Forex Trading - Abbreviations [2......continued]

Fed
Abbreviation for Federal Reserve System of the United States. In the domestic context Fed usually refers to its board of governors or to the Federal Reserve Bank of New York; in the foreign exchange context it usually refers to the latter.

Federal Open Market Committee
Key decision making committee of the Federal Reserve System. The minutes of its meeting are published about a month later, and show the current stance of US monetary policy.

Figure
Dealers' slang meaning "00" and denoting and.

Fixed Exchange rate
Official rate set by monetary authorities for one or more currencies. In practice, even fixed exchange rates are allowed to fluctuate between definite upper and lower intervention points.

Flat/Square
Where a client has not traded in that currency or where an earlier deal is reversed thereby creating a neutral (flat) position.

Floating Exchange Rate
When the value of a currency is decided by supply and demand.

Forex
An abbreviation for foreign exchange also FX.

Forward Points
The interest rate differential between two currencies expressed in exchange rate points. These forward points are added to or subtracted from the spot rate to give the forward or outright rate.

Forward Rate
The rate at which a foreign exchange contract is struck today for settlement at a specified future date.

Fundamental Analysis
Analysis based on economic factors.

Future
A contract giving the obligation to buy or sell an asset at a set date in the future.

GTC "Good Till Cancelled"
An order left with a dealer to buy or sell at a fixed price. It holds until cancelled.

Hard Currency
A currency whose value is expected to remain stable or increase in terms of other currencies.

Hedging
A hedging transaction is one which protects an asset or liability against a fluctuation in the foreign exchange rate.

IMF
International Monetary Fund

Initial Margin
The deposit required before a client can transact a deal.

Interest Parity
The interest parity theory is if there are two financial instruments in different currencies but identical in risk and maturity (e.g. three month UK gilts and Us Treasury bills), then a difference in the interest rate on the instruments will be reflected in the premium or discount for the forward exchange rate.

In-the-Money
In call options, when the strike price is below the price of the underlying contract. In put options, when the strike price is above the price of the underlying contract. In-the-Money options are the most expensive options because the premium includes intrinsic value.

Intrinsic Value
For in-the-money call and put options, the difference between the strike price and the underlying contract price.

Leads and Lags
Process of accelerating (leads) or slowing up (lags) foreign exchange payments or receipts when a change in exchange rates is expected.

Leverage
Facility whereby a small margin deposit can control a much larger total contract value, a mechanism which determines the ability to make extraordinary profits at the same time as keeping the risk capital to a minimum.

Limit Order
An order given which has restrictions upon its execution. The client specifies a price and the order can be executed only if the market reaches that price.

Lombard Rate
German term for the rate of interest charged for loans against the security of pledged paper. Particularly used by Bundesbank, which normally maintains its Lombard rate at about 1/2% above its discount rate.

London Interbank Offered Rate (LIBOR)
The interest rate at which banks in London are prepared to lend funds to first-class banks.

Long Position
A position where the client has bought a currency he does not already own. Normally expressed in base currency terms, e.g. long US dollars (short Deutsch marks).

Margin
Cash or guarantee deposited by a client wishing to trade.

Maturity
Date for settlement

Not Held Basis Order
An order whereby the price may trade through or even better than the client's desired level, but the principal is not held responsible if the order is not executed.

Offer
The rate at which a dealer is willing to sell the base currency.

One Cancels Other (OCO) Order
Where the execution of one order automatically cancels a previous order.

Open Position
Any deal which has not been settled by physical payment or reversed by an equal and opposite deal for the same value date.

Option
The right, but not the obligation, to buy or sell an asset, such as currency, on or before a set of future date.

Out-of-the Money
Option calls with strike prices above the price of the underlying contracts, and puts with strike prices below the price of the underlying contracts.

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.

Overnight Trading
Refers to a purchase or sale between 9:00 pm and 7:00 am.

Over-the-Counter Transaction (OTC)
A transaction arranged by direct negotiation, usually by telephone, rather than on an exchange.