Forex Glossary of Terms A to B
Aggregate
RiskTotal amount of exposure a bank has with a customer for both spot and forward contracts.
American Option
An option which may be exercised at any valid business date through out the life of the option.
Appreciation
Describes a currency strengthening in response to market demand rather than by official action.
Arbitrage
A risk-free type of trading where the same instrument is bought and sold simultaneously in two different markets in order to cash in on the difference in these markets.
Around
Used in quoting forward “premium / discount”.
Ask Price
Ask is the lowest price acceptable to the buyer.
Asset
In the context of foreign exchange 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 Forward or spot deal.
At Best
An instruction given to a dealer to buy or sell at the best rate that is currently available in the market.
At or Better
An order to deal at a specific rate or better.
At Par Forward Spread
When the forward price is equivalent to the spot price.
At the Price Stop-Loss Order
A stop-loss order that must be executed at the requested level regardless of market conditions.
At-the-Money
An option whose strike/exercise price is equal to or near the current market price of the underlying instrument.
Auction
Sale of an item to the highest bidder. (1) A method commonly used in exchange control regimes for the allocation of foreign exchange. (2) A method for allocating government paper, such as US Treasury Bills. Small investors are given preferential access to the bills. The average issuing price is then computed on the basis of the competitive bids accepted. In some circumstances for government auctions it is the yield rather than the price which is bid.
Average Rate Option
A contract where the exercise price is based on the difference between the strike price and the average spot rate over the contract period. Sometimes called an “Asian option”.
Back Office
Settlement and related processes.
Back to Back
(1) Transaction where all the obligations and liabilities in one transaction are mirrored in a second transaction. (2) Transaction where a loan is made in one currency in one country against a loan in another country in another currency.
Balance of Payments
A systematic record of the economic transactions during a given period for a country.(1) The term is often used to mean 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 balance of payments total. Prolonged balance of payment deficits tend to lead to restrictions in capital transfers, and or decline in currency values.
Balance of Trade
The value of exports less imports. Invisibles are normally excluded, and is otherwise referred to as mercantile or physical trade. Figures can be quoted on FoB/ FaS , customs cleared, or Fob export, FoB export.
Band
The range in which a currency is permitted to move. A system used in the ERM.
Bank Line
Line of credit granted by a bank to a customer, also known as a ” line”.
Bank Notese
Bank notes are paper issued by the central or issuing bank and are legal tender, but are not usually considered to be part of the FX market. However bank notes can be converted, in some counties, into FX. Bank notes are normally priced at a premium to the current spot rate for a currency.
Bank Rate
The rate at which a central bank is prepared to lend money to its domestic banking system.
Barrier Option
A family of path dependent options whose pay-off pattern and survival to the expiration date depend not only on the final price of the underlying currency but also on whether or not the underlying currency breaks a predetermined price level at any time during the life of the option. See Down and Out call/put, Down and in call/put, Up and out call/put, Up and in call/put.
Base Currency
The currency in which the operating results of the bank or institution are reported.
Base Rate
A term used in the UK for the rate used by banks to calculate the interest rate to borrowers. Top quality borrowers will pay a small amount over base.
Basis
The difference between the cash price and futures price.
Basis Convergence
The process whereby the basis tends towards zero as the contract expiry approaches.
Basis Point
One per cent of one per cent.
Basis Price
The price expressed in terns of yield maturity or annual rate of return.
Basis Trading
Taking opposite positions in the cash and futures market with the intention of profiting from favorable movements in the basis. .
Basket
A group of currencies normally used to manage the exchange rate of a currency. Sometimes referred to as a unit of account.
Bear
A person who believes that prices will decline.
Bear Market
A market in which prices decline sharply against a background of widespread pessimism (opposite of Bull Market).
Bid Price
Bid is the highest price that the seller is offering for the particular currency at the moment; the difference between the ask and the bid price is the spread. Together, the two prices constitute a quotation; the difference between the two is the spread. The bid-ask spread is stated as a percentage cost of transacting in the foreign.
Big Figure
Refers normally to the first three digits of an exchange rate that dealers treat as understood in quoting. For example a quote of “30/40” on dollar mark could indicates a price of 1.5530/40BIS: Bank of International Settlement.
Bilateral Clearing
A system used where foreign currency is limited. Payments are usually routed through the central banks, and sometimes require that the trade balance is equaled every year.
Binary Options
A binary “call” (or “step up”) is like a standard European call option except that the pay off at expiry is fixed at one unit of the counter currency, if the call expires in the money.
Black-Scholes Model
An option pricing formula initially derived by Fisher Black and Myron Scholes for securities options and later refined by Black for options on futures. It is widely used in the currency markets.
Booked
The recording of a transaction outside the country where the transaction is itself negotiated.
Boris
Slang for Russian trading.
Break Even Point
The price of a financial instrument at which the option buyer recovers the premium, meaning that he makes neither a loss or gain. In the case of a call option, the break even point is the exercise price plus the premium.
Break Out
In the options market, undoing a conversion or a reversal to restore the option buyer’s original position.
Bretton Woods
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.
Broker
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.
Brokerage
Commission charged by a broker.
BUBA
Bundesbank, the reserve bank of Germany.
Bull
A person who believes that prices will rise.
Bull Market
A market characterized by rising prices.
Bulldogs
Sterling bonds issued in the UK by foreign institutions.
Bundesbank
Central Bank of Germany.
Butterfly Spread
(1) A futures butterfly spread is a spread trade in which multiple futures months are traded simultaneously at a differential. The trade basically consists of two futures spread transactions with either three or four different futures months at one differential.
(2) An options butterfly spread is a combination of a bear and bull spread trade in which multiple options months and strike prices are traded simultaneously at a differential. The trade basically consists of two options spread transactions with either three or four different options months and strikes at one differential
