Market terms Glossary

Simple definitions to international markets trading terminology.


Cycle

The set of expiration dates applicable to different classes of options.

Current Balance

The value of all exports (goods plus services) less all imports of a country over a specific period of time, equal to the sum of trade and invisible balances plus net receipt of interest, profits and dividends from abroad.

Current Account

The net balance of a country's international payment arising from exports and imports together with unilateral transfers such as aid and migrant remittances. It excludes capital flows.

Currency

The type of money that a country uses. It can be traded for other currencies on the foreign exchange market, so each currency has a value relative to another.

Currency Basket

Various weightings of other currencies grouped together in relation to a basket currency (e.g. ECU or SDR). Sometimes used by currencies to fix their rate often on a trade weighted basket.

Cross-Trade

A cross-trade transaction is a transaction where either the buy broker and the sell broker are the same, or the buy broker and the sell broker belong to the same firm.

Cross Rate

An exchange rate between two currencies, usually constructed from the individual exchange rates of the two currencies, as most currencies are quoted against the dollar.

Cross Hedge

A technique using financial futures to hedge different but related cash instruments based on the view that the price movements between the instruments move in concert.

Cross Deal

A foreign exchange deal entered into involving two currencies, neither of which is the base currency.

Credit Risk

The risk that a debtor will not repay; more specifically the risk that the counterparty does not have the currency promised to be delivered.

Crawling Peg (Adjustable Peg)

An exchange rate system where a country's exchange rate is "pegged" (i.e. fixed) in relation to another currency. The official rate may be changed from time to time.

Covered Interest Rate Arbitrage

An arbitrage approach which consists of borrowing currency A, exchanging it for currency B, investing currency B for the duration of the loan, and, after taking off the forward cover on maturity, showing a profit on the entire set of deals. It is based on the theorem of interest rate parity (one of the key theoretical economic relationships) which says that the return on a hedged foreign investment will just equal the domestic interest rate on investments of identical risk. When the covered interest rate differential between the two money markets is zero, there is no arbitrage incentive to move funds from one market to another.

Cover

(1) To take out a forward foreign exchange contract.
(2) To close out a short position by buying currency or securities which have been sold.

Coupon

(1) On bearer stocks, the detachable part of the hide behind nominee status. A certificate exchangeable for dividends.
(2) Denotes the rate of interest on a fixed interest security.

Coupon Value

The annual rate of interest of a bond.

Country Risk

Factors that affect currency trading unique to the specific country include political, regulatory, legal and holiday risks.

Counterparty Risks

The risk to each party of a contract, that the counterparty will not live up to its contractual obligations. Counterparty risk as a risk to both parties and should be considered when evaluating a contract.

Counterparty

The customer or bank with which a foreign exchange deal is executed.

Cost of Carry

The interest rate parity, where the forward price is determined by the cost of borrowing money in order to hold the position.

Correspondent Bank

The foreign banks representative who regularly performs services for a bank which has no branch in the relevant centre, e.g. to facilitate the transfer of funds. In the US this often occurs domestically due to inter state banking restrictions.

Contract

An agreement to buy or sell a specified amount of a particular currency or option for a specified month in the future (See Futures contract).

Contract Month

The month in which a futures contract matures or becomes deliverable if not liquidated or traded out before the date specified.

Contract Expiration Date

The date on which a currency must be delivered to fulfill the terms of the contract. For options, the last day on which the option holder can exercise his right to buy or sell the underlying instrument or currency.

Confirmation

A memorandum to the other party describing all the relevant details of the transaction.

Compound Option

An option on an option, the dates and price of such option being fixed.

Commission

The fee that a broker may charge clients for dealing on their behalf.

Comex

Commodity Exchange of New York.

Coincident Indicator

An economic indicator that generally moves in line with the general business cycle such as industrial production.

Closing Purchase Transaction

The purchase of an option identical to one already sold to liquidate a position.

Closed Position

Executing a security transaction that is the exact opposite of an open position, thereby nullifying it and eliminating the initial exposure. Closing a long position in a security would entail selling it, while closing a short position in a security would involve buying it back.

Chartist

An individual who studies graphs and charts of historic data to find trends and predict trend reversals which include the observance of certain patterns and characteristics of the charts to derive resistance levels, head and shoulders patterns, and double bottom or double top patterns which are thought to indicate trend reversals.

Certificate of Deposit (CD)

A negotiable certificate in bearer form issued by a commercial bank as evidence of a deposit with that bank which states the maturity value, maturity rate and interest rate payable. CDs vary in size with maturities ranging from a few weeks to several years. CDs may normally be redeemed before maturity only by sale on the secondary market but may also be redeemed back to issuing bank through payment of a penalty.

Central Rate

Exchange rates against the ECU adopted for each currency within the EMS. Currencies have limited movement from the central rate according to the relevant band.

Central Bank

A central bank provides financial and banking services for a country's government and commercial banks. It implements the government's monetary policy, as well, by changing interest rates.

Cash

Normally refers to an exchange transaction contracted for settlement on the day the deal is struck. This term is mainly used in the North American markets and those countries which rely for foreign exchange services on these markets because of time zone preference i.e. Latin America. In Europe and Asia, cash transactions are often referred to as value same day deals.

Cash and Carry

The buying of an asset today and selling a future contract on the asset. A reverse cash and carry is possible by selling an asset and buying a future.

Cash Settlement

A procedure for settling futures contract where the cash difference between the future and the market price is paid instead of physical delivery.

Carry

The interest cost of financing securities or other financial instruments held.

Carry-Over Charge

A finance charge associated with the storing of commodities (or foreign exchange contracts) from one delivery date to another.

Capital Account

A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public and private international investments flowing in and out of a country.

Call

An option that gives the holder the right to buy the underlying instrument at a specified price during a fixed period.

Call Option

A call option confers the right but not the obligation to buy stock, shares or futures at a specified price.

Cable

A term used in the foreign exchange market for the British Pound / US Dollar rate.

Cable Transfer

Telegraphic transfer of funds from one centre to another. Now synonymous with interbank electronic fund transfer.

CPSS

Committee on Payment and Settlement Systems.

CPI

Consumer Price Index. Monthly measure of the change in the prices of a defined basket of consumer goods including food, clothing, and transport. Countries vary in their approach to rents and mortgages.

Contracts for Difference (CFD)

An arrangement made in a futures contract whereby differences in settlement are made through cash payments, rather than the delivery of physical goods or securities.

CME

Chicago Mercantile Exchange.

CHIPS

The New York clearing house clearing system. (Clearing House Interbank Payment System). Most Euro transactions are cleared and settled through this system.

CHAPS

Clearing House Automated Payment System.

CFTC

The Commodity Futures Trading Commission, the US Federal regulatory agency for futures traded on commodity markets, including financial futures.

CD

Certificate of Deposit.

CBOT or CBT

Chicago Board of Trade.

CBOE

Chicago Board Options Exchange.