Spot Forex: Glossary of Spot Forex Terms

Adjustable Peg - Term for an exchange rate standard where a country's exchange rate is "pegged" (i.e. fixed) in relation to another currency, often the dollar or French Franc, but where the rate may be changed on occasion. This was the basis of the Bretton Woods system. See peg, and crawling peg.

Adjustment - Official action by either a change in the official currency rate or in the internal economic policies to correct a payment imbalance.

Agent Bank - (1) A bank acting for a foreign bank. (2) In the Euro market - the agent bank is the one in the syndicate that handles the administration of the loan, having been appointed by the other banks.

Aggregate Demand - Describes the demand in total for goods and services in the economy. This includes demand in the private and public sectors for goods and services within the country as well as the demand of consumers and firms in other countries for good and services.

Aggregate risk - The amount of exposure a single customer has of a bank for both spot and forward contracts.

Aggregate Supply - Describes the supply in total of goods and services in the economy from domestic sources (including imports) available to meet aggregate demand.

Agio - The difference in the value between currencies. Also used to describe percentage charges for conversion from paper money into cash, or from a weak into a strong currency.

Appreciation - Describes when a currency strengthens due to market demand rather than by official action.

Arbitrage - The simultaneous purchase and sale on different markets, using the same or equivalent financial instruments to profit from price or currency differentials. The exchange rate differential or Swap points. May be derived from Deposit Rate differentials.

Arbitrage channel - The range of prices within which there will be no possibility for arbitrage between the cash and futures market.

Around - Used in quoting forward "premium / discount". "Five-five around" would mean five point on either side of the present spot value.

Asset Allocation - Dividing instrument funds among various markets to achieve diversification or maximum return.

Ask - The price at which a currency or instrument is offered.

Asset - In the context of foreign exchange this is the right to receive from a counterparty an amount of currency either in respect of a balance sheet asset (e.g. a loan) or at a specified future date in respect of an unmatched forward or spot deal.

At best - A direction given to a dealer to buy or sell at the best rate that can be obtained.

At or Better - An order to deal only at a specific rate or better.

Authorized Dealer - A bank, financial institution or third party authorized to deal in foreign exchange.

Balance of Payments - A systematic record of the economic transactions during a given period for a country. (1) The term is often used to describe either: (i) balance of payments on current account; or (ii) the current account plus certain long term capital movements. (2) The combination of the trade balance, current balance, capital account and invisible balance, which together make up the total balance of payments. Prolonged balance of payment deficits tend to lead to restrictions in capital transfers, and or decline in currency values.

Band - The range in which a currency is allowed to move. A system used in the ERM.

Bank line - Known as a "line", the line of credit granted by a bank to a customer.

Bank Rate - The rate at which a central bank is prepared to lend money to its domestic banking system.

Base currency - United States Dollars. The currency which each transaction shall be converted to at the Close of each position.

Basis - Difference between the cash price and futures price.

Basis point - For most currencies, this denotes the fourth decimal place in exchange rate and represents 1/100 of one percent (.01%). For some currencies, such as the Japanese Yen, a basis point is the second decimal place when quoted in currency terms or the sixth and seventh decimal places, respectively, when quoted in reciprocal terms.

Basis trading - Taking opposite positions in the cash and futures market with the speculation to profiting from favorable movements in the basis.

Basket - A group of currencies normally used to manage the exchange rate of a currency. Also referred to as a unit of account.

Bear market - A prolonged period of generally falling prices.

Bear - An investor who predicts that prices are going to fall.

Bid - The price at which a buyer has offered to purchase the currency or instrument.

Book - The summary of currency positions held by a dealer, desk, or room i.e. a total of the assets and liabilities. If the average maturity of the book is less than that of the assets, the bank is said to be running a short and open book. Passing the Book refers normally to transferring the trading of the Banks positions to another office at the Close of the day, e.g. from London to New York.

Bretton Woods - Location of the 1944 conference that led to the establishment of a 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.

Broker - Joins buyers and sellers together for a commission paid by the initiator of the transaction. Brokers do not take market positions.

Bull market - A prolonged period of generally rising prices.

Bull - An investor who predicts that prices are going to rise.

Bundesbank - Central Bank of Germany.

Buying Rate - The rate at which the market and a market maker in particular is willing to buy the currency. Sometimes called bid rate.

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

Cash Delivery - Same day settlement.

Cash market - The market in the actual financial instrument on which an options or futures contract is based.

Cash - Normally refers to an exchange transaction contracted for settlement on the day the deal is made. This term is mainly used in North American markets and those countries which rely one foreign exchange services for these markets because of time zone preference, i.e. Latin America. In Europe and Asia, cash transactions are often referred to as value same-day deals.

Cash and Carry - The buying of an asset today and selling a future contract on the asset. A reverse cash and carry is possible by selling an asset and buying a future.

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

Central Bank - A nation's main regulatory bank. Traditionally, its primary responsibility is development and implementation of monetary policy.

Central Rate - 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.

Chartist - An individual who studies charts and graphs of historic data to find trends and predict trend reversals, which include the observance of certain patterns and characteristics of the charts to derive resistance levels, head and shoulders patterns, and double bottom or double top patterns which are thought to indicate trend reversals.

Clean float - An exchange rate that is not materially affected by official intervention.

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

Commission - A fee that a broker may charge clients for dealing on their behalf.

Confirmation - A memorandum to the other party describing all the relevant details of the transaction.

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.

Conversion Account - A general ledger account representing the uncovered position in a particular currency. Also referred to as Position Accounts.

Conversion - The process by which an asset or liability denominated in one currency is exchanged for an asset or liability denominated in another currency.

Conversion arbitrage - A transaction where the asset is purchased and buys a put option and sells a call option on the asset purchased, with each option having the same exercise price and expiry.

Convertible currency - A currency that can be freely exchanged for another currency (and or gold) without special authorization from the central bank.

Copey - Slang for Danish krone.

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 U.S. this often occurs domestically due to interstate banking restrictions.

Counterparty - The other organisation or party with whom the exchange deal is being transacted.

Counter value - Where a person buys a currency against the dollar it is the dollar value of the transaction.

Country risk - The risk attached to a borrower by virtue of its location in a particular country. This involves examination of economic, political and geographical factors. Various organisations generate country risk tables.

Cover - (1) To take out a forward foreign exchange contract. (2) To close out a short position by buying currency or securities that have already been sold.

Covered Arbitrage - Arbitrage between financial instruments denominated in different currencies, using forward cover to eliminate exchange risk.

Covered Margin - The interest rate margin between two instruments denominated in different currencies after taking into account of the cost of forward cover.

Crawling Peg - A method of exchange rate adjustment; the rate is fixed/pegged, but adjusted at certain intervals in line with economic or market indicators.

Credit Risk - Risk of loss that may arise on outstanding contracts if a counter party defaults on its obligations.

Cross Deal - A foreign exchange deal entered involving two currencies, neither of which is the base currency.

Cross Rates - Rates between two currencies, neither of which is the U.S. Dollar.

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. This excludes capital flows.

Deal Ticket - The primary method of recording the basic information in regards to a transaction.

Dealer - One who, as opposed to a broker, acts as a principle in all transactions, buying and selling for its own accounts.

Deflator - The difference between real and nominal Gross National Product, which is equivalent to the overall inflation rate.

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

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

Depreciation - A fall in the value of a currency in response to market forces rather than due to official action.

Desk - A term referring to a group dealing with a specific currency or currencies.

Details - All the information required to finalize a foreign exchange transaction, including name, rate, dates, and point of delivery.

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

Direct Quotation - Quoting in fixed units of a foreign currency against variable amounts of the domestic currency.

Dirty Float - Floating a currency when the rate is controlled via intervention by the monetary authorities.

ECU - European Currency Unit.

EDI - Electronic Data Interchange.

Effective Exchange Rate - An attempt to summarize the effects of a country's currency changes against other currencies on the country's trade balance.

EFT - Electronic Fund Transfer.

EMS - Electronic Fund Transfer.

European Monetary System - A system designed to stabilise or 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.

Exchange Control - Rules used to preserve or protect the value of a country's currency.

Exotic - A less commonly traded currency.

Exposure - In foreign exchange, a potential for gain or loss because of movement in foreign exchange rates. There are three primary types of exposure:

1. Economic: The change in future earning power and cash flow resulting from a change in exchange rates. In effect, it represents a change in the value of a company holding foreign currency.
2. Transnational: A potential gain or loss arising from transactions that will definitely occur in the future, are currently in progress, or may have already been completed. A signed but not shipped sales contract, a receivable or foreign currency payment collected but not converted to local currency would all be examples of transaction exposure.
3. Translation: The potential for change in reported earnings and/or the book value of the consolidated company equity accounts, as the result of a change in foreign exchange rates used to translate the foreign currency statements of affiliates and subsidiaries known as accounting exposure.

Fed - The United States Federal Reserve. Federal Deposit Insurance Corporation Membership is compulsory for Federal Reserve members. The corporation had deep involvement in the Savings and Loans crisis of the late 80s.

Federal Reserve System - The central banking system in the United States.

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

Fisher Effect - The relationship that exists between interest rates and exchange rate movements, so that in an ideal situation, interest rate differentials would be exactly off set by exchange rate movements. See interest rate parity.

Fixed Exchange Rate - The official rate set by monetary authorities. Often the fixed exchange rate permits fluctuation within a band.

Flexible Exchange Rate - Exchange rates with a fixed parity against one or more currencies with frequent revaluations. A form of managed float.

Floating Exchange Rate - An exchange rate where the value is determined by market forces. Even floating currencies are subject to intervention by the monetary authorities. When such activity is frequent, the float is known as a dirty float.

FOMC - Federal Open Market Committee, the committee that sets money supply targets in the U.S. which tend to be implemented through Fed Fund interest rates etc.

Foreign Exchange - The purchase or sale of a currency against sale or purchase of another.

Forex - Term commonly used to refer to the foreign exchange market.

Forex Club - Groups formed in the major financial centers to encourage educational and social contacts between foreign exchange dealers, under Association Cambiste International.

Forward Margins - Discounts or premiums between forward rate and spot rate for a currency. Normally quoted in points.

Forward Operations - Foreign exchange transactions, on which the fulfillment of the mutual delivery obligations is made at a date later than the second business day after the transaction was concluded.

Forward Outright - A commitment to buy or sell a currency for delivery on a specified date or period in the future. The price is quoted as the spot rate minus or plus the forward points for the chosen period.

Forward Rate - Forward rates are quoted in terms of forward points, which represent the difference between the forward and spot rates. 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.

Free Reserves - Total reserves held by a bank less the reserves required by the authority.

Front Office - The activities carried out by the dealer; normal trading activities.

Fundamentals - The macro economic factors that are accepted as the foundation for the relative value of a currency, these include inflation, growth, trade balance, government deficit, and interest rates.

FX - Foreign Exchange.

Gap - A mismatch between maturities and cash flows in a bank or individual dealers position book. Gap exposure is effectively interest rate exposure.

Going long - The purchase of a stock, commodity, or currency for speculation or investment.

Going Short - The selling of an instrument or currency not owned by the seller.

Gold Standard - The original system for supporting the value of currency issued. It was such that where the price of gold was fixed against the currency, the increased supply of gold did not lower the price of gold but caused prices to increase.

Golden Mean Math Formula - The golden mean is a ratio admired by many. It can be expressed succinctly in the ratio of the number "1" to the irrational "1.618034..." and is used in GFT's Echelon SystemT.

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

Grid - Fixed margin within which exchange rates are permitted to fluctuate.

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

Gross National Product - Gross domestic product plus factor income from abroad - income earned from investment or work abroad.

Hedge - The purchase or sale of options or futures contracts as a temporary substitute for a transaction to be made at a future date. Usually it involves opposite positions in the cash or futures or options market.

Hedged position - Having one open buy position and one open sell position in the same currency.

Hit the bid - Acceptance of purchasing at the offer or selling at the bid.

Implied Rates - The interest rate determined by calculating the difference in spot and forward rates.

Indicative Quote - A price from market-makers which is not firm.

Inflation - The continued rise in general price level in conjunction with a related drop in purchasing power. Sometimes referred to as an excessive movement in such price levels.

Initial margin - The margin required by a foreign exchange firm to initiate the buying or selling of a determined amount of currency.

Inter-Bank Rates - The bid and offer rates at which international banks place deposits with each other. The foundation of the Interbank market.

Interest Arbitrage - Switching into another currency by buying spot and selling forward, and investing proceeds 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 realised 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.

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

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

Internationalization - Referring to a currency that is widely used to denominate trade and credit transactions by non residents of the country of issue. US dollar and Swiss Franc are examples.

Intervention - Action taken 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 order - A request to deal as a buyer or seller for a foreign currency transaction at a specified price, or at a better price, if possible.

Liquidation - Any transaction that closes out or offsets a previously established position.

Liquidity - The ability of a market to accept large transactions.

Managed Float - A situation where the monetary authorities intervene regularly in the market to stabilise the rates or to aim the exchange rate in a required direction.

Margin Call - A claim by one's dealer or broker for additional good faith performance monies usually issued when an investor's account suffers adverse price movements.

Margin - The amount of collateral or money that must be, in the first instance, provided or thereafter, maintained, to ensure against losses on open contracts. Initial margin must be placed before a trade is entered into. Maintenance or variation margin must be added to initial to maintain against losses on open positions. Sometimes herein the amount that needs to be present to establish or thereafter maintained is sometimes herein referred to as necessary margin.

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

Market Maker - A person or firm authorized to create and maintain a market in an instrument.

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

Micro Economics - The study of economic activity as it applies to individual firms or well-defined small groups of individuals or economic sectors.

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

Minimum Price Fluctuation - The smallest increment of possible market price movement in a given futures contract.

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

Moving Average - A way of smoothing a set of data. Widely used in price time series.

Offset - The closing-out or liquidation of a futures position.

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.

Overnight limit - 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.

Overnight - A deal that carries over from today to the next business day.

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

Pip - One unit of change in price in the bid/ask price of a currency. For most currencies, it denotes the fourth decimal place in an exchange rate and represents 1/100 of one percent (.01%).

Position - The netted total commitments in a given currency. A position can be either flat or square (no exposure), short (more currency sold than bought) or long (more currency bought than sold).

Profit Taking - The unwinding of a position to realise profits.

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

Reaction - When prices decline following an advance.

Reciprocal Currency - 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.

Resistance Point or Level - A price recognised by technical analysts as one which is likely to result in a rebound but if broken through, is likely to result in a significant price movement.

Revaluation - An increase in the exchange rate of a currency as a result of official action.

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

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 sovereign, market, country, delivery, transfer, credit, and counterparty risk.

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

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

Round trip - The buying and selling of a specific amount of currency.

Settlement Date - The date on which foreign exchange contracts settle.

Settlement Risk - When a payment is made to a counterparty before the counter value payment has been made. The risk is that the counterparty's payment will not be received.

Short Sale - The sale of a specified amount of currency not owned by the seller at the time of the trade. Short sales are usually made in anticipation of a decline in the price.

Short-Term Interest Rates - Normally the 90-day rate.

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

Slippage - Refers to the negative (or depreciating) pip value between when a stop loss order becomes a market order, and where that market order may be filled.

Soft Market - A market in which there are more potential sellers than buyers, creating an environment where rapid price falls are likely.

Spot - (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.

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

Spot Price/Rate - The price at which a currency is currently trading in the spot market.

Spread - (l)The difference between the bid and ask price of a currency. (2) The difference between the price of two related futures contracts.

Square - Purchase and sales are in balance, and therefore, the dealer has no open position.

Squawk Box - A speaker connected to a phone that is often used in broker trading desks.

Squeeze - An action taken by a central bank to reduce supply in order to increase the price of money.

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

Standard - A term referring to normal amounts and maturities for dealing.

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

Sterling - British pound, otherwise known as cable.

Stocky - Market slang for Swedish Krona.

Stop-Loss Order - Order to buy or sell at the best available price when a given price threshold has been reached.

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

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

Swap - The simultaneous purchase and sale of the same amount of a given currency for two different dates, against the sale and purchase of another currency. 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.

Swissy - Market slang for Swiss Franc.

Thursday/Friday Dollars - A U.S. foreign exchange technicality. If a foreign bank buys dollars on Tuesday for Thursday delivery. Or, 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.

Tick - A minimum change in price, up or down.

Today/Tomorrow - Simultaneous buying of a currency for delivery the following day and selling for the spot day, or vice versa. Also known as overnight.

Tomorrow Next (Tom next) - Simultaneous buying of a currency for delivery the following day and selling for the spot day, or vice versa.

Trade Date - The date on which a trade occurs.

Tradeable amount - The smallest transaction size acceptable.

Transaction Date - The date on which a trade transaction occurs.

Transaction - The buying or selling of currencies resulting from the execution of an order.

Two Tier Market - A dual exchange rate system where typically only one rate is open to market pressure, e.g. South Africa.

Two-Way quotation - When a dealer quotes both buying and selling rates for forex transactions.

Up Tick - A transaction executed at a price greater than the previous transaction.

Volatility - A measure of the amount by which an asset price is expected to fluctuate in a given period.

Vostro Account - 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.

Working day - A day on which the banks in a currency's principal financial centre are open for business. For forex transactions, a working day only occurs if the bank in both financial centres are open for business (all relevant currency centres in the case of a cross are open).