Foreign Exchange Glossary

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Foreign Exchange Glossary of terms used by banks and foreign currency brokers

A

Appreciation >> A currency appreciates when it strengthens in price.

Ask Rate >> Also known as the offer, this is the rate at which non-market makers can buy a particular currency.

Asset Allocation >> Investment practice that divides funds among different markets to achieve diversification for risk management purposes.

B

Bacs >> (Bankers Automated Clearing Services). The process for Sterling clearing for domestic banks. Also, Usually takes 3 business days.

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

Base Currency >> The currency which is the base for quotes. For example, the euro is the base currency for EURUSD quotes. So, while the US dollar is the base currency for USDJPY.

Bear Market >> A market that is characterized by declining prices.

Bid Rate >> The rate at which traders can currently sell a particular currency.

Bid Offer >> (Ask) Spread: The difference between the bid and the ask (offer) price.

Broker >> An individual or a company that acts as an intermediary, handling investors’ orders to buy and sell currencies. Also, Some brokers charge the commission for this service.

C

Chaps >> CHAPS: (Clearing House Automated Payment System). A faster means of making payments. Usually occurs on the same day.

Cable >> is the slang for the GBPUSD dollars exchange rate.

Central Bank >> A government or quasi-governmental organization that manages a country’s monetary policy. So, An example is the Federal Reserve, which is the US Central Bank.

Commission >> A transaction fee charged by a broker.

Cross Rate >> An exchange rate between two currencies that does not involve the US dollar, such as EURJPY.

Currency >> Any form of money issued by a government or central bank and used as legal tender.

Currency Risk >> The probability of an adverse change in exchange rates.

Foreign Exchange Glossary

Day Trading >> Refers to positions that have been opened and closed on the same day.

Deficit >> A negative balance of trade or payments

E

Exposure >> The amount of money at risk due to Foreign Exchange movements.

Economic Indicator >> A government issued statistic that indicates current economic growth and stability. Also, Common indicators include employment rates, Gross Domestic Product (GDP), CPI (inflation) and retail sales.

European Central Bank >> (ECB): The Central Bank of the European Monetary Union.

F

Federal Reserve >> (Fed): The Central Bank of the United States.

Foreign Exchange >> Foreign Exchange/ Forex or FX market: So, A market where currencies are bought and sold against each other.

Forward Contract >> is a contract to exchange a specific amount of one currency for another on a future date at a predetermined rate. A deposit normally required for forwarding contracts.

Forward Rate >> The rate at which two currencies can be exchanged on a preset future date, e.g. sterling-dollar exchange rate today for transfer in 3 months time.

Forward Points >> Difference between the spot rate and the forward rate.

Fundamental analysis >> Analysis of economic and political information with the objective of determining future movements in a financial market.

Futures Contract >> An obligation to exchange a good or an instrument at a set price on a future date. The main difference between a future and a forward that futures typically traded on an exchange to a fixed settlement date. Forwards over-the-counter (OTC) contracts and the maturity date defined on a bespoke basis.

Foreign Exchange Terms

G

GTC >> Good till cancelled. GTC stands for Good Till Cancelled: A GTC foreign exchange order left in the market until executed or cancelled by you

H

Hedge >> Protection against future currency movements.

I

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

L

Limit Order >> An order to buy at or below a specific price or to sell at or above a specific price.

Liquidity >> Ability of a market to accept large transaction with minimal or no impact on price stability.

The Long position >> Market position where the client has bought a currency he did not previously have. Normally expressed in base currency terms, e.g. long Dollars (short Swiss Franc)…

M

Margin >> is the required equity that an investor must deposit to collateralize a position.

Margin Call >> A request from a broker or a dealer for additional funds or other collateral to guarantee performance on a position that has moved against the customer. Alternatively, the client can choose to close one or more positions.

Market Maker >> Dealer who supplies prices and is prepared to buy or sell at those stated bids and ask prices.

O

OCO >> “One Cancels Other” A combination of a ‘Stop Loss’ order and a ‘Take Profit’ order. When one of these two orders executed, the other order automatically cancelled.

Order >> You can leave an “order” with us to transact on your behalf if a particular exchange rate is reached.

Offer >> Price or rate that a trader is prepared to sell it.

Open Position >> A deal that has not been settled by physical payment or reversed by an equal and opposite deal for the same value.

Over the Counter >> (OTC): Used to describe any transaction that is not conducted over a regulated exchange.

P

Pips >> The term used in the currency market to characterize the smallest incremental move an exchange rate can make. So, The value of a pip depends on the currency pair. One pip/basis point equals for instance 0.0001 for EUR/USD, GBP/USD and USD/CHF, and 0.01 for USD/JPY.

R

Resistance Level >> A price level at which you would expect selling to take place.

S

Settlement Date >> The date for the exchange of payments.

Short Position >> An investment position that benefits from a decline in market price.

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

Spot Rate >> Foreign exchange rate at which two currencies can be exchanged in 2 days time.

Spot Transaction >> Exchange of one currency for another at a specified rate for settlement in 2 working days.

Spread >> Difference between the bid and the offer (ask) price.

Stop Loss Order >> So, A stop loss order is a means of limiting your risk from adverse exchange rates. Also, A currency level set. If that current level reached, the trade automatically executed in the market. The currency level used for a stop loss order always worse than the current market price. Also, This a way to protect you from adverse changes in exchange rates without needing to constantly monitor the rate.

Support Level >> A price level at which you would expect buying to take place.

T

Take Profit Order >> Like a stop loss order, a take profit order first involves setting a currency level. So, Once that current level reached, the trade executed in the market. The currency level used for a take profit order is always better than the current market price. Also, This a way to capitalize on improvements in exchange rates without needing to constantly monitor the rate.

Technical Analysis >> An effort to forecast future market activity by analyzing market data through the use of charts. Hence, price trends, and volume.

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