Glossary

Appreciation
A currency is said to ‘appreciate’ when it strengthens in price in response to market demand.

Base Currency
The first currency in a currency pair. It shows how much the base currency is worth as measured against the second currency. For example, if the USD/CHF rate equals 1.2615 then one USD is worth CHF 1.2615. In the Forex markets, the US Dollar is normally considered the ‘base’ currency for quotes, meaning that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair. The primary exceptions to this rule are the British Pound, the Euro, and the Australian Dollar.

Bear Market
A market distinguished by declining prices.

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

Book
In a professional trading environment, a ‘book’ is the summary of a trader’s or desk’s total positions.

Bull Market
A market characterized by rising prices.

Broker
An agent who handles investor’s 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.

Cable
Dealers slang for the Sterling (British Pound) / U.S. Dollar exchange rate.

Call Rate
The overnight interbank interest rate.

Cash Market
The market for the purchase and sale of physical currencies.

Central Bank
A government or quasi-governmental organization that manages a country’s monetary policy. For example, the US central bank is the Federal Reserve, and the German central bank is the Bundesbank.

Chartist
An individual who uses charts and graphs and interprets historical data to find trends and predict future movements. Also referred to as a technical trader.

Counterpart
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.

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.

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.

Day Trading
Refers to opening and closing the same position or positions within one day’s trading.

Dealer
An individual or firm that acts as a principal or counterpart to a transaction. Principals take one side of a position, hoping to earn a spread (profit) by closing out the position in a subsequent trade with another party. In contrast, a broker is an individual or firm that acts as an intermediary, putting together buyers and sellers for a fee or commission.

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.

Economic Indicator
A government issued statistic that indicates current economic growth and stability. Common indicators include employment rates, Gross Domestic Product (GDP), inflation, retail sales, etc.

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 Central Bank (ECB)
The Central Bank for the European Monetary Union.

Federal Reserve (Fed)
The Central Bank for the United States.

Flat / Square
Where a Client has not traded in that currency or where an earlier deal is reversed thereby creating a neutral (flat) position. e.g. bought $100,000 then sold $100,000 = FLAT.

Floating Exchange Rate
When the value of a currency is decided by supply and demand.

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).

Forex
An abbreviation of foreign exchange.

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.

Forward Rate
The rate at which a foreign exchange contract is struck today for settlement at a specified future date.

Fundamental Analysis
Analysis based on economic factors.

G7
The seven leading industrial countries, being US, Germany, Japan, France, UK, Canada, Italy.

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.

Initial Margin
Deposit required by a foreign exchange dealer before clients can transact any deal.

Kiwi
Slang for the New Zealand dollar.

Limit Order
An order given which has restrictions upon its execution, where the client may specify a price and the order can be executed only if the market reaches that price.

Liquidity
The ability of a market to accept large transaction with minimal to no impact on price stability.

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 Yen).

Margin
Margin is a cash deposit provided by clients as collateral to cover losses (if any) that may result from the clients Foreign Exchange trades. The margin required from clients is normally from 1 to 2-1/2% for day trading and 2 to 5% for overnight positions.

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 minimum level to cover an adverse movement in price in the market.

Market Maker
A dealer who regularly quotes both bid and ask prices and is ready to make a two-sided market for any financial instrument.

Offer (Ask)
The rate at which a dealer is willing to sell the base currency.

One Cancels Other Order
Where the execution of one order automatically cancels a previous order.

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.

Overnight Position
A trade that remains open until the next business day.

Pip or Points
Percentage in point. Normally one basis point. i.e. 0.0001.

Position Trading
Opening and holding positions for weeks or months at a time.

Principal
A person who acts for himself and makes his own market.

Rally
A recovery in price after a period of decline.

Rate
The price of one currency in terms of another, typically used for dealing purposes.

Resistance
A price level at which you would expect selling to take place.

Risk Management
The employment of financial analysis and trading techniques to reduce and/or control exposure to various types of risk.

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
A market position where the client has sold a currency he does not already own. Normally expressed in base currency terms e.g., short Dollars, (long Yen).

Spot
Spot means the settlement date of a deal which is two business days forward.

Spread
The difference in quoted prices between bid and offer rates.

Sterling
Slang for British Pound.

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.

Swing Trading
Trades of a couple of days to upwards of a week.

Swissy
Market slang for Swiss Franc.

Technical Analysis
A government issued statistic that indicates current economic growth and stability. Common indicators include employment rates, Gross Domestic Product (GDP), inflation, retail sales, etc.

Tomorrow to Next
Simultaneous buying and selling of a currency for delivery the following day and selling for the next day or vice versa.

Value Date
Settlement date of a spot or forward deal.

Volume
The total amount of currency traded within a specific period-usually one day.

Whipsaw
Slang for a condition of a highly volatile market where a sharp price movement is quickly followed by a sharp reversal.

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