FOREX - Glossary of terms

                    FOREX - Glossary of terms

American-style option An option contract that may be exercised
at any time before it expires.

Ask The quoted price at which a customer can buy a currency
pair. Also referred to as the ‘offer,’ ‘ask price,’ or ‘ask rate.’

Base Currency For foreign exchange trading, currencies are
quoted in terms of a currency pair. The first currency in the
pair is the base currency. For example, in a USD/JPY currency
pair, the US dollar is the base currency. Also may be referred
to as the primary currency.

Bid The quoted price where a customer can sell a currency
pair. Also known as the ‘bid price’ or ‘bid rate.’

Bid/Ask Spread The point difference between the bid and ask
(offer) price.

Call A call option gives the option buyer the right to purchase
a particular currency pair at a stated exchange rate.

Counterparty The counterparty is the person who is on the other
side of an OTC trade. For retail customers, the dealer will
always be the counterparty.

Cross-rate The exchange rate between two currencies where
neither of the currencies are the US dollar.

Currency pair The two currencies that make up a foreign
exchange rate. For example, USD/YEN is a currency pair.

Dealer A firm in the business of acting as a counterparty to
foreign currency transactions.

Euro The common currency adopted by eleven European
nations (i.e., Austria, Belgium, Finland, France, Germany,
Ireland, Italy, Luxembourg, the Netherlands, Portugal and
Spain) on January 1, 1999.

European-style option An option contract that can be exercised
only on or near its expiration date.

Expiration This is the last day on which an option may either
be exercised or offset.

Forward transaction A true forward transaction is an agreement
that expects actual delivery of and full payment for the currency to occur on a future date. This term may also be used
to refer to transactions that the parties expect to offset at
some time in the future, but these transactions are not true
forward transactions and are governed by the federal
Commodity Exchange Act.

Interbank market A loose network of currency transactions
negotiated between financial institutions and other large
companies.

Leverage The ability to control large dollar amount of a commodity with a comparatively small amount of capital. Also
known as ‘gearing.’

Margin See Security Deposit.

Offer See ask.

Open position Any transaction that has not been closed out by
a corresponding opposite transaction.

Pip The smallest unit of trading in a foreign currency price.

Premium The price an option buyer pays for the option, not
including commissions.

Put A put option gives the option buyer the right to sell a particular currency pair at a stated exchange rate.

Quote currency The second currency in a currency pair is
referred to as the quote currency. For example, in a USD/JPY
currency pair, the Japanese yen is the quote currency. Also
referred to as the secondary currency or the counter currency.

Rollover The process of extending the settlement date on an
open position by rolling it over to the next settlement date.

Retail customer Any party to a forex trade who is not an eligible contract participant as defined under the Commodity

Exchange Act. This includes individuals with assets of less
than $10 million and most small businesses.

Security deposit The amount of money needed to open or maintain a position. Also known as ‘margin.’

Settlement The actual delivery of currencies made on the
maturity date of a trade.

Spot market A market of immediate delivery of and payment for
the product, in this case, currency.

Spot transaction A true spot transaction is a transaction requiring prompt delivery of and full payment for the currency. In
the interbank market, spot transactions are usually settled in
two business days. This term may also be used to refer to
transactions that the parties expect to offset or roll over within two business days, but these transactions are not true spot
transactions and are governed by the federal Commodity
Exchange Act.

Spread The point or pip difference between the ask and bid
price of a currency pair.

Sterling Another term for British currency, the pound.

Strike price The exchange rate at which the buyer of a call has
the right to purchase a specific currency pair or at which the
buyer of a put has the right to sell a specific currency pair.
Also known as the ‘exercise price.’