FX Glossary
A comprehensive guide to the most common terms used in foreign exchange and financial markets trading.
A
Appreciation
A currency is said to appreciate when its price rises.
Arbitrage
The purchase or sale of an instrument and simultaneous taking of an equal and opposite position in a related market, in order to take advantage of small price differentials between markets.
Ask (Offer)
Sometimes called the Offer Price, this is the market price for traders to buy currencies. Ask prices are shown on the right side of a quote, e.g. EUR/USD 1.1745 / 50 denotes that one EUR can be bought for 1.1750 USD.
Asset Allocation
An investment practice that divides capital among different types of asset classes in order to achieve a return that is proportionate to the investor's risk appetite.
Aussie (AUD)
The Australian Dollar.
B
Balance of Trade
Refers to the difference between a country's value of exports and imports. If Exports exceed Imports then a country is said to have a Trade Surplus. If a country's value of imports is greater than its exports, then the country is said to have a Trade Deficit.
Barrier/Option Barrier
A type of option which has a specified level which must not be broken in order for the option to be paid. This leads to the barrier being defended so the option barrier is not broken at a particular price level.
Base Currency
The currency in which the operating results of the bank or institution are reported.
Basel III
The latest of the three Basel accords which regulate the global banking system, with particular focus of the base capital requirements banks have to hold.
Basis Point
1 basis point is equivalent to 0.01% and is used to describe interest rate changes. For example, if the ECB increased interest rates to 1.50% from 1.25% this would be an increase of 25 basis points.
Basket
A group of currencies (as opposed to one single currency) normally used to measure the exchange rate of another currency. For example the USD-index is a measure of the USD against a basket of 16 other currencies.
Bear/Bearish
An investor who believes that a particular instrument or the overall market will fall in price. The opposite of Bull/Bullish.
Bid
The opposite of the Ask. It is the market price for traders to sell currencies. The Bid Price is shown on the left side of a quote, e.g. EUR/USD 1.1745 / 50 denotes that one EUR can be sold for 1.1745 USD.
Bid to Cover Ratio
A measure of demand for government debt that has been auctioned.
BIS
The Bank for International Settlements. The role of the body is to serve central banks in their pursuit of monetary and financial stability and foster international cooperation, acting as a bank for Central Banks globally.
BoC
The Bank of Canada.
BoE
The Bank of England. Also referred to as the Old Lady of Threadneedle Street.
BoJ
The Bank of Japan.
BRICS
An acronym that refers to the countries of Brazil, Russia, India, China and South Africa which are considered to be at a similar stage of newly advanced economic development.
BRL
The Brazilian Real.
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.
Buba
Shortened form of Bundesbank, the German central bank.
Bull/Bullish
An investor who believes that a particular instrument or the overall market will rise in price. The opposite of Bear/Bearish.
Bund
The benchmark German 10-year government bond. The term usually refers to the futures contract based on the underlying 10-year government bond.
C
Cable
The common name for the GBP/USD currency pair, originating from the old underwater communication cable linking the UK and USA.
CAC/CAC40
The primary French stock exchange.
CAD
The Canadian Dollar.
Call
A term related specifically to options, wherein Call refers to the right but not the obligation to buy an underlying asset.
Cash Market
Market place where financial instruments are traded and delivered for immediate delivery.
CBOT
The Chicago Board of Trade is the worlds oldest futures and options exchange which later merged with the CME and now acts as a market maker.
Central Bank
The generic name given to a country's primary monetary authority. For example, the Bank of England.
Clearer
Market term for a large bank, the term originates from those banks that clear cheques.
CME
The Chicago Mercantile Exchange, one of the largest futures and options exchanges in the world.
Commodity
The trading of physical substances such as Gold and Oil, whether in the spot or derivative markets.
Confederation of British Industry (CBI)
An influential lobbying organisation for UK business on national and international issues.
Consumer Confidence
The degree of optimism that consumers feel about the overall state of the economy.
Consumer Price Index (CPI)
A measure of the general change in price of a fixed basket of goods and services. This is one of the most important gauges of inflation.
Contagion
When a negative shock to a financial sector/system is transmitted to other healthier more sustainable sectors in an economy or country.
Corporate
A multinational corporation. Large corporations use the FX markets to hedge themselves against currency risk. For example, a company may have high revenues in USD's but high costs in EUR's.
Coupon
The interest rate payable to the holder of a bond by the issuer.
Crawling Peg
A type of currency peg which is adjusted periodically.
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.
Currency Risk
The possibility that currency depreciation will negatively affect the value of assets currently held, especially those denominated in a foreign currency.
Custodial Buyers
A Global Custodian processes cross-border securities trades, keeps financial assets safe and services the associated portfolios.
D
DAX
The primary German stock index.
Deflation
The rate at which prices for goods and services fall.
Depreciation
A currency is said to depreciate when its price falls.
Derivative
A financial product whose value is derived from an underlying asset, for example Futures or Options.
DKK
Shorthand for the Danish Krona, the national currency of Denmark.
Double-No-Touch (DNT)
A type of option which pre-defines a range for a specified time. For example, the owner of a 1.3000-1.3500 DNT would be paid if prices do not trade outside this range until expiry.
Dove/Dovish
Dovish refers to an economic outlook which generally supports lower interest rates. Doves take the position that lower interest rates are preferable with specific regard to inflation.
Dow Jones Industrial Average
A US stock index which includes the 30 largest blue-chip companies.
Downtick
A decrease in prices.
E
EUREX
A major global derivatives exchange.
Euribor
The interest rate for inter-bank lending in EUR between the primary banks in the Eurozone.
Euro (EUR)
The European single currency.
Eurogroup
The group of finance ministers that represent the EUR-member countries.
European Central Bank (ECB)
The central bank created to manage monetary policy for the Eurozone. It represents the EUR-member countries.
European Financial Stability Fund (EFSF)
The temporary instrument setup and funded by the European Union member countries to provide financial assistance to member countries that require it. To be replaced by the permanent European Stability Mechanism (ESM).
European Union (EU)
The economic association of over a dozen European countries which seek to create a unified, barrier-free market for products and services throughout the continent, as well as a common currency with a unified authority over that currency.
European/American Style Option
A European option can only be exercised on the expiry date. Compared to an American style option which can be exercised at any time prior to expiry.
EUROSTOXX 50
A stock index containing the fifty largest European companies by weighted market capitalisation.
Eurozone
The group of countries that use the EUR.
Exotic
A less broadly traded currency.
Expiry Date
The last day on which the holder of an option can exercise his right to buy or sell the underlying security.
F
Fade/Fading
A trading method whereby a trader places a trade after an initial spike in prices, usually after a data release, and tries to profit from the retracement of the initial move.
Fast Money
A market term for short term traders/scalpers who only hold a position for a very short period of time.
Federal Deposit Insurance Corporation (FDIC)
An organisation that preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and by limiting the effect on the financial system when a bank fails.
Federal Reserve (Fed)
The central bank of the United States of America.
Fibonacci Retracements
A form of technical analysis which uses the Fibonacci sequence as a basis for calculating support/resistance levels.
Fiscal Policy
Government budgetary policy, especially within taxation and borrowing.
Flat/Square
Where a client has not traded in that currency or where an earlier deal is reversed, thereby creating a neutral (flat) position.
Float
A currency can have its price fully determined by market forces, known as 'free-floating' or its price can be controlled by a government/central bank, known as a 'managed float'.
FOMC
The 12-member committee from the Federal Reserve that sets US monetary policy. It holds regular meetings at which the US interest rate is reviewed, with minutes of the meeting released to explain the views of the committee.
Forward
An over-the-counter contract obligating one party to buy and another party to sell a financial instrument, equity, commodity or currency at a specific future date.
FTSE/FTSE 100
The primary UK stock exchange.
Fundamental Analysis
Fundamental analysis focuses on key underlying economic and political factors to determine the direction of an instrument's value.
G
G20
A group comprised of the finance ministers and central bank governors of systemically important industrialised and developing economies to discuss key issues in the global economy.
G7
A group comprised of Canada, France, Germany, Italy, Japan, UK, and USA whose leaders meet one or more times every year to coordinate economic and monetary policies.
GBP
The Great British Pound.
Gilt
Market term for government bonds issued by the UK government.
Government Bond
A debt instrument issued by a government, through the Treasury or Debt Management Office, for a period of time with the purpose of raising capital by borrowing. A bond is a promise to repay the principal along with interest (coupons) on a specified date.
Gross Domestic Product (GDP)
Measures the value of goods and services produced within a country. GDP is the most comprehensive overall measure of economic output and provides key insight as to the driving forces of the economy.
H
Haircut
In lending the haircut refers to the difference between the value of a loan and the value of the collateral used to secure it.
Handle
A market term for the larger denominations when quoting a financial instrument's price. For example if EUR/USD moves in price from 1.4498 to 1.4502, it has traded with a '1.44 handle' then a '1.45 handle'.
Hard Currency
A currency that investors have confidence in.
Hawk/Hawkish
Hawkish refers to an economic outlook which generally supports higher interest rates. Hawks take the position that higher interest rates are preferable with specific regard to inflation.
Hedge
Taking an opposite position or trade to one that is already initiated in order to reduce risk.
Hedge Fund
A specific type of investment vehicle that explicitly pursues absolute returns on underlying investments through various trading strategies.
I
IFO (Information and Forschung)
An important German economic research institute and think tank which produces economic indicators of the German economy.
Illiquid Market
A market or currency pair which has a low volume of buy/sell orders and prices can therefore move a disproportionally large amount.
Inflation
The rate at which prices for goods and services rise.
Initial Public Offering (IPO)
The first sale of stock by a formerly private company. Following which they become publicly listed on a stock exchange.
INR
The Indian Rupee.
Institute of International Finance (IIF)
The global association of financial institutions. It supports the financial industry in managing risks, developing best practices and standards; and in advocating regulatory, financial, and economic policies.
Interbank Market
The market in which banks/financial institutions trade with each other. The term refers to short-term money or foreign exchange markets that are only accessible to banks or financial institutions.
International Monetary Fund (IMF)
An organization of 187 countries, working to foster global monetary cooperation, secure financial stability, promote high employment and sustainable economic growth.
Intervention
A policy tool in which a national central bank takes an active participatory role in influencing the country's currency exchange rate.
ISM (Institute for Supply Management)
An American organisation comprised of supply management professionals mainly from the manufacturing sector which produces several American economic indicators.
J
K
Kampo
The investment arm of the Japanese postal savings organisation which focuses on overseas investments and is active in the forex markets.
Kiwi (NZD)
The New Zealand Dollar.
L
LIBOR
Short for the London Inter-Bank Offered Rate. This rate is fixed daily by the British Bankers' Association and is the interest rate for inter-bank lending.
LIFFE (London International Financial Futures Exchange)
An association composed of the three largest future exchanges in the UK.
Limit Order
An order to transact at a specified price or better.
Long
The position which is in a buy direction. In forex, the primary currency when bought is long and the other is short.
Loonie
Market term for the CAD.
LSE
The London Stock Exchange.
M
Margin
The required initial deposit of collateral to enter into a position or foreign exchange trade. This is held as a deposit on any running contract.
Margin Call
A demand for additional funds to cover positions.
Market Maker
A firm that stands ready to buy and sell a particular asset class on a regular and continuous basis at a publicly quoted price in order to enhance liquidity, used particularly in stocks of companies.
Market Order
An order for immediate execution at the best available price.
Maturity
Associated with fixed income markets, referring to the date at which principal or redemption payments have to be repaid to the counterparty.
Models
Automated trading systems which use quantitative algorithms to buy/sell. Generally used by top end Hedge funds or large institutions.
Monetary Policy
The actions of a central bank, currency board or other regulatory committee that determines the size and rate of growth of the money supply, which in turn affects interest rates.
Month End
Fixings related to the adjustments that international portfolio managers need to make to their currency hedges based upon the performance of other asset classes they hold positions in. These portfolio managers usually reweigh their portfolios at the end of each month if moves were larger than anticipated.
Moving Average
A basic form of technical analysis which displays the average price of a security for a set period of time.
MPC (Monetary Policy Committee)
The 9-member committee from the Bank of England that sets UK monetary policy. It holds regular meetings at which the UK interest rate is reviewed, with minutes of the meeting released to explain the views of the committee.
N
NASDAQ
An American stock index which traditionally lists technology companies.
Nikkei 225
The primary Japanese index.
NOK
Shorthand for the Norwegian Krone, the national currency of Norway.
Nonfarm Payrolls
An economic indicator that measures the change in the number of employed people during the last month of all non-farming businesses. One of the primary economic indicators used for the US economy.
NYSE
The New York Stock Exchange.
O
Open Order
Buy or sell order that does not expire until cancelled.
Operation Twist
A method of lowering interest rates originally used by the US Federal Reserve in the 1960s. In practice the Fed sells short term duration securities and buys long term maturities in order to lower the interest rate on the 10-year note in particular which is the benchmark for other rates such as mortgages.
Option
A contract that grants the holder the right, but not the obligation, to buy or sell currency at a specified exchange rate during a specified period of time.
P
Parity
When a currency pair trades at 1.0000 or in other words when two currencies are worth the same.
Peg
An exchange rate for a currency where the government has decided to link the value to another currency or to some valuable commodity like gold.
People's Bank of China (PBOC)
The Chinese central bank.
Pip/Pips
The smallest unit of price for a currency pair. For example if EUR/USD increases in price from 1.4000 to 1.4005 it is said to have moved 5 pips.
PMI (Purchasing Manager's Index)
An indicator of the economic health of the manufacturing/services sector within a country.
Profit Taking
The unwinding of a position to realise profits.
Put
A term related specifically to options, wherein Put refers to the right but not the obligation to sell an underlying asset.
Q
Quantitative Easing (QE)
A method of stimulating the economy by a central bank, whereby it buys assets, typically government bonds, to inject extra liquidity into the economy.
R
Range
The difference between the highest and lowest price of a traded asset class recorded during a specified period.
Rating Agency
Independent agencies such as Moody's, Standard & Poor's and Fitch which assess the credit quality and likelihood of default of an issuer of debt and produce a rating to reflect this.
RBA
The Reserve Bank of Australia.
Real Money
A market term for institutional investors, typically large asset managers such as pension funds or money market funds.
Recession
A general slowdown in economic activity over a sustained period of time. Technically defined as two consecutive quarters of falling GDP.
Repo
Shorthand for 'Repurchase Operation' which is a contract in which a seller of securities agrees to buy them back at a specified time.
Reserve Currency
A currency held by a central bank on a permanent basis as a store of international liquidity; these are normally the USD, EUR and GBP.
Resistance
A term used in technical analysis to describe a price level where selling momentum for the asset exceeds the buying momentum, forming a ceiling that blocks price movements in the upward direction.
RUB
The Russian Ruble.
S
S&P 500
A leading American stock index which lists the top 500 companies from the NYSE and NASDAQ.
Scalping/Scalper
A trading style of holding a position for very short period of time, usually measured in seconds, and exiting after a small change in profitable price direction.
SEK
Shorthand for the Swedish Krona, the national currency of Sweden.
Semi-Official
Large institutional investors which sometimes invest in forex markets at the behest of a government.
Short
The opposite of 'Long', the position which is in a sell direction. In forex, the primary currency when sold is short and the other is long.
Short Covering/Short Squeeze
The purchase of an instrument to close out a short position. To close a position, an investor purchases the same number of assets that were sold short.
SNB
The Swiss National Bank.
Sovereign Rating
A measure of a country's creditworthiness with particular focus on the ratings given by the big three ratings agencies, Standard & Poor's, Moody's and Fitch.
Sovereign Wealth Fund
A fund created by a country which has large foreign exchange reserves in order to manage those reserves. For example, the China Investment Corporation.
Spot
The market for immediate delivery and settlement of currencies, or the current trading price for a currency pair.
Spread
The difference between the bid and ask price of a currency.
Stagflation
A negative phenomenon when a country/economy experiences low growth levels and rising prices i.e. inflation during the same period.
STIRS
Short-Term Interest Rate futures which are based on the various inter-bank lending rates such as Euribor.
Stop Order
An order to buy or to sell a currency when the currency's price reaches or passes a specified level.
Stop's/Stop-loss
An order which closes an open position at a pre-determined level after the market has moved against that trade. For example, if a trader was only prepared to lose 15 pips after buying EUR/USD at 1.4530, his stop loss would be at 1.4515.
Straddle
Options strategy that allows the holder to profit based on how much the price of the underlying security moves, regardless of the direction of price movement.
Strike Price
In options trading this is the fixed price at which the holder of the option is entitled to buy or sell.
Support
The opposite of resistance. A term used in technical analysis to describe a price level where buying momentum for the asset exceeds the selling momentum, forming a floor that blocks future price movements in the downward direction.
Swap
The simultaneous purchase and sale of the same amount of a given currency for two different dates, against the sale and purchase of another. Swapping is similar to borrowing one currency and lending another for the same period.
Swissy (CHF)
The Swiss Franc.
Systematically Important Financial Institution (SIFI)
A financial institution whose failure may pose systemic risks to the world economy.
T
T-Bill
Shorter term government debt issued at a discount from par value instead of having a coupon.
TALF (Term Asset-Backed Securities Loan Facility)
A programme created by the US Fed to spur consumer credit lending. Under the TALF the Fed lent USD 1 trillion.
TARP (Troubled Asset Relief Program)
A programme started in October 2008 whereby the US Treasury bought illiquid assets from banks and other financial institutions, thus allowing them to stabilise their balance sheets.
Technical Analysis
A method of evaluating securities by analysing statistics generated by historical market activity. Charts and other tools are used to identify patterns that can suggest future activity.
Tightening
When a central bank raises interest rates or otherwise conducts monetary policy in an attempt to reduce demand and curb inflation.
Toshin
Japanese investment funds which focus on investing in non-domestic assets and are active in the Forex markets.
Trading Pit/Floor
The area of an exchange where trade is conducted in the old open outcry manner as opposed to electronically.
TRL
The Turkish Lira.
Troika
An investigative body created and comprised of officials from the EU, ECB and IMF which periodically evaluate Eurozone countries involved in bailouts.
TSLF (Term Securities Lending Facility)
A 28-day lending facility managed by the Federal Reserve to enhance liquidity and foster proper functioning of the financial markets.
U
Unconvertible Currency
A currency that cannot be exchanged for another because of foreign exchange regulations.
Uptick
Opposite of downtick, an increase in prices.
USD
The United States Dollar, sometimes known as the 'Greenback'.
V
Vanilla
Typically used to describe the simplest type of option. Opposite of exotic.
Volatility
A measure of the amount by which an asset price is expected to fluctuate over a given period. Can also be implied from futures pricing, which is referred to as implied volatility.
Volatility Index (VIX)
An index measuring the implied volatility in the S&P 500 index, it is viewed as a leading forecasting tool for market behaviour.
W
Whipsaw
Market term for a condition of a highly volatile market where a sharp price movement is quickly followed by a sharp reversal.
Whisper Number
Analysts' predictions for earnings or economic indicators, which often become known to the public despite not being formally released.
Y
Yard
A common term for milliard, which denotes one thousand million.
Yield
The annual rate of return on an investment expressed as a percentage. It is calculated by dividing the coupon rate by the current price.
Yield Curve
A graph plotting the interest rate of a given security (most commonly government debt) for a range of different maturities.
Yuan (CNY)
The Chinese Yuan.
Z
ZEW (Centre for European Economic Research)
An important economic research institute and think tank which produces economic indicators particularly on the German economy but also for other European nations.