A
Appreciation: Describes the strengthening of a currency in response to market demand rather than by official action.
Arbitrage: The action of a simultaneous buy and sell of a similar or like commodity or futures product that may be made in different contract months, on different exchanges, and in different countries in order to profit from a discrepancy in price.
Arbitrage channel The range of prices within which there will be no possibility to arbitrage between the cash and the futures markets.
Asset In the context of foreign exchange, the right to receive from a counterparty an amount of currency either in respect of a balance sheet asset, such as a loan, or at a specified future date in respect of an unmatched forward or spot deal.
Asset allocation Dividing instrument funds among markets to achieve diversification or maximum return.
B
Backwardation The amount by which the spot price exceeds the forward price.
Balance of payments A systematic record of economic transactions during a given period for a country. The combination of the trade balance, current balance, capital account, and invisible balance, which together make up the balance-of-payments total. Prolonged balance-of-payment deficits tend to lead to restrictions in capital transfers and/or decline in currency values.
Bank rate The rate at which a central bank is prepared to lend money to its domestic banking system.
Basis The difference between the cash price and the futures price.
Basis trading Taking opposite positions in the cash and the futures markets with the intention of profiting from favorable movements in the basis.
Bretton Woods 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 One who solicits, executes, or fills orders for customers or solicits funds on behalf of a brokerage firm.
Bull market A prolonged period of generally rising prices.
Bundesbank Central Bank of Germany.
C
Capital risk The risk arising from a bank having to pay the counterparty without knowing whether the other party will or is able to meet its side of the bargain.
Carrying charges The cost associated with holding or storing cash or physical commodities and financial instruments. Four variables are involved: storage, insurance, finance charges, and/or interest payments on borrowed monies.
Cash Usually refers to an exchange transaction contracted for settlement on the day the deal is struck. This term is mainly used in the North American markets and those countries that rely for foreign exchange services on 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 market The market in the actual financial instrument on which a futures or options contract is based.
Cash settlement A procedure for settling futures contracts through payment of the cash difference between the future and the market price, rather than through the physical delivery of a commodity.
Central bank A country’s head regulatory bank, which is responsible for the development and implementation of monetary policy.
CFTC Commodity Futures Trading Commission, which is the federal regulatory agency in charge of overseeing the futures and nonbank forex industry. Closed position A transaction that leaves the trade with a zero net commitment
CME Chicago Mercantile Exchange.
Commission The fee that a broker may charge clients for dealing on their behalf.
Commodity A financial instrument or a product that is used in commerce and is mainly traded on a regulated commodity exchange. The types of products are agricultural (such as meats and grains), metals, petroleum, foreign currencies, stock index futures, single stock futures, and financial instruments (such as interest rate
vehicles like notes and bonds).
Commodity trading advisor (CTA) A registered individual or entity that advises others for compensation or profit in buying or selling futures contracts or commodity options; also includes one who exercises trading authority over a customer’s account or who provides research and analysis through newsletters or other media.
Conversion The process by which an asset or a liability denominated in one currency is exchanged for an asset or a liability denominated in another currency.
Conversion account A general ledger account representing the uncovered position in a particular currency. Such accounts are referred to as “position accounts.”
Conversion arbitrage A transaction where the asset is purchased and buys a put option and sells a call option on the asset purchased, 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.
Counterparty The other organization or party with whom an exchange deal is being transacted.
Countervalue The dollar value of a transaction in which a person buys a currency against the dollar.
D
Day trader A speculator who takes positions in commodities that are liquidated prior to the close of the same trading day.
Discount rate The interest rate charged on loans by the Federal Reserve to member banks.
E
Economic indicator A statistic that indicates current economic growth rates and trends, such as retail sales and employment.
European Monetary System (EMS) A system designed to stabilize if not eliminate exchange risk between member states of the EMS as part of the economic convergence policy of the European Union (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.
F
Fed The United States Federal Reserve System. Federal Deposit Insurance Corporation (FDIC) membership is compulsory for Federal Reserve members. The corporation had deep involvement in the savings-and-loan crisis of the late 1980s.
Federal Reserve System The central banking system of the United States.
Fed fund rate The interest rate on Fed funds. This is a closely watched short-term interest rate because it signals the Fed’s view as to the state of the money supply.
FOMC Federal Open Market Committee, which sets U.S. money supply targets, which tend to be implemented through Fed Fund interest rates, and so on.
Foreign exchange (forex) The purchase or sale of a currency against sale or purchase of another.
Forex market Usually referred to as the over-the-counter market where buyers and sellers conduct foreign currency exchange business.
G
G7 (Group of Seven) The seven leading industrial countries: the United States, Germany, Japan, France, the United Kingdom, Canada, and Italy.
I
IMF International Monetary Fund; established in 1946 to provide international liquidity on a short and medium term and to encourage liberalization of exchange rates. The IMF supports countries with balance-of-payments problems with the provision of loans.
Inflation 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.
Intervention Action by a central bank to effect the value of its currency by entering the market. Concerted intervention refers to action by a number of central banks to control exchange rates.
Introducing broker (IB) A person or an organization that solicits or accepts orders to buy or sell futures contracts or commodity options but does not accept money or other assets from customers to support such orders.
L
Lagging indicators Market indicators showing the general direction of the economy and confirming or denying the trend implied by the leading indicators.
Leading indicators Market indicators that signal the state of the economy for the coming months. Some of the leading indicators include average manufacturing workweek, initial claims for unemployment insurance, orders for consumer goods and material, percentage of companies reporting slower deliveries, change in manufacturers’ unfilled orders for durable goods, plant and equipment orders, new building permits, index of consumer expectations, change in material prices, prices of stocks, and change in money supply.
N
National Futures Association (NFA) The self-regulatory agency for forex and for futures and options markets. The primary responsibilities of the NFA are to enforce ethical standards and customer protection rules, to screen futures professionals for membership, to audit and monitor professionals for financial and general compliance rules, and to provide for arbitration of futures-related disputes.
O
Open interest The total number of futures or options contracts of a given commodity that have been neither offset by an opposite futures or option transaction nor fulfilled by delivery of the commodity or option exercise. Each open transaction
has a buyer and a seller; but for calculation of open interest, only one side of the contract is counted.
Option A contract that conveys the right, but not the obligation, to buy or to sell a particular item at a certain price for a limited time.
Out-of-the-money option An option with no intrinsic value; i.e., a call whose strike price is above the current futures price or a put whose strike price is below the current futures price.
P
Put option An option that gives the option buyer the right but not the obligation to sell an underlying futures contract at the strike price on or before the expiration date.
Q
Quote An indicative price; the price quoted for information purposes but not to deal.
S
Speculator An investor who is looking to profit from buying or selling derivative products with the anticipation of profiting from price moves by trading in and out of his or her positions.
Swap The simultaneous purchase and sale of the same amount of a given currency for two different dates against the sale and the 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.
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