Forex Terminology

Forex Terminology Flashcards

Aggregate Demand

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

Appreciation

A currency strengthens in price in response to market demand.

Arbitrage

The purchase/sale of an instrument with a simultaneous equal/opposite position in a related market to profit from small price differences.

Ask Rate

The rate at which a financial instrument is offered for sale.

Asset Allocation

Dividing funds among different markets for diversification, risk management, or expected returns.

Back Office

Departments and processes related to the settlement of financial transactions.

Balance of Trade

The value of a country’s exports minus its imports.

Base Currency

The currency in which an investor maintains its book of accounts; in FX, usually the US Dollar.

Bear Market

A market distinguished by declining prices.

Bid Rate

The rate at which a trader is willing to buy a currency.

Bid/Ask Spread

The difference between the bid and offer price; a measure of market liquidity.

Big Figure

Dealer expression referring to the first few digits of an exchange rate.

Book

In trading, a summary of a trader’s or desk’s total positions.

Broker

An intermediary that puts together buyers and sellers for a fee or commission.

Bull Market

A market distinguished by rising prices.

Buying/Selling (Forex)

Simultaneous buying of one currency and selling of another.

Cable

Trader jargon referring to the Sterling/US Dollar exchange rate.

Central Bank

A government organization that manages a country’s monetary policy.

Chartist

An individual who uses charts and graphs and interprets historical data to find trends and predict future movements. Also referred to as Technical Trader.

Currency

Any form of money issued by a government or central bank and used as legal tender and a basis for trade.

Currency Risk

The probability of an adverse change in exchange rates.

Clearing

The process of settling a trade.

Contagion

The tendency of an economic crisis to spread from one market to another.

Collateral

Something given to secure a loan or as a guarantee of performance.

Commission

A transaction fee charged by a broker.

Contract

The standard unit of trading.

Counterparty

One of the participants in a financial transaction.

Country Risk

Risk associated with a cross-border transaction, including legal and political conditions.

Cross Rates

The exchange rate between two currencies expressed as the ratio of two foreign exchange rates that are both expressed in terms of a third currency.

Day Trading

Positions which are opened and closed on the same trading day.

Dealer

An individual who acts as a principal or counterpart to a transaction, hoping to earn a spread (profit) by closing out the position in a subsequent trade with another party.

Deficit

A negative balance of trade or payments.

Delivery

An FX trade where both sides make and take actual delivery of the currencies traded.

Depreciation

A fall in the value of a currency due to market forces.

Derivative

A contract that changes in value in relation to the price movements of a related or underlying security, future or other physical instrument.

Devaluation

The deliberate downward adjustment of a currency’s price, normally by official announcement.

Economic Indicator

Indicators such as GDP, foreign investment, and the trade balance reflect the general health of an economy.

End Of Day Order (EOD)

An order to buy or sell at a specified price that remains open until the end of the trading day.

EURO

Since 2002 the currency of the European Monetary Union (EMU).

European Central Bank (ECB)

The Central Bank for the new European Monetary Union.

Federal Reserve System

The central bank of the United States, with responsibility for implementing the country's monetary policy and regulating member banks of the System.

Floating Exchange Rates

The value of a currency as decided by supply and demand

Flat/square

Dealer jargon used to describe a position that has been completely reversed

Foreign Exchange

The simultaneous buying of one currency while selling for another.

Forward

The pre-specified exchange rate for a foreign exchange contract settling at some agreed future date, based upon the interest rate differential between the two currencies involved.

Good ‘til Cancelled (GTC)

An order to buy or sell at a specified price that remains open until filled or until the client cancels.

Hedging

A purchase or sale of a financial product to eliminate loss arising from price fluctuations.

Inflation

An economic condition whereby prices for consumer goods rise, eroding purchasing power.

Initial margin

The initial deposit of collateral required to enter into a position as a guarantee on future performance.

Interbank Rates

The Foreign Exchange rates at which large international banks quote other large international banks.

Leading Indicators

Statistics that are considered to predict future economic activity.

LIBOR

The London Inter-Bank Offered Rate. Banks use LIBOR when borrowing from another bank.

Limit order

An order with restrictions on the maximum price to be paid or the minimum price to be received

Liquidity

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

Liquidation

The closing of an existing position through the execution of an offsetting transaction.

Long position

A position that appreciates in value if market prices increase. When one buys a currency, their position is long.

Margin

The required equity that an investor must deposit to collateralize a position.

Margin call

A request from a broker or dealer for additional funds or other collateral to guarantee performance on a position that has moved against the client.

Market Maker

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

Market Risk

Exposure to changes in market prices.

Mark-to-Market

Process of re-evaluating all open positions with the current market prices.

Maturity

The date for settlement or expiry of a financial instrument.

Narrow Market

occurs when there is light trading and greater fluctuations in prices relative to volume.

Offer

The rate at which a dealer is willing to sell a currency.

Offsetting transaction

A trade with which serves to cancel or offset some or all of the market risk of an open position.

Open order

An order that will be executed when a market moves to its designated price.

Open position

A deal not yet reversed or settled with a physical payment.

Over the Counter (OTC)

Used to describe any transaction that is not conducted over an exchange.

Overnight

A trade that remains open until the next business day.

Pips

Digits added to or subtracted from the fourth decimal place, i.e. 0.0001. Also called Points.

Political Risk

Exposure to changes in governmental policy which will have an adverse effect on an investor’s position.

Position

The netted total holdings of a given currency.

Quote

An indicative market price, normally used for information purposes only.

Rate

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

Resistance

A term used in technical analysis indicating a specific price level at which analysis concludes people will sell.

Risk

Exposure to uncertain change, the variability of returns significantly the likelihood of less- than-expected returns.

Risk Capital

The amount of money that an individual can afford to invest, which, if lost would not affect their lifestyle.

Risk Management

To hedge one’s risk they will employ financial analysis and trading techniques

Roll-Over

Process whereby the settlement of a deal is rolled forward to another value date.The cost of this process is based on the interest rate differential of the two currencies.

Short Position

An investment position that benefits from a decline in market price. When one sells a currency their position is short.

Spot Price

The current market price. Settlement of spot transactions usually occurs within two business days.

Spread

The difference between the bid (buy) and offer (ask, sell) prices; in other words the spread is the commission that the brokerage house makes on each trade. This can vary widely between currencies and between brokerage firms.

Stochastics Oscillator

This technical analysis indicator is based on the premise that during an upward trading market, prices tend to close near their high, and during a downward trading market, prices tend to close near their low.

Support Levels

A term used in technical analysis indicating a specific price level at which a currency will have the inability to cross below

Swap

A currency swap is the simultaneous sale and purchase of the same amount of a given currency at a forward exchange rate.

Swift

Society of Worldwide Interbank Financial Telecommunications. It is a dedicated computer network that is set up to support fund transfer messages between member banks worldwide.

Technical Analysis

An effort to forecast prices by analyzing market action through chart study, volume, trends, moving averages, patterns, formations and many other technical indicators.

Tick

Minimum price move.

Trading

Buying or selling of goods and services among countries called commerce. Forex Trading is the trading of Foreign Currencies.

Transaction Cost

The cost of buying or selling a financial instrument.

Trend

simply the direction of the market, usually broken down to three categories….major, intermediate and short-term trends. Three directions are also associated

Value Date

The date on which counterparts to a financial transaction agree to settle their respective obligations, i.e., exchanging payments. For spot currency transactions, the value date is normally two business days forward. Also known as maturity date.

Volatility (Vol)

A measure of price fluctuations. The standard deviation of a price series is commonly used to measure price volatility.