Arbitrage - The simultaneous purchase and sale of an instrument in two different markets to profit from a temporary price disparity
Baht - A market term for Thailand's currency
Base currency - The currency against which other currencies are quoted. For example, the primary base currency is the U.S. dollar.
Basis - The spot price minus the futures price
Basis point - A unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. It measures changes in interest rates or the difference between bond yields on fixed income securities. It is also used to refer to the percentage change in the value of an asset such as a stock. One basis point is equivalent to one hundredth of a percentage point (0.01%).
Best effort - An order to be executed at the best available price. Discretion is given to the dealer as to when to execute the order.
Bid - The rate at which a dealer is willing to buy the base currency
Cable - A market term used for the British Pound Sterling
Call option - An option that gives the holder the right (but not the obligation) to buy a fixed amount of currency from the option writer (option seller) on a future, or "forward," date at a specified exchange rate
Collar - An option contract that sets maximum and minimum exchange rate parameters that will be adhered to even if the market rate lies outside this range
Convertible currency - Currency which can be freely exchanged for other currencies or gold without special authorization from the appropriate central bank
Cost of carry - The cost of borrowing money in order to maintain a position. It is based on the interest parity which determines the forward price.
Credit line - The amount of foreign currency exposure a firm will allow a client to take
Credit risk - The idea that an outstanding currency position will not be repaid as agreed by the counterparty, either voluntarily or involuntarily. Also known as counterparty risk.
Cross rates - Often referred to as the exchange rate between any two currencies not involving the US dollar. In reality, however, all rates are technically cross rates.
Currency swaps - A way for a corporation with recurring cash flows in a foreign currency, or one seeking financing in a foreign country. With a currency swap, you simultaneously purchase and sell a given currency at a fixed exchange rate and then re-exchange those currencies at a future date allowing you to convert a stream of cash flows from one currency into another currency at a fixed exchange rate.
Daylight position limit - Position limits on a currency or aggregate on a series of currencies that a trader can carry during regular trading hours
Devaluation - Reduction in the external value of a currency. This occurs with free exchange rates via the foreign exchange market when 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.
Discount forward spread - The forward point that is subtracted from the spot to arrive at the forward price. This means that the foreign interest rate is lower than the U.S. rate for the period. This is also known as swap points.
EMU - (Economic and Monetary Union) of Europe. EMU is sometimes used more loosely to mean European Monetary Union. The goal of EMU was to create a single European market for goods and services. The creation of the Euro was a major step towards this goal. Currently, all EMU members have transitioned fully to the Euro with the exception of Denmark, Sweden, and the UK, all of which have not adopted the Euro.
EMU members are: - Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, and Spain
Euro - A market term for European currency
Exchange rate - Price of a foreign currency expressed in domestic currency. For example, $/CHF = 1.5 means that one US dollar costs 1.5 Swiss francs.
Exchange rate depreciation - Currency which loses in value against one or more currencies
Exchange rate risk - The potential loss that could be incurred from an adverse movement in exchange rates
Exotic currency - A currency with little liquidity and limited dealing which is neither a major nor minor currency
Fixed exchange rate - Official rate of exchange set by monetary authorities for one or more currencies. In practice, some fixed exchange rates are allowed to fluctuate between defined upper and lower bands.
Floating exchange rate - When the value of a currency is decided by supply and demand
Foreign currency draft - An international check which is drawn in one currency and made payable in another
Foreign exchange trading - Buying and selling of foreign currency, holding currency positions, trading foreign exchange arbitrage, or foreign exchange speculation in the foreign exchange market
Forward contract - Contract struck at the forward rate guaranteed and settlement done
Forward outright - A foreign exchange deal with a maturity beyond the spot delivery date
Forward spread - Refers to the forward premium or discount at which the forward price trades. The forward price is calculated with the spot price, interest rate differential, and days to delivery.
Forward transactions - A way of eliminating exchange rate risk when you are to receive or make a foreign currency payment in the future. A forward transaction enables you to buy or sell a currency at a fixed rate on a specified future date. By linking this date to the date of your currency payment, you lock in the exchange rate you want and eliminate the risk of future volatility.
Global check clearing - Receiving payment in the form of foreign currency denominated or US dollar checks drawn on foreign banks
Hedging - A hedging transaction is one which protects an asset or liability against a fluctuation in the foreign exchange rate
Interest rate - Interest rates may be determined by a simple rule using the bid and offer spread on a foreign exchange rate. If the rate quoted is in European terms and the offered price is higher than the bid, then you know that the interest rate in that nation is higher than the rate in the base nation for the particular time in question.
International ACH - International Automated Clearing House (IACH) payments are high volume, non-urgent, and often repetitive cross-border payments. The primary sources for these low-value foreign currency payments are supplier payments, payroll, and personal remittances made to foreign countries.
International payment solutions - Global Exchange offers a wide array of cross-border payment solutions within an FDIC-regulated environment - offering any size business the highest level of oversight and protection, competitive exchange rates, and unmatched global accounts payable services
Kiwi - A market term for the New Zealand Dollar
Koruna - A market term for Czech currency
Krone - A market term for Danish currency
Libor - London Interbank Offered Rate. This is the rate at which banks will lend to each other, set at 11 a.m. London time.
Major currency - The Euro, d-mark, Swiss franc, British pound, and Japanese yen
Mark-to-market - A system by which futures contracts and other markets are revalued using closing market prices to determine cash flow requirements for margin purposes
Market maker - One that consistently makes two way prices, providing both a bid and an offer. Unlike brokers, market makers trade their capital, although they will hedge.
Maturity - Date for settlement
Minor currency - The Canadian dollar, the Australian dollar, and the kiwi are examples of minor currencies
Non-Deliverable forwards - A way to hedge exposures in emerging market currencies where a conventional forward market does not exist or is restricted. Like a conventional forward, a non-deliverable forward makes it possible to hedge future currency exposure. However, in contrast to a conventional forward, a non-deliverable forward is settled in U.S. dollars and involves no physical exchange of foreign currencies at maturity.
Offer - The price for which a willing seller will sell the asset
Office of the Comptroller of the Currency - The Office of the Comptroller of the Currency (OCC) charters, regulates, and supervises all national banks. It also supervises the federal branches and agencies of foreign banks. Headquartered in Washington, D.C., the OCC has four district offices plus an office in London to supervise the international activities of national banks. The OCC was established in 1863 as a bureau of the U.S. Department of the Treasury. The OCC is headed by the Comptroller, who is appointed by the President, with the advice and consent of the Senate, for a five-year term. The Comptroller also is a director of the Federal Deposit Insurance Corporation and NeighborWorksÂ® America. The OCC's nationwide staff of examiners conducts on-site reviews of national banks and provides sustained supervision of bank operations. The agency issues rules, legal interpretations, and corporate decisions concerning banking, bank investments, bank community development activities, and other aspects of bank operations. National bank examiners supervise domestic and international activities of national banks and perform corporate analyses. Examiners analyze a bank's loan and investment portfolios, funds management, capital, earnings, liquidity, sensitivity to market risk, and compliance with consumer banking laws, including the Community Reinvestment Act. They review the bank's internal controls, internal and external audit, and compliance with law. They also evaluate bank management's ability to identify and control risk.
Open position - Any deal which has not been settled by a physical payment or reversed by an equal and opposite deal for the same value date
Outright rate - The forward rate of a foreign exchange deal based on the spot price plus or minus the forward adjustment which represents the difference in interest rates between the two currencies
Overnight position limit - Position limits on a currency or aggregate on a series of currencies that a trader can carry during overnight trading hours. These limits are usually smaller than daylight position limits.
Pip - The term used in the Over the Counter (OTC) currency markets to denote the smallest incremental move an exchange rate can make
Positive carry - A market position whereby the currency owned pays a higher rate of interest than that of the currency borrowed, resulting in a positive cash flow
Pound sterling - A market term for the British pound (GBP).
Premium - Forward points corresponding to interest rate differentials that are added to the spot rate; price of an option that the option buyer pays to the option writer
Premium forward spread - Forward point added to the spot price to determine a forward price. A forward premium means that the foreign interest rate is higher than the U.S. rate for the period.
Purchasing power parity - This states that the price for a good in one nation should be equal to the price of the same good in any other nation, all things being equal, exchanged at the current rate
Quotation American terms - A quotation that reflects the number of used units per foreign currency
Quotation European terms - A quotation that reflects the number of foreign currency units per US dollars
Rollover - A transaction designed for spot deals whereby the delivery is extended and "exchanged" from the old spot delivery date to the current spot delivery date. Swap points are either subtracted or added reflecting either a positive or negative cost of carry.
Rupee - A market term for Indian currency
Settlement - Actual physical exchange of one currency for another between principal and client
Spot contract - Spot means the settlement date is two business days forward
Spot deal - An foreign exchange deal whereby a party will deliver a certain currency against receiving a certain amount of another currency based on an agreed upon rate from another party within two business days; or one day for the Canadian dollar (CAD) - the exception
Spot rate - The rate of a foreign exchange contract for immediate delivery. Also known as a spot indication.
Two-way price - A quotation with both the bid and offer price
Value date - Settlement date of a spot or forward deal
Variation Margin - The margin necessary to fully cover any losses by a trader. Variation margin is required to bring the account back up to the initial margin requirements.
Volatility - A measure of price fluctuations
Window forwards - A window forward contract gives you a range of days (a "window" of time) on which to buy or sell the foreign currency. Window forwards are often used when there is uncertainty regarding the actual payment date.
Wire - Electronic fund transfers, a SWIFT wire, or a locally cleared electronic payment service
Won - A market term for Korean currency