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Jargon guide to the various terms used in the currency conversion market...
Below are some examples of the terminology you might come across when looking at the currency markets and dealing with foreign currency brokers.
Bid | The rate at which a dealer is willing to buy the base currency |
Broker | A broker is a middleman acting between a client and a market maker. A broker will charge a commission for their services |
Convertible Currency | Currency which can be freely exchanged for other currencies or gold without special authorisation from the appropriate central bank. |
Exchange Rate Depreciation | Currency which loses in value against one or more currencies |
Exchange Rate Risk | The potential loss that could be incurred from an adverse movement in exchange rates |
Fixed Exchange Rate | Official rate of exchange set by monetary authorities for one or more currencies. In practice, some fixed exchange rates are allowed to fluctuate between defined upper and lower bands |
Floating Exchange Rate | When the value of a currency is decided by supply and demand |
FOREX/FX | An abbreviation of Foreign Exchange |
Forward Points | The Interest Rate Differential between two currencies expresses in exchange rate points. The forward points are added or subtracted from the spot rate to give the forward or outright rate |
Forward Rates | The rate at which a foreign exchange contract is struck today for settlement at a specified future date |
Forward Contract | Contract struck at the forward rate as specified above. |
Hedging | A hedging transaction is one which protects an asset or liability against a fluctuation in the foreign exchange rate. |
Initial Margin | The deposit required from a client when they transact a forward order |
Interbank Rates | The FX rates large international banks quote other large international banks. The difference between the buy rate and the sell rate, the spread can be around 0.07%. Normally the public and other businesses do not have access to these rates. |
Interest Rate Risk | The potential for losses arising from changes in interest rate |
Limit Order | An order given which has restrictions upon execution. The client specifies a price and the order can be executed at the prevailing market price only if the market reached the specified price |
Margin | Cash deposit provided by clients as collateral to cover losses (if any) that may result from the client’s foreign exchange trades |
Margin Call | A demand for additional funds to cover positions |
Maturity | Date for settlement |
Offer | The rate at which a dealer is willing to sell the base currency |
Open Position | Any deal which has not been settles by a physical payment or reversed by an equal and opposite deal for the same value date |
Outright Forward |
Foreign Exchange transaction involving either the purchase or the sale of a currency for settlement at a future date |
Outright Rate | The forward rate of a foreign exchange deal based on the spot price plus or minus the forward adjustment which represents the difference in interest rates between the two currencies |
Resistance | A price level at which you would expect selling to take place |
Rollover | Where the settlement of a deal is rolled forward to another value date based on the interest rate differential of the two currencies. E.g next day |
Settlement | Actual physical exchange of one currency for another between principal and client |
Spot contract | Spot means the settlement date of a deal which is two business days forward |
Spread | The difference between bid and offer prices |
Stop Loss Order | An order to buy or sell when a particular price is reached either above or below the price that prevailed when the order was given |
Support Levels | A price level at which you would expect buying to take place |
Technical Analysis |
Analysis based on market action through chart study, moving averages, volume, open interest, formations and other technical indicators |
Value Date | Settlement date of a spot or forward deal |
Volatility | A measure of price fluctuations |