Aggregate
Total amount of exposure a bank has with a customer for both spot and forward contracts.
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American Option
An option which may be exercised at any valid business date throughout the life of the option.
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Appreciation
Describes a currency strengthening in response to market demand rather than by official action.
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Arbitrage
A risk-free type of trading where the same instrument is bought and sold simultaneously in two different markets in order to cash in on the difference in these markets.
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Around
Used in quoting forward "premium / discount".
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Ask Price
Ask is the lowest price acceptable to the buyer.
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Asset
In the context of foreign exchange it is the right to receive from a counterparty an amount of currency either in respect of a balance sheet asset (e.g. a loan) or at a specified future date in respect of an unmatched forward or spot deal.
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At Best
An instruction given to a dealer to buy or sell at the best rate that is currently available in the market.
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At or Better
An order to deal at a specific rate or better.
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At Par Forward Spread
When the forward price is equivalent to the spot price.
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At the Price Stop-Loss Order
A stop-loss order that must be executed at the requested level regardless of market conditions.
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At-the-Money
An option whose strike/exercise price is equal to or near the current market price of the underlying instrument.
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Auction
Sale of an item to the highest bidder. (1) A method commonly used in exchange control regimes for the allocation of foreign exchange. (2) A method for allocating government paper, such as US Treasury Bills. Small investors are given preferential access to the bills. The average issuing price is then computed on the basis of the competitive bids accepted. In some circumstances for government auctions it is the yield rather than the price which is bid.
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Average Rate Option
A contract where the exercise price is based on the difference between the strike price and the average spot rate over the contract period. Sometimes called an "Asian option".
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Back Office
Settlement and related processes.
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Back to Back
(1) Transaction where all the obligations and liabilities in one transaction are mirrored in a second transaction. (2) Transaction where a loan is made in one currency in one country against a loan in another country in another currency.
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Balance of Payments
A systematic record of the economic transactions during a given period for a country. (1) The term is often used to mean either: (i) balance of payments on "current account"; or (ii) the current account plus certain long term capital movements. (2) The combination of the trade balance, current balance, capital account and invisible balance, which together make up the balance of payments total. Prolonged balance of payment deficits tend to lead to restrictions in capital transfers, and or decline in currency values.
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Balance of Trade
The value of exports less imports. Invisibles are normally excluded, and is otherwise referred to as mercantile or physical trade. Figures can be quoted on FoB/ FaS , customs cleared, or FoB export.
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Band
The range in which a currency is permitted to move. A system used in the ERM.
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Bank Line
Line of credit granted by a bank to a customer, also known as a " line".
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Bank Notes
Bank notes are paper issued by the central or issuing bank and are legal tender, but are not usually considered to be part of the FX market. However bank notes can be converted, in some counties, into FX. Bank notes are normally priced at a premium to the current spot rate for a currency.
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Bank Rate
The rate at which a central bank is prepared to lend money to its domestic banking system.
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Barrier Option
A family of path dependent options whose pay-off pattern and survival to the expiration date depend not only on the final price of the underlying currency but also on whether or not the underlying currency breaks a predetermined price level at any time during the life of the option. See Down and Out call/put, Down and in call/put, Up and out call/put, Up and in call/put.
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Base Currency
The currency in which the operating results of the bank or institution are reported.
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Base Rate
A term used in the UK for the rate used by banks to calculate the interest rate to borrowers. Top quality borrowers will pay a small amount over base.
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Basis
The difference between the cash price and futures price.
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Basis Convergence
The process whereby the basis tends towards zero as the contract expiry approaches.
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Basis Point
One per cent of one per cent.
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Basis Price
The price expressed in terms of yield maturity or annual rate of return.
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Basis Trading
Taking opposite positions in the cash and futures market with the intention of profiting from favorable movements in the basis.
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Basket
A group of currencies normally used to manage the exchange rate of a currency. Sometimes referred to as a unit of account.
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Bear
A person who believes that prices will decline.
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Bear Market
A market in which prices decline sharply against a background of widespread pessimism (opposite of Bull Market).
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Bid Price
Bid is the highest price that the seller is offering for the particular currency at the moment; the difference between the ask and the bid price is the spread. Together, the two prices constitute a quotation; the difference between the two is the spread. The bid-ask spread is stated as a percentage cost of transacting in foreign exchange.
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Big Figure
Refers normally to the first three digits of an exchange rate that dealers treat as understood in quoting. For example a quote of "30/40" on dollar mark could indicates a price of 1.5530/40BIS: Bank of International Settlement.
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Bilateral Clearing
A system used where foreign currency is limited. Payments are usually routed through the central banks, and sometimes require that the trade balance is equaled every year.
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Binary Options
A binary "call" (or "step up") is like a standard European call option except that the pay off at expiry is fixed at one unit of the counter currency, if the call expires in the money.
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Black-Scholes Model
An option pricing formula initially derived by Fisher Black and Myron Scholes for securities options and later refined by Black for options on futures. It is widely used in the currency markets.
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Booked
The recording of a transaction outside the country where the transaction is itself negotiated.
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Boris
Slang for Russian trading.
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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.
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Break Out
In the options market, undoing a conversion or a reversal to restore the option buyer's original position.
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Bretton Woods
The site of the conference which in 1944 led to the establishment of the post war foreign exchange system that remained intact until the early 1970s. The conference resulted in the formation of the IMF. The system fixed currencies in a fixed exchange rate system with 1% fluctuations of the currency to gold or the dollar.
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Broker
An agent, who executes orders to buy and sell currencies and related instruments either for a commission or on a spread. Brokers are agents working on commission and not principals or agents acting on their own account. In the foreign exchange market brokers tend to act as intermediaries between banks bringing buyers and sellers together for a commission paid by the initiator or by both parties. There are four or five major global brokers operating through subsidiaries affiliates and partners in many countries.
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Brokerage
Commission charged by a broker.
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BUBA
Bundesbank, the reserve bank of Germany.
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Bull
A person who believes that prices will rise.
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Bull Market
A market characterized by rising prices.
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Bulldogs
Sterling bonds issued in the UK by foreign institutions.
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Bundesbank
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Butterfly Spread
(1) A futures butterfly spread is a spread trade in which multiple futures months are traded simultaneously at a differential. The trade basically consists of two futures spread transactions with either three or four different futures months at one differential.
(2) An options butterfly spread is a combination of a bear and bull spread trade in which multiple options months and strike prices are traded simultaneously at a differential. The trade basically consists of two options spread transactions with either three or four different options months and strikes at one differential
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Cable
A term used in the foreign exchange market for the US Dollar/British Pound rate.
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Cable Transfer
Telegraphic transfer of funds from one centre to another. Now synonymous with inter bank electronic fund transfer.
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Cable Transfer
Telegraphic transfer of funds from one centre to another. Now synonymous with inter bank electronic fund transfer.
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Call
An option that gives the holder the right to buy the underlying instrument at a specified price during a fixed period.
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Call Option
A call option confers the right but not the obligation to buy stock, shares or futures at a specified price.
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Capital Account
Juxtaposition of the long and short term capital imports and exports of a country.
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Carry
The interest cost of financing securities or other financial instruments held.
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Carry-Over Charge
A finance charge associated with the storing of commodities (or foreign exchange contracts) from one delivery date to another.
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Cash
Normally refers to an exchange transaction contracted for settlement on the day the deal is struck. This term is mainly used in the North American markets and those countries which rely for foreign exchange services on these markets because of time zone preference i.e. Latin America. In Europe and Asia, cash transactions are often referred to as value same day deals.
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Cash and Carry
The buying of an asset today and selling a future contract on the asset. A reverse cash and carry is possible by selling an asset and buying a future.
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Cash Settlement
A procedure for settling futures contract where the cash difference between the future and the market price is paid instead of physical delivery.
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CBOE
Chicago Board Options Exchange.
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CBOT or CBT
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CD
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Central Bank
A central bank provides financial and banking services for a country's government and commercial banks. It implements the government's monetary policy, as well, by changing interest rates.
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Central Rate
Exchange rates against the ECU adopted for each currency within the EMS.Currencies have limited movement from the central rate according to the relevant band.
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Certificate of Deposit (CD)
A negotiable certificate in bearer form issued by a commercial bank as evidence of a deposit with that bank which states the maturity value, maturity rate and interest rate payable. CDs vary in size with maturities ranging from a few weeks to several years. CDs may normally be redeemed before maturity only by sale on the secondary market but may also be redeemed back to issuing bank through payment of a penalty.
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CFTC
The Commodity Futures Trading Commission, the US Federal regulatory agency for futures traded on commodity markets, including financial futures.
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CHAPS
Clearing House Automated Payment System.
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Chartist
An individual who studies graphs and charts of historic data to find trends and predict trend reversals which include the observance of certain patterns and characteristics of the charts to derive resistance levels, head and shoulders patterns, and double bottom or double top patterns which are thought to indicate trend reversals.
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CHIPS
The New York clearing house clearing system. (Clearing House Interbank Payment System). Most Euro transactions are cleared and settled through this system.
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CIBOR
Copenhagen Interbank Rate, the rate at which the banks lend the Danish Krone on an unsecured basis. The rate is calculated daily by the Danmarks Nationalbank (the Danish Central Bank), based on rules set out by the Danish Banker's Association.
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Closed Position
A transaction which leaves the trade with a zero net commitment to the market with respect to a particular currency.
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Closing Purchase Transaction
The purchase of an option identical to one already sold to liquidate a position.
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CME
Chicago Mercantile Exchange.
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Coincident Indicator
An economic indicator that generally moves in line with the general business cycle such as industrial production.
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Comex
Commodity Exchange of New York.
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Commission
The fee that a broker may charge clients for dealing on their behalf.
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Compound Option
An option on an option, the dates and price of such option being fixed.
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Confirmation
A memorandum to the other party describing all the relevant details of the transaction.
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Contract
An agreement to buy or sell a specified amount of a particular currency or option for a specified month in the future (See Futures contract).
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Contract Expiration Date
The date on which a currency must be delivered to fulfill the terms of the contract. For options, the last day on which the option holder can exercise his right to buy or sell the underlying instrument or currency.
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Contract Month
The month in which a futures contract matures or becomes deliverable if not liquidated or traded out before the date specified.
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Correspondent Bank
The foreign banks representative who regularly performs services for a bank which has no branch in the relevant centre, e.g. to facilitate the transfer of funds. In the US this often occurs domestically due to inter state banking restrictions.
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Cost of Carry
The interest rate parity, where the forward price is determined by the cost of borrowing money in order to hold the position.
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Cost of Living Index
Broadly equivalent to Retail Price Index or Consumer price.
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Counterparty
The customer or bank with which a foreign exchange deal is executed.
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Counterparty Risks
Foreign Currency Inter-bank Exchange (FOREX) instruments are Positions (Buys and/or Sell) between the Client and its Counterparty and, unlike exchange-traded foreign exchange instruments which are, in effect, guaranteed by a clearing organization affiliated with the exchange on which the instruments are traded, are not guaranteed by a clearing organization. Thus, when the Customer purchases an OTC foreign exchange instrument, it relies on the Counterparty from which it has purchased the instrument to fulfill the contract. Failure of a Counterparty to fulfill a Position could result in losses of any prior payment made pursuant to the Positions as well as the loss of the expected benefit of the transaction.
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Country Risk
Factors that affect currency trading unique to the specific country include political, regulatory, legal and holiday risks.
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Coupon
(1) On bearer stocks, the detachable part of the hide behind nominee status. Certificate exchangeable for dividends.
(2) Denotes the rate of interest on a fixed interest security.
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Coupon Value
The annual rate of interest of a bond.
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Cover
(1) To take out a forward foreign exchange contract.
(2) To close out a short position by buying currency or securities which have been sold.
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Covered Interest Rate Arbitrage
An arbitrage approach which consists of borrowing currency A, exchanging it for currency B, investing currency B for the duration of the loan, and, after taking off the forward cover on maturity, showing a profit on the entire set of deals. It is based on the theorem of interest rate parity (one of the key theoretical economic relationships) which says that the return on a hedged foreign investment will just equal the domestic interest rate on investments of identical risk. When the covered interest rate differential between the two money markets is zero, there is no arbitrage incentive to move funds from one market to another.
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CPI
Consumer Price Index. Monthly measure of the change in the prices of a defined basket of consumer goods including food, clothing, and transport. Countries vary in their approach to rents and mortgages.
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CPSS
Committee on Payment and Settlement Systems.
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Crawling Peg (Adjustable Peg)
An exchange rate system where a country's exchange rate is "pegged" (i.e. fixed) in relation to another currency. The official rate may be changed from time to time.
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Credit Risk
The risk that a debtor will not repay; more specifically the risk that the counterparty does not have the currency promised to be delivered.
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Cross Deal
A foreign exchange deal entered into involving two currencies, neither of which is the base currency.
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Cross Hedge
A technique using financial futures to hedge different but related cash instruments based on the view that the price movements between the instruments move in concert.
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Cross Rate
An exchange rate between two currencies, usually constructed from the individual exchange rates of the two currencies, as most currencies are quoted against the dollar.
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Cross-Trade
A cross-trade transaction is a transaction where either the buy broker and the sell broker are the same, or the buy broker and the sell broker belong to the same firm.
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Currency
The type of money that a country uses. It can be traded for other currencies on the foreign exchange market, so each currency has a value relative to another.
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Currency Basket
Various weightings of other currencies grouped together in relation to a basket currency (e.g. ECU or SDR). Sometimes used by currencies to fix their rate often on a trade weighted basket.
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Current Account
The net balance of a country's international payment arising from exports and imports together with unilateral transfers such as aid and migrant remittances. It excludes capital flows.
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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 trade and invisible balances plus net receipt of interest, profits and dividends from abroad.
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Cycle
The set of expiration dates applicable to different classes of option
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Day Order
An order that if not executed on the specific day is automatically canceled.
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Day Trading
A Day Trading deal is a currency exchange deal which renews automatically every night at 22:00 (GMT time) starting the day the deal was made and until it ends. The deal ends in one of the following events:
1.Termination initiated by you.
2.The day trading rate has reached the Stop-Loss or Take Profit rate you predefined.
3.The deal end date.
As long as the deal is open, it is charged a renewal fee every night at 22:00 (GMT time).
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Deal Date
The date on which a transaction is agreed upon.
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Deal Ticket
The primary method of recording the basic information relating to a transaction.
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Dealer
An individual or firm acting as a principal, rather than as an agent, in the purchase and /or sale of securities. Dealers trade for their own account and risk in contrast to the brokers who trade only on behalf of their clients.
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Declaration Date
The latest day or time by which the buyer of an option must intimate to the seller his willingness or unwillingness to exercise the option.
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Deficit
Shortfall in the balance of trade, balance of payments, or government budgets.
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Delivery
The settlement of a transaction by receipt or tender of a financial instrument or currency.
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Delivery Date
The date of maturity of the contract, when the final settlement of transaction is made by exchanging the currencies. This date is more commonly known as the value date.
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Delivery Risk
A term to describe when a counterparty will not be able to complete his side of the deal. This risk is very high in case of over the counter transactions where there is no exchange which can stand as a guarantee to the trade between the two parties to the contract.
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Delta
The ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative. Also referred as the "hedge ratio".
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Delta Hedging
A method used by option writers to hedge risk exposure of written options by purchase or sale of the underlying instrument in proportion to the delta.
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Delta Spread
A ratio spread of options established as a neutral position by using the deltas of the options concerned to determine the hedge ratio.
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Depo
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Derivatives
A broad term relating to risk management instruments such as futures, options, swaps, etc. The contract value moves in relation to the underlying instrument or currency. The issue of derivatives and their control following large losses by banks and corporates has been subject of much debate.
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Desk
Term referring to a group dealing with a specific currency or currencies.
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Details
All the information required to finalize a foreign exchange transaction, i.e. name, rate, dates, and point of delivery.
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Devaluation
Deliberate downward adjustment of a currency against its fixed parities or bands which is normally accompanied by formal announcement.
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Direct Quotation
Quoting in fixed units of foreign currency against variable amounts of the domestic currency.
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Discount
Less than the spot price. For example, forward discount.
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Discount Rate
The rate at which a bill is discounted. Specifically it refers to the rate at which a central bank is prepared to discount certain bills for financial institutions as a means of easing their liquidity, and is more accurately referred to as the official discount rate
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Domestic Rates
The interest rates applicable to deposits domiciled in the country of origin. Value and values may vary from Eurodeposits due to taxation and varying market practices.
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Economic Exposure
Reflects the impact of foreign exchange changes on the future competitive position of a company in the sense of the impact it can have on the future cash flows of the company.
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Economic Indicator
A statistic which indicates current economic growth rates and trends such as retail sales and employment.
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ECU - European Currency Unit
A basket of the member currencies. As a composite unit, the ECU consists of all the European Community currencies, which are individually weighted. It was created by the European Monetary System with the eventual goal of replacing the individual European member currencies.
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Effective Exchange Rate
An attempt to summarize the effects on a country's trade balance of its currency's changes against other currencies.
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EFT
Electronic Fund Transfer.
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Either Way Market
In the Euro Interbank deposit market where both bid and offer rates for a particular period are the same.
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EMS
European Monetary System.
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EMU
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EOE
European Options Exchange.
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Epsilon
The change in the price of an option associated with a 1% change in implied volatility (technically the first derivative of the option price with respect to volatility). Also referred to as eta, vega, omega and kappa.
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ERM
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Euro Clear
A computerized settlement and depository system for safe custody, delivery of, and payment for Eurobonds.
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European Union
The group formerly known as the European Community.
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Exchange Rate Risk
The potential loss that could be incurred from an adverse movement in exchange rates.
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Exercise Price (Strike Price)
The price at which an option can be exercised.
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Exotic
A less broadly traded currency.
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Expiration Date
(1) Options - the last date after which the option can no longer be exercised.
(2) Bonds - the date on which a bond matures.
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Expiration Month
The month in which an option expires.
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Expiry Date
The last date on which an option can be bought or sold.
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Expiry Date
The last day on which the holder of an option can exercise his right to buy or sell the underlying security.
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Exposure
The total amount of money loaned to a borrower or country. Banks set rules to prevent overexposure to any single borrower. In trading operations, it is the potential for running a profit or loss from fluctuations in market prices.
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Fast Market
Rapid movement in a market caused by strong interest by buyers and/or sellers. In such circumstances price levels may be omitted and bid and offer quotations may occur too rapidly to be fully reported.
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Fed
The United States Federal Reserve. Federal Deposit Insurance Corporation Membership is compulsory for Federal Reserve members. The corporation had deep involvement in the Savings and Loans crisis of the late 80s.
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Fed Fund Rate
The interest rate on Fed funds. This is a closely watched short term interest rate as it signals the Feds view as to the state of the money supply.
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Fed Funds
Cash balances held by banks with their local Federal Reserve Bank. The normal transaction with these funds is an inter bank sale of a Fed fund deposit for one business day. Straight deals are where the funds are traded overnight on a unsecured basis.
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FEDAI
Foreign Exchange Dealers Association of India is an association of all dealers in foreign exchange which sets the ground rules for fixation of commissions and other charges and also determines the rules and regulations relating to day-to-day transactions in foreign exchange in India.
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Federal National Mortgage Association
A privately owned but US government sponsored corporation that trades in residential mortgages. Its activities are funded by the sale of instruments commonly known as Fannie Maes.
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Federal Reserve Board
The board of the Federal Reserve System, appointed by the US President for 14 year terms, one of whom is appointed for four years as chairman.
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Federal Reserve System
The central banking system of the US comprising 12 Federal Reserve Banks controlling 12 districts under the Federal Reserve Board. Membership of the Fed is compulsory for banks chartered by the Comptroller of Currency and optional for state chartered banks.
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Fiscal Policy
Use of taxation as a tool in implementing monetary policy.
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Fixed Exchange Rate
Official rate set by monetary authorities for one or more currencies. In practice, even fixed exchange rates are allowed to fluctuate between definite upper and lower bands, leading to intervention by the central bank.
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Fixing
A method of determining rates by normally finding a rate that balances buyers to sellers. Such a process occurs either once or twice daily at defined times. Used by some currencies particularly for establishing tourist rates . The system is also used in the London Bullion market.
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Flat/Square
Where a client has not traded in that currency or where an earlier deal is reversed thereby creating a neutral (flat) position. example: you bought $500,000 then sold $500,000 = FLAT .
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Float
(1) see Floating exchange rate.
(2) Cash in hand or in the course of being transferred between banks
(3) Federal Reserve Float arises from the system where cheques sent to the Federal Reserve Banks are credited sometimes in advance of the depositing bank loosening the reserve.
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Floating Exchange Rate
When the value of a currency is decided by the market forces dictating the demand and supply of that particular currency.
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Floor
(1) An agreement with a counterparty that sets a lower limit to interest rates for the floor buyer for a stated time.
(2) A term for an exchanges trading area (cf. screen based trading), normally the trading area is referred to as a pit in the commodities and futures markets.
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FOMC
Federal Open Market Committee, the committee that sets money supply targets in the US which tend to be implemented through Fed Fund interest rates etc.
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Foreign Exchange
The purchase or sale of a currency against sale or purchase of another.
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Foreign Position
It means a position under which one party agrees to purchase from or sell to the other party an agreed amount of foreign currency.
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Forex
An abbreviation of foreign exchange
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Forex Deal
The purchase or sale of a currency against sale or purchase of another currency. The maximum time for a deal is defined when the deal opens, the deal can be closed at any moment until the expiry date and time. A deal cannot be closed on its first 3 minutes, due to technical reasons.
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Forward Contract
Sometimes used as synonym for "forward deal" or "future". More specifically for arrangements with the same effect as a forward deal between a bank and a customer.
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Forward Cover Taking
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