Forex Terms

Account - Record of all transactions.

Account Balance - Same as balance.

Agent - An individual employed to act on behalf of another (the principal).

Aggregate Demand - The sum of government spending, personal consumption expenditures, and business expenditures.

All or None - A limit price order that instructs the broker to fill the whole order at the stated price or not at all.

Appreciation - A currency is said to appreciate when price rises in response to market demand; an increase in the value of an asset.

Arbitrage - Taking advantage of countervailing prices in different markets by the purchase or sale of an instrument and simultaneous taking of an equal and opposite position in a related market to profit from small price differentials.

Ask Size - The amount of shares being offered for sale at the ask rate.

Ask Rate - The lowest price at which a financial instrument is offered for sale (as in bid/ask spread).

Asset Allocation - Investment practice that distributes funds among different markets (forex, stocks, bonds, commodity, real estate) to achieve diversification for risk management purposes and/or expected returns consistent with the outlook of the investor, or investment manager.

Attorney in Fact - Person who is allowed to transact business and execute documents on behalf of another person because one holds power of attorney.

Back Office - The departments and processes related to the settlement of financial transactions (i.e. written confirmation and settlement of trades, record keeping).

Balance - Amount of money in an account.

Balance of Payments - A record of a nation’s claims of transactions with the rest of the world over a particular time period. These inlcude merchandise, services and capital flows.

Base Currency - The currency in which an investor or issuer maintains its book of accounts; the currency that other currencies are quoted against. In the forex market, 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.

Basis - The difference between the spot price and the futures price.

Basis Point - One hundredth of a percent.

Bear - An investor who believes that prices/the market will decline.

Bear Market - A market distinguished by a prolonged period of declining prices accompanied with widespread pessimism.

Bid - The price that a buyer is prepared to purchase at; the price offered for a currency.

Bid/Ask Spread - See spread

Big Figure - Dealer phrase referring to the first few digits of an exchange rate. These digits rarely change in normal market fluctuations, and therefore are omitted in dealer quotes, especially in times of high market activity. For example, a USD/Yen rate might be 107.30/107.35, but would be quoted verbally without the first three digits i.e. "30/35".

Bonds - Bonds are tradable instruments (debt securities) which are issued by a borrower to raise capital. They pay either fixed or floating interest, known as the coupon. As interest rates fall, bond prices rise and vice versa.

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

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.

Broker - An individual, or firm, that acts as an intermediary, putting together buyers and sellers usually for a fee or commission. In contrast, a `dealer` commits capital and takes one side of a position, hoping to earn a spread (profit) by closing out the position in a subsequent trade with another party.

Bull - An investor who believes that prices/the market will rise.

Bull Market - A market distinguished by a prolonged period of rising prices. (Opposite of bear market)

Bundesbank - The central bank of Germany

Cable - Trader jargon for the British Pound Sterling referring to the Sterling/US Dollar exchange rate. Term began due to the fact that the rate was originally transmitted via a transatlantic cable starting in the mid 1800`s.

Candlestick Charts - A chart that indicates the trading ranges for the day as well as the opening and closing price. If the close price is lower than the open price, the rectangle is shaded or filled. If the open price is higher than the close price, the rectangle is not filled.

Capital Markets - Markets for medium to long term investment (usually over 1 year). These tradable instruments are more international than the ‘money market’ (i.e. Government Bonds and Eurobonds).

Central Bank - A government or quasi-governmental organization that manages a country`s monetary policy a prints a nation’s currency. For example, the US central bank is the Federal Reserve, others include the ECB, BOE, BOJ.

Chartist - An individual who uses charts and graphs and interprets historical data to find trends and predict future movements, as well as, aid in technical analysis.

Clearing - The process of settling a trade.

Close a Position (Position Squaring) - To eliminate an investment from one’s portfolio by either buying back a short position or selling a long position.

Commission - Fee broker charges for a transaction.

Confirmation - A document exchanged by counterparts to a transaction that confirms the terms of said transaction.

Contagion - The tendency of an economic crisis to spread from one market to another. In 1997, financial instability in Thailand caused high volatility in its domestic currency, the Baht, which triggered a contagion into other East Asian emerging currencies, and then to Latin America. It is now referred to as the Asian Contagion.

Contract (Unit or Lot) - The standard unit of trading on certain exchanges.

Convertible Currency - A currency which can be exchanged freely for other currencies at market rates, or gold.

Cost of Carry - The cost associated with borrowing money in order to maintain a position. It is based on the interest parity, which determines the forward price.

Counter party - The participant, either a bank or customer, with whom the financial transaction is made.

Country Risk - The risk associated with government intervention (does not include central bank intervention). Examples are legal and political events such as war, or civil unrest.

Credit Checking - Due to the large size of certain financial transactions that change hands, it is essential to check that that the counter parties have room for the trade. Once the price has been agreed the credit is checked. If the credit is bad then no trade takes place. Credit is very important when trading, both in the Inter-bank market and between banks and their customers.

Credit Netting - Arrangements that exist to maximize free credit and speed the dealing process by reducing the need to constantly re-check credit. Large banks and trading institutions may have agreements to net outstanding deals.

Cross Rates - An exchange rate between two currencies. The cross rate is said to be non-standard in the country where the currency pair is quoted. For example, in the US, a GBP/CHF quote would be considered a cross rate, whereas in the UK or Switzerland it would be one of the primary currency pairs traded

Currency - A country’s unit of exchange issued by their government or central bank whose value is the basis for trade.

Currency Risk - The risk of incurring losses resulting from an adverse change in exchange rates.

Day Trading - Opening and closing the same position or positions within the same trading session.

Dealer - One who acts as a principal or counterpart to a transaction; places the order to buy or sell.

Deficit - A negative balance of trade (or payments); expenditures are greater than income/revenue.

Delivery - An actual delivery where both sides transfer possession of the currencies traded.

Deposit - The borrowing and lending of cash. The rate that money is borrowed/lent at is known as the deposit rate (or depo rate). Certificates of Deposit (CD`S) are also tradable instruments.

Depreciation - A decline in the value of a currency due to market forces.

Derivatives - Trades that are constructed or derived from another security (stock, bond, currency, or commodity). Derivatives can be both exchange and non-exchange traded (known as Over the Counter or OTC). Examples of derivative instruments include Options, Interest Rate Swaps, Forward Rate Agreements, Caps, Floors and Swap options.

Devaluation - The deliberate downward adjustment of a currency`s value versus the value of another currency normally caused by official announcement.

Economic Indicator - A statistic that indicates current economic growth and stability issued by the government or a non-government institution (i.e. Gross Domestic Product (GDP), Employement Rates, Trade Deficits, Industrial Production, and Business Inventories).

Efficient Market - A market in which the current price reflects all available information from past prices and volumes.

End Of Day (or Mark to Market) - Traders account for their positions in two ways: accrual or mark-to-market. An accrual system accounts only for cash flows when they occur, hence, it only shows a profit or loss when realized. The mark-to-market method values the trader`s book at the end of each working day using the closing market rates or revaluation rates. Any profit or loss is booked and the trader will start the next day with a net position.

Estimated Annual Income - Projected yearly earnings.

Euro - The currency of the European Monetary Union (EMU) which replaced the European Currency Unit (ECU).

European Central Bank - The Central Bank for the European Monetary Union.

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.

Economic Exposure - The risk on a company’s cash flow stemming from foreign exchange fluctuations.

Federal Deposit Insurance Corporation (FDIC) - The regulatory agency responsible for administering bank depository insurance in the US.

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

Fixed Exchange Rate - An official exchange rate set by monetary authorities for one or more currencies. In practice, even fixed exchange rates fluctuate between definite upper and lower bands, leading to intervention.

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