Trade Responsibly: CFDs and Spot FX are complex instruments and come with a high risk of losing money rapidly due to leverage. You should not engage in his form of investing unless you understand the nature of the Transaction you are entering into and the true extent of your exposure to the risk of loss. Your profit and loss will vary according to the extent of the fluctuations in the price of the underlying markets on which the trade is based.
Foreign Exchange (FX or FOREX) is the cornerstone of all international capital transactions and surpasses the huge American domestic money markets in terms of liquidity and depth; even the futures and stock markets are insignificant in comparison.
The majority of Foreign Exchange transactions are neither directly related to international trade nor to international settlements but are in fact speculative in nature. For every trade-related transaction in the FOREX Market, there are about 7 to 9 speculative ones. Foreign Exchange is the world's fastest growing industry today and its growth can be attributed to its substantial liquidity and to the orderly manner in which it functions.
Spot FX, unlike stocks and futures instruments, is not traded on an exchange. Through technological advances in the electronic and telecommunications fields, networks of banks and brokers have gained access to a virtually instantaneous system of global transfers of information, data and funds. With the aid of such developments, spot FX has gained a significant advantage over other financial products that are limited to certain time zones and have to endure the erratic strains and confusion of trading floors.
Banks and brokers these days operate on screen based systems were two-way prices are continuously fed in and dealt on by participants. These systems guarantee greater transparency and instantaneous access to price information anywhere in the world.
Currencies are always priced in pairs; therefore all trades result in the simultaneous buying of one currency and the selling of another. The objective of FX trading is to exchange one currency for another in the expectation that the market price will change so that the currency bought will increase in value relative to the one sold.
When a trader buys a currency that later appreciates in value, the trader must sell the currency back in order to lock in the profit. An open trade or open position is one in which a trader has either bought/sold one currency pair and has not sold/bought back the equivalent amount to effectively close the position.
With all financial products, FX quotes include a "bid" and "ask". The “bid” is the price at which a market maker is willing to buy (clients sell) while the “ask” is where the market maker will sell (clients buy) the currency pair. The difference between the bid and the ask prices is referred to as the spread.
In the wholesale market, currencies are quoted using five significant numbers, with the last placeholder called a point or a pip. In spot FX, like any traded instrument, there is an immediate cost in establishing a position. For example, EUR/USD may be bid at 1.3150 and ask at 1.3153, this three-pip spread defines the trader’s cost, which can be recovered with a favorable currency move in the market.
By quoting both the bid and ask in real time, ICM ensures that traders always receive a fair price on all transactions.
The Concept of Margin
Margin is a good faith deposit giving the trader the right to buy or sell the value of the underlying contract of a currency, bullion or derivative instrument. This margin requirement allows the investor to trade a larger amount of money with a relatively small deposit. The small margin payments are one of the main reasons why spot FX has become so attractive for individual investors.
Central Banks in most countries have the ultimate control over money supply and interest rates. They intervene to regulate market fluctuations for freely convertible currencies by using their foreign currency reserves or by influencing interest rates through Money Market operations.
Commercial banks are market makers that quote two-way spot FX prices that are continuously changed so as to allow them to balance supply and demand for the currencies. In the currency markets the interbank exchange rate is the wholesale price and the commercial exchange rate is the retail price.
Brokers are intermediaries that convey the market prices received from banks via electronic or telecommunications networks to other market participants. These rates do not serve just as an indication, but are the prices at which they are willing to deal, usually for an accepted marketable amount.
Corporations traditionally have been entering into currency transaction in order to hedge (cover) their foreign currency exposures so as to minimize risks. Corporations today are increasingly adopting more aggressive policies and actively take positions in currencies. Large multi-national corporations even have their own in-house dealing rooms and credit control departments, but the majority of corporations still conduct their currency transactions through brokers.
Many smaller investors today are purchasing shares in mutual funds. Some of these funds have in excess of US$ 1 billion in assets and are managed by one or more fund managers. Depending on the liquidity, trading strategy and overall policy of the fund, the fund managers would invest a certain percentage of these funds in the Foreign Exchange market. Today, the transaction size and volume of some funds exceed that of some Central Banks.
These institutions are not very active market participants, but in certain circumstances, they can inject large funds into the foreign exchange markets; this is mostly carried out by developing countries where import and export business is channeled through government monopolies.
The Individual Investor
The volume and the number of transactions entered into by individuals has been increasing rapidly. Today, a growing number of individual investors are trading in spot currencies and the futures markets by depositing collateral into margin accounts with brokers such as ICM. These investors are now gaining in importance and are having short-term influence on exchange rate movements during illiquid market conditions.
What Every Trader Should Know
The spot FX market is one of the most popular markets for speculation due to its enormous size, liquidity and tendency for currencies to move in strong trends. An enticing aspect of trading currencies is the high degree of leverage available. ICM allows positions to be leveraged, in some cases, up to 400:1. Without proper risk management, this high degree of leverage can lead to enormous swings between profit and loss. Knowing that even seasoned traders sometimes suffer losses, speculation in the spot FX should only be conducted with risk capital funds that if lost, will not significantly affect one's personal financial well- being.
For many years, traders active in the stock market and foreign exchange market have found that one successful way to forecast future movements in rates is to analyze the patterns that can be seen in past movements. This approach is often referred to as technical analysis which actually dates back to the late 1800s. It has gained in importance since the 1990’s through the usage of computer models and advanced charting techniques.
Currencies rarely spend much time in tight trading ranges and have the tendency to develop strong trends. Over 80% of volume is speculative in nature resulting in a market that frequently overshoots and then corrects itself. A technically trained trader can easily identify new trends and breakouts that provide multiple opportunities to enter and exit positions.
Technical Analysis with Charts
The charting of price patterns is one of the classic technical analysis techniques. Charts are historical records of price movements that provide important information needed for the analysis of the trend of currencies. There are no fixed ways to interpret charts but being able to recognize the most basic patterns can help to predict future price movements. Pattern recognition is a hands-on and labor intensive exercise requiring careful visual examination of the price chart. The explanations below are designed to introduce various chart patterns but are by no means complete or conclusive.
The Bar Chart
In a bar chart price movement is reflected by a bar. The length of this bar is determined by the high and low of a trading period (e.g. a day). Small horizontal tics may be used to designate opening and closing prices for this trading period.
The Candlestick Chart
A Candlestick chart is visual, giving a nice picture of the profile of market prices and making it easier to categorize market price patterns to a finer degree. The body of the candle represents the difference between the open and the close for a period. When the opening rate is higher than the closing rate the candlestick is solid. When the closing rate exceeds the opening rate, the candlestick is hollow.
Trend Lines and Chart Patterns
Tops, Bottoms and Trend lines are very useful as a means of identifying historically significant price levels. Trend lines are lines drawn that connect either a series of highs or lows in a trend. They are used to track the trend in progress.
Support and Resistance Levels
Support and resistance levels are one of the most basic and an essential component of technical analysis that signal tops and bottoms. A support level is a price level at which a declining market has stopped falling and will either move sideways or begin to advance. A resistance level is a price level at which a rising market has stopped advancing and will either move sideways or begin to decline.
NOTE: support and resistance levels are psychological barriers that cause temporary changes in the underlying trend of the market.
Trend Analysis and Timing
Markets don't move straight up and down. The direction of any market at any time is either Bullish (up), Bearish (down) or Neutral (sideways). Within these trends, markets have countertrend (backing & filling) movements. In a general sense, markets move in waves and a trader must catch the wave at the right time. Trend lines showing support and resistance boundaries may be used as buying or selling areas.
Applying Technical Analysis
Charts can be used on an intraday (5 minutes, 15 minutes), hourly, daily, weekly or monthly basis. The chart you study depends on how long you plan on holding a position. If you are trading short-term, you may want to look at 5-minute or 15-minute charts. If you plan on holding a position for a few days, you would likely look at an hourly, 4-hour or daily chart. Weekly and monthly charts compress price movements to allow for much longer-range trend analysis.
With the help of computer systems, traders can now predict future market trends based on calculated averages, relative strength of up or down trends, overbought and oversold conditions and many other mathematical models that have proven to be helpful in predicting price behavior. The following sections will explain a few of the basic calculation methods and the application of the studies in different scenarios.
Relative Strength Index (RSI)
RSI attempts to estimate the market's current strength or weakness during a given period. It is an oscillator which measures the ratio of upward to downward movement for a given instrument over a specified period of time. The time period used affects the RSI dramatically; the shorter the interval used the more sensitive will be the corresponding move in RSI. Conversely, the longer the period specified, the less sensitive, therefore slower, the RSI. The RSI depends solely on changes in price to quantify price momentum. The result appears as a percent value ranging between 0 and 100. Values between 0-30 represent oversold conditions, whereas values between 70-100 represent overbought conditions. Overbought/oversold analysis is the main thrust of the Relative Strength Index. This assessment is based on the assumption that higher closes indicate strong markets while lower closes indicate weakness.
NOTE: RSI works best during overbought/oversold market conditions and as a divergent indicator.
Stochastics is a popular oscillator to judge price momentum. It measures the close of a price in relation to its range and is represented by a ratio multiplied by 100. This measure is called %K, while another measure, the %D, is a Moving Average of %K. A 3-period Moving Average applied to %K yields reasonable values. These values are plotted on a scale from 0 to 100. The concept for Stochastics is based on the tendency that as prices move higher, the intraday closes will be closer to the high of the daily range. The reverse is true in downtrends. Values over 70 indicate overbought condition while values below 30 indicate oversold condition. If the %K crosses the %D line from above (below) at the upper (lower) part of the graph a sell (buy) signal is given. A divergence between the %K and %D lines indicates a new trend may be on the way.
A Moving Average is a mathematical procedure to smooth or eliminate the fluctuations in data and to assist in determining when to buy and sell. Moving averages help clarify the long-term trend of a market while eliminating shorter-term fluctuation. They are often used by professional portfolio managers and have been popular and attractive because the trend can be determined mathematically making computer analysis of price trends a reality.
A simple moving average is constructed by adding up the closing price of a certain number of periods (i.e. days) and then dividing by that number. Each period (day), the oldest price in the series is dropped and the most recent close is added. When these values are plotted, a smooth trend is seen.
A weighted Moving Average places more emphasis on the most recent data as this affects the averages sensitivity more readily. Current data is more relevant to the trading outlook than older data in the Moving Average, thus a ‘weight’ is applied to the nearby data.
An exponential Moving Average creates an average over a constant number of observations or periods. It uses a smoothing factor to apply increasing weight to more recent periods. The exponential average uses the previous value of the exponential moving average to calculate the current value, while the weighted drops off the oldest data point in the selected period of the moving average.
Describes the difference between a portfolio's performance vs. the average market performance over a set period of time.
A country is said to have an absolute advantage if its output per unit of inputs of all goods is larger than that of another country.
A record of financial transactions for an individual at a at a bank or a brokerage company.
The dollar amount currently remaining in an account.
An individual who usually works for a brokerage company and has the legal power to buy or sell financial instruments on behalf of a client.
A summary of all transactions and positions (long and short) between a broker/dealer and a client.
Money owed to customers or suppliers.
Money owed by customers.
Accredited investors must have a combined net worth with their spouse in excess of £5,000,000, or individual income for the past two years in excess of $200,000, or have joint income with their spouse in excess of $300,000 for the past two years or be a director or executive officer of the company.
The volume of financial instruments over a given period of time.
An interest rate that is adjusted periodically, usually according to a standard market rate outside the control of the bank or savings institution.
Relationship between two companies when one company owns substantial interest of another company.
AFTER HOURS TRADING
Trading after regular trading hours on organized exchanges.
An agent acts as intermediary between buyer and seller, taking no financial risk personally or as a firm, and charging a commission for the service.
The total demand for goods and services produced in the economy over a period of time. It includes consumer demand of durable and non durable items, investment spending by companies on capital goods, government spending on publicly provided goods and services, and the difference between exports and imports of goods and services of the country.
A measure of the total supply of goods and services produced within the economy from domestic sources that are available to meet aggregate demand.
ALL OR NONE
A Futures order that instructs the broker to either fill the whole order or not at all.
A coefficient measuring the risk-adjusted performance of a currency or stock option. A large alpha indicates that the underlying has performed better than would be predicted given its beta (volatility).
Investments in hedge funds that pursue strategies uncommon in mutual funds such as long-short equity, event driven, statistical arbitrage, fixed income arbitrage, convertible arbitrage, short bias, global macro, and equity market neutral.
An option that may be exercised at any time prior to expiration, as opposed to a European option that can only be exercised on a specific date (usually at expiration).
American Stock Exchange.
AMMAN STOCK EXCHANGE
The formal securities market in Jordan.
The repayment of a loan by installments.
An employee of a brokerage house who studies companies and makes buy/sell recommendations on various instruments.
Date when particular news concerning a company is announced to the public.
Yearly record of a company's financial condition. It includes the firm's operations, balance sheet, income statement, and cash flow statement.
The simultaneous purchase and sale of the same (or equivalent) financial instrument on different markets to profit from price discrepancies.
The price at which the currency or instrument is offered.
Any possession that has value.
ASSET BACKED SECURITY
A security that is collateralized by loans, leases, receivables, or installment contracts on personal property, not real estate.
ASSET MANAGEMENT ACCOUNT
Account at a brokerage house, bank, or savings institution that integrates banking services and brokerage features.
Instructions given to a dealer to buy or sell the currency or instrument at the best rate that can be obtained.
AT OR BETTER
Instructions given to a dealer to buy or sell the currency or instrument at a specific rate or better.
A price equal to nominal or face value of a security.
AT THE MARKET
A buy or sell order that must be executed at the best price currently available in the market. These are also called market orders.
An option whose strike/exercise price is equal to or near the current market price of the underlying instrument.
An examination of a company's accounting records and books conducted by an outside professional in order to determine whether the company is maintaining records according to generally accepted accounting principles.
AWAY FROM THE MARKET
On limit orders, a buy order away from the market would be placed lower than the current market price, and sell orders would be placed higher than the current market price. Such orders are usually held to be executed later.
Business to Business; A strategy of dealing directly with businesses, rather than consumers.
Clerical operations that support settlement of trades and related processes.
Creating a hypothetical performance history by applying current selection criteria to prior time periods.
BALANCE OF PAYMENTS
An account of all transactions between one country and all other countries--transactions that are measured in terms of receipts and payments. The three main components of BOP are the current account, the capital account and the balancing account.
BALANCE OF TRADE
The value of exports less imports of an economy. There are visible and invisible balance figures. The visible balance represents the physical goods while the invisible represents the service economy.
Bank notes are paper issued by the central bank and are legal tender.
The rate at which a central bank is prepared to lend money to its domestic banking system.
A computer message system linking major banks that is used as a mechanism to advise the receiving bank of some action that occurred.
Inability to pay debts.
A path dependent option that has a knock-in or knock-out feature that causes the option to become effective or terminate if a specified barrier level is reached.
In Foreign exchange markets, the base currency is the first currency in a currency pair. The second currency is named the quote currency or secondary.
The difference between the cash price and futures price.
One hundredth of a percentage point (0.01%).
BEAR (PUT) SPREAD
A spread designed to exploit falling exchange rates by purchasing a put option with a high strike price and selling one with a low strike price.
A substantial drop in prices over a prolonged period of time BEAR An investor who believes that prices are going to fall.
Person who enjoys the benefits of ownership even though title is in another.
The measure of an asset's risk in relation to the market. A security with a beta of 1.5, will move about 1.5 times the market return.
The highest price a dealer will pay at any given time to purchase a currency pair or a financial instrument.
Refers normally to the first three digits of an exchange rate.
An option pricing formula initially derived by Fisher Black and Myron Scholes for securities options and later refined by Black for options on futures.
A technical study used by chartists; Plus or minus two standard deviations where the standard deviations are calculated historically in a moving window estimation. Hence, the bands will widen if the most recent data is more volatile. If the prices break out of the band, this is considered a significant move.
Bonds are debt instruments issued by a government or municipality for a period of more than one year. An investor is lending money when buying bonds. The seller of the bond agrees to repay the principal amount of the loan at a specified time plus interest.
A rating based on the possibility of default by a bond issuer. The ratings range from AAA to D.
BREAK EVEN POINT
The price of a financial instrument where total revenue received equals total costs (TR=TC).
A technical term used by chartists to denote a break of a support, a resistance level, or any technical formation.
An agent who executes orders to buy and sell currencies and related instruments either for a commission or a spread.
The commission charged by a broker.
Bundesbank, the Central Bank of Germany.
An investor who believes that prices are going to rise.
BULL (CALL) SPREAD
A spread designed to exploit rising exchange rates by purchasing a put option with a lower strike price and selling one with a higher strike price.
A substantial rise in prices over a prolonged period of time.
A term for gold bars.
An option strategy combining a bull and bear spread. It uses three strike prices. The lower two strike prices are used in the bull spread and the higher strike price from the bear spread. Both puts and calls can be used.
The purchaser of a currency pair or an.
Rate at which the dealer is willing to buy the currency; or bid.
BUYING THE SPREAD
In an option, buy the nearby contract and simultaneously sell the deferred contract; also referred to as a bull spread.
A term used in the foreign exchange market for the USD/GBP rate.
An option position comprised of purchase and sale of two option contracts of the same type and at the same strike price but with different expiration dates.
An option that gives the holder the right, but not the obligation, to buy the underlying instrument at a specified price during a fixed period.
To void a working order in the market.
Money invested in a company.
When securities are sold for a profit, the capital gain is the difference between the net sales price of the securities and their net cost.
A general term encompassing all markets for financial instruments with more than one year to maturity.
Capital Asset Pricing Model; An economic theory that describes the relationship between risk and expected return, and serves as a model for the pricing of risky securities.
A term used to describe the amount of an underlying commodity; one commodity contract.
A company that generates a steady and significant amount of free cash flow.
Same day settlement.
Measure of the actual cash generated by a business rather than the accounting profit.
Also called spot markets; these are markets that involve the immediate delivery of an instrument.
A method of settling certain futures or option contracts whereby the seller pays the buyer the cash value of the commodity traded.
Chicago Board Options Exchange.
Chicago Board of Trade.
The highest price such as an interest rate or other numerical factor allowable in a financial transaction.
A bank which is responsible for controlling a country's monetary policy.
CERTIFICATE OF DEPOSIT
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.
CHAPTER 11 PROCEEDINGS
Provisions of the Bankruptcy Reform Act under which the debtor is reorganized by a court because the estimated value of the reorganization exceeds the expected proceeds from its liquidation.
CHAPTER 7 PROCEEDINGS
Provisions of the Bankruptcy Reform Act under which the debtor's assets are liquidated by a court because reorganization would fail to establish a profitable business.
An individual who studies graphs of historic data to find trends and predict support and resistance levels as well as other continuation and reversal patterns.
Options of the same type with the same underlying security.
The procedure were a clearing house or principle becomes the buyer and/or the seller, and assumes responsibility for protecting buyers and sellers from financial loss by assuring performance on each contract.
An adjunct to a futures exchange through which transactions executed on its floor are settled by a process of matching trades.
A transaction which leaves the trade with a zero net exposure to the market with respect to a particular currency.
Chicago Mercantile Exchange.
Commodity Exchange of New York.
The fee that a broker may charge clients for dealing on their behalf.
A commodity is food, metal, or another fixed physical substance that investors buy or sell, usually through futures contracts.
An option strategy consisting of both puts and calls at different strike prices to capitalize on a narrow range of volatility.
The process immediately following a transaction whereby the traders confirm the details of the trade.
CONSUMER PRICE INDEX
Monthly measure of prices of a specified set of consumer goods and services, providing a measure of inflation. Rising CPI is normally associated with expectation of higher short term interest rates and may therefore be supportive for a currency in the short term.
An agreement to buy or sell a specified amount of a particular currency on OTC, future or option basis for a specified month in the future.
CONTRACT EXPIRY DATE
The last trading date of a futures or options contract.
The processes by which companies raise capital to fund growth, acquisitions etc; the division of an investment bank which advises on acquisitions, mergers, bid defenses, restructures and disposals.
COST OF LIVING INDEX
An index that measures inflation such as CPI.
The party that takes the other side of an exchange transaction.
If a currency is traded against the dollar, the counter value would be the dollar value of the transaction.
Any transaction taken to limit exposure.
Having a long position in a currency or an asset combined with a short call option position on the same underlying currency or asset.
The risk of loss due to a counterparty defaulting or a debtor not repaying, or more generally the risk of loss due to some "credit event".
A foreign exchange deal involving two currencies that neither of which is the US Dollar or the base currency.
Rates between two currencies that neither of which is the US Dollar or the base currency.
An agreement to swap a series of specified payment obligations denominated in one currency for a series of specified payment obligations denominated in a different currency.
The net balance of a country's balance of payments (BOP) and contains the import and export items of goods and services as well as transfer payments and net investment income.
An order that is automatically canceled if not executed during the day.
A trader who takes positions that are closed during the same trading day.
The date that the transaction took place
The primary method of recording the basic information of a transaction.
An individual or firm acting as a principal in the purchase or sale of currencies or securities. Dealers trade for their own account and risk.
The amount that is owed to a broker by a margin customer for loans the customer uses to buy currencies or securities.
The market for trading debt instruments.
The latest day or time by which the buyer of an option must indicate to the seller his intention to execute the option.
Failure to make timely payment of interest or principal on a debt security.
A shortfall that is usually referenced to the balance of trade.
A price index measuring changes in prices of all new, domestically produced, final goods and services in an economy.
The settlement of a futures contract by receipt or tender of a financial instrument, currency or commodity.
The date when the exchange of the currencies is made on a currency contract, or the value date. Could also refer to the exchange of commodity on a commodities contract.
The calendar month in which a futures contract comes to maturity and becomes deliverable.
Those locations designated by futures exchanges at which the futures contract may be delivered in fulfillment of the contract.
Delta measures the sensitivity of the value of a option to changes in the price of its underlying instrument.
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.
A ratio spread of options established as a neutral position by using the deltas of the options concerned to determine the hedge ratio.
A fall in the value of a currency due to market forces.
The reduction of government's role in controlling markets, which lead to a free and presumably a more efficient marketplace.
A broad term relating to instruments such as futures or options. The value of a derivative instrument moves in relation to the underlying.
Deliberate downward adjustment of a currency against its fixed parities or bands, normally by formal announcement from the government.
The purchase of a longer maturity option and the sale of a shorter maturity, lower exercise price option. The choice of calls or puts will determine its bear or bull character.
For foreign exchange, the number of US dollars needed to buy one unit of a foreign currency.
A system of floating exchange rates in which a government may intervene to change the direction of the value of the country's currency.
The release of all information pertaining to the company's business activity, regardless of how that information may influence investors.
A term used for instruments where the forward rate is lower than the spot rate or where an option is trading for less than its intrinsic value.
The rate at which a central bank is prepared to discount certain bills for financial institutions as a means of easing their liquidity.
Accounts over which an individual or organization, other than the person in whose name the account is carried, exercises trading authority or control.
A decrease in the rate of inflation.
A reduction in capital investment of a company and its decision not to replace depleted capital goods.
Earnings after tax.
When two or more averages or indexes fail to show confirming trends.
A portion of a company's profit paid to common and preferred shareholders.
The fixed or floating rate paid on preferred stock based on par value.
A nation's internal market representing the mechanisms for issuing and trading securities of entities domiciled within that nation.
A term used in technical analysis to refer to the drop of a stock's price, a rebound, and then a drop back to the same level as the original drop.
A term used in technical analysis to refer to the rise of a stock's price, a drop, and then a rise back to the same level as the original rise.
A negative change in ratings for a stock, or other rated security.
Background check and research conducted by the company to assess validity of a prospective client and that client's customers.
DURABLE GOODS ORDERS
A measure of new orders placed with domestic manufacturers for immediate and future delivery. A major indicator of the health of the manufacturing sector in an economy.
A modest decline in interest rates or prices.
Earnings before Interest and Taxes.
Earnings before Interest, Taxes and Depreciation.
Earnings before Interest, Taxes, Depreciation and Amortization.
European Central bank; Created to monitor the monetary policy of 11 countries that have converted to the Euro from their local currencies.
A statistic released by a government body that indicates current economic trends such growth rate, retail sales, employment, etc…
The percentage of the labor force that is employed.
Earnings Per Share; A company's profit divided by its number of outstanding shares.
Exchange rate at which demand for a currency is equal to the supply of the currency in the economy.
The residual dollar value of a trading account, assuming its liquidation is at the current market price.
Currency deposited by companies and federal governments in banks outside their own country, usually currency of a non-European country deposited in Europe.
Deposits denominated in United States Dollar at banks outside the United States.
An option that can be exercised only on its expiration date rather than before that date.
The group of countries formally known as the European Community.
A system of controlling inflows and outflows of foreign exchange.
The price of one country's currency expressed in another country's currency.
The process of completing an order to buy or sell an instrument.
The formal notification that the holder of a call (or put) option wishes to buy (or sell) the underlying security at the exercise price.
The price at which an options holder can buy or sell the underlying instrument.
The profit amount between the strike price and the underlying investment when the option is exercised.
A less broadly traded currency or option.
The last date after which the option can no longer be exercised.
The month in which an option expires.
The last date on which an option can be bought or sold.
The condition of being subjected to a source of risk.
FAIR MARKET PRICE
Amount at which an asset would change hands between two parties, were both have knowledge of the relevant facts.
A financial market that has a combination of high volatility and heavy trading.
The United States Federal Reserve. The 7-member Board of Governors that oversees Federal Reserve Banks, establishes monetary policy, and monitors the economic health of the country.
FED FUND RATE
The interest rate at which banks lend to each other overnight. This is a closely watched short term interest rate that the Fed controls through open market operations.
FEDERAL OPEN MARKET COMMITTEE
A 12-member committee which sets credit and interest rate policies for the Federal Reserve System. This committee consists of 7 members of the Board of Governors, and 5 of the 12 Federal Reserve Bank Presidents. This group, headed by the Chairman of the Federal Reserve Board, sets interest rates either directly (by changing the discount rate) or through the use of open market operations (by buying and selling government securities which affects the federal funds rate).
FEDERAL RESERVE BOARD
The 7-member Board of Governors that oversees Federal Reserve Banks. Its members are appointed by the President subject to Senate confirmation, and serve 14-year terms. Also called the Fed.
FEDERAL RESERVE SYSTEM
The central banking system of the US comprising 12 Federal Reserve Banks controlling 12 districts under the Federal Reserve Board.
One who must act for the benefit of another party.
The price at which an order is executed.
FILL OR KILL
A exchange traded order that is canceled unless executed within a designated time period.
A company whose business and primary function is to make loans to individuals, while not receiving deposits like a bank.
Professionals who analyze financial statements, interview corporate executives, and attend trade shows in order to write reports recommending either purchasing, selling, or holding various stocks.
A futures contract based on a financial instrument.
An enterprise such as a bank whose primary business and function is to collect money from the public and invest it in financial assets.
An organized institutional structure for creating and exchanging financial assets.
Government spending and taxing for the specific purpose of stabilizing the economy.
FIXED EXCHANGE RATE
Official rate set by monetary authorities. Often the fixed exchange rate permits fluctuation within a band.
A method for determining fixed rates. Such a process occurs either once or twice daily at defined times. The system is also used in the London Bullion market.
FLEXIBLE EXCHANGE RATE
Exchange rates with a fixed parity against one or more currencies with frequent revaluation. A form of managed float.
FLOATING EXCHANGE RATE
An exchange rate where the value is determined by market forces.
The profit/loss that may only be realized if the open contracts are liquidated (settled).
An exchanges trading area. May also be used as the lower limit of an option or an interest rate.
See Federal Open Market Committee.
The premature closing out of a contract when an investor is unable to meet a margin call.
The purchase or sale of a currency against another.
An over-the-counter market where buyers and sellers conduct foreign exchange transactions.
A cash market transaction between a bank and a customer in which the seller agrees to deliver a specific cash commodity to the buyer at some point in the future. Unlike futures contracts, forward contracts are privately negotiated and are not standardized.
A deal with a value date greater than spot.
A commitment to buy or sell a currency for delivery on a specified future date or period. The price is quoted as the Spot rate, minus or plus the forward points for the chosen period.
Forward rates are quoted in terms of forward points or pips, which represents the difference between the forward and spot rates. The decision to subtract or add points is determined by the differential between the deposit rates for both currencies concerned in the transaction.
FORWARD RATE AGREEMENTS
FRA - A forward contract that specifies an interest rate to be paid on an obligation beginning on some future date.
Total reserves held by a bank less the reserves required by the authority.
The activities carried out by the dealer.
The macro economic factors that are accepted as forming the foundation for the relative value of a currency, these include inflation, growth, trade balance, government deficit, interest rates, etc…
A standardized, transferable, exchange-traded contract that requires delivery of a commodity, bond, currency, or stock index, at a specified price, on a specified future date.
An over-the-counter market where buyers and sellers conduct foreign exchange transactions.
G7 plus Belgium, Netherlands and Sweden, a group associated with IMF discussions.
The seven leading industrial countries, being US , Germany, Japan, France, UK, Canada, Italy.
A measurement of how fast delta changes, given a unit change in the underlying price of the instrument.
A significant price movement of a currency, security or commodity between two trading sessions.
A ratio that is used to account for the effect of inflation on the GDP figure.
Tendency toward a worldwide investment environment and the integration of national capital markets.
A system for global after hours electronic trading in futures and options developed by Reuters for CME and CBOT for use in conjunction with various exchanges around the world.
Investment-grade gold which may be smelted into gold coins or bars.
A monetary system that backs its currency with a reserve of gold, and allows currency holders to convert their currency into gold. The U.S. went off the gold standard in 1971.
GOOD UNTIL CANCELED (GTC)
An instruction to a broker that the order must remain valid until cancelled by the client.
Before deduction of tax.
GROSS DOMESTIC PRODUCT
GDP is the broadest measure of aggregate economic activity available. The total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports.
See Good until Canceled.
(GTF) An instruction to a broker that the order must remain valid until closing of trading day on Friday.
A freely convertible currency that is not expected to depreciate in value in the foreseeable future.
HEAD AND SHOULDERS
A technical analysis term referring to a chart formation in which a price exhibits three successive rallies, the second one being the highest. The name derives from the fact that on a chart the first and third rallies look like shoulders and the second looks like a head. Bearish indicator.
An investment made in order to reduce the risk of adverse price movements in a currency or security, by taking an offsetting position in the same or a related instrument.
A portfolio consisting of a long and short (put option) position in the underlying instrument HEDGE FUND A fund that may employ a variety of techniques to enhance returns.
A fund that may employ a variety of techniques to enhance returns.
Hong Kong Inter-bank Offered Rate.
The historical rate at which the price of an underlying currency or security moves up and down.
The simultaneous purchase and sale of two options that differ only in their expiration dates.
A measure of the number of residential units on which construction is begun each month.
Very high and self sustaining inflation levels.
A security becomes illiquid when a lack of trading activity in the security makes it hard to sell without taking a large loss.
An organization founded in 1944 to oversee exchange arrangements of member countries and to lend foreign currency reserves to members with short-term balance of payment problems.
International Monetary Market is part of the CME that lists a number of currency and financial futures contracts.
A theoretical value designed to represent the volatility of the underlying instrument as determined by the price of the option. The factors that affect implied volatility are the exercise price, the rate of return, maturity date and the price of the option.
IMPLIED VOLATILITY SKEWS
The implied volatility varies for different strikes of an option.
IN THE MONEY
A call option is in the money when the strike price is less than the current price of the underlying instrument. A put is when the strike price is greater.
Currency which cannot be exchanged for other currencies, because this is forbidden by the foreign exchange regulations.
Statistical composite that measures changes in the economy or in financial markets.
A price quoted but is not firm.
An indicator measuring physical output of manufacturing, mining and utilities.
The overall general upward price movement of goods and services in an economy, usually as measured by the Consumer Price Index and the Producer Price Index.
The amount of cash collateral required by a brokerage firm to be deposited before buying or selling on margin IPO Initial Public Offering; A company's first sale of stock to the public.
The bid and offer rates at which international banks place deposits with each other.
INTEREST RATE FLOOR
The minimum interest rate that could be charged.
INTEREST RATE OPTIONS
An option contract whose underlying security is a debt obligation.
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.
Action taken by a central bank to affect the value of its currency.
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. Such options have intrinsic value.
INTRA DAY POSITION
An open position that is usually squared off by the close of the day.
The amount by which an option is In-the-money. The intrinsic value is the difference between the exercise price and the price of the underlying instrument.
Initial Public Offering; A company's first sale of stock to the public.
An economic theory of British economist, John Maynard Keynes that active government intervention is necessary to ensure economic growth and stability.
Slang for the New Zealand dollar.
Where a barrier option becomes active as the underlying spot price hits the barrier level.
Where a barrier option ceases to exist as the underlying spot price hits the barrier level.
Economic indicators that follow rather than precede the country's overall pace of economic activity.
Doctrine that a government should not interfere with business and economic affair.
LAST TRADING DAY
The day on which trading ceases for an expiring contract.
A transaction used to take a public corporation private that is financed through debt such as bank loans and bonds.
The commercial or investment bank with the primary responsibility for organizing syndicated bank credit or bond issue. The lead manager recruits underwriting banks, negotiates terms of the issue with the issuer, and assesses market conditions.
An economic indicator that changes before the economy has changed. Examples of leading indicators include production workweek, building permits, unemployment insurance claims, money supply, inventory changes, and stock prices.
The degree to which an investor or business is utilizing borrowed money.
The London Interbank Bid Rate; the rate charged by one bank to another for deposits.
The London Interbank Offered Rate, the rate charged by one bank to another for lending money.
London International Financial Futures Exchange.
The amount that one bank is prepared to trade with another; or the amount that a dealer is permitted to trade in a given currency.
The maximum price decline permitted in one trading session.
An order to buy or sell a specified amount of a security at a specified price or better.
The maximum price advance permitted in one trading session.
An banking arrangement to lend an investor any amount up to the full amount of the line.
Any transaction that closes out a previously established position.
The ability of an asset to be quickly converted into cash; or a market with a large number of buyers and sellers.
One of the key commercial interest rates in Europe; an interest rate for a loan against the security of pledged paper LONG The state of actually owning a currency, security, or commodity.
The purchase of futures contracts for price protection purposes as a defensive position against an increase in cash prices.
Cash in circulation; only used by the UK.
Cash in circulation plus demand deposits at commercial banks.
Includes demand deposits, time deposits and money market mutual funds, excluding large CDs.
M2 plus large time deposits, repos of maturity greater than one day and institutional money market accounts.
M2 plus neg
Analysis of a country's econtron MARGIN The minimum margin which an investor must keep on deposit in a margin account at all times for of each open contract.
Difference between the buying and selling rates; or the initial deposit made brokerage firm upon establishing an account.
A demand for additional funds to be deposited in a margin account to meet margin requirements because of adverse price movements.
The risk that a customer goes bankrupt after entering into a forward contract.
The difference between the lowest current offered price and the higher price that a dealer charges to a customer.
An arrangement whereby the profits or losses on a futures contract are settled each day.
The conventional amount dealt between banks.
MARKET IF TOUCHED (MIT)
An exchange order that automatically becomes a market order if the specified price is reached.
A brokerage company or a bank that maintains a firm bid and ask price and is ready, willing, and able to buy or sell at publicly quoted prices.
MARKET ON CLOSE (MOC)
An exchange order that is filled as close as possible to the close.
An order to buy or sell a financial instrument immediately at the best possible price.
Marche a Terme International de France.
The last trading day of a futures contract.
MEDIUM TERM NOTE
A corporate debt instrument that has maturity bands of: 9 months to 1 year, more than 1 year to 18 months, more than 18 months to 2 years, etc., up to 30 years.
The study of the behavior of small economic units such as individual consumers or households.
The group of employees responsible for calculating profits and losses and for managing risks.
The average of both buying and selling prices.
Expression used to indicate that the willingness to buy at the rate offered by the counter party.
MINIMUM PRICE FLUCTUATION
The smallest increment of market price movement possible.
Reserves required to be deposited at central banks by commercial banks and other financial institutions.
Traders' reference for a Million.
MODERN PORTFOLIO THEORY
Principals underlying the analysis and evaluation of rational portfolio choices based on risk-return trade-offs and efficient diversification.
Indicators used in market analysis to quantify the momentum of upward and downward price movements.
Market for short-term debt securities with maturity of one year or less and often 30 days or less.
The total supply of money in circulation in a given country's economy at a given time.
Moving averages are used on charts to that show whether an instrument's price is trending up or down. It is a technical analysis term meaning the average price of an instrument over a specified time period, used in order to spot pricing trends by flattening out large fluctuations.
An open-ended fund operated by an investment company that raises money from shareholders and invests in a group of assets in accordance with a stated set of objectives.
National Association of Securities Dealers; Nonprofit organization formed under the joint sponsorship of the investment bankers' conference and the SEC to provide regulation on the OTC market.
The nearest actively traded delivery month or the current delivery month.
NET ASSET VALUE
The value of a fund's investments.
The difference between total open long and open short positions in a given instrument held by an individual.
NET PRESENT VALUE
The present value of the expected future cash flows minus the cost NEUTRAL Describing an opinion that is neither bearish not bullish.
Describing an opinion that is neither bearish not bullish.
NEW YORK MERCANTILE EXCHANGE
NYMEX; The world's largest physical commodity futures exchange.
NEW YORK STOCK EXCHANGE
NYSE; Also known as the Big Board or the Exchange.
A foreign currency current account maintained with another bank that is used to receive and pay currency assets and liabilities denominated in the currency of the country in which the bank is resident.
NOT HELD ORDER
A futures order, usually a Market order, in which the customer gives the floor broker total discretion to transact on a best-efforts basis.
A short-term debt security usually with a maturity of five years or less.
An international organization helping governments tackle the economic, social and governance challenges of a global economy.
The price at which a seller is willing to sell.
Temporary situation where offers exceed bids.
A document that outlines the terms of securities to be offered in a private placement.
The closing-out or liquidation of a position.
The operations of a financial institution that although physically located in a country, has little connection with that country's financial systems.
An account maintained by one broker with another in which all of the accounts of the former are combined and carried only in its name, rather than designated separately.
The total number of outstanding option or futures contracts that have not been closed out by offset or fulfilled by delivery.
OPEN MARKET COMMITTEE
Same as Federal Open Market Committee.
OPEN MARKET OPERATIONS
Central Bank operations in the markets to influence exchange and interest rates.
A position that is not yet closed.
The right, but not the obligation, to buy (call) or sell (put) a specific amount of a given stock, commodity, currency, index, or debt, at a specified price (the strike price) during a specified period of time OTC Over-the-Counter; A security which is not traded on an exchange.
Options of the same type as said to be of the same class.
All options of the same class having the same exercise/strike price and expiry.
Over-the-Counter; A security which is not traded on an exchange.
OUT-OF THE MONEY
A call option whose strike price is higher than the market price of the underlying, or a put option whose strike price is lower than the market price of the underlying.
Technically too high in price, and hence a technical correction is expected.
Technically too low in price, and hence a technical correction to the upside is expected.
OVER THE COUNTER
A deal from today until the next business day.
Net long or short position in one or more currencies that a dealer can carry over into the next dealing day.
Price Earnings Ratio; shows the multiple of earnings at which a stock sells and determined by dividing current stock price by current earnings per share.
Represents the excess of funds received for stock of a corporation in excess of its book value.
Equal to the nominal or face value of a security; A bond selling at par is worth an amount equivalent to its original issue value or its value upon redemption at maturity.
Equality; the value of one currency in terms of another.
The date on which a dividend or bond interest payment is scheduled to be delivered.
Payroll employment is a measure of the number of people being paid as employees by non-farm business establishments and units of government.
A fund set up to pay the pension benefits of workers after retirement.
Foreign exchange reserves of oil producing nations arising from oil sales.
A commodity is food, metal, or another fixed physical substance that investors buy or sell.
The smallest price unit in a currency (0.0001 of a unit).
A specific area on the trading floor that is designed for the trading of commodity, index, currency or interest rate futures.
The 1985 Plaza Hotel agreement by the G5 to lower the dollar.
Minimum fluctuation or smallest increment of price movement; One percent on an interest rate.
A collection of investments, real and/or financial.
The net of the total commitments in a given currency.
POWER OF ATTORNEY
A written authorization allowing a person to perform certain acts on behalf of another, such as moving of assets between accounts or trading for a person's benefit.
Preferred shares give investors a fixed dividend from the company's earnings and entitle them to be paid before common shareholders.
The amount by which a forward rate exceeds a spot rate; the margin paid above the normal price level.
The amount of cash today that is equivalent in value to a payment, or to a stream of payments, to be received in the future.
PRICE EARNINGS RATIO
See P/E above.
Gaps occur when opening price movements create a blank spot on the chart. This occurs when the high of the day is below the low of the previous day or when the low of the day is above the high of the previous day.
Usually refers to the select list of securities firms that are authorized to deal in new issues of government bonds.
PRODUCER PRICE INDEX
PPI; An inflationary indicator published by the U.S. Bureau of Labor Statistics to evaluate wholesale price levels in the economy.
The action taken by investors to sell when prices are rising or to purchase when prices are declining in order to secure gains.
Trades based on signals from computer programs, usually entered directly from the trader's computer and executed automatically.
Gives the right but not the obligation to sell currencies or instruments at the option exercise price within a predetermined time period.
Use of advanced econometric and mathematical valuation models to identify the firms with the best possible prospective.
The amount of sales needed to reach a company's sales goal; an amount set by the government to limit imports or exports.
The price quoted for information purposes but not to deal.
A substantial rise in the market price following a decline.
The high and low transaction prices of a currency, security or commodity during a given period.
The price of one currency in terms of another.
An evaluation of credit quality of a company's debt issue by a rating agency. Investors and analysts use ratings to assess the riskness of an investment.
RATIO CALENDAR SPREAD
Selling more near-term options than longer maturity options at the same strike price.
Buying a specific quantity of options and selling a larger quantity of out of the money options.
A reversal of the prevailing trend in price movement. The term is most often used to describe a decline after a period of rising prices.
Interest rate that has been adjusted to eliminate the effect of inflation.
Inflation adjusted model of Gross Domestic Product.
A real-time quote is one that states the most recent bid or offer.
A period of general economic decline; specifically a decline in GDP for two or more consecutive quarters.
The rate at which interest earned on a loan can be reinvested. The rate may not attract the same level of interest as the principal amount.
A contract in which the seller of fixed income securities such as Treasury Bills agrees to buy them back at a specified time and price.
The buy back rate of the repurchase agreement.
The ratio of reserves to deposits, expressed as a fraction, prescribed by national banking authorities.
Funds set aside for emergencies or other future needs; Official reserves are to ensure that a government can meet near term obligations.
A price recognized by technical analysts as a price which is likely to result in a rebound but if broken through is likely to result in a significant price movement.
RETAIL PRICE INDEX
RPI; an inflationary indicator that measures the change in the cost of a fixed basket of retail goods.
A monthly measurement of all goods sold by retailers based on a sampling of retail stores of different types and sizes; often a measure of consumer confidence.
RETURN ON EQUITY
Indicator of profitability. Determined by dividing net income for the past 12 months by common stockholder equity.
RETURN ON INVESTMENT
A figure of merit used to help make capital investment decisions. ROI is calculated by considering the annual benefit divided by the investment amount.
A system for award-winning trading between banks in operation since the early 1980s.
A change, usually an increase, in a country's fixed exchange rate as a result of official.
Change in the general trend of the market.
The process of analyzing exposure to risk and determining how to best handle such exposure.
A combination of purchasing put options with the sale of call options. The put limits downside, while the call limits the upside.
An overnight swap, specifically the next business day against the following business day (also called Tomorrow Next, abbreviated to Tom-Next).
A completed transaction involving both a purchase and a subsequent sale, or a sale followed by a liquidating purchase.
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.
A strategy of buying at the bid and selling at the offer as soon as possible.
Special Drawing Right; an artificial currency unit based upon several national currencies. SDR serves as the official monetary unit of the IMF, and acts as a supplemental reserve for national banking systems.
The market in which securities are traded after they are initially offered in the primary market.
Rate that a bank is willing to sell foreign currency.
All options of the same class which share a common strike price and expiration date.
The date by which an executed transaction must be settled; in currencies it is 2 days while stocks is 3 days.
The official closing price for a future set by the clearing house at the end of each trading day.
Risk associated with the non-settlement of the transaction by the counter party.
Certificates or book entries representing ownership in a corporation or similar entity.
Buying to unwind a short position.
An investor who has sold a currency or an instrument without having covered it.
SHORT-TERM INTEREST RATES
Normally the 90 day rate.
The difference between estimated transactions costs and actual transactions costs. The difference usually represents revisions to price difference or spread and commission costs... Read More
Swiss Options and Financial Futures Exchange, a fully automated and integrated trading and clearing system.
Refers to a transaction for immediate delivery; spot currency transactions have a value date of 2 business days.
The contract month closest to delivery.
The overnight swap from the spot date to the next business day.
The price that a currency is currently trading in the spot market.
The difference between the bid and ask price of a currency; the difference between the price of two related futures contracts.
The buy and sell positions are in balance; no open positions.
A speaker connected to a phone often used in broker trading desks.
A period of tight monetary policy, when interest rates are high and borrowing is difficult.
Recession or low growth in conjunction with high inflation rates.
A term r
eferring to certain normal amounts and maturities for dealing.
STANDARD AND POORS
A US firm engaged in assessing the financial health of borrowers. The firm also has generated certain stock indices i.e. S & P 500.
Central Bank activity in the domestic money market to reduce the impact on money supply of its intervention activities in the FX market.
British pound, otherwise known as Cable.
STOP LOSS ORDER
A market order to buy or sell a certain quantity of a certain currency or security if a specified price (the stop price) is touched.
The simultaneous purchase/sale of both call and put options for the same currency, exercise/strike price and expiry date.
A combination of two calls and one put.
The price at which an options holder can buy or sell the underlying instrument; the exercise price.
A combination of two puts and one call.
When an exchange rate depreciates or appreciates to a level where technical analysis techniques suggest that the currency will rebound or not go below.
An exchange of streams of payments over time according to specified terms.
A price as a differential between two dates of the swap.
An option to enter into a swap contract.
Society for World-wide Interbank Telecommunications is a Belgian based company that provides the global electronic network for settlement of most foreign exchange transactions.
Market slang for Swiss Franc.
The artificial creation of an asset using combinations of other assets; In options, a long call option and a short put option amounts to a synthetic long, or a long put option and a short call option amounts to a synthetic short.
Treasury Bill; Short-term obligations of a Government issued for periods of one year or less.
The study of price action in markets through the use of charts and quantitative techniques to attempt to forecast price trends.
An adjustment to the price of an instrument that is based on technical factors rather than market sentiment.
The process of inviting parties to submit a formal offer for the supply or purchase of goods and services, followed by evaluation of offers and selecting a successful bidder.
Maturity of an option or a loan.
Mathematically determined value of a derivative instrument as dictated by a pricing model such as the Black-Scholes model.
A measure of the sensitivity of the price of an option to a change in its time to expiry.
A market in which trading volume is low and in which consequently bid and ask quotes are wide due to lack of liquidity of the instrument.
A minimum change in price, up or down.
The primary method of recording the basic information of a transaction.
The portion of the option premium that is attributable to the amount of time remaining until the expiration of the option contract. Time value is whatever value the option has in addition to its intrinsic value. The longer the time remaining until expiration, the higher the time value.
Simultaneous buying of a currency for delivery the following day and selling for the spot day or vice versa.
TOP DOWN APPROACH
A method of security selection that starts with asset allocation and works systematically through sector and industry allocation to individual security selection.
An oral or electronic transaction involving one party buying or selling a currency, security, or derivative from another party.
TRADE ABLE AMOUNT
The smallest transaction size acceptable.
The sum of the money gained by a given economy by selling exports, minus the cost of buying imports; part of the balance of payments.
The date on which a trade occurs.
The difference between the value of imports and exports.
The primary method of recording the basic information of a transaction.
An executed order to buy or sell an instrument; could be an entry or a liquidation trade.
The date on which a trade occurs.
The corporate officer responsible for designing and implementing a firm's financing and investing activities.
Short-term obligations of a Government issued for periods of one year or less. Treasury bills do not carry a rate of interest and are issued at a discount on the par value. Treasury bills are repaid at par on the due date.
Government obligations with maturities of ten years or more.
Government obligations with maturities more than one year but less than ten years.
Outstanding stock that has been sold and subsequently repurchased by the issuing firm. Treasury stock does not carry voting rights or an ability to collect dividends, and is not used in earnings per share calculations.
The total money value of currency contracts traded is calculated by multiplying size by the number of contracts traded.
When a dealer quotes both buying and selling rates for foreign exchange transactions.
A position not covered by an offsetting position.
A short call option position in which the writer does not own the underlying product represented by the option contracts.
A firm, usually an investment bank, that buys an issue of securities from a company and resells it to investors.
Acting as the underwriter in the issue of new securities for a firm.
An exchange rate is normally considered to be undervalued when it is below its purchasing power parity.
The percentage of the people classified as unemployed as compared to the total labor force.
Items in the current account of the balance of payments of a country that correspond to gifts from foreigners or pension payments to foreign residents who once worked in the particular country.
A transaction executed at a price greater than the previous transaction.
Determination of the value of a company's stock based on earnings and the market value of assets.
For exchange contracts it is the day on which the two contracting parties exchange the currencies which are being bought or sold. For a spot transaction it is two business banking days forward in the country of the bank providing quotations which determine the spot value date. The only exception to this general rule is the spot day in the quoting centre coinciding with a banking holiday in the country(ies) of the foreign currency(ies). The value date then moves forward a day.
Spot normally settles after two working days.
Transaction executed for same day settlement; sometimes also referred to as "cash transaction".
A simple option whose terms and conditions do not include any provisions other than exercise style, expiry and strike.
Profits or losses on open positions in futures and options contracts which are paid or collected daily.
Expresses the price change of an option for a one per cent change in the implied volatility.
VERTICAL (BEAR OR BULL) SPREAD
The sale of an option with a high exercise price and the purchase (in the case of a bull) or the sale (in the case of a bear) of an option with a lower exercise price. Both options will have the same expiration date.
A measure of the fluctuations in the underlying instrument over a given time period. It is expressed as a percentage and computed as the annualized standard deviation of percentage change in daily price. High values usually mean high risk.
The risk in the value of options portfolios due to the unpredictable changes in the volatility of the underlying asset.
Generic term for the securities industry firms that buy, sell, and underwrite securities.
A security entitling the holder to buy a proportionate amount of stock at some specified future date at a specified price, usually one higher than current market price. Warrants are traded as securities whose price reflects the value of the underlying stock.
WHOLESALE PRICE INDEX
It measures changes in prices in the manufacturing and distribution sector of the economy and tends to lead the consumer price index by 60 to 90 days. The index is often quoted separately for food and industrial products.
The difference between current assets and current liabilities.
A day when the banks in a currency's principal financial center are open for business.
A bank made up of members of the IMF whose aim is to assist in the development of member states by making loans where private capital is not available.
Slang for milliard, one thousand million.
YEAR TO DATE
YTD; The period beginning at the start of the calendar year up to the current date.
A graph that shows changes in yield on instruments depending on time to maturity. A positive sloping curve has lower interest rates at the shorter maturities and higher at the longer maturities. A negative sloping curve has higher interest rates at the shorter maturities.
ZERO COUPON BOND
A bond that pays no interest because it was initially offered at a discount to its redemption value.
ZERO INVESTMENT PORTFOLIO
A portfolio of zero net value established by buying and shorting component securities, usually in the context of an arbitrage strategy.
Trading Examples for Forex
The MetaTrader 4 trading software which is used at ICM includes a full back office function that make it easy for
the trader to realize the value of open positions as well as the profit and loss of closed trades. However, it is important
that traders understand how a trade works and how to calculate profits and losses manually.
MAJOR CURRENCY PAIRS
(Euro vs. US Dollar)
(UK Pound vs. US Dollar)
(US Dollar vs. Japanese Yen)
(US Dollar vs. Swiss Franc)
(US Dollar vs. Canadian Dollar)
(Australian Dollar vs. US Dollar)
Primary (base) vs. Secondary Currencies
The primary currency, or the base currency, is the reference that defines the contract size. The profit and loss calculation however is always on the secondary currency. All currencies are traded in pairs, with the 'base' currency being the first currency of the pair and the 'quote' or 'term' currency being the second currency in the pair. Examples are as follows:
VALUE OF 1 PIP
VALUE OF 1 PIP IN US$
(Divide by current USD/JPY rate)
(Divide by current USD/CHF rate)
(Divide by current USD/CAD rate)
At ICM, in order to buy or sell 1 contract (lot) of a particular currency pair the client must have a minimum of $1,000 in the account, or about 1% margin. In other words, a $1,000 initial margin is required for every Ccy 100,000 that is traded, which corresponds to a leverage of 1:100. If the trader has less than $1,000 they can still trade but this will be with less than 1 lot.
ICM has no maintenance margin however a 1% margin is initially required on standard accounts. In order to guarantee that clients' accounts do not extend into negative equity, the trading platform automatically closes all positions at the 5% Equity/Margin ratio.
Profit and Loss Calculation Examples
Buy 5 EUR/USD at 1.3450 | Sell 5 EUR/USD at 1.3490
1.3450 (open price) x 5 (lots traded) x 100,000 (contract size) = 672,500
1.3490 (close price) x 5 (lots traded) x 100,000 (contract size) = 674,500 $ 2,000 (Profit)
Buy 5 EUR/USD at 1.3156 | Sell 5 EUR/USD at 1.3124
1.3156 (open price) x 5 (lots traded) x 100,000 (contract size) = 657,800
1.3124 (close price) x 5 (lots traded) x 100,000 (contract size) = 656,200 $ 1,600 (Loss)
Sell 3 USD/CHF at 0.8982 | Buy 3 USD/CHF at 0.8924
0.8982 (open price) x 3 (lots traded) x 100,000 (contract size) = 269,460
0.8924 (close price) x 3 (lots traded) x 100,000 (contract size) = 267,720 CHF 1,740 (Profit)
Sell 3 USD/CHF at 0.9141 | Buy 3 USD/CHF at 0.9191
0.9141 (open price) x 3 (lots traded) x 100,000 (contract size) = 274,230
0.9191 (close price) x 3 (lots traded) x 100,000 (contract size) = 275,730 CHF 1,500 (Loss)
In order to obtain USD value, the CHF Profit amount must be divided by the Closed Price CHF 1,740 ÷ 0.8924 (closed price) = $1,949.79.