American option
This type
of option can be exercised at any time, i.e. not only on a specific date (European
option).
Arbitrage
Exploitation
of price differences when identical securities, currencies or commodities are traded on
various markets, buying in markets with low prices and selling in markets with high
prices.
Asian Currencies
These are the main currencies traded in Asia. They mainly the Hong Kong Dollar and the Yen.
At-the-money
An option
is at-the-money when the price of the underlying instrument is equivalent or very near to
the strike
price.
Balance of payments
System of
recording a country’s economic transactions between companies, banks, private
households and public authorities at home and abroad over a specific time period.
Depending on the type of transaction involved, it is broken down into sub-divisions (trade balance,
current
balance, capital account, invisible
balance) which together make up the balance of payments total. Long-lasting balance of
payments deficits tend to lead to restrictions in capital transfers with foreign countries
and/or import restrictions.
Balloon Payments
When
repayments under a loan agreement are spread over a number of regular installments,
they are referred to as balloon payments.
Bank note rate
Exchange rate
used in bank note dealing.
Bank notes
Paper
issued by the central bank, redeemable as money and considered to be full legal tender.
Base Curency
The base currency is the currency that you hold or the home currency.
Break-even point
The price
of a financial instrument, at which the option buyer recovers the premium, meaning that he
makes neither a loss nor a gain. In the case of a call option, the break-even point is the
exercise price plus the premium, and in the case of a put option, the exercise price minus
the premium.
Bid and Offer (Buying and selling)
A bank will
quote the buying and selling exchange rates of a currency as the
Bid and Offer. For directly quoted currencies, the Bid (buying) rate is
the rate at which the bank is prepared to buy Dollars against the other currency
and the Offer (selling) is the rate at which the bank is prepared to sell Dollars
against the other currency. For indirectly quoted currencies the Bid and Offer would
apply to the base currency of the indirectly quoted currency.
Bretton-Woods System
This is an
agreement reached in July, 1945 by the Allies after the second world war that established
rates at which to exchange currencies against one other. The system fixed
exchange rates with fluctuation grids, in which every member of the IMF set a specific
parity for its currency relative to gold or the dollar, and undertook to keep fluctuations
within 1% of parity by central bank market interventions. This was necessary as the war
had caused vast disparities between currencies and rates that existed before the war were
no longer applicable. By the late eighties this agreement was effectively abandoned as
currencies were allowed to float in value based on supply and demand.
Broken date
A forward
foreign exchange arrangement which is not for a standard maturity period. Standard periods
are 1 week, 2 weeks, 1, 2, 3, 6 and 12 months.
Bullet Payments
This is the
repayment of a loan in one single payment on maturity of the loan.
Buy
In strict financial terms this refers to the currency that the bank buys. Please
Bid and Offer. In the Forex ToolKit we have looked at it from you the users view point and it refers to you buying the currency. So if you are an importer click the buy button to see the rate you would buy at.
Call money
Overnight
money (GB) or Federal funds (US); currency lent by banks on a very short-term basis, which
can be called the same day, at one day's notice or at two days notice.
Call option
The right
(but not the obligation) to buy a fixed amount of currency from the option writer (option seller) at a
predetermined exchange rate and/or exercise price on the expiry date stipulated in the
contract (European
option). Option.
Cancellation of a FEC
When a Forward Exchange Contract (FEC) reaches maturity and
there is no need for the foreign currency at that time or during the remainder
of the FEC, the contract must be cancelled.
The bank buys
back from the seller or sells back to the buyer, depending on whether the contract is for
imports or exports, the amount under the forward exchange contract at the forward rate. Simultaneously, the bank will
reverse the sale or purchase at the ruling spot rate. The difference in value between the two
transactions will be for the seller or buyers account.
Cap (Interest rate option)
On borrowed
funds with an interest rate which is tied to the market rate, an upside limit or cap can
be agreed upon, i.e. against payment of a premium, an upper interest rate limit is agreed
upon, which will not be exceeded even if the market rate rises above the level in
question.
Capital account
Juxtaposition
of the long and short-term capital imports and exports of a country (balance of
payments).
Capital movements
Short and
long-term claims and liabilities, which are entered into vis-a-vis foreign countries, e.g.
repayment of foreign debt, direct investments, portfolio investments, purchase of private
real estate.
Central bank
The only
institution that has the right to issue bank notes and which constitutes the monetary and
credit policy authority of a currency zone. Apart from this, it supplies the economy with
money and credit, regulates domestic and foreign payments transactions and maintains
internal and external monetary stability.
Collar
An agreement to
put upper and lower (cap and floor) limits on an interest rate which will be adhered to
even if the market rate lies outside this range.
Convention
Written
agreement on, for example, the fixing of uniform interest rates and exchange rates.
Convertibility
When a currency can be
easily changed into another currency, without any restriction or the need for authority
from a government or bank, it is said to be convertible. Convertibility is independent
from who owns the currency.
Cost of Funds
The
cost of funds is the interest a bank, company or individual has to pay to raise money. It
is typically the interest paid on loans or the interest paid on deposits.
Cross
Forward Points
All currencies are traded through the American Dollar. The points between the base currency and the dollar would be referred to as the base/dollar points. That between the dollar and the foreign currency would be referred to as the dollar/third points. The points between the base currency and the third currency are referred to as the cross forward points.
Cross
Forward Rate
All currencies are traded through the American Dollar. The rate between the base currency and the dollar would be referred to as the base/dollar rate. That between the dollar and the foreign currency would be referred to as the dollar/third rate. The rate between the base currency and the third currency is referred to as the cross forward rate.
Cross Rates
Exchange
rate parities that are not quoted against the dollar.
By convention
and because of the Bretton-Wood agreement, all directly and indirectly
quoted currencies are traded via the American Dollar. The home currency rate of
exchange to the USD is referred to as the Base rate. The rate of exchange between the
American dollar and a currency other than the base currency is referred to as the Third Currency
rate. The rate of exchange between the Base currency and the Third currency is referred to
as the Cross-Rate. The Third Rate is calculated by dividing the Third Rate by the Base
Rate for directly quoted currencies or multiplying the Base
Rate by the Third Rate for indirectly quoted currencies.
Cross Spot Rate
All currencies are traded through the American Dollar. The rate between the base currency and the dollar would be referred to as the base/dollar rate. That between the dollar and the foreign currency would be referred to as the dollar/third rate. The rate between the base currency and the third currency is referred to as the cross spot rate.
Currency
Name given
to the material form of a country's payment medium, e.g. "Swiss francs, divided up
into 100 centimes".
Currency basket
Various
weightings of other currencies grouped together in relation to a basket currency (e.g.
ECU, SDR).
Currency Fluctuations
This
is the change in the value of one currency against another caused by supply and demand.
These fluctuations could be small and gradual or may be rapid and large. The speed and
degree to which the value of currency changes is termed its volatility. Small, gradual
changes would represent low volatility while large, rapid changes would represent high
volatility.
Currency snake
A system
brought into being in 1972 to promote cooperation on monetary policy between the EC
countries. The currency snake was replaced in 1979 by the European
Monetary System (EMS).
Currency zone
Area of
validity in spatial terms of a currency; normally coincides with the national frontiers of
a country because it is defined by the monetary order. A supranational currency zone arises
when different currencies are connected either through convertibility or fixed
exchange rates. Examples are the Franc zone and the Sterling zone.
Current balance
The value
of all exports (goods plus services) less all imports of a country over a specific period
of time, equal to the sum of the trade (visible) and invisible
balances plus net receipts of interest, profits and dividends from abroad.
Del credere risk
Risk that
the counterparty is either unable or unwilling to fulfil his payment obligations.
Delta
A ratio,
which indicates by how many units the premium on an option changes for a one-unit change
in the value of the underlying instrument. An at-the-money option has a delta of about 0.5. The
deeper the option is in-the-money, the closer the delta gets to 1 and the
deeper the option is out-of-the-money, the more the delta approaches 0.
Delta hedging
A method used
by options writers to hedge risk exposure of written options by purchase or sale of the
underlying instrument in proportion to the delta. Example: the writer of a call
option with a delta of 0.5 would have to buy half the amount of the instrument underlying
the option (e.g. US$), which he might eventually be forced to deliver upon expiry of the
option.
Deposit dealings
Money
market operations.
Deposit money
Also known
as bank or giro money: bank, giro and postal giro account credit balances which can be
converted at any time into notes and coinage but which are normally used for cash-less
payment transactions.
Devaluation
Reduction
in the external
value of a currency
occurs with free exchange rates via the foreign
exchange market, in that the price of the domestic currency drops against a specific
unit of foreign currency. With fixed
exchange rates, the parity of the domestic against the foreign currency is lowered
administratively.
Directly Quoted Currencies
A directly
quoted currency is one that has its value related to the American dollar. It would be
quoted as 1 American dollar is equal to ‘n’ units of the directly
quoted currency.
Discount
Discount,
markdown, (forward discount) or backwardation on a forward rate against the spot rate.
i.e. the forward rate is lower than spot rate. See Premiums
and Discounts.
ECU
See European
Monetary System.
Eurobond market
Euromarket
for international long-term bonds (Eurobonds).
Eurocredit market
Euromarket
for medium-term credits.
Establishment Date
This is the date on which a deal is established. It is the current date.
Euro Currency
This term
is applied to a currency
that is accepted on deposit by a bank outside of the country in which the currency is
legal tender. i.e. American Dollars in London or Sterling in Frankfurt.
Eurodollar
Name for
US$-denominated deposits and claims on the Euromarket.
Euromarket
An
international capital market on which deposits and claims are traded in currencies outside
the sovereign territory of the states in question.
Euromoney market
International
money market in the major financial hubs of Western Europe but focused on London and
Luxembourg. Exists alongside the national money markets.
European Community (EC)
Association
of 12 European countries (Belgium, Germany, Denmark, France, Greece, United Kingdom,
Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain) whose aim it is to create a
single economic area without national frontiers.
European Currencies
These are the major currencies of Europe and include the Euro. Pound Sterling and the Swiss Franc. Some of the
legacy currencies will be shown until they are discontinued in the year 2000.
European Monetary System (EMS)
The
monetary system of the EC member states which aims to create a zone at currency stability
as the forerunner of a single currency.
European option
In contrast
to an American
option, can only be exercised on the expiry date.
Exchange control
State
control of all payments transactions and asset transactions with foreign countries.
Exchange rate
Price of a
foreign currency,
expressed in domestic currency, e.g. $/SFr = 1.50, which means that one US dollar costs
1.50 Swiss francs.
Exchange rate system
Comprises
the exchange
rate of all currencies, determined according to the same principles of exchange rate
policy. The rates of those currencies determined by supply and demand on the foreign
exchange market constitute a system of free
exchange rates. A system of fixed exchange rates arises when the currency unit is
tied to a reference (e.g. gold, $, etc).
Exercise price
Strike price.
Expiry day
In options
business, the last day on which an option can be exercised.
External value
Purchasing
power of a currency
abroad, converted using the exchange rate.
Extensions of Forward Exchange
Contract
Although forward exchange contracts mature on fixed dates, the
maturity date
can be extended to a later date through the SWAP mechanism.
On the maturity
date of the FEC, the bank will purchase from the client or sell to the client the FEC
amount at its forward rate.
To extend the
FEC, the bank will purchase the proceeds or sell back the currency at the spot rate to the
same value as the maturing contract and simultaneously, the bank will sell forward or buy
forward that same amount to the new maturity date.
Any loss or
profit on maturity of the original FEC due to a difference between this FEC’s forward
value and the spot value at its maturity will be for the client's account.
Fixed exchange rate
An
administratively fixed exchange rate. With fixed exchange rates, no rate fluctuations are
possible.
Fixing
Establishing
of the official exchange rate of the domestic currency against other negotiable currencies.
Fixed Term Foreign Exchange Contract
Fixed Term
Contracts are agreements to deliver or receive a currency on a predetermined date.
The forward rate of the contract is valid for that date
only. Any change to this date will cause a change in the forward rate due to a different
interest rate differential.
The maturity
date must not be on a public holiday or weekend for any of the currencies involved. As all
transactions are traded against the American Dollar, any Dollar holidays will prevent
delivery of all currencies.
Floating
1.
Free determination of exchange rates without intervention on the part of the central bank.
Correspondingly, rates are determined by supply and demand on the foreign
exchange market.
2. Dirty
floating: monetary policy which in principle recognizes floating exchange rates but which
tries to influence the exchange rate level through more or less frequent interventions.
Floor
With cash
investments, where the rate of interest is subject to adjustment to the market rate, a
so-called floor can be agreed upon, i.e. for a premium, a minimum interest rate is
stipulated and remains valid even if the market interest rate is lower.
Foreign bank notes and coin
Foreign
bank notes and coin are not foreign exchange in the narrower sense because they
are not always freely convertible. See Bank notes.
Foreign Currency
This is
legal tender of a country other than the home country.
Foreign exchange
Current or
liquid claims payable in foreign currency and in a foreign country (bank balances,
cheques and bills of exchange): Not to be confused with foreign
bank notes and coin, which are not included in this definition.
Foreign
exchange market
Worldwide
system of contacts, either by telephone, teleprinter or in writing, which take place
permanently between non-bank foreign exchange dealers and foreign exchange traders at
banks as well as foreign exchange traders amongst themselves: place where foreign exchange
rates are determined.
Foreign exchange trading
Buying
and selling of foreign exchange, holding of currency positions,
foreign exchange arbitrage,
foreign exchange speculation on the foreign exchange market.
Foreign Value
This is the value of the
foreign currency that is to be traded.
Forward Date
See
Maturity Date.
Forward Exchange Contract (FEC)
This is a
contractual obligation between a bank and its client whereby the one agrees to deliver to
the other and the second agrees to accept from the first a specified amount of foreign
currency in exchange for an amount of another currency at a predetermined forward exchange rate at a certain maturity date
in the future. There are optional dated contracts and fixed dated contracts.
Forward Exchange Rate (Forward Rate)
The Forward
Exchange Rate is the rate at which the exchange of currencies takes place between the one currency and
the other currency in a forward exchange contract. This forward exchange rate comprises the Spot Rate, the
Interest Rate Differential and the time period of the contract.
Forward Instruments
These are
instruments sold or purchased by banks and other financial institutions for forward
operations. Typically they will be forward exchange contracts, financial options and
derivatives.
Forward
operations
Foreign
exchange transactions, on which the fulfillment of the mutual delivery obligations is made
on a date later than the second business day after the transaction was concluded.
Forward points
Forward
points are a means of expressing the interest rate differential between currencies in
terms of the spot rate. Forward points are calculated as follows
Spot rate X Interest rate differential X Time = Forward points.
Forward
Rate
The forward rate is the spot rate plus or minus the
forward points.
FRA
With
Forward Rate Agreements (also known as Future Rate Agreements), two counterparties can
hedge themselves against future interest rate changes. They agree upon an interest rate
for a future period within a specific currency segment, which is valid for a
pre-determined amount. The risk and the final settlement amount to the transfer of the
difference between the agreed contract interest and the current market interest. In
contrast to futures, FRA’s are not standardized and are not traded on exchanges but
are used in interbank trading.
Free exchange rate
Floating.
Fundamental analysis
Analysis of
basic economic data in a market (supply and demand) in order to be able to make assertions
as to the future price trend of a traded commodity. Fundamental exchange rate analysis is
based on the economic and business cycle data of the country in question and leads to
longer-term exchange rate forecasts.
Futures contract
Standardized
forward contract, officially traded on an exchange (CBOT, IMM, LIFFE, COMEX, NYMEX). The
contract is valid for a specific amount of a commodity or a fixed amount of a financial
instrument.
Gamma
The rate of
change of an option’s delta with respect to a marginal change in the price of the
underlying instrument.
Global
Currencies
These are the major currencies of the world and include the American Dollar, British Pound, Euro, etc. Some of the
legacy currencies are shown until the year 2000 when they will be discontinued.
Grid
Fixed
margin within which exchange rates are allowed to fluctuate.
G7
(Group of
7). Group comprising the major industrialized nations in economic terms, which in view of
the global economic importance of the member states have made it their objective to
coordinate their respective domestic economic policies. The coordination of economic,
exchange rate and monetary policy aims is achieved both at government, central bank and
also on other institutionalized levels. Member states are the USA, F, GB, FRG, J, CAN, I.
Group of Ten
A group of
originally 10 countries (following Switzerland’s accession, 11), comprising BEL, FRG,
F, GB, IT, JAP, CAN, NL, SW and USA, who within the framework of the General Arrangements
to Borrow (GAB) have decided to put the equivalent of 17 billion SDR’s in their
various currencies at the IMF’s disposal for granting loans. The Group of Ten plays
an important role in discussions concerning monetary policy.
Hedge ratio
The amount
of an underlying instrument or the number of options which are needed to hedge a covered
option. The hedge ratio is determined by the size of the delta.
Hedging
This
is the process of establishing protection against loss caused through currency
fluctuations by buying a currency from a bank ahead of the time that it is needed or
selling a currency to a bank before it is received.
Hedging is
achieved by doing forward transactions with a bank.
IMF
International
Monetary Fund. Created as a result of the agreement concluded at Bretton
Woods in 1944 by the allied forces, the IMF became operational in Washington in 1946.
Its aim is to maintain orderly exchange practices. The IMF supports countries with balance
of payments problems by granting them loans. Switzerland is not a member of the IMF but
endeavours to cooperate in specific areas.
Implied volatility
Volatility.
Indication Rate
When a
client requires the rate of exchange between two currencies but
does not intend to deal in the currency, the bank will provide an Indication Rate that
will be an accurate estimate of the market rate at that moment in time.
Indirectly Quoted Currencies
An
indirectly quoted currency is one that has its value quoted against a base other than the
American dollar. An example of this would be the Pound Sterling, which is quoted as 1
pound equals ‘n’ American dollars.
Installments
An
installment is an amount of money either paid or received at regular intervals in
settlement of a debt. It is customary for these installments to be paid monthly,
quarterly, half yearly or annually depending on the nature of the debt.
Installment
payments as described above are referred to as balloon payments while a single payment in settlement of the
entire debt is called a bullet payment.
Inflation
Loss of
purchasing power of money caused by growth of the amount of money in circulation which, if
the supply of goods stays the same or only increases at a slower rate loads to an increase
in prices.
Initial margin
The amount
of margin which has to be deposited with the clearing house both by the buyer and the
seller through the respective broker and/or bank in order to establish a position in a
futures contract.
Interbank dealings
Dealings
between the banks.
Interest arbitrage.
The attempt to
make a profit out of differing interest rates for various maturities and/or various
instruments.
Intervention (on the foreign
exchange market)
Buying or
selling of the domestic currency against foreign currencies (normally against
US dollars), in order to support or weaken the exchange rate as the monetary authority
sees fit.
In-the-money
An option
is in-the-money in the following cases:
Call: market
price > strike price
Put: market
price < strike price
For European options, the market price has to be
replaced by the forward price of the underlying instrument on the expiry date of the
option.
Intrinsic
value
The
difference between the strike price of an option and the forward price of the underlying
security up to maturity, as long as the option is in-the-money.
The premium
of an option is made up of the time value and the intrinsic
value.
Invisible
balance
Comprises
transportation services; income and expenditure on travel services, insurances, licenses,
earnings and interest income from international capital
movements.
Key currency
Small
countries, which are highly dependent on exports, orientate their exchange rate to major
currencies in the global economy, the so-called key currencies
Legacy Currencies
These are the currencies that were replaced by the Euro. They comprise the following.
German Mark
French Franc
Dutch Guilder
Austrian Shilling
Belgian Franc
Finnish Markka
Italian Lira
Spanish Peseta
Portuguese Escudo
Irish Punt
Luxembourg Franc
Leverage
In options
terminology, this expresses the disproportionately large change in the premium in terms of
the relative price movement of the underlying instrument.
LIBID
Short for
London Interbank Bid rate. The interest rate at which banks in London are prepared to
accept each other's short-term deposits.
LIBOR
London
Inter Bank Offered Rate. This is the interest rate applied by banks in London when lending
to each other. The LIBOR Rate fluctuates and is not necessarily the same between the
various banks at a moment in time.
LIMEAN
Calculated
from the average of LIBOR
and LIBID.
Liquidity
1. A
Company's ability to meet its obligations at all times.
2. The availability of
liquid funds in an economy.
3. The possibility of being
able to carry out financial transactions without influencing the market.
Lombard
rate
The
interest rate applied to loans backed by collateral in the form of movable easily sold
assets (goods or securities).
Long
To be long
in a currency
means that ones claims in the currency exceeds ones debts in the currency. i.e. you have
more than you need.
Margin
Spread
between bid and offer rates.
Initial margin.
The good
faith deposit which the writer of an option or the buyer of a forward or futures contract
has to put up to cover the risk of adverse price movements.
Markup Premium.
Market Rate
The market
rate is the last accepted bid and offer rate made in the market.
Maturity Date
The
maturity date of a forward exchange contract or other agreement is the
date on which funds are transferred from one parties account to the other parties account
and the date on which interest charges commences. This is also referred to as the value
date of the contract or agreement.
Monetary system
The
authority of the state in matters of monetary policy. Determining the monetary unit, the
monetary authorities and the ways in which money is issued and the money supply can be
controlled.
Money creation
Increase in
money supply by the central or commercial banks.
Money market
Where
supply of and demand for short-term funds come together.
Money market operations
Comprises
the acceptance and re-lending of deposits (time deposits) on the money market.
New Fwd Value
See
Forward value.
Money supply
Amount of
domestic cash and deposit money available in an economy.
Non-resident Account
This is the
bank account held by a person who resides outside of the country in which the bank account
is held.
Nostro account
Own
accounts at another bank.
On the spot
A
transaction which is concluded in the current time. See spot transactions.
Option
The
contractually agreed right to buy (call option) or sell (put option) a specific amount of
an underlying instrument at a predetermined price on (European option) or up to a future date (American option).
Optional Date Contracts
At the
client's request, the bank will issue a forward exchange contract at a predetermined forward rate at which the client may demand delivery
or receipt of funds at his option on any day on or before the maturity date of the contract. This type
of contract differs from a fixed term contract in that the forward rate is valid
for the entire period of the contract and not only for the maturity date.
Original Forward Value
See
Forward Value.
OTC
Over-the-counter
market (off-board/off-floor trading of securities unlisted securities market). Securities
trading which is not arranged through exchanges nor tied to a specific place nor time.
OTC trading
OTC
(over-the-counter) trading takes place outside the normal exchanges. In contrast to the
latter, is not tied to a central set-up in any one place but is conducted mainly by
telephone and telex between traders, brokers and customers.
Out-of-the-money
An
option is out-of-the-money in the following cases:
Call: market
price < strike price
Put: market
price > strike price
For European options, the market price has to be
replaced by the forward price of the underlying instrument on the expiry date of the
option.
Outright
A forward
purchase or sale of foreign exchange which is not offset by a corresponding spot
transaction, i.e. which has not been contracted through swaps.
Overnight
Swap from
settlement date until the following business day, i.e. one day or three days over the
weekend.
Parity
Exchange
relationship of a currency to a legally binding reference i.e. to a specific amount of
gold to SDR's or to
other currencies.
Parity (official parity)
Predetermined
exchange rate relationship between two currencies.
Period of Grace
When
entering into a loan transaction, the party making the funds available may choose to allow
a period of time to elapse before repayment of the loan commences. This period is referred
to as a period of grace.
Pips
In foreign
exchange dealing the last decimal places of a price quotation are called pips for purposes
of simplicity (1/10th of 1 percent or 0.0001 of a unit). In futures trading the smallest
possible price fluctuation upwards or downwards (1 pip) is called a tick.
Premium and Discount
1. Premium markup (forward premium) or contango of a forward rate
against the spot rate.
2.
Corresponds to the price of an option, which the option buyer pays to the option writer.
The Premiums and Discounts reflect the interest rate differentials between
the centres of two relative currencies.
A premium
exists for an importer when the interest rate in the home country is higher than the
interest rate in the country imported from.
A discount exists for an importer when the interest rate in the home
country is lower than the interest rate in the country imported from.
A premium exists for an exporter when the interest rate in the home
country is lower than the interest rates in the country exported to.
A discount exists for an exporter when the interest rate in the home
country is higher than the interest rate in the country exported to.
Prime Rate
The
interest rate charged by banks to their first-class non-banking clients.
Public Rate
Based on market rates,
each morning the bank calculates an exchange rate for small sums. These rates are
normally valid for the entire day. They may vary depending on developments in the market.
These rates appear in newspapers and are higher than those obtained for large value
transactions.
Put option
Opposite of
call option.
Quotation
The price
quotation of a currency can be made either directly or indirectly. The direct quotation
gives the equivalent of a certain amount of foreign currency (normally in units of 1OO or
1) in domestic currency. It is less common for the indirect price quotation to be used: in
this case the domestic currency is valued in units of foreign currency.
Rate of Exchange
The value
of a currency
in relation to other currencies is said to be the rate of exchange between the two
currencies. Market forces of supply and demand determine this rate of exchange. The rate
may be influenced by central bank activity as it may trade in the market
to influence the rate of exchange.
Realignment
Simultaneous
and mutually coordinated re-and devaluation of the currencies of several countries. The
concept was first used in 1971 for the exchange rate corrections made in a number of
countries within the framework of the Smithsonian Agreement. Since then, it has mainly
been used to describe the exchange rate corrections within the EMS.
Revaluation
Opposite of
devaluation.
Risk position
An asset or
Iiability, which is exposed to fluctuations in value through changes in exchange rates or
interest rates.
Rollover
1. Extension of a maturing foreign exchange operation through the
conclusion of a swap agreement (e.g. tom/next swap).
2. Variability at an interest rate according to the appropriate, currently
prevailing rates on the Euromarket (normally LIBOR) for a
medium-term loan.
Rollover credit
Medium-term
credit with a variable interest rate, which is governed by the currently prevailing rates
on the Euromarket
(normally LIBOR).
SDR
Special
Drawing Rights.
Sell
In strict financial terms this refers to the currency that the bank sells. Please see
Bid and Offer. In the Forex ToolKit we have looked at it from you the users view point and it refers to you selling the currency. So if you are an exporter click the sell button to see the rate you would sell at.
Selling rate
Rate at
which a bank is willing to sell foreign exchange or to lend money.
Short
To be short
in a currency
means that ones debts in that currency exceeds ones claims in that currency. i.e. you need
more than you have got.
Special Drawing Rights (SDR)
Reserve
assets of the member states of the International Monetary Fund (Bretton-Woods system),
for which they can draw an amount of SDRs proportional to their predetermined quota in the
IMF. The value of an SDR is based on a currency basket (the last realignment was in
January 1991: $ = 40%, DM = 21%, Yen = 17%, GB£ = 11%, FF = 11%). Some countries define
the parity of
their currencies in SDR.
Spot Date
When
currency is traded "on the spot", the delivery of the funds will only take place
in two working days time. This allows for the documentation to be processed and forwarded
to the relevant parties.
The spot date is therefore two working days after the date on which the transaction is
done.
Spot/next
Swap
transaction, the spot side of which has the normal spot value date while the forward side
becomes due one business day later.
Spot operations
Foreign
exchange dealing in which settlement of the mutual delivery commitments is made at the
latest two days (normally on the second business day) after the transaction was carried
out.
Spot Rate
The Spot
Rate of a currency
is that exchange
rate at which a transaction takes place "on the spot". That is a transaction
with immediate effect. However, the delivery of the funds only takes place two business
days later. This is known as the spot date.
Spot Value
This is the value of the foreign currency converted at the
spot rate.
Squaring (positions)
Covering an
open position (securities, foreign exchange or commodities) by means of corresponding
contra business.
Stop loss order
An order to
buy (on a short position) or to sell (on a long position) foreign exchange if the rate
rises above or falls below a specific limit. As soon as the rate reaches the prescribed
limit, the order will be carried out at the next rate. Depending on the market situation,
this rate can differ considerably from the limit rate.
Strike price
Price at
which the option buyer obtains the right to purchase (call option) or sell (put option)
the underlying currency.
Striking price
Strike price.
Swap
Swap is the word used to describe a transaction that comprises a spot transaction and a simultaneous forward transaction. This would occur when doing early utilisation of or extensions to forward exchange contracts.
Swap transaction
Sale of one
currency
against another currency at a specific maturity and the simultaneous repurchase from the
same counterparty at a different maturity. Normally, one of the maturity dates will be
that of spot operations.
The Cable
This is the
buying or selling exchange rate between Sterling and the American
Dollar in London. It is quoted as 1 pound = ‘n’ dollars.
Third Currency
By
convention and because of the Bretton-Wood agreement, all currencies are traded via
the American Dollar. The American dollar is a common standard for all currencies. The home
currency is referred to as the Base currency. Third Currency currency is any currency that
is not the home currency or the American dollar.
Tau
Expresses
the price change of an option for a 1 percent change in the implied
volatility.
Technical analysis
Is
concerned with past price and volume trends - often with the help of chart analysis - in a
market, in order to be able to make forecasts about the future price developments of the
commodity being traded. Technical exchange rate analysis is often used in professional
dealing for short-term exchange rate forecasts.
Theta
This ratio
expresses the price change of an option (i.e. the change in the premium) over a period of
time (per time unit). Mathematically, this corresponds to the 1st derivative of the option
premium according to the time factor.
Tick
Pips.
Time deposits
Funds
invested in a bank for a pre-determined time and at a specific interest rate. Maturities
in Switzerland range from 3-12 months. For larger amounts, conditions can be freely
negotiable (maturity, interest rate).
Time value
This
corresponds to the value of an option, if the intrinsic
value is zero. It merely reflects possible price fluctuations of the underlying
instrument, so that at a later point in time the option could achieve an intrinsic value.
Tom/next
Swap
transaction, where the spot side becomes due on the business day following the day on
which the contract was concluded and where the forward side becomes due on the day after,
i.e. on the normal spot value date.
Trade balance
Current
balance, balance of payments.
Trade-weighted revaluation rate
The change
in value of a currency is ascertained in terms of an index against a basket of currencies.
The make-up of the currencies in the basket and their weighting are determined according
to the percentage of exports of the country whose currency is to be valued with its
trading partners.
Ultimo day
The last
business day or last stock trading day of a month.
Value date
Fixing of a
value date for accounting purposes on banking operations, i.e. the date on which the
interest accrual for the prospective accounting entry begins or ends.
Vega
Expresses
the price change of an option for a 1 percent change in the implied
volatility.
Volatility
Measure of
the relative deviation of a price from the mean.
Writer
The party
who writes an option (also known as the option seller). The writer undertakes the
obligation to carry out the conditions of the options contract according to the choice of
the option buyer during the whole life to maturity of the option. For this he receives a
premium which is paid to him by the buyer of the option. |