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Forex Glossary

Base currency
The first currency in a currency pair is the base currency. The base currency remains constant when determining a currency pair's price. In terms of the foreign exchange market's daily traded volume, the USD (US Dollar) and EUR (Euro) are the dominant base currencies. Ranking third is the GPB (British Pound).

The basis is the difference between the spot price and the futures price.

Basis point
The basis point is one-hundredth (1/100) of a percentage point.

Bid /Ask Spread
The Bid/Ask spread is the difference between the bid and ask (offer) prices. This is also known as a two-way price.

Central bank
The principal monetary authority of a nation is the central bank. It is controlled by the national government and is responsible for setting monetary policy, interest rates and exchange rate policy as well as issuing currency and regulating and supervising the private banking sector. In the United States, the Federal Reserve is the central bank. Other notable central banks are the Bank of England, European Central Bank and the Bank of Japan.

Conversion is the process by which an asset (or a liability) denominated in one currency is exchanged for an asset (or a liability) denominated in a different currency.

Cross rates
The cross rates are an exchange rate between two different currencies. In the country where the currency pair is quoted, the cross rate is said to be non-standard. (Example: In the United States, a GBP/CHF quote would be considered a cross rate. On the other-hand, in the United Kingdom or in Switzerland, it would be one of the primary currency pairs traded.

The currency is a country's unit of exchange issued by their central bank or government whose value is the basis of trade.

Currency (exchange rate) risk
The currency risk is the risk of incurring losses resulting from an adverse change in exchange rates.

Devaluating is the lowering of a country's currency value in relation to the value of currencies of other countries. When a nation's currency is devalued, its exported goods become less expensive (and more competitive) abroad and its imported goods become more expensive.

The drawdown is the measure of a decline in account value, either in dollar or percentage terms, as measured from the peak to the subsequent dip. (Example: If the value of a trading account increases from $10,000 to $20,000 then decreases to $15,000 and increases again to $25,000, the account would have a maximum drawdown of $5,000. even though the account was never in a loss position. The drawdown was calculated by finding the difference between the highest point - $20,000 and the lowest dip - $15,000.)

The Euro is the currency of the European Monetary Union (EMU). It replaced the European Currency Unit (ECU). At this time, the countries participating in the European Monetary Union are Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovenia and Spain.

Exchange rate
The exchange rate is the price of one country's currency stated in terms of another country's currency. (Example: $1 Canadian Dollar = $0.7700 US Dollar*)
*The exchange rate varies. This should not be used as a basis for determining current exchange rates.

Fixed exchange rate
A fixed exchange rate is a country's decision to tie the value of its currency to another country's currency, gold (or other commodity) or a group of currencies. In reality, fixed exchange rates also fluctuate between definite upper and lower bands, leading to intervention.

Foreign exchange (Forex)
Forex is the simultaneous buying of one country's currency and selling of another, in an over-the-counter market.

The G-7 is made up of the seven (7) leading industrial countries: USA, Germany, Japan, France, Britain Canada and Italy.

The G-10 is a group associated with the International Monetary Fund (IMF) discussions and is made up of the G-7 countries as well as Belgium, the Netherlands and Sweden. Switzerland is sometimes involved as well.

The G-20 is a group made up of the finance ministers and central bankers of the following twenty (20) countries/groups: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the United States and the European Union. The World Bank and the International Monetary Fund (IMF) also participate. The G-20 was set up to respond to the financial turmoil of 1997-1999, through the development of policies that "promote international financial stability".

Hedge fund
A hedge fund is an unregulated, private investment fund for wealthy* investors specializing in short-term, high-risk speculation on currencies, bonds, stock options and derivatives.
*Minimum investments usually start at $1,000,000 USD.

Hedging is a strategy created to reduce the risk in investing. The purpose of hedging is to reduce the volatility of a portfolio by investing in alternative instruments that offset the risk in the main portfolio.

London Inter-Bank Offer Rate or LIBOR
The London Inter-Bank Offer Rate (also known as LIBOR) is the standard for the interest rate that banks charge each other for loans (usually in Eurodollars). This rate is applicable to the short-term international inter-bank deposit market and applies to very large loans borrowed from one (1) day to five (5) years. This market allows banks with liquidity requirements to borrow quickly from other banks with surpluses, enabling banks to avoid holding excessively large amounts of their asset base as liquid assets. Although the rate changes throughout the day, the LIBOR is officially fixed once a day by a small group of large London banks.

Leverage is the extent to which an investor or business is using borrowed money. For investors, leverage means buying a margin to enhance return on value without increasing their investment. The amount, expressed as a multiple, by which the notional amount traded exceeds the margin required to trade. (Example: If the notional amount traded is $100,000 and the required margin is $2,000, the trader can trade with 50 times leverage. This is determined by dividing $100,000 by $2,000.) Leveraged investing can be extremely risky because you can lose all of the money that you have invested.

The liquidity is the ability of a market to accept large transactions. A function of volume and activity in a market, it is the efficiency and cost effectiveness with which positions can be traded and orders executed. A more liquid market will provide more frequent price quotes at a tighter bid/ask spread.

Long is a position of purchasing one currency against another currency, with the anticipation that the value of the purchased currency will appreciate against the second currency.

Margins are funds that customers must deposit as collateral to cover potential losses from adverse movements in prices.

Margin Call
A margin call is a requirement for additional funds or other collateral, from a broker or dealer, to increase margin to a necessary level to guarantee performance on a position that has moved against the customer.

Market Maker
A market maker is a dealer that supplies prices and is prepared to buy and sell at those bid and ask prices. Some CFTC registered FDMs are market makers.

Pip (tick)
The term used in currency markets to represent the smallest incremental move an exchange rate can make. Depending on context, normally one basis point. For example, 0.0001 in the case of EUR/USD, GBD/USD, USD/CHF and .01 in the case of USD/JPY.
A pip or tick is the smallest possible incremental move on an exchange rate. A pip is usually one basis point, depending on context. (Example: a pip in the case of EUR/USD is 0.0001 and a pip in the case of USD/JPY is 0.01.)

A position is a view expressed by a trader through the buying or selling of currencies. Position can also refer to the amount of currency an investor owns or owes.

Premium (cost of carry)
The premium, which is also known as the cost of carry, is the cost or benefit associated with carrying an open position from one day to the next. The premium is calculated by using the differential in short-term interest rates between the two currencies in the pair.

Revaluation is an increase in the forex value of a currency that is pegged to gold or other currencies.

Revaluation rates
Revaluation rates are the rates for any period or currency which is used to revalue a position or book. The revaluation rates are the market rates used when a trader runs an end-of-day to establish profit and loss for the day.

Rollover is the settlement of a deal which is rolled forward to another value date with the cost of this process based on the interest rate differential between the two currencies. An overnight swap, specifically the next business day against the following business day.

Short is the selling of a currency without actually owning. It also refers to holding a short position with expectations that the price will decrease so it can be bought back at a later time at a profit.

A spread is the difference between the bid and ask prices of a currency, which is used to measure market liquidity. Spreads which are more narrow will usually signify higher liquidity.

Spot Price
The spot price is the current market price. The settlement of spot transactions usually occurs within two (2) business days.

A foreign exchange swap is a trade that combines both a spot and a forward transaction into one deal, or two (2) forward trades with different maturity dates.

The uptick is a new price quote that is higher than the preceding quote for the same currency.