RiskTotal amount of exposure a bank has with a customer for both spot and forward contracts.
At or Better
At Par Forward Spread
At the Price Stop-Loss Order
Average Rate Option
Settlement and related processes.
Back to Back
Balance of Payments
Balance of Trade
The rate at which a central bank is prepared to lend money to its domestic banking system.
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.
The currency in which the operating results of the bank or institution are reported.
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.
The recording of a transaction outside the country where the transaction is itself negotiated.
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.
In the options market, undoing a conversion or a reversal to restore the option buyer’s original position.
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.
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.
(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.
A trade where you borrow and pay interest in order to buy something else that has higher interest. For example, with a positively sloped term structure (short rates lower than long rates), one might borrow at low short term rates and finance the purchase of long-term bonds. The carry return is the coupon on the bonds minus the interest costs of the short-term borrowing. Of course, if long-term interest rates unexpectedly rose(and long-term bond prices fell as a result), the carry trade could become unprofitable. Indeed, if this occured, there could be a number of investors trying to unwind the carry trade, which would involve selling the long-term bonds. It is possible that this could exacerbate the increase in long-term interest rates, i.e. push the rates even higher.
A finance charge associated with the storing of commodities (or foreign exchange contracts) from one delivery date to another.
Cash and Carry
CBOT or CBT
Certificate of Deposit (CD)
Closing Purchase Transaction
Contract Expiration Date
Cost of Carry
Cost of Living Index
Covered Interest Rate Arbitrage
Crawling Peg (Adjustable Peg)
An order that if not executed on the specific day is automatically canceled.
As long as the deal is open, it is charged a renewal fee every night at 22:00 (GMT time).
Reflects the impact of foreign exchange changes on the future competitive position of a company in the sense of the impact it can have on the future cash flows of the company.
ECU – European Currency Unit
Effective Exchange Rate
Either Way Market
Exchange Rate Risk
Exercise Price (Strike Price)
Rapid movement in a market caused by strong interest by buyers and/or sellers. In such circumstances price levels may be omitted and bid and offer quotations may occur too rapidly to be fully reported.
Fed Fund Rate
Federal National Mortgage Association
Federal Reserve Board
Federal Reserve System
Fixed Exchange Rate
Floating Exchange Rate
Forward Cover Taking
Futures Exchange-Traded Contracts
The Group of Five. The five leading industrial countries, being US, Germany, Japan, France, UK.
Gross Domestic Product
Gross National Product
GTC “Good Till Cancelled”
A currency whose value is expected to remain stable or increase in terms of other currencies.
Head and Shoulders
International Commodities Clearing House Limited, a clearing house based in London operating world wide for many futures markets.
Interest Rate Risk
Interest Rate Swaps
Intra Day Limit
Intra Day Position
ISDA (International Securities Dealers Association)
A term describing the expected effect of a devaluation on a country’s trade balance. It is anticipated that import bills rise before export orders and receipts increase.
Slang for the New Zealand dollar.
To carry out a transaction in the market to offset a previous transaction and return to a square position.
Leads and Lags
LIBOR (London Inter Bank Offer Rate)
LIFFE – London International Financial Futures Exchange.
Limit Order – Reserved Day Trading Deal
Cash in circulation . Only used by the UK.
Make a Market
Mark – To – Market
US term for five basis points.
Not Held Basis Order
The rate at which a dealer is willing to sell the base currency.
Official Settlements Account
One Cancels Other Order
Open Market Operations
Over The Counter (OTC)
When a number of exchange and /or deposit orders have to be fulfilled simultaneously.
Purchasing Power Parity
Put Call Parity
An indicative price. The price quoted for information purposes but not to deal.
The difference between the highest and lowest price of a future recorded during a given trading session.
Retail Price Index
Rate at which a bank is willing to sell foreign currency.
Standard and Poors (S&P)
Stop Loss Order
Stop Out Price
Terms of Trade
Tomorrow Next (Tom next)
An exchange rate is normally considered to be undervalued when it is below its purchasing power parity.
For exchange contracts it is the day on which the two contracting parties exchange the currencies which are being bought or sold. For complete description see the chapter on trading. For a spot transaction it is two business banking days forward in the country of the bank providing quotations which determine the spot value date. The only exception to this general rule is the spot day in the quoting centre coinciding with a banking holiday in the country(ies) of the foreign currency(ies). The value date then moves forward a day. The enquirer is the party who must make sure that his spot day coincides with the one applied by the respondent. The forward months maturity must fall on the corresponding date in the relevant calendar month If the one month date falls on a non-banking day in one of the centers then the operative date would be the next business day that is common. The adjustment of the maturity for a particular month does not effect the other maturities that will continue to fall on the original corresponding date if they meet the open day requirement. If the last spot date falls on the last business day of a month, the forward dates will match this date by also falling due on the last business day. Also referred to as maturity date.
Velocity of Money
Money borrowed in large amounts from banks and institutions rather than from small investors.
Wholesale Price Index
The graph showing changes in yield on instruments depending on time to maturity. A system originally developed in the bond markets is now broadly applied to various financial futures. A positive sloping curve has lower interest rates at the shorter maturities and higher at the longer maturities. A negative sloping curve has higher interest rates at the shorter maturities.
Certificate issued by the Bank of England to “discount houses” in lieu of stock certificates to facilitate their dealing in the short dated gilt edge securities.
Zero Coupon Bond