Open Position Any deal which has not been settled by physical payment or reversed by an equal and opposite deal for the same value date. It can be termed as a high risk, high return proposition.
Option A contract conferring the right but not the obligation to buy (call) or to sell (put) a specified amount of an instrument at a specified price within a predetermined time period.
Over The Counter (OTC) A market conducted directly between dealers and principals via a telephone and computer network rather than a regulated exchange trading floor. These markets have not been very popular because of the risks both the parties face in case the other party fails to honor the contract. They were never part of the Stock Exchange since they were seen as "unofficial".
Par (1) The nominal value of a security or instrument. (2) The official value of a currency.
Parity (1) Foreign exchange dealer's slang for your price is the correct market price. (2) Official rates in terms of SDR or other pegging currency.
Point (1) 100th part of a per cent, normally 10,000 of any spot rate. Movement of exchange rates are usually in terms of points. (2) One percent on an interest rate, e.g. from 8-9%. (3) Minimum fluctuation or smallest increment of price movement.
Premium (1) The amount by which a forward rate exceeds a spot rate. (2) The amount by which the market price of a bond exceeds its par value. (3) Options, the price a put or call buyer must pay to a put or call seller for an option contract. (4) The margin paid above the normal price level.
Principal A dealer who buys or sells stock for his/her own account.
Profit Taking The unwinding of a position to realize profits.
Put Option A put option confers the right but not the obligation to sell currencies, instruments or futures at the option exercise price within a predetermined time period.
Quote An indicative price. The price quoted for information purposes but not to deal.
Rally A recovery in price after a period of decline. *
Range The difference between the highest and lowest price of a future recorded during a given trading session.
Rate The price of one currency in terms of another. It has the same meaning as the term parities.
Reserves Funds held against future contingencies, normally a combination of convertible foreign currency, gold, and SDRs. Official reserves are to ensure that a government can meet near term obligations. They are an asset in the balance of payments.
Risk management The identification and acceptance or offsetting of the risks threatening the profitability or existence of an organization. With respect to foreign exchange involves among others consideration of market, sovereign, country, transfer, delivery, credit, and counterparty risk.
Rollover An overnight swap, specifically the next business day against the following business day (also called Tomorrow Next, abbreviated to Tom-Next). *
Short A market position where the client has sold a currency he does not already own. Usually expressed in base currency terms.
Spot (1) The most common foreign exchange transaction. (2) Spot refers to the buying and selling of the currency where the settlement date is two business days forward.
Square Purchase and sales are in balance and thus the dealer has no open position.
Stagflation Recession or low growth (stagnation) in conjunction with high inflation rates.
Standard and Poor’s (S&P) A US firm engaged in assessing the financial health of borrowers. The firm also has generated certain stock indices i.e. S&P 500.
Stop Loss Order Order given to ensure that, should a currency weaken by a certain percentage, a short position will be covered even though this involves taking a loss. Realize profit orders are less common.
Support Levels A price level at which the buying is expected to take place. When an exchange rate depreciates or appreciates to a level where (1) Technical analysis techniques suggest that the currency will rebound, or not go below; (2) The monetary authorities intervene to stop any further downward movement. See Resistance Point.
Swap The simultaneous purchase and sale of the same amount of a given currency for two different dates, against the sale and 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.
Technical Analysis The study of the price that reflects the supply and demand factors of a currency. Common methods are flags, trend-lines spikes, bottoms, tops, pennants, patterns and gaps
Tomorrow Next (Tom next) Simultaneous buying and selling of a currency for delivery the following day and selling for the next day or vice versa.
Volatility A measure of the amount by which an asset price is expected to fluctuate over a given period. Normally measured by the annual standard deviation of daily price changes (historic). Can be implied from futures pricing, implied volatility.
Yard Slang for milliard, one thousand million (1 European milliard = 1 US billion = 1,000 million).
