Glossary of Foreign Exchange Terms

Account
A record of transactions of goods and services owed to one person by another.

Agent
An intermediary or person hired to carry out transactions on behalf of another person.

Aggregate Demand
Total demand in an economy, consisting of government spending, private/consumer and business investment.

All or None
Refers to requests for a broker to fill an order completely at a predetermined price or not at all. Refers to both buy and sell orders.

American Option
An option that can be exercised anytime during its life. The majority of exchange-traded options are American.

Anonymous trading
Visible bids and offers on the market without the identity of the bidder and seller being revealed. Anonymous trades allow the high profile investors to execute transactions without the scrutiny and speculation of the market.

Appreciation
An increase in the value of a currency in response to market demand.

Arbitrage
When a price differential arises, creating an opportunity to profit through buying and selling. Arbitrage is a “riskless” opportunity to profit, as there is no uncertainty involved. In regards to the foreign exchange market, arbitrage arises when a profit can be made through differentials in exchange rates. Arbitrage opportunities in the foreign exchange market are rare.

Asian Option
An option whose payoff depends on the average price of the underlying asset over a certain period of time. These type of option contracts are attractive because they tend to cost less than regular American options

Ask Rate
The lowest price that shares will be offered for sale, such as the bid/ask spread in the foreign exchange market.

Ask Size
The number of shares a seller is willing to sell at his/her ask rate.

Asset Allocation
The diversification of one’s assets into different sectors, such as real estate, stocks, bonds, and forex, to optimize growth potential and minimize risk.

Asset Swap
An interest rate swap used to alter the cash flow characteristics of an institution’s assets in order to provide a better match with its liabilities.

Attorney in Fact
A person given the right or authority to act on behalf of another to carryout business transactions and implement documents.

Authorized Dealer
A financial institution or bank authorized to deal in foreign exchange.

Automatic Exercise
A procedure implemented to protect an option holder where the Option Clearing Corporation will automatically exercise an “in the money” option for the holder.

Away From the Market
When the bid on an order is lower (or the ask price is higher) than the current market price for the security.

Back Testing
The process of designing a trading strategy based on historical data. It is then applied to fresh data to see if and how well the strategy works. Most technical analysis is tested with this approach

Balance/Account Balance
The net value of an account.

Balance of Payments
A record of all transactions made by one particular country with others during a certain time period. It compares the amount of economic transactions between a country and all other countries. This includes trade balance, foreign investments, and investments by foreigners.

Balance of Trade
Net flow of goods (exports minus its imports) between two countries.

Bank for International Settlements
The BIS is an international organization fostering the cooperation of central banks and international financial institutions. Essentially, the BIS, located in Basel, Switzerland, is a central bank for central banks. It monitors and collects data on international banking activity and promulgates rules concerning international bank regulation.

Back Office
Refers to the administrative arm of financial service companies, who carry out and confirm financial transactions. Duties include, accounting, settlements, clearances, regulatory compliance and record maintenance.

Balance of Payments
Record of all transactions, such as trade balances and capital flows, carried out by a county with the rest of the world within a certain period.

Base Currency
In general terms, the base currency is the currency in which an investor or issuer maintains its book of accounts. In the FX markets, the US Dollar is normally considered the ‘base’ currency for quotes, meaning that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair. The primary exceptions to this rule are the British Pound, the Euro and the Australian Dollar.

Basis
The difference between the cash price and the futures price.

Basis Point
Measure of a bond’s yield equal to 1/100th. A 1% change in yield is equal to 100 basis points and 0.01% is equal to one basis point.

Bear
Investor acting on the belief that prices or the market will decline.

Bear Market
Any market that exhibits a declining trend. In the long run they have a down turn of 20% or more.

Bid
The price an investor is willing to pay for an asset.

Bid/Ask Spread
The difference between the bid and the ask price.

Big Figure
Refers to the first number to the left of the decimal point in an exchange rate quote, which changes so infrequently that dealers often omit them in quotes.

Bonds
Bonds are debt instruments used to raise capital, which are issued for periods greater than one year. Bondholders are loaning money (investing in debt) to companies and governments, at the end of which they will be paid a specified interest rate. Bond prices are inversely related to interest rates, as interest rates rise, bond prices fall. There are numerous types of bonds, including treasury bonds, notes, and bills; municipal bonds and corporate bonds.

Book
Recording of the total positions held by a trader or desk.

Bretton Woods Accord (1944)
This accord established a fixed exchange rate regime, whose aim was to provide stability in the world economy after the Great Depression and the WWII. This accord fixed the exchange rates of major currencies to the US dollar and set the price of gold to $35. The accord required central bank intervention to maintain the fixed exchange rates. The US Central Bank was required to exchange dollars for gold, which eventually let to the demise of this system, when the demand for the dollar declined, as well as the gold reserves, forcing Nixon to stop the exchange of dollars for gold, effectively ending the system in 1971.

Broker
Individual or firm acting as an intermediary to bring together buyers and sellers typically for a commission or fee.

Bull
Investor who expects markets or prices to rise.

Bull Market
A market where prices are rising or are expected to rise.

Bundesbank
Germany’s Central Bank.

Buy a bounce
A recommendation to instigate a long trade if the price bounces from a certain level.

Buy break
A recommendation to buy the currency pair if it breaks the current level specified.

Buy stops above
A recommendation to enter the market when the exchange rate breaks through a specific level. The client placing a stop entry order believes that when the market’s momentum breaks through a specified level, the rate will continue in that direction.

Cable
Term used to describe the exchange rate between the US dollar and the British Pound.

Candlestick Chart
Chart depicting the daily high, low, opening and closing price, similar to that of a bar chart. If the close is lower than the open than the body of the candlestick is filled in, and if the open is lower than the close the body is left empty.

Capital Markets
Markets in which capital (stocks, bonds, etc.) are traded. Usually for medium or long term investing.

Carry Trade
An investment position of buying a higher yielding currency with the capital of a lower yielding currency to gain an interest rate differential.


Central Bank
A banking organization, usually independent of government, responsible for implementing a country’s monetary policy and for printing money.

Chartist
Refers to a technical analyst or one who analyses charts/graphs and data to uncover potential trends.

Clearing
Refers to the settlements/confirmations of trades.

Close a Position (Position Squaring)
Refers to getting rid of a position, either by buying back a short position or selling a long position.

Commission
A fee charged by broker or agent for carrying out transactions/orders.

Confirmation
A written document verifying the completion of a trade/transaction to include such things as date, fees or commissions, settlement terms and the price.

Contagion
Term used to describe the spread of economic crises from one country’s market to other countries within close geographic proximity. This term was first used following the Asian Financial Crisis in 1997, which began in Thailand and soon spread to other East Asian economies. It now is used to refer to the recent c