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American Terms: Quotes how many U.S. Dollars it costs to buy one unit of the foreign currency; for example, if the Euro is quoted at 1.3207/1.3212, then the bid price is US $1.3207 per Euro and the offered price is $1.3212 per Euro. See also Direct Quotes
Assets: Property owned by or owed to an individual or business. On a balance sheet, this includes: cash, accounts receivable, inventory, plant and equipment, loans receivable, deposits, pre-paid expenses, investments, and goodwill, to name a few. Some people think of an asset as anything that puts money into one’s pocket.
Associated Person (AP):An individual who finds customers, solicits and submits orders for fulfillment while in the employ of a FCM, IB, CTA, or CPO. APs are required to register with both the CFTC and the NFA.
Barrier Option: An exotic option which comes in two types: knock-in and knock-out. A knock-in option is activated when the price of the underlying asset hits a predetermined level known as the "barrier level." A knock-out option becomes null and void when the price of the underlying asset hits a predetermined level known as the “barrier level.” See also Knock-In Option and Knock-Out Option.
Base Currency: In a currency pair, the first currency mentioned. The quote states how much of the quote currency is required to purchase one unit of the base currency; for example, if the Australian dollar is quoted as AUD/USD .8077/80, AUD is the base currency; the bid price is USD .8077 per Australian dollar and the offered price is USD .8080 per Australian dollar.
Basis Points: Each basis point is one one-hundredth of one percent (0.01%); i.e., the smallest increment for quoting yields on fixed-income instruments. If an interest rate rises from 3.25% to 3.50%, it has risen by 25 basis points.
Bid/Ask Spread: The difference between the price at which a forex dealer sells (ask price) a currency and the price he is willing to pay to buy (bid price) the same currency.
Collateral: Assets that can be sold by a lender in the event of a loan default. Also called security.
Commodity Pool Operator (CPO): An individual or firm that manages and/or finds customers to contribute to a commodity pool that is invested in futures and/or futures options. CPOs are usually required to register with the CFTC and NFA.
Commodity Trading Advisor (CTA): An individual or firm that, for remuneration or a percent of profits, recommends futures or futures options trades. This may involve trading a customer's discretionary account. CTAs are usually required to register with the CFTC and NFA.
Compound Option: A compound option is an option with another option as the underlying asset.
Counterparty: In general terms, a counterparty is the individual or entity that holds the opposite position in a bilateral agreement or contract. For purposes of the forex markets, Section 2(c) (2)(B)(ii)(I)-(VI) of the Commodity Exchange Act defines a counterparty as a financial institution, a broker-dealer, a broker-dealer’s associated person, an FCM, an insurance company, a financial holding company, and/or an investment bank holding company who enters into an agreement, contract, or transaction in foreign currency that isn’t traded on an exchange or otherwise regulated by the Securities Exchange Commission (SEC).
Cross Rates: The exchange rate between any two foreign currencies. In the United States, this means any currency pair not including the U.S. dollar. For example, in the United States, a Euro/AUD trade would be a cross rate trade, while in Germany or Australia the Euro/AUD would be one of the primary currency pairs traded.
Currency Pairs: The two currencies traded or quoted in a forex transaction.
Dealer: An individual or entity, that is in the business of being a counter-party in the forex industry. Dealers can either trade their own funds or those of their customers.
Direct Quotes: Quotes foreign currency prices in terms of the domestic currency; for example, if the trader is in the United States and the quote is AUD/USD, this would be a direct quote because the quote currency is the domestic currency. The quote would state the number of U.S. dollars required to buy one Australian dollar. In Australia, a direct quote would be USD/AUD, and would state the number of Australian dollars required to buy one U.S. dollar.
Discount Rate: The interest rate charged by the Federal Reserve to its member banks (banks which belong to the Federal Reserve System) for funds they borrow. This rate has a direct bearing on the interest rates banks charge their customers. When the discount rate is increased, the banks must raise the rates they charge to cover their increased cost of borrowing. Likewise, when the discount rate is lowered, banks are able to charge lower interest rates on their loans.
Double-Barrier Option: An exotic option with two barriers that bound the price fluctuation of the underlying asset. A Knock-in double-barrier option is profitable when the price of the underlying asset reaches either one of the barriers. A Knock-out double-barrier option is profitable when the price of the underlying asset remains between the two barriers.
Economic good: That which is scarce (relative to manís wants) and useful to mankind.
Eligible Contract Participant: A classification, as outlined by the Commodity Exchange Act, for institutional investors based on their regulated status or amount of assets, in contrast to retail customers. This classification permits these persons to engage in transactions not generally available to non-eligible contract participants.
European Terms: Quotes how many foreign currency units it costs to buy one U.S. dollar; i.e., uses the U.S. dollar as the base currency; for example, if the Swiss Franc is quoted as USD/CHF 1.2358/61, the bid price is CHF 1.2358 per dollar and the offered price is CHF 1.2561 per dollar. See also Indirect Quote.
Exchange Rate: The price of one currency stated in terms of another. Also known as the foreign exchange rate, or rate of exchange.
Exchange-Traded Fund (ETF): An Exchange-Traded Fund (ETF) is an open-ended investment company that trades on a stock exchange. By investing in the components of an index or in the commodity, the ETF makes available to small investors the opportunity to invest in the index or commodity. For example, an ounce of gold may cost $1,500.00, but a share in a gold ETF may cost $150.00, making it a more viable investment for many more people.
Exotic Option: Any option that is non-standard with regard to its terms. Exotic options trade over-the-counter, rather than on an exchange, due to their complexity and the need to negotiate the specific terms of the option. Some examples: chooser options (buyer can choose whether it’s a call or a put after creation of the option), Barrier Options, Asian options, digital options, and Compound Option.
Fed Funds Rate: The interest rate charged by one commercial bank to another commercial bank for fed funds borrowed (usually for short periods of time).
Forex Dealer Member (FDM): A Retail Foreign Exchange Dealer and/or a Futures Commission Merchant that conducts a significant amount of on-exchange business and acts as a retail forex counterparty is a Forex Dealer Member (FDM) of NFA.
Forward contract: A contract entered into by two parties who agree to the future purchase or sale of a specified commodity. This differs from a futures contract in that the participants in a forward contract are contracting directly with each other, rather than through a clearing corporation. The terms of a forward contract are negotiated between the buyer and seller, while exchanges set the terms of futures contracts.
Forward Points: Basis points used to adjust the current spot rate to arrive at a forward rate. A forward points premium occurs when points are added to the spot rate; a forward points discount occurs when points are subtracted from the spot rate. See also Basis Points and Forward Rate.
Forward Rate: The forward rate is calculated by adding or subtracting forward points from the spot rate. If the base-currency country has a higher interest rate than the quote-currency country, the forward points are subtracted from the spot rate. Conversely, if the base-currency country has a lower interest rate than the quote-currency country, the forward points are added to the spot rate. In other words, the difference between the forward rate and the spot rate is due to a difference in interest rates between the base-currency country and the quote-currency country. Forward rates are market-determined through a bid/offer process.
Futures Commission Merchant (FCM): An individual or organization accepting orders to buy or sell futures contracts or futures options, and accepting payment for his/its services. FCMs must be registered with the CFTC and the NFA, and maintain a minimum Adjusted Net Capital of the greatest of $1 million or several size- and risk-based capital requirements. For FCMs who participate in the forex markets, the minimum capitalization requirement is the greater of $20,000,000 or other RFED risk-based capital requirement.
Futures market: Exchanges where contracts for the future delivery of commodities, such as corn, sugar, silver, cattle, crude oil, and contracts for T-Bonds, currencies, and stock indices are traded. The terms of the contracts (commodity, time of delivery, point of delivery, size of contract, and quality or grade) are standardized by the exchange, making it easier for hedgers and speculators to accomplish their respective goals. Only the price is negotiated between buyers and sellers through their brokers.
Futures options market: markets where calls and puts (options) with futures contract as the underlying assets are traded. When a call purchaser exercises his call, he receives a long futures position, while the call seller (writer, or grantor) is assigned a short futures position. Conversely, when a put purchaser exercises his put, he receives a short futures position and the put seller (writer, or grantor) is assigned a long futures position.
Indirect Quote: Quotes domestic currency prices in terms of the foreign currency; i.e., uses the foreign currency as the quote currency; for example, in the United States, an indirect quote would be USD/CHF (Swiss franc is the quote currency). The quote states the number of Swiss francs (CHF) required to buy one U.S. dollar. In Switzerland, an indirect quote is quoted as CHF/USD, and states the number of U.S. dollars required to buy one Swiss franc; for example, CHF/USD 0.9342/45 where the bid price is USD 0.9342 per CHF and the offered price is USD 0.9345 per CHF.
Inflation: An increase in available currency and credit resulting in a decline in the currency's purchasing power. Such an increase results in higher prices for goods and services.
Interest Rate Differential (IRD): The difference in interest rates earned by two different financial instruments. This differential comes into play in the forex markets because the interest rates paid differ between two currencies. This can affect the exchange rates as investors prefer to borrow money in countries/currencies that have a low interest rate and exchange their cash into a country/currency in which they can earn a higher interest rate.
Interest Rate Parity: A trading tool used to determine whether the difference between the interest rates in two countries equals the expected change in exchange rates between the two currencies. If they are not equal, the interest rate parity theory predicts that there is an opportunity for profit.
For example, assume that the interest rate in Europe is 5% and the interest rate in the United States is 0%. According to interest rate parity theory, this relationship shows that the Euro is expected to depreciate against the U.S. dollar by approximately 5%. In other words, to convince an investor to invest in Europe while its currency depreciates, the European interest rate has to be about 5% higher than the U.S. interest rate. If the difference between the interest rates is not equal to the expected change in exchange rates between the two currencies, then there is an opportunity for profit.
Introducing Broker (IB): An individual or firm who can perform all the functions of a broker except one. An IB is not permitted to accept money, securities, or property from a customer. An IB must be registered with the CFTC, and conduct its business through an FCM on a fully disclosed basis.
Knock-In Option: A type of barrier option. Knock-in options can be “up-and-in” or “down-and-in.” “Up-and-in” options have a barrier level above the current market price of the underlying asset, and the option is activated when the price of the underlying asset moves to or above the barrier level. “Down-and-in” options have a barrier level below the current market price of the underlying asset, and the option is activated when the price of the underlying asset moves to or below the barrier level.
Knock-Out Option: A type of barrier option. Knock-out options can be “up-and-out” or “down-and-out.” “Up-and-out” options have a barrier level above the current market price of the underlying asset, and the option, which was active until it reached the barrier level, is nullified or voided when the price of the underlying asset moves to or above the barrier level. “Down-and-out” options have a barrier level below the current market price of the underlying asset, and the option, which was active until it reached the barrier level, is nullified or voided when the price of the underlying asset moves to or below the barrier level.
Leverage: The control of a larger sum of money with a smaller amount. By accepting the liability to purchase or deliver the total value of a futures contract, a smaller sum (margin) may be used as earnest money to guarantee performance. If prices move favorably, a large return on the margin can be earned from the leverage. Conversely, a loss can also be large, relative to the margin, due to the leverage.
Liability: 1) In the broad legal sense, responsibility or obligation. For example, a person is liable to pay his debts, under the law; 2) In accounting, any debt owed by an individual or organization. Current, or short-term, liabilities are those to be paid in less than one year (wages, taxes, accounts payable, etc.). Long-term, or fixed, liabilities are those that run for one year or more (mortgages, bonds, etc.); 3) In futures, traders deposit margin as earnest money, but they are liable for the entire value of the contract; 4) In futures options, purchasers of options have their liability limited to the premium they pay; option writers are subject to the liability associated with the underlying deliverable futures contract.
Mark-Down: An amount subtracted from the bid/ask spread to reduce the amount earned by the broker for processing the trade.
Mark-Up: An amount added to the spread between the bid and asked prices by a retail broker. Money earned by the broker for processing the trade.
Over-the-Counter Market: The market for securities that are not listed on an exchange. Various broker/dealers buy and sell these securities for their own accounts.
Paper Trading: The practice of "investing" with imaginary money; i.e., pretending to place orders at specific prices, presuming to receive fills, and profiting or losing accordingly. This is a good step to take prior to using real money to trade.
Price Interest Points or Percentage in Points (PIPs): The minimum price fluctuation for a currency. If the EUR/USD rate is 1.3211, for example, then a one pip rise in the price would make the rate 1.3212.
Primary Credit Rates: An interest rate at which sound depository institutions (banks) can borrow short-term funds at 1% above the targeted fed funds rate. There are no restrictions or questions asked for the use of primary credit.
Qualified Eligible Person (QEP): Investors (including FCMs, registered broker/dealers, large CPOs and CTAs, registered investment companies, banks, insurance companies, pension plans, and natural persons) with a net worth greater than $1,000,000 and/or income greater than $200,000 for each of the last two years, as well as other institutional type investors. Some, but not all, of these QEPs must meet a "portfolio requirement" of owning investments with a market value of $2 million or more, or having (or recently had) an account with a FCM containing $200,000 or more in initial margin and option premiums, or some combination of the two.
Quote Currency: In a currency pair, the second currency mentioned. The quote states how much of the quote currency is required to purchase one unit of the base currency. For example, if the Australian dollar is quoted as AUD/USD .8077/80, USD is the quote currency; the bid price is USD .8077 per Australian dollar and the offered price is USD .8080 per Australian dollar. The quote currency is also known as the "secondary currency," "counter currency," or "terms currency."
Reserve Currency: A currency that is held by many central banks and used to make international payments. Recently, the U.S. dollar has been the world's reserve currency.
Retail Foreign Exchange Dealer (RFED): A firm that acts exclusively as a counterparty in retail off-exchange foreign exchange transactions. Such firms are required to register with the National Futures Association (NFA).
Rollover: The process of postponing a settlement date by exchanging a maturing forex position for one with a later settlement date.
Secondary Credit Rates: An interest rate at which troubled depository institutions (banks) can borrow short-term funds at 1.5% above the targeted fed funds rate. Use of secondary credit entails higher levels of supervision by the Fed.
Security Deposit: A performance bond used to open forex positions. To calculate the security deposit in the quote currency, multiply the current price of the base currency by the transaction size times the security deposit percentage. For example, if the security deposit percentage is 2%, the base currency is U.S. dollars, the quote currency is the British Pound, and the bid/ask spread is £.6530/2, then the security deposit is £.6530/dollar times $100,000 times .02 equals £1,306.00.
Settlement Date: When a trade is completed (delivered) by transferring currencies/funds between buyer and seller.
Spot Date: Two days after the current trading day, when currencies traded today must be delivered.
Spot-Next: A forex procedure in which a position is closed out at the end of the day after the spot day (two business days out).
Spot Price: Today’s market price (closest rate to today). Spot transactions usually settle within two business days.
Spot Transaction: A currency trade that settles as soon as possible, usually within two business days.
Swap: The temporary exchange of one currency for another, accomplished by simultaneously buying and selling a spot contract and a forward contract for the same amount of currency. The effect is that the swapped currency is held for a fixed period of time before re-exchanging back into the original currency. The interest rate differential between the two currencies determines the rate for the swap. Most swaps are entered by large corporations and investors.
Technical analysis: Technical analysis uses charts to examine changes in price patterns, volume of trading, open interest, and rates of change to predict and profit from trends. Someone who follows technical rules (called a technician) believes that prices will anticipate changes in fundamentals.
Tom-Next (Tomorrow Next): A forex procedure in which a position is closed out at the end of the day prior to the spot day (which is two business days out) — thus closed tomorrow, before its settlement (or value) date, and re-opened upon the next day’s opening, moving the settlement date out. Daily forex trading "closes" each day at 15:00 ET, and immediately re-opens for the next day's trading. Thus, the Tom-Next swap or rollover takes place almost instantaneously at this time. This imay be used as a short-term cash management tool, as well as for speculators to maintain positions over time without going into delivery.
Trade Date: The date on which a trade is designated by an exchange to have occurred. Trade dates exist for forex markets, securities markets, futures markets, etc. Note that it is possible for a t rade date to vary from the actual date on which the trade occurs depending on custom and timing of the trade during the day.
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Disclaimer: The information contained on these pages is from sources believed to be reliable. There is no expressed or implied warranty as to the accuracy or completeness of the material. All information is subject to change without notice. Past performance is not necessarily indicative of future results. You should read a "Risk Disclosure Statement" and/or an "Option Risk Disclosure Statement" before trading and should understand the risks associated with futures and options trading. The risk of loss may be substantial. Trading is risky, and many traders lose money. Before trading, one should be aware that with the potential for profits, there is also the potential for losses, which may be large. The information on this web site is not to be construed as trading advice, and should not be relied upon for timeliness as its availability cannot be guaranteed.