The apportionment of premiums and discounts on forward exchange transactions that relate directly to deposit swap (Interest Arbitrage) deals, over the period of each deal.


The underlying assets or instruments which are traded in the cash market.

Adjustable Peg

Term for an exchange rate regime where a country's exchange rate is "pegged" (i.e. fixed) in relation to another currency, often the dollar or French Franc, but where the rate may be changed from time to time. This was the basis of the Bretton Woods system. See peg, and crawling peg.


Official action normally by either change in the internal economic policies to correct a payment imbalance or in the official currency rate or.

Agent Bank

1. A bank acting for a foreign bank.

2. In the Euro market - the agent bank is the one appointed by the other banks in the syndicate to handle the administration of the loan.

Aggregate Demand

Total demand for goods and services in the economy. It includes private and public sector demand for goods and services within the country and the demand of consumers and and firms in other countries for good and services.

Aggregate Risk

Size of exposure of a bank to a single customer for both spot and forward contracts.

Aggregate Supply

Total supply of goods and services in the economy from domestic sources (including imports) available to meet aggregate demand.


Difference in the value between currencies. Also used to describe percentage charges for conversion from paper money into cash, or from a weak into a strong currency.


Describes a currency strengthening in response to market demand rather than by official action.


The simultaneous purchase and sale on different markets, of the same or equivalent financial instruments to profit from price or currency differentials. The exchange rate differential or Swap points. May be derived from Deposit Rate differentials.

Arbitrage Channel

The range of prices within which there will be no possibility to arbitrage between the cash and futures market.


Used in quoting forward "premium / discount". "Five-five around" would mean five point on either side of the present spot value.

Asset Allocation

Dividing instrument funds among markets to achieve diversification or maximum return.


The price at which the currency or instrument is offered.


In the context of foreign exchange 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.

At Best

An instruction given to a dealer to buy or sell at the best rate that can be obtained.

At or Better

An order to deal at a specific rate or better.

Authorized Dealer

A financial institution or bank authorized to deal in foreign exchange.



Someone who believes the prices/market will decline.

Bear Market

A market in which prices decline sharply against a background of widespread pessimism (opposite of Bull Market).



The price that a buyer is prepared to purchase at; the price offered for a currency.


Bid/Ask Spread

See spread


Bretton Woods Accord of 1944

An agreement that established fixed foreign exchange rates for major currencies, provided for central bank intervention in the currency markets, and set the price of gold at US $35 per ounce. The agreement lasted until 1971. See More on Bretton Woods.



Someone who believes the prices/market will rise.


Bull Market

A market characterised by rising prices.



An agent who handles investors' orders to buy and sell currency. For this service, a commission is charged which, depending upon the broker and the amount of the transaction, may or may not be negotiated.



Dealers slang for the Sterling/US Dollar exchange rate.


Call Rate

The overnight interbank interest rate.


Cash Market

The market for the purchase and sale of physical currencies.


Convertible Currency

Currency which can be freely exchanged for other currencies or gold without special authorisation from the appropriate central bank.


Counter party

The customer or bank with whom a foreign deal is made. The term is also used in interest and currency swaps markets to refer to a participant in a swap exchange.


Cross Rate

An exchange rate between two currencies, usually constructed from the individual exchange rates of the two currencies, measured against the United States dollar.


Currency Risk

The risk of incurring losses resulting from an adverse change in exchange rates.


Currency Swap

Contract which commits two counter-parties to exchange streams of interest payments in different currencies for an agreed period of time and to exchange principal amounts in different currencies at a pre-agreed exchange rate at maturity.


Currency Option

Option contract which gives the right to buy or sell a currency with another currency at a specified exchange rate during a specified period.


Currency Swaption

OTC Option to enter into a currency swap contract.


Currency Warrant

OTC Option; long-dated (more than one year) currency option.


Day Trading

Refers to opening and closing the same position or positions within one day's trading.

Dollar Rate

When a variable amount of a foreign currency is quoted against one US Dollar, regardless of where the dealer is located or in what currency he is requesting a quote. The exception is the Sterling/US Dollar rate (cable) which is quoted as variable amount of US Dollars to one Sterling.



Abbreviation for European Monetary System, an agreement between member nations of the European Union to maintain an alignment between the exchange rates of their respective currencies.


European Monetary Union

The principal goal of the EMU is to establish a single European currency called the Euro, which will officially replace the national currencies of the member EU countries in 2002. Currently, the Euro exists only as a banking currency and for paper financial transactions and foreign exchange. The current members of the EMU are Germany, France, Belgium, Luxembourg, Austria, Finland, Ireland, the Netherlands, Italy, Spain and Portugal.


Exchange Rate Risk

See Currency Risk.


Federal Reserve (Fed)

The Central Bank of the United States.


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.


Flat / Square

To be neither long nor short is the same as to be flat or square. One would have a flat book if he has no positions or if all the positions cancel each other out.


Floating Rate Interest

As opposed to a fixed rate, the interest rate on this type of deal will fluctuate with market rates or benchmark rates. One example of a floating rate interest is a standard mortgage.


Foreign Exchange Swap

Transaction which involves the actual exchange of two currencies (principal amount only) on a specific date at a rate agreed at the time of the conclusion of the contract (short leg), at a date further in the future at a rate agreed at the time of the contract (the long leg).

Foreign Exchange (or Forex or FX)

The simultaneous buying of one currency and selling of another in an over-the-counter market. Most major FX is quoted against the US Dollar.



A deal that will commence at an agreed date in the future. Forward trades in FX are usually expressed as a margin above (premium) or below (discount) the spot rate. To obtain the actual forward FX price, one adds the margin to the spot rate. The rate will reflect what the FX rate has to be at the forward date so that if funds were re-exchanged at that rate there would be no profit or loss (i.e. a neutral trade). The rate is calculated from the relevant deposit rates in the 2 underlying currencies and the spot FX rate. Unlike in the futures market, forward trading can be customized according to the needs of the two parties and involves more flexibility. Also, there is no centralized exchange.


Fundamental Analysis

Thorough analysis of economic and political data with the goal of determining future movements in a financial market.



" Good Till Cancelled". An order left with a Dealer to buy or sell at a fixed price. The order remains in place until it is cancelled by the client.



The practice of undertaking one investment activity in order to protect against loss in another, e.g. selling short to nullify a previous purchase, or buying long to offset a previous short sale. While hedges reduce potential losses, they also tend to reduce potential profits.



Usually the highest traded price and the lowest traded price for the underlying instrument for the current trading day.


Initial Margin

The required initial deposit of collateral to enter into a position as a guarantee on future performance.


Interbank Rates

The Foreign Exchange rates at which large international banks quote other large international banks.


Limit Order

An order to buy at or below a specified price or to sell at or above a specified price.


Long Position

A market position where the Client has bought a currency he previously did not hold own. Normally expressed in base currency terms, e.g., long Dollars (short D.Marks).



Customers must deposit funds as collateral to cover any potential losses from adverse movements in prices.


Margin Call

A demand for additional funds. A requirement by a clearing house that a clearing member (or by a brokerage firm that a client) brings margin deposits up to a required minimu m level to cover an adverse movement in price in the market.


Market Maker

A dealer who supplies prices and is prepared to buy or sell at those stated bid and ask prices. A market maker runs a trading book.



Date for settlement.



The price, or rate, that a willing seller is prepared to sell at.

One Cancels Other Order (O.C.O. Order)

A contingent order where the execution of one part of the order automatically cancels the other part.


Open Position

Any deal which has not been settled by physical payment or reversed by an equal and opposite deal for the same value date.

Over The Counter (OTC)

Used to describe any transaction that is not conducted over an exchange.


Overnight Trading

Refers to a purchase or sale between the hours of 9.00 pm and 8.00 am. on the following day.


Pip (or Points)

The term used in currency market to represent the smallest incremental move an exchange rate can make. Depending on context, normally one basis point (0.0001 in the case of EUR/USD, GBD/USD, USD/CHF and .01 in the case of USD/JPY).


Political Risk

The uncertainty in return on an investment due to the possibility that a government might take actions which are detrimental to the investor's interests.



A price level at which you would expect selling to take place.


Risk Capital

The amount of money that an individual can afford to invest, which, if lost would not affect their lifestyle.



Where the settlement of a deal is rolled forward to another value date based on the interest rate differential of the two currencies.



Actual physical exchange of one currency for another.



To go `short` is to have sold an instrument without actually owning it, and to hold a short position with expectations that the price will decline so it can be bought back in the future at a profit.



A transaction that occurs immediately, but the funds will usually change hands within two days after deal is struck.



The difference between the bid and offer (ask) prices; used to measure market liquidity. Narrower spreads usually signify high liquidity.


Stop Loss Order

An order to buy or sell at the market when a particular price is reached, either above or below the price that prevailed when the order was given.


Support Levels

A price level at which you would expect buying to take place.


Technical Analysis

An effort to forecast future market activity by analyzing market data such as charts, price trends, and volume.


Tomorrow to Next

Simultaneous buying and selling of a currency for delivery the following day and selling for the next day or vice versa.


Two-Way Price

Rates for which both a bid and offer are quoted.


US Prime Rate

The rate at which US banks will lend to their prime corporate customers.


Value Date

Settlement date of a spot or forward deal.


Variation Margin

An additional margin requirement that a broker will need from a client due to market fluctuation.



A statistical measure of a market or a security's price movements over time and is calculated by using standard deviation. Associated with high volatility is a high degree of risk