Forex Trading - Abbreviations [......3]

Point
0.0001 of a unit; for instance, if the GBP/USD is 1.5220, then 1.5219 is one point lower

Political Risk
The potential for losses arising from a change in government policy.

Premium
In options, the price of a call or a put, which the buyer initially pays to the option writer.

Price Risk (Market Risk)
The risk of a fall in the market value of a foreign investment (as measured in the domestic currency of the investor) due to an adverse change in the value of the currency of the investment.

Principal
The counterparty that sells and buys currencies for his own account as opposed to a broker who introduces a buyer to a seller and vice versa.

Purchasing Power Parity
The proposition that over the long term, changes in the exchange rate between two currencies are the result of differences in the relative rate of inflation in the two countries concerned.

Put
In options, the buyer of a put has the right to acquire a short position in the underlying contract at the strike price until the option expires; the seller (writer) of a put obligates himself to take a long position in the contract at the strike price if the buyer exercises his put.

Resistance
A price level at which you would expect selling to take place due to technical analysis. The resistance level of one currency is the support level for the other.

Risk Neutrality
An attitude that risks should neither be sought nor avoided, but should be accepted whenever they arise.

Rollover
Where the settlement of a deal is rolled forward to another value date based on the interest rate differential of the two currencies.

Settlement
Actual exchange of base currency and currency between principal and client.

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

Soft Currency
A currency which is expected to devalue or depreciate against other currencies, or whose exchange rate must be supported by central bank intervention or exchange controls.

Speculation
Buying or selling currency in expectation of an exchange rate movement, so as to make a profit, either in the same market or between two different markets, e.g. forex cash markets and derivatives markets.

Spot
Spot means that the settlement date of a deal is two business days forward.

Spread
The difference in prices between bid and offer rates.

Stop Loss Order (or Stop)
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.

Strike Price
For call options, the specified price at which the buyer has the right to purchase the underlying contract.

Structural Hedging
The process of reducing or eliminating currency exposure by matching receivables and payables in each currency or currency bloc to minimise the net exposure.

Support
Price level at which you expect buying to take place. See resistance.

Swap
An agreement between two parties to exchange a series of future payments. In a currency swap, the exchange of payments (cash flow) are in two currencies, one of which is often the US dollar.

Swift
The society for Worldwide International Fund Transfers is a multinational facility for fund transfers based in Belgium and the Netherlands.

Technical Analysis
Analysis based on market action through chart study, moving averages, volume, open interest, oscillators, formations, stochastics and other technical indicators.

Thin Trading
When the volumes of currency bought and sold are low.

Time Value
In options, the value of the premium is based on the amount of time left before the contract expires and the volatility of the underlying contract. Time value represents that portion of the premium in excess of intrinsic value. Time value diminishes as the expiration of the option draws near and/or if the underlying contract's price development becomes less volatile.

Two-Way Price
Rates for which both a bid and offer are quoted.

US Prime Rate
The rate at which US banks will lend to their prime corporate customers.

Value Date
Settlement date of a spot or forward deal.

Volatility
A measure of price fluctuation.