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Settlement and related processes

System of recording a country's economic transactions

Paper issued by the central bank, redeemable as money and considered to be full legal tender.

The currency in which the operating results of the bank or institution are reported.

One hundredth of a percentage point. 50 basis points [50bp] is half a percentage point.

A spread designed to exploit falling exchange rates by purchasing a call option with a high exercise price and selling one with a low exercise price.

A spread designed to exploit falling exchange rates by purchasing a put option with a high exercise price and selling one with a low exercise price.

The difference between the buy (bid) and sell (offer) price of a currency or financial instrument.

An exchange rate system which links all of the central rates of the EMS currencies in terms of the ECU.

A quantitative method which combines a moving average with the instrument's volatility. The bands were designed to gauge whether the prices are high or low on relative basis. They are plotted two standard deviations above and below a simple moving average. The bands look like an expanding and contracting envelope model.

A price gap which occurs in the beginning of a new trend, many times at the end of a long consolidation period. It may also appear after the completion of major chart formations.

The price of a financial instrument at which the option buyer recovers the premium.

The site of the conference which in 1944 led to the establishment of the post war foreign exchange system that remained intact until the early 1970s. The conference resulted in the formation of the IMF. The system fixed currencies in a fixed exchange rate system with 1% fluctuations of the currency to gold or the dollar.

Deals that are undertaken for value dates that are not standard periods e.g. 1 month. The standard periods are 1 week, 2 weeks, 1,2,3,6, and 12 months. Terms also used are odd dates, or cock dates, broken period or broken period.

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.

Rate at which a bank is prepared to buy foreign exchange. Also known as the Bid Rate.

Buying and selling in the foreign exchange market always happens in the currency which is quoted first. “Buy dollar/mark” means buy the dollar/sell the mark. Traders buy when they expect a currency's value to rise and sell when they expect a currency to fall.

A term used in the foreign exchange market for the US Dollar/British Pound rate.

(1) An option that gives the holder the right to buy the underlying instrument at a specified price during a fixed period.
(2) A period of trading.
(3) The right of an bond issuer to pre-pay debt and demand the surrender of its bonds.

A type of chart which consist of four major prices: high, low, open, close. The body (jittai) of the candlestick bar is formed by the opening and closing prices. To indicate that the opening was lower than the closing, the body of the bar is left blank. If the currency closes below its opening , the body is filled. The rest of the range is marked by two “shadows”: the upper shadow (uwakage) and the lower shadow (shitakage).

Juxtaposition of the long and short term capital imports and exports of a country.

The interest cost of financing securities or other financial instruments held.

A finance charge associated with the storing of commodities (or foreign exchange contracts) from one delivery date to another.

A procedure for settling futures contract where the cash difference between the future and the market price is paid instead of physical delivery.

A central bank provides financial and banking services for a country's government and commercial banks. It implements the government's monetary policy, as well, by changing interest rates.

Exchange rates against the ECU adopted for each currency within the EMS. Currencies have limited movement from the central rate according to the relevant band.

(Clearinghouse House Interbank Payment System) A computerised system used for foreign exchange dollar settlements.

Clearing House Automated Payment System.

A transaction which leaves the trade with a zero net commitment to the market with respect to a particular currency.

The purchase of an option identical to one already sold to liquidate a position.

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 Swiss Franc is closely correlated with the German Mark.

The interest rate parity, where the forward price is determined by the cost of borrowing money in order to hold the position.

An arbitrage approach which consists of borrowing currency A, exchanging it for currency B, investing currency B for the duration of the loan, and, after taking off the forward cover on maturity, showing a profit on the entire set of deals.

The exchange rate between two currencies e.g. US dollar/Yen.

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. If one US dollar can buy 1.55 Deutschmarks, then one Deutschmark can buy 0.65 US dollars.

Speculators who take positions in commodities which are then liquidated prior to the close of the same trading day.

The primary method of recording the basic information relating to a transaction.

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.

On-line computers which link the contributing banks around the world on a one-on-one basis

The latest day or time by which the buyer of an option must indicate to the seller his intention to the option.

The latest day or time by which the buyer of an option must indicate to the seller his intention to the option.

The date of maturity of the contract, when the exchange of the currencies is made. This date is more commonly known as the value date in the FX or Money markets.

The calendar month in which a futures contract comes to maturity and becomes deliverable.

Those locations designated by futures exchanges at which the currency represented by a futures contract may be delivered in fulfilment of the contract.

A term to describe when a counterparty will not be able to complete his side of the deal, although willing to do so.

The settlement of a futures contract by receipt or tender of a financial instrument or currency.

Deliberate downward adjustment of a currency against its fixed parities or bands, normally by formal announcement.

The change in the value of the option premium made fully paid by the capitalisation of reserves and given relative to the instantaneous change in the value of the; underlying instrument, expressed as a coefficient.

Quoting in fixed units of foreign currency against variable amounts of the domestic currency

The interest rate at which eligible depository institutions may borrow funds directly from the Federal Reserve Banks. This rate is controlled by the Federal Reserve and is not subject to trading.

Forward rate is lower than spot rate (2) an option that is trading for less than its intrinsic value.

An option either to buy or sell an instrument or currency at a specified price. The exercise of the right to sell causes the right to buy to expire and vice-versa.

An economic indicator which measures the changes in sales of products with a life span in excess of three years.

Reflects the impact of foreign exchange changes on the future competitive position of a company.

A system of empirically derived rules for interpreting action in the markets. It refers to a five-wave/three-wave pattern which forms one complete bull market /bear market cycle of eight waves.

The irrevocable fixing of exchange rates between member currencies and their replacement by a single European currency, the euro. The euro is to be issued by a future European central bank, to be independent of political control and federal in nature. All countries which fulfil the five convergence criteria in 1998 will proceed to EMU in 2000. The UK and Denmark have secured opt-outs from EMU. Sweden's joining is subject to ratification by parliament.

A basket of the member currencies. As a composite unit, the ECU consists of all the European Community currencies, which are individually weighted. It was created by the European Monetary System with the eventual goal of replacing the individual European member currencies.

A system designed to stabilise if not eliminate exchange risk between member states of the EMS as part of the economic convergence policy of the EU. It permits currencies to move in a measured fashion (divergence indicator) within agreed bands (the parity grid) with respect to the ECU and consequently with each other. Italy and the UK are currently not part of the system. Only Germany and the Benelux are within the current narrow band.

A system designed to stabilise if not eliminate exchange risk between member states of the EMS as part of the economic convergence policy of the EU. It permits currencies to move in a measured fashion (divergence indicator) within agreed bands (the parity grid) with respect to the ECU and consequently with each other. Italy and the UK are currently not part of the system. Only Germany and the Benelux are within the current narrow band.

A formal notification that the holder of an option wishes to exercise it by buying or selling the underlying stock at the exercise price.

The price at which an option may be exercised.

The last day on which the holder of an option can exercise his right to buy or sell the underlying security.

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.

An economic indicator which refers to the total orders of durable and non-durable goods. The non-durable goods orders consist of food , clothing , light industrial products and products designed for the maintenance of the durable goods.

An automated communications and settlement system linking the Federal Reserve banks with other banks and with depository institutions.

An order which must be entered for trading, normally in a pit three times, if not filled is immediately cancelled.

A currency market part of the New York Cotton Exchange (NYCE), the oldest futures exchange in New York. The exchange lists futures on the European Currency Unit and the USDX a basket of 10 currencies.

London is the largest centre of foreign exchange trading. New York, Tokyo, Singapore, Zurich and Hong Kong are also important.

Market where currencies are traded internationally. About 4-5 trillion (million million) dollars-worth of foreign exchange is traded globally every day, making foreign exchange larger than all bond markets put together. Currency markets exist in the form of spot, forward, futures and options markets.

A forward / forward deal is one where both legs of the deal have value dates greater than the current spot value date.

Foreign exchange deal which matures on any day past the spot delivery date.

Forward rates are quoted in terms of forward points, which represents the difference between the forward and spot rates. In order to obtain the forward rate from the actual exchange rate the forward points are either added or subtracted from the exchange rate. 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 price used to adjust a spot price to calculate a forward price. It is based on the current spot exchange rate, interest rate differential and the number of days to delivery.

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.

The seven leading industrial countries: The United States, Germany, Japan, France, United Kingdom, Canada, and Italy.

The price Gap between consecutive trading ranges (i.e. the low of the current range is higher than the high of the previous range)

A system for global after hours electronic trading in futures and options developed by Reuters for CME and CBOT for use in conjunction with various exchanges around the world.

The original system for supporting the value of currency issued. The way that where the price of gold is fixed against the currency it means that the increased supply of gold does not lower the price of gold but causes prices to increase.

Part of the country quota for IMF members that had to be paid in gold. This was normally 25% of the quota, the remainder being in domestic currency. The Gold Tranche was automatically available to members without condition.

An intersection of two consecutive moving averages which move in the same direction and suggest that the currency will move in the same direction.

An instruction to a broker that unlike normal practice the order does not expire at the end of the trading day, although normally terminates at the end of the trading month.

A process where full payment of each transaction is made rather than clearing a group of transactions as currently occurs in the FX market. A method designed to eliminate capital risk.

Total value of a country's output, income or expenditure produced within the country's physical borders.

Gross domestic product plus “factor income from abroad” – income earned from investment or work abroad.

A currency whose value is expected to remain stable or increase in terms of other currencies.

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 the price to drop to around the same level as the shoulder. A further modest rise or level will indicate a that a further major fall is imminent. The breach of the neckline is the indication to sell.

A strategy used to offset market risk, whereby one position protects another.

The number of futures or options required to hedge a given exposure in the cash market.

International Commodities Clearing House Limited, a clearing house based in London operating world wide for many futures markets.

International Foreign Exchange Master Agreement

International Monetary Fund, established in 1946 to provide international liquidity on a short and medium term and encourage liberalization of exchange rates. The IMF supports countries with balance of payments problems with the provision of loans.

International Monetary Market part of the Chicago Mercantile Exchange that lists a number of currency and financial futures.

A measurement of the market's expected price range of the underlying currency futures based on the traded option premiums.

The implied volatility varies for different strikes of an option.

The interest rate determined by calculating the difference between spot and forward rates.

A call option is in-the-money if the price of the underlying instrument is higher than the exercise/strike price. A put option is in-the-money if the price of the underlying instrument is below the exercise/strike price.

Currency which cannot be exchanged for other currencies, either because this is forbidden by the foreign exchange regulations.

The process of linking wages, social benefits payments, prices, interest rates or loan values to an economic index, usually of prices.

A market-maker's price which is not firm.

A coincident indicator measuring physical output of manufacturing, mining and utilities.

Continued rise in the general price level in conjunction with a related drop in purchasing power. Sometimes referred to as an excessive movement in such price levels.

The margin is a returnable deposit required to be lodged by buyers and sellers with the clearing house to secure a new futures or options position.

The specification of the banks at which funds shall be paid upon settlement.

The bid and offer rates at which international banks place deposits with each other. The basis of the Interbank market.

A specialist broker who acts as an intermediary between market-makers who wish to buy or sell securities to improve their book positions, without revealing their identities to other market-makers.

Switching into another currency by buying spot and selling forward, and investing proceeds in order to obtain a higher interest yield. Interest arbitrage can be inward, i.e. from foreign currency into the local one or outward, i.e. from the local currency to the foreign one. Sometimes better results can be obtained by not selling the forward interest amount. In that case some treat it as no longer being a complete arbitrage, as if the exchange rate moved against the arbitrageur, the profit on the transaction may create a loss.

One currency is in interest parity with another when the difference in the interest rates is equalised by the forward exchange margins. For instance, if the operative interest rate in Japan is 3% and in the UK 6%, a forward premium of 3% for the Japanese Yen against sterling would bring about interest parity.

An agreement permitting a party to obtain a particular interest rate, issued both OTC and by exchanges.

An agreement that provides the buyer of a cap with a maximum interest rate for future borrowing requirements.

A combination of a cap and a floor to provide maximum and minimum interest rates for borrowing or lending.

An agreement which provides the buyer of the floor with a minimum interest rate for future lending requirements.

An agreement to swap interest rate exposures from floating to fixed or vice-versa. There is no swap of the principal. It is the interest cash flows be they payments or receipts that are exchanged.

Action by a central bank to affect the value of its currency by entering the market. Concerted intervention refers to action by a number of central banks to control exchange rates.

Limit set by bank management on the size of each dealer's Intra Day Position. Intra-Day Position Open positions run by a dealer within the day. Usually squared by the close of the day.

The amount by which an option is in-the-money. The intrinsic value is the difference between the exercise/strike price and the price of the underlying security.

Where short term instruments are trading at premiums to long term instruments.

Index and Options Market part of the Chicago Mercantile Exchange

A term describing the expected effect of a devaluation on a country's trade balance. It is anticipated that import bills rise before export orders and receipts increase.

Announcements and statements by politicians or monetary authorities to influence decisions by business, consumer, or trade union sectors, often associated with forecasts and policy implications.

(1) The risk inherent in placing funds in the Centre where they will be under the jurisdiction of a foreign legal authority.
(2) The risk in making a loan subject to the laws of another country.

A measure of the sensitivity of the price of an option to a change in its implied volatility.

Small countries, which are highly dependent on exports, orientates their currencies to their major trading partners, the constituents of a currency basket.

Slang for the New Zealand dollar.

A process where a barrier option (European) becomes active as the underlying spot price is in the money. Knock out has a corresponding meaning although the option may permanently cease to exist.

Dealers analysis of the forward book or deposit book showing every existing deal by maturity date, and the net position at each future date arising.

A measure of economic activity which tends to change after change has occurred in the overall economy e.g. CPI.

Rights for which call payments have not been made by the acceptance date.

The day on which trading ceases for an expiring contract.

To carry out a transaction in the market to offset a previous transaction and return to a square position.

Statistic that are considered to precede changes in economic growth rates and total business activity, e.g. factory orders.

The effect on foreign trade payments of an anticipated move in the exchange rate, normally a devaluation. Then payment of imports is faster and export receipts are slowed down.

Taking the left hand side of a two way quote i.e. selling the quoted currency. See Right-hand Side.

In options terminology, this expresses the disproportionately large change in the premium in terms of the relative price movement of the underlying instrument.

In terms of foreign exchange , the obligation to deliver to a counterparty an amount of currency either in respect of a balance sheet holding at a specified future date or in respect of an un-matured forward or spot transaction.

The London Interbank Offered Rate, the rate charged by one bank to another for lending money.

The period between the beginning of trading in a particular future and the expiration of trading.

London International Financial Futures Exchange

The maximum price decline from the previous trading day's settlement price permitted in one trading session.

A price that has advanced or declined the permissible limit permitted during one trading session.

An order to buy or sell a specified amount of a security at a specified price or better.

The maximum price advance from the previous trading day's settlement price permitted in one trading session.

(1) The maximum price fluctuation permitted by an exchange from the previous session's settlement price for a given contract.
(2) In international banking, the limit a bank is willing to lend in a country.
(3) The amount that one bank is prepared to trade with another.
(4) The amount that a dealer is permitted to trade in a given currency.

When residents of a country are prohibited from buying other currencies even though non-residents may be completely free to buy or sell the national currency.

Cash in circulation plus demand deposits at commercial banks. There are variations between the precise definitions used by national financial authorities.

Includes demand deposits time deposits and money market mutual funds excluding large CDs.

In the UK it is M1 plus public and private sector time deposits and sight deposits held by the public sector.

In the US it is M2 plus negotiable CDs.

The minimum margin which an investor must keep on deposit in a margin account at all times in respect of each open contract.

A dealer is said to make a market when he or she quotes bid and offer prices at which he or she stands ready to buy and sell.

When the monetary authorities intervene regularly in the market to stabilise the rates or to aim the exchange rate in a required direction.

(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.

A demand for additional funds to be deposited in a margin account to meet margin requirements because of adverse future price movements.

The risk that a customer goes bankrupt after entering into a forward contract. In such an event the issuer must close the commitment running the risk of having to pay the marginal movement on the contract.

The daily adjustment of an account to reflect accrued profits and losses often required to calculate variations of margins.

Premium

The minimum amount conventionally dealt for between banks.

A market maker is a person or firm authorised to create and maintain a market in an instrument.

An order to buy or sell a financial instrument immediately at the best possible price.

A model that states that if the sum of the elasticity's of demand for a country's and that of the imports exceed one, then devaluation will have a positive effect upon the trade balance.

Where a dealer is able to match two customer deals which off set one another.

If the distribution of the maturities of a banks liabilities equal that of its assets , it is said to be running a matched book.

The process of ensuring that purchases and sales in each currency and deposits given and taken in each currency are in balance, by amount and maturity.

Electronic Systems duplicating the traditional brokers market. A price shown by a bank is available to all trades.

(1) The last trading day of a futures contract.
(2) Date on which a bond matures, at which time the face value will be returned to the purchaser. Sometimes the maturity date is not one specified date but a range of dates during which the bond may be repaid.

The price half-way between the two prices, or the average of both buying and selling prices offered by the market makers.

The smallest increment of market price movement possible in a given futures contract.

Reserves required to be deposited at central banks by commercial banks and other financial institutions. Sometimes referred to as Registered Reserves.

(1) A mismatch between the interest rate maturities of a banks assets and liabilities.
(2) Forward purchases differ in the value date from the forward sales in a given currency.

Japanese ministry of International Trade & Industry.

Money Markets.

A school of economics which believes that strict control of money supply is the principal tool for implementing monetary policy, especially against inflation. Policies include cuts in public spending and high interest rates.

Currency in circulation plus banks' required and excess deposits at the central bank.

A modest loosening of monetary constraint by changing interest rate, money supply, deposit ratios.

A central bank's management of a country's money supply. Economic theory underlying monetary policy suggests that controlling the growth of the amount of money in the economy is the key to controlling prices and therefore inflation. However, central banks' monetary capability is severely limited by global money movements. This forces them to use the indirect tool of exchange rate manipulation.

An agreement between countries to maintain a fixed exchange rate between their currencies. A process which the EMS is intended to lead to, especially after the Maastricht Treaty.

A market consisting of financial institutions and dealers in money or credit who wish to either borrow or lend.

Comprises the acceptance and re-lending of deposits on the money market.

The amount of money in the economy, which can be measured in a number of ways. See definitions of M0-M4.

An undertaking to give the rate of tariff concession offered to members of the GATT. More concessionaire rates can exist.

A way of smoothing a set of data, widely used in price time series.

A central bank type of intervention in the foreign exchange market which consist solely of the foreign exchange activity. This type of intervention has a monetary effect on the money supply and a long term effect on foreign exchange.

Limited definition of money to include cash or near cash, i.e. M1 or M0.

The closest active futures contracts, i.e. those that expire the soonest.

A yield curve where interest rates in the shorter dates are above those in the longer dates.

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.

The number of futures contracts bought or sold which have not yet been offset by opposite transactions.

A stop-loss order which must be executed after the request level was reached.

Used in Futures markets to refer to the estimated price for a future month or date for which there is no bid, ask or trade price.

Name in which a security is registered and held in trust on behalf of the beneficial owner.

A foreign currency current account maintained with another bank. The account is used to receive and pay currency assets and liabilities denominated in the currency of the country in which the bank is resident.

A financial instrument consisting of a promise to pay rather than an order to pay or a certificate of indebtedness.

Any day on which notices of intent to deliver on futures contracts may be issued.

A non standard amount for a transaction.

Organization of Economic Co-operation and Development. Membership is the more than developed countries.

The price at which a seller is willing to sell. The best offer is the lowest such price available.

Temporary situation where offers exceed bid.

The closing-out or liquidation of a futures position. Official Settlements Account
A U.S. balance of payments measure based on movement of dollars in foreign official holdings and US reserves. Also referred to as reserve transaction account.

Old Lady of Threadneedle Street, a term for the Bank of England.

An account maintained by one broker with another in which all of the accounts of the former are combined and carried only in its name, rather than designated separately.

The total number of outstanding option or futures contracts that have not been closed out by offset or fulfilled by delivery.

A public auction method of trading conducted by calling out bids and offers across a trading ring or pit and having them accepted.

Central Bank operations in the markets to influence exchange and interest rates.

The difference between assets and liabilities in a particular currency. This may be measured on a per currency basis or the position of all currencies when calculated in base currency.

A contract conferring the right but not the obligation to buy (call) or to sell (put) a specified amount of an instrument at a specified price within a predetermined time period.

All options of the same type – calls or puts -listed on the same underlying instrument.

All options of the same class having the same exercise/strike price and expiration date.

See Initial Margin.

A market conducted directly between dealers and principals via a telephone and computer network rather than a regulated exchange trading floor. These markets have not been very popular. They were never part of the Stock Exchange since they were seen as “unofficial”. Each OTC firm operates a market in the shares of a restricted list of (generally small and little-known) companies. Sometimes the dealer simply puts would-be buyers and sellers together but does not take a position in the shares themselves. These days OTC trading is seen as “consumer-friendly,” meaning that it is interested in getting the buyer and seller the best possible price. Some see this as what share-trading is all about. However, market makers, many of whom create market movements purposefully, feel they are being elbowed out by OTC, and that speculation, arbitrage and “smart-trading” are undermined by the new market.

A put option is out-of-the-money if the exercise/strike price is below the price of the underlying instrument. A call option is out-of-the money if the exercise/strike price is higher than the price of the underlying instrument.

A forward deal that is not part of a swap operation.

A holding of foreign exchange that is temporarily unable to be converted from the reserve currency into other reserve assets.

Is an economy where high-growth rates placing pressure on production capacity resulting in increased inflationary pressures and higher interest rates.

Net long or short position in one or more currencies that a dealer can carry over into the next dealing day. Passing the book to other bank dealing rooms in the next trading time zone reduces the need for dealers to maintain these unmonitored exposures.

A deal from today until the next business day.

See OTC.

Quantitative methods designed to provide signals regarding the overbought and oversold conditions.

When a number of exchange and /or deposit orders have to be fulfilled simultaneously.

(1) The nominal value of a security or instrument.
(2) The official value of a currency.

A term for USD FRF Spot Rate.

(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.

The value of one currency in terms of another.

A term used in the context of the European Monetary System which consists of the upper, central and lower intervention points between member currencies.

The date on which a dividend or bond interest payment is scheduled to be paid.

A system where a currency moves in line with another currency, some pegs are strict while others have bands of movement.

Foreign exchange reserves of oil producing nations arising from oil sales.

The oldest U.S. securities exchange which offers currency futures and options on currency futures.

See point (below)

(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.

An option hedging strategy to protect long cash market positions.

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).

A clerk who assist the dealer in recording a dealers position and ensures that all deal tickets are completed and transferred to the back office or input into the books in a position keeping system.

The maximum position, either net long or net short, in one future or in all futures of one currency or instrument combined which may be held or controlled by one person.

Quoted standard periods that fall between the transaction date and the current spot value date.

(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.

Gold related monetary reserves, being gold, SDR, etc.

(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.

A dealer who buys or sells stock for his/her own account.

An economic indicator which gauges the average changes on prices received by domestic producers for their output at all stages of processing.

A graphical representation of the profits to a given options strategy for different underlying asset prices.

The unwinding of a position to realise profits.

A term to describe when it is necessary to hedge against a currency where there is no market but it follows a major currency, the hedge is entered against the major currency.

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.

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.

The equilibrium relationship between premiums of call and put options of the same strike and expiry.

The use of cash generated by positive variation margins on a futures position to increase the size of the position, each reinvestment in successively smaller increments.

(1) A limit on imports or exports.
(2) A country's subscription to the IMF.

An indicative price. The price quoted for information purposes but not to deal.

An efficient market hypothesis, stating that prices move randomly versus their intrinsic value. Therefore, no one can forecast market activity based on the available information.

A recovery in price after a period of decline.

The difference between the highest and lowest price of a future recorded during a given trading session.

(1) The price of one currency in terms of another, normally against USD
(2) Assessment of the credit worthiness of an institution.

Buying a specific quantity of options and selling a larger quantity of out of the money options.

Selling more near-term options than longer maturity options at the same strike price.

A decline in prices following an advance.

A price, interest rate or statistic that has been adjusted to eliminate the effect of inflation.

Simultaneous and mutually co-ordinated re- and devaluation of the currencies of several countries. An activity that mostly refers to EMS activity.

A currency that is normally quoted as dollars per unit of currency rather than the normal quote method of units of currency per dollar. Sterling is the most common example.

The rate at which interest earned on a loan can be reinvested. The rate may not attract the same level of interest as the principal amount.

French term for premium.

Term for U.S. Primary Dealers.

See Repurchase Agreement.

Agreements by a borrower where they sell securities with a commitment to repurchase them at the same rate with a specified interest rate.

A currency held by a central bank on a permanent basis as a store of international liquidity, these are normally Dollar, Euro, and sterling.

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.

The ratio of reserves to deposits, expressed as a fraction prescribed by national banking authorities, including the United States.

The 25% of its quota to which a member of the IMF has unconditional access, and for which there is no obligation to repay.

A price recognised by technical analysts as a price which is likely to result in a rebound but if broken through is likely to result in a significant price movement.

The renegotiation of the terms of existing debts. The term is usually used with reference to LDC debt. The term rescheduling is considered to be refinancing to avoid any implication of default. Major sovereign debt rescheduling for Brazil, and Mexico have been undertaken in recent years.

Measurement of the monthly change in the average level of prices at retail, normally of a defined group of goods.

Process of changing a call into a put.
Reversal patterns that occur at the end of the trend, signalling the trend change.

Increase in the exchange rate of a currency as a result of official action.

The rate for any period or currency which is used to revalue a position or book.

Revolving credit Upon repayment by the borrower the credit becomes automatically available

To do a deal on the right hand side of a two way quote, normally to buy the currency and sell dollars. See Left-hand Side.

An area on a trading floor where futures or equities are traded.

The degree of uncertainty associated with an investment. The main elements that contribute to the riskiness of an investment are volatility, liquidity and leverage. All things being equal, a high degree of volatility and leverage makes an investment more risky. An illiquid market, where buyers are not always matched by sellers, also increases risk & investors can be left holding an asset that is falling in price.

The relationship between the risk and return on an investment. Usually, the more risk you are prepared to take, the higher the return you can expect. Depositing your money in a bank is safe and therefore a low return is regarded as sufficient. Investing in stock market exposes you to more risk (from capital losses) and so investors will expect a higher return.

The risk factor (delta) indicates the risk of an option position relative to that of the related futures contract.

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.

An asset or liability, which is exposed to fluctuations in value through changes in exchange rates or interest rates.

Additional sum payable or return to compensate a party for adopting a particular risk.

A combination of purchasing put options with the sale of call options.
The put limits downside, while the call limits the upside.

An overnight swap, specifically the next business day against the following business day (also called Tomorrow Next, abbreviated to Tom-Next).

Medium term credit with a variable interest rate, which is governed by the currently prevailing rates on the Euromarket.

Buying and selling of a futures or options contract.

Keeping open positions in the hope of a speculative gain.

A transaction that matures on the day the transaction takes place.

Same as a butterfly spread.

A strategy of buying at the bid and selling at the offer as soon as possible.

Special Drawing Right. A standard basket of five major currencies in fixed amounts as defined by the IMF.

Rate at which a bank is willing to sell foreign currency.

Also known as the option writer.

Options on the same underlying futures being contract which expire in more than one month.

All options of the same class which share a common strike price and expiration date.

The date by which an executed order must be settled by the transference of instruments or currencies and funds between buyer and seller.

The official closing price for a future set by the clearing house at the end of each trading day.

Risk associated with the non settlement of the transaction by the counter party.

A shortage of assets in a particular currency. See Short Sale.

Contracts with up to six months to delivery.

Buying to unwind a shortage of a particular currency or asset.

The term short forward refers to period up to two months, although it is more commonly used with respect to maturities of less than one month.

The sale of a currency futures not owned by the seller at the time of the trade. Short sales are usually made in expectation of a decline in the price.

Normally the 90 day rate.

A major currency that is lightly traded due to major market interest being in another currency pair.

Singapore International Monetary Exchange

Standard International Trade Classification. A system for reporting trade statistics in a common manner.

Swiss Options and Financial Futures Exchange, a fully automated and integrated trading and clearing system.

More potential sellers than buyers, which creates an environment where rapid price falls are likely.

Legal doctrine which means that the state cannot be sued or have its assets seized.

(1) Risk of default on a sovereign loan
(2) Risk of appropriation of assets held in a foreign country. Split Date See Broken Date.

(1) The most common foreign exchange transaction
(2) Spot or Spot date refers to the spot transaction value date that requires settlement within two business days, subject to value date calculation.

The overnight swap from the spot date to the next business day.

The contract month closest to delivery or settlement.

The price at which the currency is currently trading in the spot market.

A standard period of one week swap measured from the current value date of the currency spot rate.

(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.

Purchase and sales are in balance and thus the dealer has no open position.

A speaker connected to a phone often used in broker trading desks.

Action by a central bank to reduce supply in order to increase the price of money.

An active market which can absorb large sale or purchases of currency without major moves.

A term referring to certain normal amounts and maturities for dealing.

An arrangement with the IMF for draw downs on a “need” basis. The term is sometimes more generally used.

Central Bank activity in the domestic money market to reduce the impact on money supply of its intervention activities in the FX market.

A index based on the movement of sterling against the major currency.

British pound, otherwise known as cable

Market slang for Swedish Krona.

Order given to ensure that, should a currency weaken by a certain percentage, a short position will be covered even though his involves taking a loss. Realise profit orders are less common.

U.S. term for the lowest accepted price for Treasury Bills at auction.

The simultaneous purchase/sale of both call and put options for the same share, exercise/strike price and expiry date.

Recession or low growth in conjunction with high inflation rates.

A combination of two calls and one put.

Also called exercise price. The price at which an options holder can buy or sell the underlying instrument.

A combination of two puts and one call.

The concept is that tax cuts will boost investment leading to an increase in the supply of goods in the economy. To be compared with demand led Keynesian economics.

When an exchange rate depreciates or appreciates to a level where (1) Technical analysis techniques suggest that the currency will rebound, or not go below; (2) the monetary authorities intervene to stop any further downward movement. See Resistance Point.

The simultaneous purchase and sale of the same amount of a given currency for two different dates, against the sale and purchase of another. A swap can be a swap against a forward. In essence, swapping is somewhat similar to borrowing one currency and lending another for the same period. However, any rate of return or cost of funds is expressed in the price differential between the two sides of the transaction.

Swaps expressed as an annualized percentage.

A price as a differential between two dates of the swap.

An option to enter into a swap contract.

Society for World-wide Interbank Telecommunications is Belgian based company that provides the global electronic network for settlement of most foreign exchange transactions.

Market slang for Swiss Franc.

Options or futures that create a position that able to be achieved directly but is generated by a combination of options and futures in the relevant market. In foreign exchange a SAFE combines two forward contracts into a single transaction where settlement only involves the difference in values.

Statements made normally by the central bank or government minister designed to bolster market sentiment with respect to the currency.

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.

An adjustment to price not based on market sentiment but technical factors such as volume and charting.

Method of determining accounting exposure which translates all balance sheet items at the current rate of exchange, not the one at the time the cost was incurred.

(1) a formal offer to supply or purchase goods or services.
(2) In the UK the term for the weekly Treasury Bill issue.

Maturity or number of days to maturity normally on bills of exchange.

The ratio between export and import price indices.

A model of exchange rate determination stating that the exchange rate is simply the price of the foreign exchange which maintains the BOP in equilibrium. The degree to which the exchange rate responds to a change in price.

A safety feature for the EMS which creates an emergency exit for currencies which become the singular focus of various adverse forces. The threshold of divergence indicates when the specific country with the pressured currency should take additional steps other then simple central bank intervention in the foreign exchange markets.

A measure of the sensitivity of the price of an option to a change in its time to expiry.

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.

A U.S. foreign exchange technicality. If the bank leaves the funds overnight and transfers them on Friday by means of a clearing house cheque then clearance is not until Monday, the next working day. Higher interest rates for this period are thus available.

A minimum change in price, up or down.

See Deal Slip.

A measure of a banks financial strength used by the BIS being the shareholders' equity available to cover actual or potential irredeemable and non-cumulative preference shares. It excludes, hybrid forms of capital such as fixed term stock, goodwill, and revaluation reserves. BIS has a minimum requirement of 4 percent on risk-weighted assets.

A condition where there is a shortage of credit as a result of monetary policy restricting the supply of credit normally through raising interest rates.

Tokyo International Financial Futures Exchange.

The decline in the time value of an option as the expiry approaches.
Interest bearing deposits at a savings institution that has a specific maturity.

That part of an option premium which reflects the length of time remaining in the option prior to expiration. The longer the time remaining until expiration, the higher the time value.

Simultaneous buying of a currency for delivery the following day and selling for the spot day, or vice versa. Also referred to as overnight.

Colloquial term for announcement in a publication that a loan or bond has been arranged.

Simultaneous buying of a currency for delivery the following day and selling for the spot day or vice versa.

The date on which a trade occurs.

The difference between the value of imports and exports. Often only reported in visible trade terms.

The changes in the exchange rate against a trade weighted basket including the currencies of the county's principal trading partners.

Transferable options with the right to buy and sell a standardised amount of a currency at a fixed price within a specified period.

Smallest transaction size acceptable.

See deal ticket

The date on which a trade occurs.

A portion of, specifically used for borrowings from the IMF.

A measure of the sensitivity of the price of an option to a change in its time to expiry.

The buying or selling of securities resulting from the execution of an order.

Potential profit and loss generated by current foreign exchange transactions.

The calculation of loss or profit resulting from the valuation of foreign assets and liabilities for balance sheet purposes, when consolidating into the base currency.

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.

The total money value of currency contracts traded is calculated by multiplying size by the number of contracts traded.

A dual exchange rate system where normally only one rate is open to market pressure, e.g. South Africa.

When a dealer quotes both buying and selling rates for foreign exchange transactions.

Another term for an open position.

Before finalizing a transaction all the details should be submitted for approval to the order giver, who has the right to turn down the proposal.

An exchange rate is normally considered to be undervalued when it is below its purchasing power parity.

A colloquial term for reversing a transaction, e.g., a spot sale by means of a forward purchase or if done in error a spot purchase.

Term for sale of assets or unwinding positions either to limit loss or to undermine other market participants positions.

If the average maturity of a banks liabilities is less than that of its assets, it is said to be running an unmatched book.

Selling of assets and or instruments to square a position.

A transaction executed at a price greater than the previous transaction.

Currency index which consist of the weighted average of the prices of ten foreign currencies against the U.S. Dollar: Deutsche Mark, Japanese Yen, French Franc, British Pound, Canadian Dollar, Italian Lira, Dutch Guilder, Belgian Franc, Swedish Krona, and Swiss Franc.

Exchange rate quotation on a reciprocal basis. Also known as an American Quote.

The expected loss from an adverse market movement.

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. The only exception to this general rule is the spot day in the quoting centre coinciding with a banking holiday in the country/countries of the foreign currency/currencies. The value date then moves forward a day. The enquirer is the party who must make sure that his spot day coincides with the one applied by the respondent. The forward months maturity must fall on the corresponding date in the relevant calendar month. If the one month date falls on a non-banking day in one of the centres, the operative date would be the next business day that is common. The adjustment of the maturity for a particular month does not effect the other maturities that will continue to fall on the original corresponding date if they meet the open day requirement. If the last spot date falls on the last business day of a month, the forward dates will match this date by also falling due on the last business day (also referred to as maturity date).

Normally settlement for two working days from today.

Transaction executed for same day settlement; sometimes also referred to as “cash transaction.”

The speed with which money circulates or turnover in the economy. It is calculated as the annual national income: average money stock in the period.

The sale of an option with a high exercise price and the purchase (in the case of a bull) or the sale (in the case of a bear) of an option with a lower exercise price. Both options will have the same expiration date.

Trade in merchandise goods as compared with capital flows and invisible trade.

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, see implied volatility.

A local currency account maintained with a bank by another bank. The term is normally applied to the counterparty's account from which funds may be paid into or withdrawn, as a result of a transaction.

Term for where a trader takes a position, then has to move against it, triggering stop-loss limits and liquidation of positions, then having to move in the original direction. Normally occurs in volatile markets.

Money borrowed in large amounts from banks and institutions rather than from small investors.

It measures changes in prices in the manufacturing and distribution sector of the economy and tends to lead the consumer price index by 60 to 90 days. The index is often quoted separately for food and industrial products.

Discretionary element in the monetary reserves of a central bank.

A bank made up of members of the IMF whose aim is to assist in the development of member states by making loans where private capital is not available.

The graph showing changes in yield on instruments depending on time to maturity. A system originally developed in the bond markets is now broadly applied to various financial futures. A positive sloping curve has lower interest rates at the shorter maturities and higher at the longer maturities. A negative sloping curve has higher interest rates at the shorter maturities.