Glossary of Foreign Exchange Terms

ABA - a digital code used by the American Bankers Association to define a bank.

Base Currency
The currency which other currencies are quoted against.

Basis Point - One hundredth of one percentage point. A change from 5.25% to 5.75% is said to be a 50 basis point move. See 'Point' for currency moves.

Bid - The price that a buyer is willing to pay to purchase a given currency and sell another at a particular time.

Central Bank - A Government institution in control of the nation's monetary policy and the printing of that nation's currency.

Consumer Price Index (CPI)
A measure of the average amount (price) paid for a market basket of goods and services by a typical U.S. consumer in comparison to the average paid for the same basket in an earlier base year.

Cross Rates
The exchange rate between two currencies expressed as the ratio of two foreign exchange rates that are both expressed in terms of a third currency. Foreign exchange rate between two currencies other than the U.S. dollar, the currency in which most exchanges are usually quoted.

Currency - means money denominated in the lawful currency of a country.

Current Account
A category in the balance of payments account that includes all transactions that either contribute to national income or involve the spending of national income.

Day Trading - refers to opening and closing the same position(s) before the close of that day's trading. Associated with speculative trading.

Deficit Spending
A term which refers to the situation wherein he government spends more than it receives in taxes.

Discount Rate
The interest a private bank pays for a loan from the US Federal Reserve System.

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EMS - European Monetary System

Euro - The currency of the European Monetary Union (EMU). This is the amalgamation of the following currencies, after Jan. 1, 2002 these currencies will be considered legacy currencies. Germany Deutsche Marks, Italy Lira, Austria Schillings, France Franc, Belgium Francs, Netherlands (Dutch) Guilders, Finland Markka, Portugal Escudo, Greece Drachmas, Ireland Punt, Luxembourg Francs, Spanish Pesetas.

Federal Debt
The current dollar sum of obligations equal to the accumulated past deficits minus surpluses of the United States government.

Federal Open Market Committee (FOMC)
The body that is responsible for setting the interest rates and credit policies of the Federal Reserve System. A 12-member committee consisting of the seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank presidents. The Committee sets objectives for the growth of money and credit. These objectives are implemented through purchases and sales of U.S. government securities in the open market. The FOMC also establishes policy relating to System operations in the foreign exchange markets.

Federal Reserve System - The central bank of the United States, with responsibility for implementing the country's monetary policy and regulating member banks of the System. The Fed was created in 1913 and is composed of 12 regional Federal Reserve Banks and a national Board of Governors.

Fiscal Policy
Government policy regarding taxation and spending. Fiscal policy is made by Congress and the Administration.

Fixed Exchange Rate
Official rate set by monetary authorities for one or more currencies

Floating Exchange Rates
Floating exchange rates refer to the value of a currency as decided by supply and demand.

Foreign Exchange - The exchange of foreign currency. On the foreign exchange market, foreign currency is bought and sold for immediate (spot) or forward delivery

Forex - Industry term - Same as Foreign Exchange

Forward Contract - A forward contract fixes the exchange rate for future delivery at a date to be agreed by both participants. A deposit (or a minimum margin) is usually required in forward transactions. For example, if I want to lock in today's rate to buy $10,000 USD at 1.5820 Canadian for the next 4 months, I will have the ability to purchase up to $10,000 USD at this rate.

Fundamental Analysis - focuses on the economic forces of supply and demand that causes price movement. The Fundamentalist studies the causes of market movement, whereas the Technician studies the effects.

FX - an abbreviation of Foreign Exchange

Hedging - A hedging transaction is a purchase or sale of a financial product, having as its purpose the elimination of loss arising from price fluctuations. With regards to currency transactions it would protect one against fluctuations in the foreign exchange rate. (see Forward Contract)

Initial Claims
Initial jobless claims measure the number of filings for state jobless benefits. This report provides a timely, but often misleading, indicator of the direction of the economy, with increases (decreases) in claims potential signalling slowing (accelerating) job growth. On a week-to-week basis, claims are quite volatile, and many analysts therefore track a four week moving average to get a better sense of the underlying trend. It typically takes a sustained move of at least 30K in claims to signal a meaningful change in job growth.

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

Margin - a cash deposit provided by a client as collateral to cover a forward position.

Monetarists
Followers of Milton Friedman who focus on the effect of money and monetary policy on changing price and employment levels.

Monetary Policy
The federal governments attempt to change aggregate demand through money supply changes.

Money Markets - Refers to financial investments that are generally under one year in duration and generally only open to banks and other financial institutions

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

Point (or Pip) the term used in currency market to represent the smallest incremental move an exchange rate can make. It is one one-hundredth of a percent
For example, when a currency moves from 1.5720 to 1.5725 it has moved 5 points.

Repurchase Agreements
When the Federal Reserve makes a repurchase agreement with a government securities dealer, it buys a security for immediate delivery with an agreement to sell the security back at the same price by a specific date (usually within 15 days) and receives interest at a specific rate. This arrangement allows the Federal Reserve to inject reserves into the banking system on a temporary basis to meet a temporary need and to withdraw these reserves as soon as that need has passed.

Settlement - (1) The final stage of a transaction, actual physical exchange of one currency for another (2) is the process by which available funds have been instructed by a client of Cambridge for transfer via wire, draft or deposit to a multi-currency account and a designated receiver of such funds.

Spot - Generally describes a transaction which will come to settlement in two days.

Spot Price - The current market price for a spot transaction.

Spot Rate - The current rate for a spot transaction.

Spread - The difference between the bid and offer prices. This is usually used for Interbank trade of currencies.

Swift - Society of Worldwide Interbank Financial Telecommunications. It is a dedicated computer network that is set up to support fund transfer messages between member banks worldwide.

Technical Analysis - is analysis based on market action through chart study, volume, trends, moving averages, patterns, formations and many other technical indicators.

Treasury Bill - Short-term U.S. government obligations sold at a discount from face value. Treasury bills generally are issued with 13-, 26- or 52-week maturities.

Treasury Bond - Obligations of the U.S. government that mature in 15 or more years and pay a specified coupon.

Treasury Note - Obligations of the U.S. government that mature in 2 to 10 years and pay a specified coupon

Trend - simply the direction of the market, usually broken down to three categories….major, intermediate and short-term trends. Three directions are also associated with a trend; that is, uptrend, downtrend, and a sideways trend.

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

Value Date - The date that both parties of a transaction agree to exchange payments.

Volatility - A measure of price fluctuations. The standard deviation of a price series is commonly used to measure price volatility.

Volume - represents the total amount of trading activity in a particular stock, commodity or index for that day. It is the total number of contracts traded during the day.