FOREIGN EXCHANGE AND INTERNATIONAL PAYMENTS Free guide -
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GLOSSARY 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 £ v US$ rate is falling). If the decline was expected to continue, the market would be Bearish.
Bid Price – The highest price a prospective buyer is willing to pay at a particular time for securities, futures contracts or foreign currencies.
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).
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 £ v US$ rate moves higher). If the advance is expected to continue, the market would be Bullish.
British Pound (Pound Sterling) – The standard unit of currency used in the United Kingdom.
Broker – An agent who handles investors orders to buy and sell. For this service, a commission is charged which, depending upon the broker and the amount of the transaction, may or may not be negotiated...
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.
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.
Consolidation – This is another technical analysis term which relates to a condition when the rates are moving in a sideways fashion which is usually encountered after a market top or bottom.
Currency Hedging – Trying to reduce or eliminate exchange rate risks by buying forward, using financial features or borrowing in the exposed currency.
Currency Symbols Australian Dollar AUD
Canadian Dollar CAD
Euro EUR
Japanese Yen JPY
British Pound GBP
Swiss Franc CHF
US Dollar USD
Dollar – The standard unit of currency used in the following countries:
American Samoa (US Dollar) Marshall Islands (US Dollar)
Anguilla (East Caribbean Dollar) Micronesia Federation (US Dollar)
Antigua & Barbuda (East Caribbean Dollar) Montserrat (East Caribbean Dollar)
Australia (Australian Dollar) Namibia (Namibian Dollar)
Bahamas (Bahamian Dollar) Nauru (Australian Dollar)
Barbados (Barbadian Dollar) New Zealand (New Zealand Dollar)
Belize (Belizean Dollar) Niue (New Zealand Dollar)
Bermuda (Bermudian Dollar) Norfolk Island (Australian Dollar)
British Virgin Islands (US Dollar) Northern Mariana Islands (US Dollar)
Brunei (Bruneian Dollar) Palau (US Dollar) Panama (US Dollar)
Canada (Canadian Dollar) Pitcairn Islands (New Zealand Dollar)
Cayman Islands (Caymanian Dollar) Puerto Rico (US Dollar)
Christmas Island (Australian Dollar) Saint Kitts & Nevis (East Caribbean Dollar)
Cocos Keeling Islands (Australian Dollar) Saint Lucia (East Caribbean Dollar)
Dominica (East Caribbean Dollar) Saint Vincent & Grenadines (East Caribbean Dollar)
East Timor (US Dollar) Singapore (Singapore Dollar)
Ecuador (US Dollar) Solomon Islands (Solomon Dollar)
El Salvador (US Dollar) Suriname (Surinamese Dollar)
Fiji (Fijian Dollar) Taiwan (New Taiwan Dollar)
Grenada (East Caribbean Dollar) Tokelau (New Zealand Dollar)
Guam (US Dollar) Trinidad & Tobago (Trinidad & Tobago Dollar)
Guatemala (US Dollar) Turks & Caicos Islands (US Dollar)
Guyana (Guyanese Dollar) Tuvalu (Australian Dollar)
Hong Kong (Hong Kong Dollar) United States of America (US Dollar)
Jamaica (Jamaican Dollar) Virgin Islands (US Dollar)
Kiribati (Australian Dollar) Zimbabwe (Zimbabwean Dollar)
Liberia (Liberian Dollar)
ECB– European Central Bank. Manage the Euro currency and European interest rates/monetary policy.
Euro – On January 1, 1999, the Euro was adopted as the official currency by Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.
Following the adoption of the Euro by Greece in 2001, Europe created one of the most significant changes in the world’s monetary system when in 2002, the Euro became the common currency of Europe for 12 countries in the European Union.
Exchange Rate Risk – The potential loss that could be incurred from a movement in exchange rates.
Federal Reserve System – The Federal Reserve System, also known as The Fed, is the central bank of the United States of America. It was created to provide the United States of America with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded. The Federal Reserve System is a network of twelve Federal Reserve Banks and a number of branches under the general oversight of the Board of Governors. The Reserve Banks are the operating arms of the central bank.
The Federal Open Market Committee (FOMC) – FOMC is a 12-member committee which sets credit and interest rate policies for the Federal Reserve System. This committee consists of 7 members of the Board of Governors, and 5 of the 12 Federal Reserve Bank Presidents. This group, headed by the Chairman of the Federal Reserve Board, sets interest rates either directly (by changing the discount rate) or through the use of open market operations (by buying and selling government securities which affects the federal funds rate).
Forex – An abbreviation of Foreign Exchange (Forex).
Forward Points – The interest rate differential between two currencies expressed in exchange rate points. The forward points are added to or subtracted from the spot rate to give the forward or outright rate.
Forward Contracts – A contract between two counterparties where one person agrees to buy from another other person, who of course agrees to sell, a certain quantity of a financial instrument or commodity at a pre determined price but for delivery at an agreed future date.
Interbank Rates – FX rates large international banks quote other large international banks. The difference between the buy and sell rate, (the spread) can be around 0.07%. Normally the public and other businesses do not have access to these rates.
Limit Order – An order given which has restrictions upon its execution, where the client may specify a price and the order can be executed only if the market reaches that price.
Monetary Policy – A body whose members are appointed by the Bank of England, responsible for setting UK interest rates at monthly meetings.
Monetary Policy Committee (MPC) – A committee within the Bank of England (UK Central Bank) responsible for setting interest rates The MPC sets an interest rate it judges will enable the inflation target to be met. The Bank of England's Monetary Policy Committee (MPC) is made up of nine members – the Governor, the two Deputy Governors, the Bank's Chief Economist, the Executive Director for Markets and four external members appointed directly by the Chancellor. (UK Central Bank) which is responsible for setting interest rates in the UK.
OCO (One Cancels the Other) Order – This is a type currency trade that is often used in the Forex and futures market. In simple terms, it is actually two separate orders which are linked together and placed as a single order. When one of the linked orders is executed, the other order is automatically cancelled.
Offer- The rate at which a dealer is willing to sell.
Overnight Trading – The buying or selling of currencies between 9pm and 8am which can be executed using stop loss or limit orders.
PIP or Points – Currencies are quoted to 5 decimal points, and depending on context, PIP is the term used to define the smallest element of an exchange rate, normally one basis point. For example; 0.0001.
Resistance – A price level at which you would expect selling to take place.
Spot – Spot means the contract is based on an instantaneous price and the settlement date is two business days forward.
Spread – The difference in prices between bid and offer rates.
Stop Loss Order – This is the term used to describe an order to buy or sell one currency against another when a pre-determined price is reached. This type of order which is lodged with a Bank or Broker 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 and individuals to protect themselves from negative movements while leaving the door open for them to benefit if the market moves in their favour.
Sterling – Another term to describe the UK currency, i.e.; UK Pound Sterling
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.
Top – A market top is an area where prices in an upward trend encountered heavy resistance, was unable to progress any higher, and either reversed (i.e. went into a bear trend) or traded sideways.