Glossary of Forex and Risk Management Terms

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.

Aggregate Risk
Total amount of exposure a bank has with a customer for both spot
and forward contracts.

Ask
The price at which the currency or instrument is offered.

Base Price
One hundredth of a percentage point. 50 basis points [50bp] is half a
percentage point.

Bid
The price at which market maker is prepared to buy the currency

Bid-Offer Spread
The difference between the buy (bid) and sell (offer) price of a
currency or financial instrument.

Buying Rate
Rate at which a bank is prepared to buy foreign exchange. Also known
as the Bid Rate.

Buying Selling FX
Buying and selling in the foreign exchange market always happens in
the currency which is quoted first. "Buy dollar/mark" means buy the
dollar/sell the mark. Traders buy when they expect a currency's value
to rise and sell when they expect a currency to fall.

Cable/Sterling
A term used in the foreign exchange market for the US Dollar/British
Pound rate.
Call
(1) An option that gives the holder the right to buy the underlying
instrument at a specified price during a fixed period.
(2) A period of trading.
(3) The right of a bond issuer to pre-pay debt and demand the
surrender of its bonds.

CHIPS
(Clearinghouse House Interbank Payment System) A computerised
system used for foreign exchange dollar settlements.

CHAPS
Clearing House Automated Payment System.

Closed position
A transaction which leaves the trade with a zero net commitment to
the market with respect to a particular currency.

Country Risk
This risk deals with government intervention or otherwise, central
bank intervention excepted. Examples include war, the freezing of
foreign funds, political pressures on the banking system, etc.

Credit Risk
This type of risk deals with the counter party to any fx transaction. An
outstanding currency position may not be closed out due to the failure
of the counter party for whatever reason.

Cross-Rate
The exchange rate between two currencies, e.g., Yen /French franc.

Day Trader
Speculators who take positions in commodities which are then
liquidated prior to the close of the same trading day.

Deal Ticket/Deal Slip

The primary method of recording the basic information relating to a
transaction.

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.
Delivery Date
The date of maturity of the contract, when the exchange of the
currencies is made. This date is more commonly known as the value
date in the FX or Money markets.

Delivery Risk
A term to describe when a counterparty will not be able to complete
his side of the deal, although willing to do so.

Delivery
The settlement of a futures contract by receipt or tender of a financial
instrument or currency.

Derivatives
A collective term for securities whose prices are based on the prices of
another (underlying) investment. The main derivatives are Futures,
Options, Swaps, Warrants, Convertibles

Direct Quotation
Quoting in fixed units of foreign currency against variable amounts of
the domestic currency.

Discount
Forward rate is lower than spot rate (2) an option that is trading for
less than its intrinsic value.

Economic Exposure
Reflects the impact of foreign exchange changes on the future
competitive position of a company. This relates to changing exchange
rates and its' affect on the cash flow and earning power of a
corporation. Import/Export companies are particularly affected by
economic exposure.

Exchange Rate Risk

Deals with the risk associated with the spot price. It is affected by the
supply and demand of foreign exchange worldwide.

Exercise Price (Strike Price)

The price at which an option may be exercised.

Expiry Date
The last day on which the holder of an option can exercise his right to
buy or sell the underlying security.
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.

Forward
A forward / forward deal is one where both legs of the deal have value
dates greater than the current spot value date.

Forward Spread (forward points or forward pips)

Forward price used to adjust a spot price to calculate a forward price.
It is based on the current spot exchange rate, interest rate differential
and the number of days to delivery.

Futures
Exchange-traded contracts. They are firm agreements to deliver (or
take delivery of) a standardized amount of something on a certain
date at a predetermined price. Futures exist in currencies, money
market deposits, bonds, shares and commodities. The Chicago Board
of Trade's Treasury bond future is the world's most actively-traded
derivative contract. The Chicago Mercantile Exchange's Eurodollar
contract has the world's largest open interest.

Gap
The price Gap between consecutive trading ranges ( i.e. the low of the
current range is higher than the high of the previous range) Gap could
also be interest rate gaps, maturity gaps etc.

Gross Settlement
A process where full payment of each transaction is made rather than
clearing a group of transactions as currently occurs in the FX market.
A method designed to eliminate capital risk.

Hedging
A strategy used to offset market risk, whereby one position protects
another. Transactions undertaken to reduce the volatility in portfolio
value. This is accomplished by taking the opposite side of ones'
portfolio exposure similar to insurance. The instruments used are
varied and include forwards, futures, options, and combinations of all
of them.
In-the-Money
A call option is in-the-money if the price of the underlying instrument
is higher than the exercise/strike price. A put option is in-the-money if
the price of the underlying instrument is below the exercise/strike
price.

Inter-bank Rates
The bid and offer rates at which international banks place deposits
with each other. The basis of the Interbank market.

Interest Arbitrage
Switching into another currency by buying spot and selling forward,
and investing proceeds in order to obtain a higher interest yield.
Interest arbitrage can be inward, i.e. from foreign currency into the
local one or outward, i.e. from the local currency to the foreign one.
Sometimes better results can be obtained by not selling the forward
interest amount. In that case some treat it as no longer being a
complete arbitrage, as if the exchange rate moved against the
arbitrageur, the profit on the transaction may create a loss.

Interest Rate Options

An agreement permitting a party to obtain a particular interest rate,
issued both OTC and by exchanges.

Interest Rate Cap

An agreement that provides the buyer of a cap with a maximum
interest rate for future borrowing requirements.

Interest Rate Collar

A combination of a cap and a floor to provide maximum and minimum
interest rates for borrowing or lending.

Interest Rate Floor

An agreement which provides the buyer of the floor with a minimum
interest rate for future lending requirements.

Interest Rate Swaps

An agreement to swap interest rate exposures from floating to fixed or
vice versa. There is no swap of the principal. It is the interest cash
flows be they payments or receipts that are exchanged.
Intra-Day limit
Limit set by bank management on the size of each dealer's Intra Day
Position.

Intra-Day Position
Open positions run by a dealer within the day. Usually squared by the
close.

Ladder
Dealers analysis of the forward book or deposit book showing every
existing deal by maturity date, and the net position at each future date
arising.

Liability
In terms of foreign exchange , the obligation to deliver to a
counterparty an amount of currency either in respect of a balance
sheet holding at a specified future date or in respect of an un-matured
forward or spot transaction.

LIBOR
The London Interbank Offered Rate, the rate charged by one bank to
another for lending money.

Limit
(1) The maximum price fluctuation permitted by an exchange from the
previous session's settlement price for a given contract. (2) In
international banking the limit a bank is willing to lend in a country.
(3) The amount that one bank is prepared to trade with another. (4)
The amount that a dealer is permitted to trade in a given currency.

Limited Convertibility
When residents of a country are prohibited from buying other
currencies even though non-residents may be completely free to buy
or sell the national currency.

Liquidation
Any transaction that offsets or closes out a previously established
position.

Liquidity
The ability of a market to accept large transactions.
Long Dated Shorts
A forward purchase and sale with a brief uncovered position between
them. This may also be referred to as long short dates.

Long
The holding of an excess of a particular currency .

Maintenance Margin
The minimum margin which an investor must keep on deposit in a
margin account at all times in respect of each open contract.

Make a Market
A dealer is said to make a market when he or she quotes bid and offer
prices at which he or she stands ready to buy and sell.

Managed Float
When the monetary authorities intervene regularly in the market to
stabilise the rates or to aim the exchange rate in a required direction.

Margin
(1)Difference between the buying and selling rates, also used to
indicate the discount or premium between spot or forward.
(2)For options the sum required as collateral from the writer of an
option.
(3)For futures a deposit made to the clearing house on establishing a
futures position account.
(4) The percentage reserve required by the US Federal Reserve to
make an initial credit transaction.

Markup
Premium.

Market Amount
The minimum amount conventionally dealt for between banks.

Market Maker
A market maker is a person or firm authorised to create and maintain
a market in an instrument.

Market Order
An order to buy or sell a financial instrument immediately at the best
possible price.
Marry
Where a dealer is able to match two customer deals which off set one
another.

Matched Book
If the distribution of the maturities of a banks liabilities equal that of
its assets , it is said to be running a matched book.

Matching
The process of ensuring that purchases and sales in each currency and
deposits given and taken in each currency are in balance , by amount
and maturity.

Maturity Date
(1) The last trading day of a futures contract.
(2) Date on which a bond matures, at which time the face value will be
returned to the purchaser. Sometimes the maturity date is not one
specified date but a range of dates during which the bond may be
repaid.

Mismatch
(1) A mismatch between the interest rate maturities of a banks assets
and liabilities.
(2) Forward purchases differ in the value date from the forward sales
in a given currency.

Netting
A process which enables institutions to settle only the net positions
with one another at the end of the day, in a single transaction, not
trade by trade.

Net Position
The number of futures contracts bought or sold which have not yet
been offset by opposite transactions.

Nostro Account
A foreign currency current account maintained with another bank. The
account is used to receive and pay currency assets and liabilities
denominated in the currency of the country in which the bank is
resident.
Offer
The price at which a seller is willing to sell. The best offer is the lowest
such price available.

Offered Market
Temporary situation where offers exceed bid.

Offset
The closing-out or liquidation of a futures position.

Old Lady
Old lady of Threadneedle Street, a term for the Bank of England.

Open position
The difference between assets and liabilities in a particular currency.
This may be measured on a per currency basis or the position of all
currencies when calculated in base currency.

Option
A contract conferring the right but not the obligation to buy (call) or to
sell (put) a specified amount of an instrument at a specified price
within a predetermined time period.

Option Class
All options of the same type - calls or puts -listed on the same
underlying instrument.

Option Series
All options of the same class having the same exercise/strike price and
expiration date.

Out-of-the-Money
A put option is out-of-the-money if the exercise/strike price is below
the price of the underlying instrument. A call option is out-of-the
money if the exercise/strike price is higher than the price of the
underlying instrument.

Outright Deal
A forward deal that is not part of a swap operation.

Overnight Limit
Net long or short position in one or more currencies that a dealer can
carry over into the next dealing day. Passing the book to other bank
dealing rooms in the next trading time zone reduces the need for
dealers to maintain these unmonitored exposures.

Overnight
A deal from today until the next business day.

Par
(1) The nominal value of a security or instrument.
(2) The official value of a currency.

Point / Pip
(1) 100th part of a per cent, normally 10,000 of any spot rate.
Movement of exchange rates are usually in terms of points.
(2) One percent on an interest rate e.g. from 8% -9%.
(3) Minimum fluctuation or smallest increment of price movement.

Position
The netted total commitments in a given currency. A position can be
either flat or square ( no exposure), long, (more currency bought than
sold), or short ( more currency sold than bought).

Position Limit
The maximum position, either net long or net short, in one future or in
all futures of one currency or instrument combined which may be held
or controlled by one person.

Pre-Spot Dates
Quoted standard periods that fall between the transaction date and the
current spot value date.

Premium
(1) The amount by which a forward rate exceeds a spot rate.
(2) The amount by which the market price of a bond exceeds its par
value.
(3) Options, the price a put or call buyer must pay to a put or call
seller for an option contract.
(4) The margin paid above the normal price level.

Prime Rate
The rate from which lending rates by banks are calculated
Profit Taking
The unwinding of a position to realise profits.

Proxy Hedge
A term to describe when it is necessary to hedge against a currency
where there is no market but it follows a major currency, the hedge is
entered against the major currency.

Purchasing Power Parity

Model of exchange rate determination stating that the price of a good
in one country should equal the price of the same good in another
country, exchanged at the current rate. Also known as the law of one
price.

Put Option
A put option confers the right but not the obligation to sell currencies,
instruments or futures at the option exercise price within a
predetermined time period.

Put Call Parity

The equilibrium relationship between premiums of call and put options
of the same strike and expiry.

Quota
(1) A limit on imports or exports.
(2) A country's subscription to the IMF.

Quote
An indicative price. The price quoted for information purposes but not
to deal.

Rate
(1) The price of one currency in terms of another

Reciprocal Currency
A currency that is normally quoted as dollars per unit of currency
rather than the normal quote method of units of currency per dollar.
Sterling is the most common example.

Replacement Risk
The consequence of settlement risk. If you have not received payment
from your counter party, you now have to enter the market and make
the necessary purchase/sale to settle your books thus exposing your firm to
the prevailing market rates.

Report
French term for premium.

Repurchase Agreement
Agreements by a borrower where they sell securities with a
commitment to repurchase them at the same rate with a specified
interest rate.

Reversal
Process of changing a call into a put.

Risk
The degree of uncertainty associated with an investment. The main
elements that contribute to the riskiness of an investment are
volatility, liquidity and leverage. All things being equal, a high degree
of volatility and leverage makes an investment more risky. An illiquid
market, where buyers are not always matched by sellers, also
increases risk; and many investors can be left holding an asset that is
falling in price.

Risk/Return
The relationship between the risk and return on an investment.
Usually, the more risk you are prepared to take, the higher the return
you can expect. Depositing your money in a bank is safe and therefore
a low return is regarded as sufficient. Investing in stock market
exposes you to more risk (from capital losses) and so investors will
expect a higher return.

Risk Management
The identification and acceptance or offsetting of the risks threatening
the profitability or existence of an organisation. With respect to foreign
exchange involves among others consideration of market, sovereign,
country, transfer, delivery, credit, and counterparty risk.

Risk Position
An asset or liability, which is exposed to fluctuations in value through
changes in exchange rates or interest rates.
Risk Premium
Additional sum payable or return to compensate a party for adopting a
particular risk.

Risk Reversal
A combination of purchasing put options with the sale of call options.

Running a Position
Keeping open positions in the hope of a speculative gain.

Same Day Transaction

A transaction that matures on the day the transaction takes place.

Scalping
A strategy of buying at the bid and selling at the offer as soon as
possible.

Selling rate
Rate at which a bank is willing to sell foreign currency.

Seller/Grantor
Also known as the option writer.

Settlement Date
The date by which an executed order must be settled by the
transference of instruments or currencies and funds between buyer
and seller.

Settlement Price
The official closing price for a future set by the clearing house at the
end of each trading day.

Settlement Risk
Risk associated with the non settlement of the transaction by the
counter party. Risk that relates to making an fx payment to a counter
party before the counter payment is received. This risk arises from the
possibility that your counter party will never pay you.

Short / Short Position

A shortage of assets in a particular currency. See Short Sale.
Short Contracts
Contracts with up to six months to delivery.

Short Forward Date/Rate

The term short forward refers to period up to two months, although it
is more commonly used with respect to maturities of less than one
month.

Short Sale
The sale of a currency futures not owned by the seller at the time of
the trade. Short sales are usually made in expectation of a decline in
the price.

Short-Term Interest Rates

Normally the 90 day rate.

Soft Market
More potential sellers than buyers, which creates an environment
where rapid price falls are likely.

Sovereign Risk
(1) Risk of default on a sovereign loan
(2) Risk of appropriation of assets held in a foreign country. Split Date

Spot
(1) The most common foreign exchange transaction
(2) Spot or Spot date refers to the spot transaction value date that
requires settlement within two business days, subject to value date
calculation.

Spot Next
The overnight swap from the spot date to the next business day.

Spot Month
The contract month closest to delivery or settlement.

Spot Price/Rate
The price at which the currency is currently trading in the spot market.
Spot Week
A standard period of one week swap measured from the current value
date of the currency spot rate.

Spread
(1)The difference between the bid and ask price of a currency.
(2) The difference between the price of two related futures contracts.
(3) For options, transactions involving two or more option series on
the same underlying currency.

Square
Purchase and sales are in balance and thus the dealer has no open
position.

Strike Price
Also called exercise price. The price at which an options holder can buy
or sell the underlying instrument.

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. A swap can be a swap against a forward. In essence,
swapping is somewhat similar to borrowing one currency and lending
another for the same period. However, any rate of return or cost of
funds is expressed in the price differential between the two sides of
the transaction.

SWIFT
Society for World-wide Interbank Telecommunications is Belgian based
company that provides the global electronic network for settlement of
most foreign exchange transactions.

Thin Market
A market in which trading volume is low and in which consequently bid
and ask quotes are wide and the liquidity of the instrument traded is
low.

Tick
A minimum change in price, up or down.

Today/Tomorrow
Simultaneous buying of a currency for delivery the following day and
selling for the spot day, or vice versa. Also referred to as overnight.
Tom
Value date on next working day

Tomorrow Next (Tom Next)

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

Traded Options
Transferable options with the right to buy and sell a standardised
amount of a currency at a fixed price within a specified period.

Tradeable Amount
Smallest transaction size acceptable.

Transaction Date
The date on which a trade occurs.

Transaction Exposure
Potential profit and loss generated by current foreign exchange
transactions. Also known as exchange risk. This reflects the potential
gain or loss from transactions in fx. These transactions could be
attributed to accounts receivable, payable or transactions that may
occur in the future, such as being awarded a contract

Translation Exposure
The calculation of loss or profit resulting from the valuation of foreign
assets and liabilities for balance sheet purposes, when consolidating
into the base currency. Applies to the fluctuation of

Value Date
Maturity Date (settlement date) of a spot or forward contract