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International Trading Glossary

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A–E

F–O

P–Z


A–E

American option
An option that can be exercised at any time up to the expiration date. Also see European option.
At the Money (ATM)
A currency option whose strike price is equal to the prevailing spot rate or the prevailing rate corresponding to the contract’s expiry date.
Call option
An option that gives the holder the right (but not the obligation) to buy a fixed amount of currency from the option writer (option seller) on a future, or "forward," date at a specified exchange rate.
Central bank
The only institution that has the right to issue banknotes and that has authority over monetary and credit policies for a particular currency zone. The central bank also supplies the economy with money and credit, regulates domestic and foreign payment transactions, and maintains internal and external monetary stability.
Collar
An option contract that sets a maximum and minimum exchange rate parameters that will be adhered to even if the market rate lies outside this range.
Cross-rate
An exchange rate between two non-US dollar currencies.
Currency Basket
Various weightings of other currencies grouped together in relation to a basket currency, such as the ECU.
Devaluation
Reduction in the external value of a currency. This occurs with free exchange rates via the foreign exchange market, in that the price of the domestic currency drops against a specific unit of foreign currency. With fixed exchange rates, the parity of the domestic against the foreign currency is lowered administratively.
Discount
The amount by which the forward rate is reduced relative to the spot rate, i.e., the forward rate is lower than the spot rate.
Downside
A term used to refer to an option out of the money. See out of the money.
EMU
Economic and Monetary Union of Europe. EMU is sometimes used more loosely to mean European Monetary Union. The goal of EMU was to create a single European market for goods and services. The creation of the euro was a major step towards this goal. Currently, all EMU members have transitioned fully to the euro except Denmark, Sweden and the UK, which have not adopted the euro.

EMU members are: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden, and United Kingdom.
Euro
The currency unit for most EMU countries (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal and Spain). First introduced in January 1999, the transition to the euro was completed in January 2002.
Eurodollar
Name for U.S. dollar-denominated deposits and claims held outside the U.S.
European option
An option that can be exercised only on the expiration date, not during the option period as with an American option.
Exchange control
State control of all payment and asset transactions with foreign countries.
Exchange rate
Price of a foreign currency expressed in domestic currency. For example, $/CHF = 1.5 means that one US dollar costs 1.5 Swiss francs.
Exercise price
The price at which the option buyer can purchase (call option) or sell (put option) the underlying currency. Also called the strike price.
Expiration date
The last day that an option can be exercised.
Export letters of credit
Used to reduce the supplier’s (exporter’s) risk of non-payment from their overseas buyers and can expedite payments to the supplier when they comply with the requirements of the letter of credit. The buyer’s bank commits to ensuring payment to the supplier when the terms of the sale have been met, usually based on the correct shipping documents.
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F–O

Foreign exchange
Worldwide system of contacts between non-bank foreign exchange dealers and foreign exchange traders (bank and non-bank) that are executed by telephone, telex, Internet or personal market computer; place or entity where foreign exchange rates are determined.
Foreign currency draft
A check that is payable in a currency other than the local currency of the country from which you conduct business.
Forward contract
An agreement to convert ("buy" or "sell" a set amount of a foreign currency on a future, or "forward," date at a specified exchange rate. Forward window and non-delivery forward contracts are types of forward contracts.
Foreign exchange trading
Buying and selling of foreign currency, holding currency positions, trading foreign exchange arbitrage, or foreign exchange speculation in the foreign exchange market.
Functional currency
The working or operating currency of a corporate affiliate, as defined by FASB 52. (Financial Accounting Standards Board)
Import letters of credit
These help a buyers (importers) purchase goods or materials from suppliers abroad who want payment guaranteed by a reputable bank. This extension of credit on behalf of the buyer helps the buyer expand their network of foreign suppliers and reduces their trading partners’ risk. In lieu of cash payment in advance, import letters of credit enable buyers to pay when the goods have arrived and are available for delivery. This is particularly important when working with new suppliers.
Letters of credit
Documents issued by a bank stating its commitment to pay someone (supplier/exporter/seller) a stated amount of money on behalf of a buyer (importer) so long as the seller meets very specific terms and conditions. Many suppliers (exporters) require letters of credit from their buyers (importers). See also Import letters of Credit and Export letters of Credit.
Mark-to-market
To revalue a contract using current market prices.
Notional amount
The notional amount is the value or quantity of the asset that is being delivered in a contract.
Option
The contractually agreed upon right to buy (call) or sell (put) a specific amount of currency at a predetermined price on a future, or "forward," date at a specified exchange rate. A fee is paid up front for an option.
  • In-the-money call option is when the market price is greater than the strike price.
  • In-the-money put option is when the market price is less than the strike price.
  • Out-of-the-money call option is when the market price is less than the strike price.
  • Out-of-the-money put option is when the market price is greater than the strike price.
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P–Z

Premium
Forward points corresponding to interest rate differentials that are added to the spot rate; price of an option that the option buyer pays to the option writer.
Put option
The right (but not the obligation) to sell a fixed amount of currency to the option writer (option seller) at a predetermined exchange rate and/or exercise price prior to the expiration date stipulated in the contract.
Reporting currency
The currency in which a parent firm prepares its financial statements.
Spot contract
A contract to buy or sell one currency to another currency for settlement two business days after the trade was made.
Strike price
Price at which the option buyer can purchase (call option) or sell (put option) the underlying currency. Same as exercise price.
Swap transaction
Sale of one currency against another currency at a specific maturity and the simultaneous repurchase from the same counter party at a different maturity.
Upside
A term used to refer to an option in the money. See in the money.
Value date
The date that the spot or forward contract settles.
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