Glossary of Terms

 

American-style option – An option contract that may be exercised at any time before it expires.

 

Ask – The quoted price at which a customer can buy a currency pair.  Also referred to as the ‘offer,’ ‘ask price,’ or ‘ask rate.’

 

Base Currency – For foreign exchange trading, currencies are quoted in terms of a currency pair. The first currency in the pair is the base currency. For example, in a USD/JPY currency pair, the US dollar is the base currency. Also may be referred to as the primary currency.

 

Bid – The quoted price where a customer can sell a currency pair. Also known as the 'bid price' or 'bid rate.'

 

Bid/Ask Spread – The point difference between the bid and ask (offer) price.

 

Currency pair – The two currencies that make up a foreign exchange rate. For example, USD/YEN is a currency pair.

 

Dealer – A firm in the business of acting as a counterparty to foreign currency transactions.

 

European-style option – An option contract that can be exercised only on or near its expiration date.

 

Expiration – This is the last day on which an option may either be exercised or offset.

 

Interbank market – A loose network of currency transactions negotiated between financial institutions and other large companies.

 

Leverage – The ability to control large dollar amount of a commodity with a comparatively small amount of capital.  Also known as ‘gearing.’

 

Margin – See Security Deposit.

 

Offer – See Ask.

 

Open position – Any transaction that has not been closed out by a corresponding opposite transaction.

 

Quote currency – The second currency in a currency pair is referred to as the quote currency. For example, in a USD/JPY currency pair, the Japanese yen is the quote currency. Also referred to as the secondary currency or the counter currency.

 

Rollover – The process of extending the settlement date on an open position by rolling it over to the next settlement date.

 

Security deposit – The amount of money needed to open or maintain a position. Also known as ‘margin.’

 

Settlement – The actual delivery of currencies made on the maturity date of a trade.

 

Spread – The point difference between the ask and bid price of a currency pair.

 

Trader – An individual who is on the other side of the trade with the dealer and whose objective is to profit from price movements.