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Forex Glossary |
Bear
Someone who believes the prices/market
will decline.
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Bear
Market
A market in which prices decline sharply
against a background of widespread pessimism
(opposite of Bull Market). |
Bid
The price that a buyer is prepared to
purchase at; the price offered for a currency.
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Bid/Ask Spread
See spread |
Bretton Woods Accord of 1944
An agreement that established fixed foreign
exchange rates for major currencies, provided
for central bank intervention in the currency
markets, and set the price of gold at
US $35 per ounce. The agreement lasted
until 1971. See More on Bretton Woods.
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Bull
Someone who believes the prices/market
will rise. |
Bull
Market
A market characterised by rising prices.
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Broker
An agent who handles investors' orders
to buy and sell currency. For this service,
a commission is charged which, depending
upon the broker and the amount of the
transaction, may or may not be negotiated.
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Cable
Dealers slang for the Sterling/US Dollar
exchange rate. |
Call
Rate
The overnight interbank interest rate.
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Cash
Market
The market for the purchase and sale of
physical currencies. |
Convertible Currency
Currency which can be freely exchanged
for other currencies or gold without special
authorisation from the appropriate central
bank. |
Counter party
The customer or bank with whom a foreign
deal is made. The term is also used in
interest and currency swaps markets to
refer to a participant in a swap exchange.
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Cross Rate
An exchange rate between two currencies,
usually constructed from the individual
exchange rates of the two currencies,
measured against the United States dollar.
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Currency Risk
The risk of incurring losses resulting
from an adverse change in exchange rates.
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Currency Swap
Contract which commits two counter-parties
to exchange streams of interest payments
in different currencies for an agreed
period of time and to exchange principal
amounts in different currencies at a pre-agreed
exchange rate at maturity. |
Currency Option
Option contract which gives the right
to buy or sell a currency with another
currency at a specified exchange rate
during a specified period. |
Currency Swaption
OTC Option to enter into a currency swap
contract. |
Currency Warrant
OTC Option; long-dated (more than one
year) currency option. |
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Day
Trading
Refers to opening and closing the same
position or positions within one day's
trading. |
Dollar Rate
When a variable amount of a foreign currency
is quoted against one US Dollar, regardless
of where the dealer is located or in what
currency he is requesting a quote. The
exception is the Sterling/US Dollar rate
(cable) which is quoted as variable amount
of US Dollars to one Sterling. |
EMS
Abbreviation for European Monetary System,
an agreement between member nations of
the European Union to maintain an alignment
between the exchange rates of their respective
currencies. |
European Monetary Unit
The principal goal of the EMU is to establish
a single European currency called the
Euro, which will officially replace the
national currencies of the member EU countries
in 2002. Currently, the Euro exists only
as a banking currency and for paper financial
transactions and foreign exchange. The
current members of the EMU are Germany,
France, Belgium, Luxembourg, Austria,
Finland, Ireland, the Netherlands, Italy,
Spain and Portugal. |
Exchange Rate Risk
See Currency Risk. |
Federal
Reserve (Fed)
The Central Bank of the United States.
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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.
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Flat
/ Square
To be neither long nor short is the same
as to be flat or square. One would have
a flat book if he has no positions or
if all the positions cancel each other
out. |
Floating Rate Interest
As opposed to a fixed rate, the interest
rate on this type of deal will fluctuate
with market rates or benchmark rates.
One example of a floating rate interest
is a standard mortgage. |
Foreign Exchange Swap
Transaction which involves the actual
exchange of two currencies (principal
amount only) on a specific date at a rate
agreed at the time of the conclusion of
the contract (short leg), at a date further
in the future at a rate agreed at the
time of the contract (the long leg). |
Foreign
Exchange (or Forex or FX)
The simultaneous buying of one currency
and selling of another in an over-the-counter
market. Most major FX is quoted against
the US Dollar. |
Forward
A deal that will commence at an agreed
date in the future. Forward trades in
FX are usually expressed as a margin above
(premium) or below (discount) the spot
rate. To obtain the actual forward FX
price, one adds the margin to the spot
rate. The rate will reflect what the FX
rate has to be at the forward date so
that if funds were re-exchanged at that
rate there would be no profit or loss
(i.e. a neutral trade). The rate is calculated
from the relevant deposit rates in the
2 underlying currencies and the spot FX
rate. Unlike in the futures market, forward
trading can be customized according to
the needs of the two parties and involves
more flexibility. Also, there is no centralized
exchange. |
Fundamental Analysis
Thorough analysis of economic and political
data with the goal of determining future
movements in a financial market. |
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GTC
"Good Till Cancelled". An order left with
a Dealer to buy or sell at a fixed price.
The order remains in place until it is
cancelled by the client. |
Hedging
The practice of undertaking one investment
activity in order to protect against loss
in another, e.g. selling short to nullify
a previous purchase, or buying long to
offset a previous short sale. While hedges
reduce potential losses, they also tend
to reduce potential profits. |
High/Low
Usually the highest traded price and the
lowest traded price for the underlying
instrument for the current trading day.
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Initial Margin
The required initial deposit of collateral
to enter into a position as a guarantee
on future performance |
Interbank Rates
The Foreign Exchange rates at which large
international banks quote other large
international banks |
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Limit Order
An order to buy at or below a specified
price or to sell at or above a specified
price. |
Long Position
A market position where the Client has
bought a currency he previously did not
hold own. Normally expressed in base currency
terms, e.g., long Dollars (short D.Marks).
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Margin
Customers must deposit funds as collateral
to cover any potential losses from adverse
movements in prices. |
Margin Call
A demand for additional funds. A requirement
by a clearing house that a clearing member
(or by a brokerage firm that a client)
brings margin deposits up to a required
minimu m level to cover an adverse movement
in price in the market. |
Market Maker
A dealer who supplies prices and is prepared
to buy or sell at those stated bid and
ask prices. A market maker runs a trading
book. |
Maturity
Date for settlement. |
Offer
The price, or rate, that a willing seller
is prepared to sell at. |
One Cancels Other Order
(O.C.O. Order)
A contingent order where the execution
of one part of the order automatically
cancels the other part. |
Open Position
Any deal which has not been settled by
physical payment or reversed by an equal
and opposite deal for the same value date.
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Over The Counter (OTC)
Used to describe any transaction that
is not conducted over an exchange. |
Overnight Trading
Refers to a purchase or sale between the
hours of 9.00 pm and 8.00 am. on the following
day. |
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Pip (or Points)
The term used in currency market to represent
the smallest incremental move an exchange
rate can make. Depending on context, normally
one basis point (0.0001 in the case of
EUR/USD, GBD/USD, USD/CHF and .01 in the
case of USD/JPY). |
Political Risk
The uncertainty in return on an investment
due to the possibility that a government
might take actions which are detrimental
to the investor's interests. |
Resistance
A price level at which you would expect
selling to take place. |
Risk Capital
The amount of money that an individual
can afford to invest, which, if lost would
not affect their lifestyle. |
Rollover
Where the settlement of a deal is rolled
forward to another value date based on
the interest rate differential of the
two currencies. |
Settlement
Actual physical exchange of one currency
for another. |
Short
To go `short` is to have sold an instrument
without actually owning it, and to hold
a short position with expectations that
the price will decline so it can be bought
back in the future at a profit. |
Spot
A transaction that occurs immediately,
but the funds will usually change hands
within two days after deal is struck.
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Spread
The difference between the bid and offer
(ask) prices; used to measure market liquidity.
Narrower spreads usually signify high
liquidity. |
Stop Loss Order
An order to buy or sell at the market
when a particular price is reached, either
above or below the price that prevailed
when the order was given. |
Support Levels
A price level at which you would expect
buying to take place. |
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Technical Analysis
An effort to forecast future market activity
by analyzing market data such as charts,
price trends, and volume. |
Tomorrow to Next
Simultaneous buying and selling of a currency
for delivery the following day and selling
for the next day or vice versa. |
Two-Way Price
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. |
Value Date
Settlement date of a spot or forward deal.
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Variation Margin
An additional margin requirement that
a broker will need from a client due to
market fluctuation. |
Volatility
A statistical measure of a market or a
security's price movements over time and
is calculated by using standard deviation.
Associated with high volatility is a high
degree of risk. |
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