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HiFX - Foreign exchange glossary
Category: Economy and Finance > Foreign exchange
Date & country: 25/11/2007, UK
Words: 30


Bear, Bearish, Bear Market
A Bear is a person who believes that the prices in the market will decline. This person would be considered Bearish. A Bear Market is a market that is declining (e.g. if the £ vs US$ rate is falling). If the decline was expected to continue, the market would be Bearish.

Bid price
The rate quoted when you wish to buy some foreign currency against the Pound.

Bottom
A market bottom is an area where prices in a decline encountered heavy support, were unable to progress any lower, and either reversed (i.e. went into a bull trend) or consolidated (traded sideways).

Broker
A Broker is a middleman between a client – company and the market.

Bull, Bullish, Bull Market
A Bull is a person who believes that prices in the market will rise. This person would be considered Bullish. A Bull Market is a market that is rising (e.g. if the £ vs US$ rate moves higher). If the advance is expected to continue, the market would be Bullish.

Cable
Foreign Exchange jargon for the UK Pound v US Dollar exchange rate. Alludes to the cable laid under the Atlantic, which linked the tickertape machines in New York and London.

Consolidation
Another technical analysis term. It relates to a condition when the rates are moving in a sideways fashion, which is usually encountered after a market top or bottom.

Correction
This is a technical analysis term. When a market moves strongly in one direction and then pulls back, this pullback will be referred to as a correction. A correction, (which is a common occurrence in a bull (up) or bear (down) trend), is often sharper (i.e. occurs more quickly) than the preceding move. Corrections are a component of the overall trend (either up or down) and are not considered terminal to that trend (i.e. reversing it). Indeed, a correction usually strengthens the foundations of the trend to carry on and sustain further gains or further losses in the days/weeks ahead.

ECB
European Central Bank. Manage the Euro currency and European interest rates/monetary policy.

Exchange Rate Risk
The exposure/potential loss a company faces from a movement in exchange rates.

Federal Reserve - FED
This is the American central bank

FOMC
The Federal Open Market Committee. The monetary policy making and tactical arm of the Federal Reserve. This is the committee which sets US interest rates.

Forex
An abbreviation of foreign exchange.

Forward Points
Different countries will generally have different interest rates. When buying one currency against another for delivery at a future date, the bank or broker will adjust the spot (immediate delivery) price to take this variation into account. The sale of a low yielding currency (in a low interest-rate economy) and the purchase of a high yielding one will be reflected in a higher net price than the spot rate. This is described as 'points on' for the forward adjustment. Obviously the opposite position results in a 'points off' adjustment.

Fundamental Analysis
Analysis or forecasting of currencies/economies based on economic and political factors and events.

Hedging-Forward Contracts
A hedging transaction is one that protects an asset or liability against fluctuation in the foreign exchange rates. For commercial forex deals the most popular hedging tool is a Forward Contract. A forward contract allows a company to lock in a rate of exchange based on today's spot price (with an adjustment for the 'forward points') for a future date when they need to buy or sell a foreign currency.

Inter-Bank Rates
The rates banks/brokers quote other banks/brokers for trades between banks (inter-bank). The true market price. The prices quoted for transactions in excess of £500,000 or equivalent.

Limit Order
An order to buy or sell one currency against another when a pre-determined price is reached. It is lodged with a Bank or Broker and floats 24 hrs a day until either cancelled or hit. It is used to try and achieve a very favourable price at the very top or bottom of a range. It is free of charge to use and provides an excellent vehicle for companies to attempt to buy or sell their currencies at the best point in a range (without having to constantly monitor the prices and keep calling a broker/bank for prices).

Monetary Policy
Generally associated with the setting of interest rate levels in an economy to try and stimulate or stifle borrowing and thus control consumer demand/spending. Conventional wisdom states that if interest rates move in an upward direction in one nation (under normal economic circumstances) then the currency in that nation should move up in value against foreign currencies. The rationale is that the rate of return on interest bearing deposits become more attractive and the foreign demand for that currency should increase.

MPC
The committee within the Bank of England (UK Central Bank) which is responsible for setting interest rates in the UK.

OCO (One Cancels the Other) Order
A combination of a linked limit order and a stop loss order at predetermined market levels, where if one is executed the other order is automatically cancelled. It is used to encapsulate foreign exchange risk within known parameters i.e. to try to achieve a favourable rate whilst also giving protection against adverse market moves. It is lodged with a Bank or Broker and offers 24-hour protection and will float until either cancelled or hit. It is free of charge to use and provides an excellent vehicle for companies to transact their currencies at the best point in a range, whilst protecting themselves from negative movements.

Offer
The rate quoted when you wish to sell a foreign currency.

Overnight Trading
Refers to a purchase or sale of currencies between the hours of 21: 00 and 08:00, which can be done through using stop loss or limit orders.

PIP or Points
Most currencies are quoted in five digit figures, irrespective of the position of the decimal point. A PIP is the phrase used to describe the smallest part of an exchange rate. Example: on the £ v US$ rate of £/$ 1.6500 a pip is 0.0001. Accordingly if the rate moves up by 5 pips the resulting rate in the example will be 1.6505. A POINT is generally 100 pips. In the above example, if the rate moves up by 100 pips (one point) the resulting rate will be 1.6600.

Resistance
Resistance is a forecasted price level where the rate of exchange should encounter selling pressure, which should stop the price/rate from rising any further. Main market participants (Investment funds, Banks etc.) look for resistance and support levels to place orders and thus they become, to a large degree, self-fulfilling prophecies. See also SUPPORT.

Spot
Spot means the settlement date of a deal that is two business days forward. It is the rate used if a client wishes to buy currency for the fastest possible delivery.

Spread
The difference in prices between bid and offer rates. The inter-bank spread is considered the smallest and the variation between tourist buy & sell rates is generally the largest.

Stop Loss Order
An order to buy or sell one currency against another when a pre-determined price is reached. It is lodged with a Bank or Broker and offers 24-hour protection and will float until either cancelled or hit. It is used to protect your purchase or sale of a currency from negative movements in the market overnight or over a period of days/weeks. It is free of charge to use and provides an excellent vehicle for companies to protect themselves from negative movements while leaving the door open to a company to benefit if the market moves in their favour.

Support Levels
Support is a forecasted price level where the rate of exchange should encounter buying pressure, which should stop the price/rate from falling any further. Main market participants (Investment Funds, Banks etc.) look for support and resistance levels to place their orders and thus they become, to a larger degree, self-fulfilling prophecies. See also RESISTANCE.

Technical Analysis
Technical analysis is the study of market action, primarily through the use of charts, for the purposes of forecasting future prices and trends. Technical analysis provides details of SUPPORT and RESISTANCE levels. It further identifies trends and indicates when a trend is reversing. It is widely used by the main market players (the people who move the rates with the volumes they trade) and accordingly has arguably become the most popular form of analysis in tracking and forecasting currency movements.