issuing price is then computed on the basis of the competitive bids accepted. In
some circumstances for government auctions it is the yield rather than the price which is bid.
At-the-Money
An option whose strike/exercise price is equal to or near the current market price of the
underlying instrument.
FOREX TERMINOLOGY