Options or futures that create a position that is able to be achieved directly but is generated by a combination of options and futures in the relevant market. In foreign exchange a SAFE combines two forward contracts into a single transaction where settlement only involves the difference in values.
Friday, December 21, 2007
SWIFT
Society for World-wide Interbank Telecommunications is a Belgian based company that provides the global electronic network for settlement of most foreign exchange transactions.
Swap
The simultaneous purchase and sale of the same amount of a given currency for two different dates, against the sale and purchase of another. A swap can be a swap against a forward. In essence, swapping is somewhat similar to borrowing one currency and lending another for the same period. However, any rate of return or cost of funds is expressed in the price differential between the two sides of the transaction.
Support Levels
When an exchange rate depreciates or appreciates to a level where (1) Technical analysis techniques suggest that the currency will rebound, or not go below; (2) The monetary authorities intervene to stop any further downward movement. See Resistance Point.
Strike Price
Also called Exercise Price. The price at which an options holder can buy or sell the underlying instrument.
Straight
A bond with unquestioned right to repayment of principal and interest at the specified dates with no additional further rights or bonuses.
Straddle
The simultaneous purchase/sale of both call and put options for the same share, exercise/strike price and expiry date.
Stop Loss Order
Order given to ensure that , should a currency weaken by a certain percentage, a short position will be covered even though this involves taking a loss. Realize profit orders are less common.
Sterilization
Central Bank activity in the domestic money market to reduce the impact on money supply of its intervention activities in the FX market.
Standard and Poors
A US firm engaged in assessing the financial health of borrowers. The firm also has generated certain stock indices i.e. S & P 500.
Stable Market
An active market which can absorb large sale or purchases of currency without major moves.
Spread
(l)The difference between the bid and ask price of a currency. (2) The difference between the price of two related futures contracts. (3) For options, transactions involving two or more option series on the same underlying currency.
Spot Week
A standard period of one week swap measured from the current value date of the currency spot rate.
Spot
(1) The most common foreign exchange transaction. (2) Spot or Spot date refers to the spot transaction value date that requires settlement within two business days, subject to value date calculation.
Soft Market
More potential sellers than buyers, which creates an environment where rapid price falls are likely.
SOFFEX
Swiss Options and Financial Futures Exchange, a fully automated and integrated trading and clearing system.
SITC
Standard International Trade Classification. A system for reporting trade statistics in a common manner.
Short Sale
The sale of a currency futures not owned by the seller at the time of the trade. Short sales are usually made in expectation of a decline in the price.
Short Forward Date/Rate
The term short forward refers to a period of up to two months, although it is more commonly used with respect to maturities of less than one month.
Settlement Price
The official closing price for a future set by the clearing house at the end of each trading day.
Settlement Date
The date by which an executed order must be settled by the transference of instruments or currencies and funds between buyer and seller.
SDR
Special Drawing Right. A standard basket of five major currencies in fixed amounts as defined by the IMF.
Rollover
An overnight swap, specifically the next business day against the following business day (also called Tomorrow Next, abbreviated to Tom-Next).
Rolling Over
The substituting of a far option for a near option of the same underlying stock at the same strike/exercise price.
Risk Reversal
A combination of purchasing put options with the sale of call options. The put limits downside, while the call limits the upside.
Risk Position
An asset or liability, which is exposed to fluctuations in value through changes in exchange rates or interest rates.
Risk Management
The identification and acceptance or offsetting of the risks threatening the profitability or existence of an organization. With respect to foreign exchange involves among others consideration of market, sovereign, country, transfer, delivery, credit, and counterparty risk.
Reuter Dealing
A system for screen based trading that has been in operation since the early 1980s now has a matching optional enhancement known as Dealing 2000-2.
Retail Sales
Retail Sales are a measure of the total receipts of retail stores. Monthly percentage changes reflect the rate of change of such sales and are widely followed as an indicator of consumer spending. Rising in Retail Sales are often associated with a strong economy and therefore an expectation of higher short term interest rates that are often supportive to a currency in at least the short term.
Retail Price Index
Measurement of the monthly change in the average level of prices at retail, normally of a defined group of goods.
Resistance Point or Level
A price recognized by technical analysts as a price which is likely to result in a rebound but if broken through is likely to result in a significant price movement.
Reserve Tranche
The 25% of its quota to which a member of the IMF has unconditional access, and for which there is no obligation to repay.
Reserve Requirement
The ratio of reserves to deposits, expressed as a fraction prescribed by national banking authorities including USA.
Reserves
Funds held against future contingencies, normally a combination of convertible foreign currency, gold, and SDRs. Official reserves are to ensure that a government can meet near term obligations. They are an asset in the balance of payments.
Repurchase Agreement
Agreements by a borrower where they sell securities with a commitment to repurchase them at the same rate with a specified interest rate.
Reinvestment Rate
The rate at which interest earned on a loan can be reinvested. The rate may not attract the same level of interest as the principal amount.
Real
A price, interest rate or statistic that has been adjusted to eliminate the effect of inflation.
Ratio Calendar Spread
Selling more near-term options than longer maturity options at the same strike price.
Ratio Spread
Buying a specific quantity of options and selling a larger quantity of out of the money options.
Put Option
A put option confers the right but not the obligation to sell currencies, instruments or futures at the option exercise price within a predetermined time period.
Producer Price Index (PPI)
PPI is a measure of the average level of prices of a fixed basket of goods received in primary markets by producers. A rising PPI is normally expected to lead to higher CPI and thereby to potentially higher short term interest rates.
Prime Rate
(1) The rate from which lending rates by banks are calculated in the US. (2) The rate of discount of prime bank bills in the UK.
Premium
(1) The amount by which a forward rate exceeds a spot rate (2) The amount by which the market price of a bond exceeds its par value. (3) Options, the price a put or call buyer must pay to a put or call seller for an option contract. (4) The margin paid above the normal price level.
Position
The netted total commitments in a given currency. A position can be either flat or square (no exposure), long, (more currency bought than sold), or short ( more currency sold than bought).
Position Limit
The maximum position, either net long or net short, in one future or in all futures of one currency or instrument combined which may be held or controlled by one person.
Payroll Employment
Payroll employment is a measure of the number of people being paid as employees by non-farm business establishments and units of government. Monthly changes in payroll employment reflect the number of net new jobs created or lost during the month and changes are widely followed as an important indicator of economic activity. Large increases in payroll employment are seen as signs of strong economic activity that could eventually lead to higher interest rates that are supportive of the currency at least in the short term.
Parity
(1) Foreign exchange dealer's slang for your price is the correct market price. (2) Official rates in terms of SDR or other pegging currency
Overnight Limit
Net long or short position in one or more currencies that a dealer can carry over into the next dealing day. Passing the book to other bank dealing rooms in the next trading time zone reduces the need for dealers to maintain these unmonitored exposures.
Out-of the Money
A put option is Out-of-the-money if the exercise/strike price is below the price of the underlying instrument. A call option is Out-of-the money if the exercise/strike price is higher than the price of the underlying instrument. See In-the-money.
OTC
Over the Counter, the term used to describe futures and options not traded on an exchange. Trade is directly between buyers and sellers and there is no standardization of strikes or expirations.
Option
A contract conferring the right but not the obligation to buy (call) or to sell (put) a specified amount of an instrument at a specified price within a predetermined time period.
Option Class
All options of the same type - calls or puts - listed on the same underlying instrument.
Open Position
The difference between assets and liabilities in a particular currency. This may be measured on a per currency basis or the position of all currencies when calculated in base currency.
Open Market Operations
Central Bank operations in the markets to influence exchange and interest rates.
Open Interest
The total number of outstanding option or futures contracts that have not been closed out by offset or fulfilled by delivery.
Off-Shore
The operations of a financial institution which although physically located in a country, has little connection with that country's financial systems. In certain countries a bank is not permitted to do business in the domestic market but only with other foreign banks. This is known as an off shore banking unit.
Offer
The price at which a seller is willing to sell. The best offer is the lowest such price available.
OECD
An international organization helping governments tackle the economic, social and governance challenges of a globalised economy.
Note
A financial instrument consisting of a promise to pay rather than an order to pay or a certificate of indebtedness.
Nostro Account
A foreign currency current account maintained with another bank. The account is used to receive and pay currency assets and liabilities denominated in the currency of the country in which the bank is resident.
Net Position
The number of futures contracts bought or sold which have not yet been offset by opposite transactions.
Multiple Exchange Rates
Different exchange rates for different types of transaction. The South African Rand is an example.
Money Supply
The amount of money in the economy, which can be measured in a number of ways. See definitions of M0-M4.
Money Market
A market consisting of financial institutions and dealers in money or credit who wish to either borrow or lend.
Minimum Reserve
Reserves required to be deposited at central banks by commercial banks and other financial institutions. Sometimes referred to as Registered Reserves.
Minimum Price Fluctuation
The smallest increment of market price movement possible in a given futures contract..
Mine
Expression used to indicate that the contacting party is willing to buy at the rate offered by the quoting bank..
Mid-Price or Middle Rate
The price half-way between the two prices, or the average of both buying and selling prices offered by the market makers.
Micro Economics
The study of economic activity as it applies to individual firms or well defined small groups of individuals or economic sectors.
Market Maker
A market maker is a person or firm authorized to create and maintain a market in an instrument.
Marginal Risk
The risk that a customer goes bankrupt after entering into a forward contract. In such an event the issuer must close the commitment running the risk of having to pay the marginal movement on the contract.
Margin Call
A demand for additional funds to be deposited in a margin account to meet margin requirements because of adverse future price movements.
Maintenance Margin
The minimum margin which an investor must keep on deposit in a margin account at all times in respect of each open contract.
M3
In the UK it is M1 plus public and private sector time deposits and sight deposits held by the public sector.
M1
Cash in circulation plus demand deposits at commercial banks. There are variations between the precise definitions used by national financial authorities.
Long Hedge
The purchase of futures contracts for price protection purposes, as a defensive position against an increase in cash prices, or falling interest rates.
Lombard Rate
One of the key commercial interest rates normally referring to Germany although such rates exist in France, Belgium, and Switzerland. An interest rate for a loan against the security of pledged paper.
Lines
An arrangement by which a bank agrees to lend to the line holder during some specified period any amount up to the full amount of the line.
Limit
(1)The maximum price fluctuation permitted by an exchange from the previous session's settlement price for a given contract. (2) In international banking the limit a bank is willing to lend in a country. (3) The amount that one bank is prepared to trade with another. (4) The amount that a dealer is permitted to trade in a given currency.
Limit Up
The maximum price advance from the previous trading day's settlement price permitted in one trading session.
Limit Order
An order to buy or sell a specified amount of a security at a specified price or better.
Limit Down
The maximum price decline from the previous trading day's settlement price permitted in one trading session.
Leading Indicators
Statistics that are considered to precede changes in economic growth rates and total business activity, e.g. factory orders.
Knock In
A process where a barrier option (European) becomes active as the underlying spot price is in the money.
Key Currency
Small countries, which are highly dependent on exports, orientates their currencies to their major trading partners, the constituents of a currency basket.
Intrinsic Value
The amount by which an option is In-the-money. The intrinsic value is the difference between the exercise/strike price and the price of the underlying security.
In the Money
A call option is in the money when the strike price is less than the current price of the underlying instrument. A put is when the strike price is greater.
Intervention
Action by a central bank to effect the value of its currency by entering the market. Concerted intervention refers to action by a number of central banks to control exchange rates.
Interest Rate Swaps
An agreement to swap interest rate exposures from floating to fixed or vice versa. There is no swap of the principal. It is the interest cash flows be they payments or receipts that are exchanged.
Interest Rate Floor
An agreement which provides the buyer of the floor with a minimum interest rate for future lending requirements.
Interest Rate Floor
An agreement which provides the buyer of the floor with a minimum interest rate for future lending requirements.
Interest Rate Options
An agreement permitting a party to obtain a particular interest rate, issued both OTC and by exchanges.
Inter-Bank Rates
The bid and offer rates at which international banks place deposits with each other. The basis of the Interbank market.
Initial Margin
The margin is a returnable deposit required to be lodged by buyers and sellers with the clearing house to secure a new futures or options position.
Inflation
Continued rise in the general price level in conjunction with a related drop in purchasing power. Sometimes referred to as an excessive movement in such price levels.
Industrial Production Index
A coincident indicator measuring physical output of manufacturing, mining and utilities.
Inconvertible Currency
Currency which cannot be exchanged for other currencies, because this is forbidden by the foreign exchange regulations.
In-the-Money
A call option is In-the-money if the price of the underlying instrument is higher than the exercise/strike price. A put option is In-the-money if the price of the underlying instrument is below the exercise/strike price. See Out-of-the-money.
Implied Rates
The interest rate determined by calculating the difference between spot and forward rates.
Implied Volatility
A measurement of the market's expected price range of the underlying currency futures based on the traded option premiums.
IMM
International Monetary Market part of the Chicago Mercantile Exchange that lists a number of currency and financial futures.
Thursday, December 20, 2007
Hyperinflation
Very high and self sustaining inflation levels. One definition being the period while inflation exceeds 50% until it has dropped below that level for 12 months.
Housing Starts
Housing Starts are a measure of the number of residential units on which construction is begun each month.
Historical Volatility
The annualized standard deviation of percentage changes in futures prices over a specific period. It is an indication of past volatility in the marketplace.
Hedge
The purchase or sale of options or futures contracts as a temporary substitute for a transaction to be made at a later date. Usually it involves opposite positions in the cash or futures or options market.
Head and Shoulders
SA pattern in price trends which chartists consider indicates a price trend reversal. The price has risen for some time, at the peak of the left shoulder, profit taking has caused the price to drop or level. The price then rises steeply again to the head before more profit taking causes the price to drop to around the same level as the shoulder. A further modest rise or level will indicate that a further major fall is imminent. The breach of the neckline is the indication to sell.
GNP Deflator
Removes inflation from the GNP figure. Usually expressed as a percentage and based on an index figure.
Gross National Product
(GNP) Gross domestic product plus "factor income from abroad" - income earned from investment or work abroad.
Gold Standard
A monetary system that backs its currency with a reserve of gold, and allows currency holders to convert their currency into gold. The U.S. went off the gold standard in 1971.
GLOBEX
A system for global after hours electronic trading in futures and options developed by Reuters for CME and CBOT for use in conjunction with various exchanges around the world.
Gamma
The rate at which a delta changes over time or for one unit change in the price of the underlying asset.
G10
G7 plus Belgium, Netherlands and Sweden, a group associated with IMF discussions. Switzerland is sometimes peripherally involved.
Fundamentals
The macro economic factors that are accepted as forming the foundation for the relative value of a currency, these include inflation, growth, trade balance, government deficit, and interest rates.
Forward Rate
Forward rates are quoted in terms of forward points, which represents the difference between the forward and spot rates. In order to obtain the forward rate from the actual exchange rate the forward points are either added or subtracted from the exchange rate. The decision to subtract or add points is determined by the differential between the deposit rates for both currencies concerned in the transaction. The base currency with the higher interest rate is said to be at a discount to the lower interest rate quoted currency in the forward market. Therefore the forward points are subtracted from the spot rate. Similarly, the lower interest rate base currency is said to be at a premium, and the forward points are added to the spot rate to obtain the forward rate.
Forward Rate Agreements
The FRA is an agreement between two parties that determine the interest rate that will apply to a notional future loan or deposit of an agreement.
Forward Outright
A commitment to buy or sell a currency for delivery on a specified future date or period. The price is quoted as the Spot rate minus or plus the forward points for the chosen period.
Forward Operations
Foreign exchange transactions, on which the fulfillment of the mutual delivery obligations is made on a date later than the second business day after the transaction was concluded.
Forward Margins
Discounts or premiums between spot rate and the forward rate for a currency. Normally quoted in points.
Forward Forward
A forward / forward deal is one where both legs of the deal have value dates greater than the current spot value date.
FOMC
Federal Open Market Committee, the committee that sets money supply targets in the US which tend to be implemented through Fed Fund interest rates etc.
Floor
(1) An agreement with a counterparty that sets a lower limit to interest rates for the floor buyer for a stated time. (2) A term for an exchanges trading area (cf. screen based trading), normally the trading area is referred to as a pit in the commodities and futures markets.
Floating Exchange Rate
An exchange rate where the value is determined by market forces. Even floating currencies are subject to intervention by the monetary authorities. When such activity is frequent the float is known as a dirty float.
Flexible Exchange Rate
Exchange rates with a fixed parity against one or more currencies with frequent revaluation. A form of managed float.
Fixing
A method of determining rates by normally finding a rate that balances buyers to sellers. Such a process occurs either once or twice daily at defined times. Used by some currencies particularly for establishing tourist rates. The system is also used in the London Bullion market.
Fixed Exchange Rate
Official rate set by monetary authorities. Often the fixed exchange rate permits fluctuation within a band.
Fixed Dates
he monthly calendar dates similar to the spot. There are two exceptions. For detailed description see value dates.
Fine Rate
The price given in response to a request for a rate at which the quoting party is willing to execute a deal for a reasonable amount for spot settlement. Screen quotes are indicative. Quotes on matching systems are normally firm depending on systems requirement to reconfirm rate prior to completing matching.
Federal Reserve System
The central banking system of the US comprising 12 Federal Reserve Banks controlling 12 districts under the Federal Reserve Board. Membership of the Fed is compulsory for banks chartered by the Controller of Currency and optional for state chartered banks.
Federal Reserve Board
The board of the Federal Reserve System, appointed by the US President for 14 year terms, one of whom is appointed for four years as chairman.
Fed
The United States Federal Reserve. Federal Deposit Insurance Corporation Membership is compulsory for Federal Reserve members. The corporation had deep involvement in the Savings and Loans crisis of the late 80s.
Fed Funds
Cash balances held by banks with their local Federal Reserve Bank. The normal transaction with these funds is an inter bank sale of a Fed fund deposit for one business day. Straight deals are where the funds are traded overnight on an unsecured basis.
Fed Fund Rate
The interest rate on Fed funds. This is a closely watched short term interest rate as it signals the Feds view as to the state of the money supply.
Fast Market
Rapid movement in a market caused by strong interest by buyers and/or sellers. In such circumstances price levels may be omitted and bid and offer quotations may occur too rapidly to be fully reported.
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