Glossary

An interest rate swap under which a counter-party pays a vanilla floating reference rate, usually three or six months' LIBOR, and receives LIBOR plus a significant spread. Interest payments to this counterparty will only accrue on days when rates stay within a certain range dictated by preset upper and lower boundaries.

Can vary depending on context, but generally defined as the amount of exposure a customer has to the (potential) movement of spot and forward rates.

A vehicle which effectively enables American investors to own shares in foreign corporations. ADRS trade on exchanges like conventional securities. The sponsoring bank collects dividends, pays local taxes and converts them to dollars for distribution to American shareholders. It should be noted that ADRs are affected both by company performance and by changes in exchange rates.

An option which may be exercised at any time prior to expiration.

The simultaneous purchase and sale of an equivalent security in different markets, with the goal of profiting from pricing inconsistencies. In the context of currency trading, arbitrage applies to a mismatch in paired exchange rates between three currencies (triangular arbitrage) or an inefficiency between identical securities listed in different markets that arises from exchange rate fluctuation.

The price at which specific currency or contract can be purchased. In practice, this can be understood as the number on the right side of the quote, which is usually the higher price. For example, in the quote EUR/USD 1.4122/26, the ask price is 1.4126; meaning you can buy one Euro for 1.4126 US dollars. Opposite to bid price.

A hedging tool where a series of spot rate fixings during the life of an option are used to calculate an average rate. If the average rate is below the strike price, then the bank must settle the difference with the customer. Otherwise, the option expires worthless with no payment made. Average rate options are generally suited for those who need protection against adverse currency moves that still wish to retain full upside potential. Also known as an Asian Option.

Describes an an investor who believes that asset prices will fall.

The price at which a specific currency or contract can be sold. In practice, this can be understood as the number on the left side of the quote, which is usually the lower price. For example, in the quote EUR/USD 1.4122/26, the bid price is 1.4122; meaning you can sell one Euro for 1.4122 US dollars. Opposite of Ask/Offer price.

Refers to the buyer/holder of an option, who has the right but not the obligation to purchase the underlying security.

Contract in which the buyer has the right but not the obligation to purchase a particular security for a given strike price, on (in the case of European call options) or before (in the case of American call options) the expiration date.

A trading strategy involving the sale of low-yielding currency (funding currency) in favor of a higher-yielding (carry currency) alternative, with the goal of earning a return on the spread/differential. This differential is known as the 'carry'.

Trading unit. A standard lot in the forex market is $100,000. A mini lot is $10,000.

Agreement between a client and a provider to exchange the difference between the opening and the closing value of the contract.

Agreement between two parties to exchange principal and fixed rate interest payments on a loan in one currency for principal and fixed rate interest payments on an equal loan in another currency.

An approach to trading which involves entering and closing trades on the same day or trading session.

Financial instrument (forwards, futures, options, swaps) whose value is derived from an underlying security.

Bond in US dollars or other currency that is sold to investors who don't reside in the country whose currency is used.

Type of Eurobond that pays both interest and principal in euros, whose most salient feature is that they are not regulated by the SEC.

Currencies that are not actively traded; as opposed to 'major currencies'.

Value of a bond to be paid out at maturity. Also known as Par Value.

Derivative Agreement between two parties to buy or sell an asset at a certain future time for a certain price agreed today. This is in contrast to a spot contract, which is an agreement to buy or sell an asset today.

Standardized contract to buy or sell a specified commodity/asset of standardized quality at a certain date in the future, at a market determined price (the futures price). The contracts differ from forward contracts in that they are traded on a futures exchange.

Trading strategy implemented with the goal of reducing risk from adverse price movements that surrounds one's primary position. Typically involves taking an offsetting position in another security/currency, and/or using derivatives to limit downside.

The derived volatility of an asset calculated indirectly from options prices.

Investment funds which seek to mirror the returns of a market index by investing directly in the securities that make up that index.

Funds required to enter into a leveraged transaction, quoted as a percentage of the price of the asset.

Market open only to large financial institutions.

Refers to a trader that aims to achieve small and consistent, short-term (usually intra-day) profits.

The ability to borrow money to fund trading/investing activity. The amount that can be borrowed varies between brokers, and is quoted as a multiple of maximum position size to deposited funds.

Generally, a claim on a company's assets. In forex, the obligation to deliver to a counter-party an amount of currency at a specified future date, in connection to a forward or spot transaction.

Daily reference rate based on the interest rates at which banks borrow unsecured funds from other banks in the London interbank market. It is roughly comparable to the US federal funds rate.

Refers to the ability of an asset/currency to be easily converted through an act of buying or selling without causing a significant movement in the price and with minimum loss of value.

Standardized quantity in forex, composed of 100,000 units of a particular currency pair.

An investment strategy driven by macroeconomic considerations.

Minimum margin ratio above which margin account balances must remain. Falling below will trigger a margin call, whereby a customer will be requested to either deposit funds or sell securities in order to return the maintenance margin to an acceptable level.

Minimum deposit required to maintain an open position.

Oral or written notification requesting a customer to either deposit funds or sell securities in order to return the maintenance margin to an acceptable level.

Refers to any dealer who provides a two-way quote a bid and ask price in which they stand ready to buy or sell.

The ability to borrow money to fund trading/investing activity. The amount that can be borrowed varies between brokers, and is quoted as a multiple of maximum position size to deposited funds.

The index of the 225 leading stocks traded on the Tokyo Stock Exchange.

All options, usually separated into calls and puts, for a given underlying asset.

Currency listed second in a currency pairing.

Daily calculation of unrealized P&L (on open positions) based on the difference between the previous closing price and the current opening price. Also refers to a change in a country's exchange rate for a currency as a result of central bank intervention or other official action.

Refers to the use of financial instruments to manage exposure to risk, particularly credit risk and market risk.

Simultaneous closing of an open position for today's value date and the opening of the same position for the next day's value date at a price reflecting the interest rate differential between the two currencies.

Slang term for Open Position.

Ask or offer rate.

The act of selling a currency pair such that one is short the base currency and long the quote currency, with the goal of profiting from depreciation.

Physical exchange of one currency for another.

An open position that aims to capture gains from currency depreciation.

Refers to the phenomenon whereby the actual fill price differs from the expected fill price, as a result of a fast-moving market or broker error.

The act of buying or selling forex based on current (spot) prices, with settlement taking place two days later.

Difference between the bid and ask price for a given currency pair. Also known as Bid-Ask Spread.

Spread betting is a type of speculation that involves betting on the price movement of a currency pair without actually purchasing or selling lots.

The price at which a stop order is triggered. For purchases, the stop price acts as a minimum price you will pay if an investment is made. For sales, the stop price acts as the maximum price you will receive if a holding is sold.

Type of derivative in which two parties agree to exchange one stream of cash flows against another.

An order specifying the exact rate or number of pips from the current price point at which point a current position should be closed, and gains will be locked in.

Debt obligations of the US government that come in the form of bills (short-term), notes (medium-term), and bonds (long-term). Used as a risk-free benchmark for the pricing of US dollar-dominated securities.

The asset or currency on which the covered warrant, futures contract or option is based and derives its value.

Descriptive term that refers to a relatively simple financial instrument (option or other derivative), with standard features and no special or unusual characteristics. Opposite of Exotic Option.

Refers to the funds required to bring the margin ratio back up to the required level, calculated daily.

A measure of the amount of movement in the price/rate of a currency. Often used as a proxy for risk.