Index Of Money Market Terms

Introduction

Dictionary

A B C D E F G H I L M N O P R S T U V W

A

ABA - a digital code used by the American Bankers Association to define a bank.

B

Base Currency - The currency which other currencies are quoted against.

Basis Point - One hundredth of one percentage point. A change from 5.25% to 5.75% is said to be a 50 basis point move. See 'Point' for currency moves.

Bear - Someone who believes the prices/market will decline.

Bear Market - A market in which prices decline sharply against a background of widespread pessimism (opposite of Bull Market).

Bretton Woods Accord of 1944 - An agreement that established fixed foreign exchange rates for major currencies, provided for central bank intervention in the currency markets, and set the price of gold at US $35 per ounce. The agreement lasted until 1971. See More on Bretton Woods.

Bull - Someone who believes the prices/market will rise.

Bull Market - A market characterised by rising prices.

Broker - An agent who handles investors' orders to buy and sell currency. For this service, a commission is charged which, depending upon the broker and the amount of the transaction, may or may not be negotiated.

Bid - The price that a buyer is willing to pay to purchase a given currency and sell another at a particular time.

C

Cable - Dealers slang for the Sterling/US Dollar exchange rate.

Call Rate - The overnight interbank interest rate.

Cash Market - The market for the purchase and sale of physical currencies.

Convertible Currency - Currency which can be freely exchanged for other currencies or gold without special authorisation from the appropriate central bank.

Counter party - The customer or bank with whom a foreign deal is made. The term is also used in interest and currency swaps markets to refer to a participant in a swap exchange.

Cross Rate - An exchange rate between two currencies, usually constructed from the individual exchange rates of the two currencies, measured against the United States dollar.

Currency Risk - The risk of incurring losses resulting from an adverse change in exchange rates.

Currency Swap - Contract which commits two counter-parties to exchange streams of interest payments in different currencies for an agreed period of time and to exchange principal amounts in different currencies at a pre-agreed exchange rate at maturity.

Currency Option - Option contract which gives the right to buy or sell a currency with another currency at a specified exchange rate during a specified period.

Currency Swaption - OTC Option to enter into a currency swap contract.

Currency Warrant - OTC Option; long-dated (more than one year) currency option.

Central Bank - A Government institution in control of the nation's monetary policy and the printing of that nation's currency.

Cross Rates - The exchange rate between two currencies expressed as the ratio of two foreign exchange rates that are both expressed in terms of a third currency. Foreign exchange rate between two currencies other than the U.S. dollar, the currency in which most exchanges are usually quoted.

Currency - means money denominated in the lawful currency of a country.

D

Day Trading - refers to opening and closing the same position(s) before the close of that day's trading. Associated with speculative trading.

Dollar Rate - When a variable amount of a foreign currency is quoted against one US Dollar, regardless of where the dealer is located or in what currency he is requesting a quote. The exception is the Sterling/US Dollar rate (cable) which is quoted as variable amount of US Dollars to one Sterling.

E

EMS - Abbreviation for European Monetary System, an agreement between member nations of the European Union to maintain an alignment between the exchange rates of their respective currencies.

European Monetary Unit - The principal goal of the EMU is to establish a single European currency called the Euro, which will officially replace the national currencies of the member EU countries in 2002. Currently, the Euro exists only as a banking currency and for paper financial transactions and foreign exchange. The current members of the EMU are Germany, France, Belgium, Luxembourg, Austria, Finland, Ireland, the Netherlands, Italy, Spain and Portugal.

Euro - The currency of the European Monetary Union (EMU). This is the amalgamation of the following currencies, after Jan. 1, 2002 these currencies will be considered legacy currencies. Germany Deutsche Marks, Italy Lira, Austria Schillings, France Franc, Belgium Francs, Netherlands (Dutch) Guilders, Finland Markka, Portugal Escudo, Greece Drachmas, Ireland Punt, Luxembourg Francs, Spanish Pesetas.

F

Federal Reserve System - The central bank of the United States, with responsibility for implementing the country's monetary policy and regulating member banks of the System. The Fed was created in 1913 and is composed of 12 regional Federal Reserve Banks and a national Board of Governors.

Fixed Exchange Rate - Official rate set by monetary authorities for one or more currencies

Floating Exchange Rates - Floating exchange rates refer to the value of a currency as decided by supply and demand.

Foreign Exchange - The exchange of foreign currency. On the foreign exchange market, foreign currency is bought and sold for immediate (spot) or forward delivery

Forex - Same as Foreign Exchange

Forward Contract - A forward contract fixes the exchange rate for future delivery at a date to be agreed by both participants. A deposit (or a minimum margin) is usually required in forward transactions. For example, if I want to lock in today's rate to buy $10,000 USD at 1.5820 Canadian for the next 4 months, I will have the ability to purchase up to $10,000 USD at this rate.

Fundamental Analysis - focuses on the economic forces of supply and demand that causes price movement. The Fundamentalist studies the causes of market movement, whereas the Technician studies the effects.

FX - an abbreviation of Foreign Exchange

Federal Reserve (Fed) - The Central Bank of the United States.

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 bands, leading to intervention.

Flat / Square - To be neither long nor short is the same as to be flat or square. One would have a flat book if he has no positions or if all the positions cancel each other out.

Floating Rate Interest - As opposed to a fixed rate, the interest rate on this type of deal will fluctuate with market rates or benchmark rates. One example of a floating rate interest is a standard mortgage.

Foreign Exchange Swap - Transaction which involves the actual exchange of two currencies (principal amount only) on a specific date at a rate agreed at the time of the conclusion of the contract (short leg), at a date further in the future at a rate agreed at the time of the contract (the long leg).

Foreign Exchange (or Forex or FX) - The simultaneous buying of one currency and selling of another in an over-the-counter market. Most major FX is quoted against the US Dollar.

Forward - A deal that will commence at an agreed date in the future. Forward trades in FX are usually expressed as a margin above (premium) or below (discount) the spot rate. To obtain the actual forward FX price, one adds the margin to the spot rate. The rate will reflect what the FX rate has to be at the forward date so that if funds were re-exchanged at that rate there would be no profit or loss (i.e. a neutral trade). The rate is calculated from the relevant deposit rates in the 2 underlying currencies and the spot FX rate. Unlike in the futures market, forward trading can be customized according to the needs of the two parties and involves more flexibility. Also, there is no centralized exchange.

Fundamental Analysis - Thorough analysis of economic and political data with the goal of determining future movements in a financial market.

G

GTC - "Good Till Cancelled". An order left with a Dealer to buy or sell at a fixed price. The order remains in place until it is cancelled by the client.

H

Hedging - A hedging transaction is a purchase or sale of a financial product, having as its purpose the elimination of loss arising from price fluctuations. With regards to currency transactions it would protect one against fluctuations in the foreign exchange rate. (see Forward Contract)
The practice of undertaking one investment activity in order to protect against loss in another, e.g. selling short to nullify a previous purchase, or buying long to offset a previous short sale. While hedges reduce potential losses, they also tend to reduce potential profits.

High/Low - Usually the highest traded price and the lowest traded price for the underlying instrument for the current trading day.

I

Interbank Rates - The Foreign Exchange rates at which large international banks quote other large international banks.

Initial Margin - The required initial deposit of collateral to enter into a position as a guarantee on future performance

L

Limit Order - An order to buy at or below a specified price or to sell at or above a specified price.

Long Position - A market position where the Client has bought a currency he previously did not hold own.
Normally expressed in base currency terms, e.g., long Dollars (short D.Marks).

M

Margin - a cash deposit provided by a client as collateral to cover a forward position.

Money Markets - Refers to financial investments that are generally under one year in duration and generally only open to banks and other financial institutions

Margin - Customers must deposit funds as collateral to cover any potential losses from adverse movements in prices.

Margin Call - A demand for additional funds. A requirement by a clearing house that a clearing member (or by a brokerage firm that a client) brings margin deposits up to a required minimu m level to cover an adverse movement in price in the market.

Market Maker - A dealer who supplies prices and is prepared to buy or sell at those stated bid and ask prices. A market maker runs a trading book.

Maturity - Date for settlement.

N

O

Offer - The price, or rate, that a willing seller is prepared to sell at.

One Cancels Other Order - (O.C.O. Order) A contingent order where the execution of one part of the order automatically cancels the other part.

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.

Over The Counter (OTC) - Used to describe any transaction that is not conducted over an exchange.

Overnight Trading - Refers to a purchase or sale between the hours of 9.00 pm and 8.00 am. on the following day.

P

Point (or Pip) - the term used in currency market to represent the smallest incremental move an exchange rate can make. It is one one-hundredth of a percent For example, when a currency moves from 1.5720 to 1.5725 it has moved 5 points. Depending on context, normally one basis point (0.0001 in the case of EUR*USD, GBD*USD, CHF*USD and .01 in the case of JPY*USD).

Political Risk - The uncertainty in return on an investment due to the possibility that a government might take actions which are detrimental to the investor's interests.

R

Resistance - A price level at which you would expect selling to take place.

Risk Capital - The amount of money that an individual can afford to invest, which, if lost would not affect their lifestyle.

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

S

Settlement - (1) The final stage of a transaction, actual physical exchange of one currency for another
(2) is the process by which available funds have been instructed by a client for transfer via wire,
draft or deposit to a multi-currency account and a designated receiver of such funds.
Actual physical exchange of one currency for another.

Short - To go `short` is to have sold an instrument without actually owning it, and to hold a short position with expectations that the price will decline so it can be bought back in the future at a profit.

Spread - The difference between the bid and offer (ask) prices; used to measure market liquidity. Narrower spreads usually signify high liquidity.

Stop Loss Order - An order to buy or sell at the market when a particular price is reached, either above or below the price that prevailed when the order was given.

Support Levels - A price level at which you would expect buying to take place.

Spot - Generally describes a transaction which will come to settlement in two days. A transaction that occurs immediately, but the funds will usually change hands within two days after deal is struck.

Spot Price - The current market price for a spot transaction.

Spot Rate - The current rate for a spot transaction.

Spread - The difference between the bid and offer prices. This is usually used for Interbank trade of currencies.

Swift - Society of Worldwide Interbank Financial Telecommunications. It is a dedicated computer network that is set up to support fund transfer messages between member banks worldwide.

T

Technical Analysis - is analysis based on market action through chart study, volume, trends, moving averages, patterns, formations and many other technical indicators.

Treasury Bill - Short-term U.S. government obligations sold at a discount from face value. Treasury bills generally are issued with 13-, 26- or 52-week maturities.

Treasury Bond - Obligations of the U.S. government that mature in 15 or more years and pay a specified coupon.

Treasury Note - Obligations of the U.S. government that mature in 2 to 10 years and pay a specified coupon

Trend - simply the direction of the market, usually broken down to three categories….major, intermediate and short-term trends. Three directions are also associated with a trend;that is, uptrend, downtrend, and a sideways trend.

Tomorrow to Next - Simultaneous buying and selling of a currency for delivery the following day and selling for the next day or vice versa.

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

U

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

V

Value Date - The date that both parties of a transaction agree to exchange payments. Settlement date of a spot or forward deal.

Volatility - A measure of price fluctuations. The standard deviation of a price series is commonly used to measure price volatility.
A statistical measure of a market or a security's price movements over time and is calculated by using standard deviation.
Associated with high volatility is a high degree of risk.

Volume - represents the total amount of trading activity in a particular stock, commodity or index for that day.
It is the total number of contracts traded during the day

Variation Margin - An additional margin requirement that a broker will need from a client due to market fluctuation.

W

Conclusion

This is a simple dictionary.