Currency Glossary

Adjustable PEG Rate

An adjustable peg rate is a way of tying a country?s exchange rate to a more stable currency. The country?s exchange rate moves in unison with the exchange rate of the country it is ?pegged to, making it less susceptible to wide swings due to local economic conditions. The rate does not have to always move in lock-step with the other currency. The U.S. Dollar, the Euro and several other currencies are often assigned the status of a pegged currency.

AGIO

This is the difference in value between two currencies. It is a word to describe in percentage terms the transaction costs associated with converting a weak currency into a stronger currency. It can also apply to the costs of converting paper money into gold, silver or other cash equivalents.

Appreciation

Appreciation is a short or long-term increase in the price of a currency. When supply is low and demand is high for a particular currency, the price will appreciate. As an example, the U.S. Dollar may appreciate because of actions by the Federal Reserve that strengthen its relative value to other currencies. Foreign investors may find investing in the United States more attractive than in their own country and they need to convert their currency to the U.S. Dollar.

Arbitrage

Sophisticated traders will buy the exact same currency in different market places to take advantage of lower prices. If a currency is selling at a lower price in Japan than in Australia, the shrewd currency trader will buy the currency in Japan and turn around and sell it for a profit in Australia. Arbitrage situations are rare occurrences, but when they occur, it is possible to ?guarantee? profits by acting quickly and taking advantage of the special situation that has developed in the currency markets.

Asset Allocation

As it applies to currency, asset allocation is a way of diversifying a currency portfolio. Instead of only holding U.S. Dollars, it might be prudent to have some money in Euros, Pesos, Pounds or Yen to spread the risk. When one currency may be weak, another is usually strong. Having your assets spread among various investments allows the investor to take advantage of different market conditions around the world.

Authorized Dealer

When you are visiting a foreign country or trying to exchange your currency for a local currency, you should make the exchange at state-authorized currency exchange. Banks and other financial institutions are authorized dealers. You can have confidence when dealing with an authorized dealer that you will be getting a fair rate of exchange (less a small service fee) and that the currency will not counterfeit. Visitors to foreign countries should be aware of individuals that approach them in the street and offer a better rate of exchange than what authorized dealers are offering. Not only is it illegal for non-authorized individuals to make such exchanges, but, many such transactions ?rip off? the uninformed tourist or traveler.

Base Currency

Currency exchange rates are expressed in pairs. If one wants to exchange US Dollars into Japanese Yen, the rate would be written as USD/JPY = 80.91. The USD is the base currency and the Yen is the secondary currency. In this example, one US Dollar would be worth 80.91 Japanese Yen.

Big Figure

A dealer will often quote the current exchange rate in a type of shorthand language. Instead of referring to the full number associated with a particular currency pairing, the dealer will only refer to the figures to the right of the decimal point. This is done in currency trading to facilitate communication in fast moving trades. The whole number does not usually change and traders understand the abbreviated quotes quite easily. As an example, if a USD/Euro quote is 1.3065 and changes to 1.3067, the dealer will say the bid/ask is .3065 to .3067 or even, 65 to 67 as long as it is clear to the buyer and seller.

Book

All of a trader?s positions are known as the trader?s book. The trader may have long positions in several currencies, short positions in others and be in the process of buying or selling those positions from his inventory (book) of total currency positions.

Bretton Woods Agreement

The Bretton Woods Agreement was a historical agreement in 1944 that fixed foreign exchange rates, allowed control of those rates by a central bank and also pegged the price of gold at $35 per ounce. The Agreement lasted until 1971 when President Nixon revoked the Bretton Woods Agreement, allowing currency exchange rates and gold prices to float and fluctuate with changing market conditions.

Cable

Cable is a colloquial term for the GB Pound and US Dollar exchange rate. The term originated back in the middle of the 19th century when exchange rates between the currencies of the two countries were transmitted from London to New York through an underwater cable across the Atlantic Ocean.

Cleared Funds

This is money that has no restrictions placed on their use. Cleared funds may be used to make new purchases or as payment on settlement day. When not being used, cleared funds generally are funneled into a liquid money market or checking account where they can be accessed almost immediately.

Contract

When currencies are traded the actual trades are referred to as a Contract or a Lot. It generally refers to an agreement to purchase or sell a given amount of currency at a specific rate at a future date.

Cross Rate

This is the exchange rate between two currencies, neither of which is the US Dollar.

Currency Risk

Currency risk is the chance or likelihood that the expected future movement of a given currency will not go as expected. Multi-national companies have to consider currency risk before conducting business or setting up operations in another country.

Day Order

An order to buy or sell that expires at the end of the trading day. The order can have limitations as to the price that the buyer is willing to pay or the seller is willing to sell the currency for or it can be a market order where it is executed at the prevailing market rates.

Delivery

When a trade is completed, the seller delivers and the buyer receives the currency which goes directly into his or her account. In certain instances such as options trading, there may be no actually delivery of the underlying currency, but the buyer or seller will receive the proceeds generated by the transaction.

Dirty Float

This is a term that refers to the floating of a currency when that currency?s rate is artificially controlled or set by the intervention of a central bank or other financial institution. Free market forces are not allowed to determine the rate of the currency that is being floated

Dollar Currency Conversion Rate

(Source: Bloomberg.com for April 15, 2012)

  • 1.3065 Euros
  • 80.9100 Yen
  • 0.6307 British Pounds
  • 0.9202 Swiss Francs
  • 0.9999 Canadian Dollar
  • 0.9645 Australian Dollars
  • 7.7599 Hong Kong Dollars

Euro Zone

The Euro Zone is a group of 15 European countries that banded together and agreed to use one currency ? the Euro, to facilitate economic transactions between all of the member countries. The European Central Bank (ECB) is the main body that decides policy and handles economic issues relating to the single currency. While the Euro has had a unifying effect on Europe, it also has had the unintended consequences of dragging down all member countries when one or two of the group of 15 is having serious financial difficulties.

Exotic Currency

The term does not refer to the exotic islands of Fiji or the Maldives, but rather to any nation?s currency that is lightly traded on the world?s currency exchanges. This is a term used to describe a less commonly traded currency. While the U.S. Dollar and Japanese Yen are broadly traded, the currencies of the Maldives or Fiji are not normally traded in large numbers. When trading exotic currencies, there is almost always a wider spread between the bid and ask prices than exists in a high frequency trading environment.

Federal Reserve

This is the central bank for the United States. They have the power to initiate monetary policy by controlling the money supply. The Chairman of the Federal Reserve leads a Board of Governors who collectively decides whether to lower or raise interest rates. They operate under the current administration (The President) but are a semi-autonomous, independent body. Many Constitutional Scholars argue that the Federal Reserve (The FED) has too much power there should be greater oversight over this very powerful, but unelected, group of decision-makers.

Filled Order

Once an order has been taken and a trade executed, that order is said to be filled. The filled order can not be cancelled or amended. If a buyer realizes he or she made a mistake by placing the order, there only remedy is to create another order and make another trade. Such a decision may wind up costing the individual additional commissions and a possible loss in the combined transactions.

Foreign Exchange Rate

The foreign exchange rate is a measurement of the relative worth of one currency when measured against another currency. The price relationship between the two currencies fluctuates by the economic forces of supply and demand. Currencies may rise or fall by a fraction of a cent and current quotes are normally extended out 4 decimal places. Millions and even billions of dollars change hands every day and even very small moves in the foreign exchange rate can have a major effect on the profitability or loss of a trade.

Forex

This is an abbreviation for the foreign exchange market

G7 Countries

This is a group of seven economically important and powerful countries. The G7 consists of the United States, Germany, Japan, France, the UK, Canada and Italy.

Going Long

Going long is when you buy a currency for investment or speculation purposes. When you go long, you hope your investment appreciates in price.

Going Short

Going short is when you sell a currency that you do not own. When you sell short, you are making a bet that the price of the currency will decline. If the price declines, you theoretically, if not actually, purchase the underlying currency and deliver it to the buyer at the short price. The difference between the short price and the current market price is your profit.

Good Until Cancelled

When a good until cancelled order is placed with a broker, the order remains open until it is either executed or cancelled. Unlike a day order which expires at the end of the trading day if it has not been filled, a good until cancelled order can stay open for several days or some other specified period of time. It is unusual for such an order to remain open for more than a month.

Hard Currency

This term refers to any of the widely accepted world currencies that are very liquid and can easily be converted into another currency through any official currency exchange in the world. The USD, EURO and British Pound are all considered hard currency.

Hedging

Hedging is a method of reducing the risk of future price movements. The process usually involves buying options that limit the risk of dramatic moves in either an up or down direction.

IMF

This stands for the International Monetary Fund, an organization first established in 1946. It is the role of the IMF to provide liquidity to countries of the world and facilitate the smooth operation of currency markets.

Interbank Rates

The foreign exchange rates that one international bank will quote to another international bank. Generally, rates quoted by large banks are very much in line with other large banks that deal in foreign exchange rates.

Intervention

A bank may cause the value of a given currency to change by intervening in the marketplace. They may buy or sell a large quantity of a currency which may affect the exchange rate. They may make a bullish or bearish comment that has the psychological impact of changing the outlook on a given currency market. Any concentrated effort that might affect the future price of a currency is considered to be an intervention.

ISO Alpha-Numeric Codes

In an effort to make the trading of foreign currencies more uniform around the world, all recognized official currencies have been assigned an alpha and a numeric code by the International Organization of Standardization (ISO). Following is a partial chart of the alpha and numerical codes of some of the world?s most widely used currencies.

  • Australian Dollar: AUD – 036
  • Brazilian Real: BRL ? 986
  • Canadian Dollar: CAD ? 124
  • Yuan Renminbi (Mainland China): CNY ? 156
  • Pound Sterling (UK): GBP ? 826
  • Euro (Eurozone): EUR ? 978
  • Hong Kong Dollar: HKD ? 344
  • Indian Rupee: INR ? 356
  • Rupiah (Indonesia): IDR ? 360
  • Japanese Yen: JPY ? 392
  • Mexican Peso: MXN ? 484
  • Russian Ruble: RUB ? 643
  • Baht (Thailand): THB ? 764
  • U.S. Dollar: USD ? 840

KIWI

The term used to refer to the New Zealand dollar.

Leverage

The ability to control a larger amount of assets by only needing to put down a portion of the total cost of that asset. Buying on margin creates leverage. The advantage or disadvantage of using leverage in currency investments is that small percentage moves in the price are multiplied by the amount of leverage used. When a long, leveraged investment rises in price, leverage is good. When that same leveraged investment drops in value, it creates a bigger percentage loss.

Limit Order

Unlike a market order where a trade is executed at the prevailing market price, a limit order sets certain parameters that must be met before a trade can be executed. A limit order specifies the price at which a trade can be executed. It may either be higher than the market price ? in the case of a seller, or, lower than the market price ? in the case of a buyer. When buying or selling currencies with a limit order, the currency may never reach the specified price target during the trading day and the order will not be executed.
The best time to use limit orders is in very volatile markets where the price can rise or fall rapidly. A broker may require an additional fee for placing a limit order as opposed to a market order. Generally, limit orders are most suited for speculators or day traders looking to capitalize on the short-term price movement in the currency market. Long term investors should be just fine placing market orders that are executed quickly and efficiently and with low commissions.

Liquidity

The ability for an individual or institution to make a transaction without materially affecting the price of the currency is the measure of the liquidity of that currency. A high trading volume is indicative of greater liquidity. All of the major currencies are very liquid as huge daily volume usually only affects the daily price by a fraction of a cent.

LOT

The size of the contract in a foreign exchange of currency is called a lot. Lots make it easier to conduct trades in uniform sizes rather than one Dollar or 1 Euro at a time.

Margin

Margin is the financial requirement required to make an investment of a certain value. If you have a 50% margin requirement, you can control a $100,000 investment with as little as $50,000 in cash. A margin account uses leverage to allow an investor to buy more than he or she could normally afford. When an investment goes up in a margin account that means the investor will have an additional amount of available funds that can be margined. If the investment drops in value the lender extending credit may require you to add additional funds to meet the minimum margin requirements. It may also mean that you will have to sell some of your holdings, usually at inopportune times, to meet those margin requirements.

Margin Call

While brokers or bankers are willing to accept some risk when extending credit, there is a limit as to how much risk they are willing to take. As an example, if you have a margin account of $50,000 and the value of that account drops down to only $20,000, you will probably receive a margin call requiring you to either add more funds to the account or else the assets in your account may be sold at the discretion of the margin issuer. All terms are clearly disclosed when you sign a margin agreement.

Market Order

This is an order to buy at the current ask price or sell at the current bid price. In liquid markets, market orders are normally executed within seconds of being placed.

Market Rate or Quote

The market rate or quote is the rate that is currently being charged for a currency pair. After getting a market quote from your broker and deciding to place a market order, you should expect your order to be filled at or very near the quoted rate.

Maturity

This is the date when the life of an investment ends. The investment may be allowed to expire upon maturity or arrangements can usually be made to transition into another investment when the old investment matures.

Monetary Base

The monetary base includes all of the money currently in circulation plus all of the required and excess deposits held in banks. A strong monetary base adds a level of protection in economically difficult times.

Net Position

When you make any currency exchange, you are exchanging one currency for another. The net position is the amount of one currency you own offset by the amount of the other currency in the pair. For example if you make a USD/Yen exchange that results in a total of $50,000 US Dollars and only $20,000 in Japanese Yen, you would have a $30,000 net position in US Dollars.

Odd Lot Transaction

When trades are conducted in non-standard lots such as 100 or 1000 units, they are referred to as odd lots. An odd lot transaction may incur a higher transaction fee, either in absolute or percentage terms, than a standard order. Generally, odd lot transactions are small transactions (under 100 shares in the case of stock purchases) that are usually purchased by investors with limited funds.

Order

When a customer or the customer?s authorized agent requests that a trade be executed by their broker, the mechanism for handling the transaction is known as an order. There are numerous types of orders from the common market order to limit and stop-loss orders.

PIP

A PIP is the smallest unit of price for any foreign currency. It is an abbreviation for the Price Interest Point. A PIP varies by the type of currency being traded or exchanged. For example, in a USD/CHF transaction, one PIP equals .0001 Swiss Francs. In a transaction of the US Dollar and the Japanese Yen, the PIP is extended to two decimal points (.01) for trading purposes. When referring to currency prices, many brokers quote rates by quoting only the PIP and not the entire number because the full number rarely changes by more than a few PIPS.

Premium

A premium is the amount above the current spot price for purchasing currency in the futures market. The premium is affected by market conditions and the length of time before the futures price expires.

Range

This is the difference between the highest and lowest price that currency trades over a specific range of time. There can be a daily trading range, monthly trading range or even an annual trading range. The range is often used as part of technical analysis when evaluating the prospects of a currency investment.

Realized Gain or Loss

When you sell a currency, stock or any other financial instrument for more than you paid for it, you have a realized gain. A realized gain is the positive amount above the original purchase price less any commissions or fees charged for the transaction. A realized loss occurs when you sell for less than the original basis of the investment. Both realized gains and realized losses become taxable events in most situations.

Resistance

Traders that closely follow the currency markets and use technical analysis to evaluate the appropriate time to buy or sell, often refer to the resistance level of a currency. If a currency is range-bound and suddenly breaks above or below the established range, it is said to break resistance. Technicians use such a signal as an indicator that the direction of the resistance-breaking movement will lead to further gains or losses in the near future.

Revaluation and Devaluation

When some type of official action causes the exchange rate to rise, it is said to be revalued. If the Federal Reserve tightens money supply and causes the dollar to rise, they are revaluing the Dollar. While revaluation generally refers to the strengthening of a currency, devaluation of a currency can make the currency less valuable in comparison to other currencies. A country that increases money supply by printing more money will cause their currency to be devalued. In addition to being inflationary, the basic laws of supply and demand take over and the exchange rate between the devalued currency and other currencies is lowered.

Risk Capital

This is the amount of money the investor can afford to lose without having a material effect on his or her lifestyle. While some individuals may be able to continue investing after losing a substantial amount of risk capital, others that can not clearly separate risk capital from serious capital often change their definition of what constitutes risk capital.

Settlement Date

This is the legally binding day by which all funds must be deposited and available to complete a currency transaction. If you do not have liquid funds in your account when it is time to settle, your broker will call you and insist that you make good on your contractual agreement. You will either need to immediately transfer funds into your brokerage account or sell some or all of your other positions to meet the terms of the earlier transaction. A settlement date is just as binding on the party acquiring the currency as it is on the party receiving payment for the currency.

Soft Market

This is where there are more sellers or fewer buyers and prices tend to fall rather quickly.

Spot Contract

This is the most common kind of foreign exchange transaction. A spot contract must be settled within two business days from the time the trade was executed.

Spot Price

This is the current selling price of currency as determined by market conditions.

Squeeze

When a central bank initiates action that will reduce money supply, they create a ?squeeze? that will increase the cost of money. This is one type of manipulation that a bank has at its disposal to affect foreign exchange rates with the currency they oversee.

Sterling

This is a term that refers to the British Pound.

Swissy

This is a term that refers to the Swiss Franc.

Tick

A measure of a small move up or down in the trading price

Trade Date

This is the actual date when a buyer and seller make a deal. This differs from the settlement date which is typically several days after the trade date.

Transaction Cost

This is the additional charge beyond the actual exchange rate when a currency is bought or sold.

Two-Way Quote

This simply means that a dealer quotes both the price one has to pay to buy a currency and also the price a seller can expect to receive when disposing of the same currency.

Volatility

This is a measure of the current and future amount of fluctuation expected in the price for a given currency. Very conservative currency traders prefer low volatility. While higher volatility investments offer the chance for greater profits, they also tend to be more risky than low volatility investments.

Wash

This is a trade where the results are zero gains or losses. A trade is said to be a wash when the proceeds from a sale equal the original basis of the investment.

Yard

This is a slang term for one billion.