FAQ & Glossary

Glossary

ABA - American Bankers Association digital code used to define a bank.

Base Currency - The currency against which other currencies are quoted.

Basis Point - One hundredth of one percentage point. A rise from 4.25% to 4.65% is said to be a move of 40 basis points. See 'Point' for currency moves.

Bid - The price currency buyers are willing to pay to purchase a particular currency and sell another currency at a specific date/time.

Central Bank - A government institution which controls a nation's monetary policy and the printing of the currency of that nation.

Consumer Price Index (CPI) - This is a country's average amount (price) paid for a market basket of goods and services by a typical consumer in that country in comparison to the average price paid for the same basket in a previous base year.

Cross Rates - The difference between two currencies expressed as a ratio between those currencies and a third currency. Often the U.S. dollar is used as the third currency against which two other currencies are compared.

Currency - Is the lawful money or medium of exchange in a country.

Current Account - A balance of payments account category that incorporates all transactions that either contribute to a country's national income or involve the spending of that national income.

Day Trading - Is known as speculative trading in the foreign exchange community. It refers to opening and closing the same position(s) within single day's trading.

Deficit Spending - A term that describes a government's manner or habit of spending more than it receives in taxes.

Discount Rate - This is the interest a private bank pays for a loan from a county's national reserve system.

EMS - European Monetary System

Euro - The currency of the European Monetary Union (EMU). This is the amalgamation of the following European currencies, after Jan. 1, 2002.  The currencies of participating countries are now considered legacy currencies. These currencies include the Germany Deutsche Marks, Italy Lira, Austria Schillings, France Franc, Belgium Francs, Netherlands (Dutch) Guilders, Finland Markka, Portugal Escudo, Greece Drachmas, Ireland Punt, Luxembourg Francs, Spanish Pesetas.

Federal Debt - The current dollar sum of obligations equal to the accumulated past deficits minus surpluses of a particular government.

Federal Open Market Committee (FOMC) - The US body that is responsible for setting the interest rates and credit policies of the United States' Federal Reserve System. A 12-member committee consisting of the seven members of the U.S. Federal Reserve Board and five of the twelve Federal Reserve Bank presidents. The Committee sets objectives for the growth of money and credit. These objectives are implemented through purchases and sales of U.S. government securities in the open market. The FOMC also establishes policy relating to System operations in the foreign exchange markets.

Federal Reserve System - The central bank of the United States of America. It implements the U.S. monetary policy and regulates member banks of the U.S. System. Created in 1913, it is composed of 12 regional Federal Reserve Banks and a national Board of Governors.

Fiscal Policy - Government policy regarding taxation and spending. A country's Fiscal policy is made by its government and Administrative branch.

Fixed Exchange Rate - Official currency exchange rate set by monetary authorities for one or more currencies.

Floating Exchange Rates - This refers to the value of a particular currency as decided by supply and demand. Changing supply and demand create different daily price levels.

Foreign Exchange - The exchange of foreign currency. On the foreign exchange market, foreign currency is bought and sold for immediate (spot) or forward delivery.

Forex - Is an insider term used by traders and those experienced in international commerce. It is an abbreviation of Foreign Exchange

Forward Contract - A forward contract is a buy/sell contract that has a set exchange rate for future delivery at a date to be agreed by both participants. Forward transactions normally require a deposit (or a minimum margin). For example, if we want to guarantee today's exchange rate to buy €10,000 at £1.5820 for the next 3 months, we will be able to purchase up to €10,000 at this exchange rate for the period of 3 months.

Fundamental Analysis - Examines the economic forces of supply and demand that change currency prices. The Fundamental Analyst will study the causes of market movement, whereas the Technical Analyst will examine the effects of currency changes.

FX - Similar to Forex; an abbreviation of Foreign Exchange.

Hedging - A hedging transaction is a purchase or sale of a financial product to minimize exposure to currency fluctuations which could result in financial loss. Its purpose is the elimination of losses from currency price fluctuations or the foreign exchange rate (see Forward Contract).

Initial Jobless Claims - Initial jobless claims measure the number of workers filing for unemployment benefits. It is a timely, but often misleading, indicator of the direction of an economy. Increases in claims potential signal slowing and decreases are thought to accelerate job growth. On a weekly basis, jobless claims can be very volatile. Therefore, many economic analysts track a four week moving average to get a better sense of the underlying jobless trend.

Interbank Rates - The Foreign Exchange rates quoted by large international banks for other large international banks.

Margin - A cash deposit in a client's account, which is necessary collateral for covering a forward position.

Monetarists - Followers of Milton Friedman who focus on the effect of money and monetary policy on changing price and employment levels.

Monetary Policy - The rule or attempt of a country's governments to change aggregate demand through money supply changes.

Money Markets - These are financial investments generally under one year in duration and open to banks and other financial institutions.

Offer - The price, or rate, that a willing currency seller is prepared to sell at.

Point (or Pip) - It is one one-hundredth of a percent. It is the smallest incremental move an exchange rate can make. As an example, if a currency moves from 1.0520 to 1.0525, it has moved 5 points.

Price Volatility - A measure of currency price fluctuations. Price volatility is usually measured by the standard deviation of a price series. Volume is the total number of currency contracts traded during the day. It represents the total amount of trading activity in a particular currency or index for that specific day.

Repurchase Agreements - When the Federal Reserve of a country makes a repurchase agreement with a government securities dealer, it buys a security for immediate delivery with an agreement to sell the security back at the same price by a specific date (usually within 15 days) and receives interest at a specific rate. This arrangement allows the Federal Reserve to inject reserves into the banking system on a temporary basis to meet a temporary need and to withdraw these reserves as soon as that need has passed.

Settlement - (1) The final stage of a currency transaction, where the actual physical or legal exchange of one currency for another is conducted. (2) The process by which a client of Cambridge instructs the available funds to be transferred via wire, draft or deposit to a multi-currency account, and then to the designated receiver of these funds.

Spot - Is meant to be a transaction which will come to settlement within two days.

Spot Price - The current market price for a spot currency transaction.

Spot Rate - The current rate for a spot currency transaction.

Spread - The difference between the bid and offer prices. It is most often used for Interbank trade of currencies.

Swift - Society of Worldwide Interbank Financial Telecommunications. It is a dedicated computer network that is set up to enable fund transfer messages worldwide between member banks.

Technical Analysis - Is market analysis based on market action through chart study, moving averages, patterns, volume, trends, formations and other technical indicators.

Treasury Bill - Short-term U.S. government obligations sold at a discount from face value. Treasury bills generally are issued with 13-, 26- or 52-week maturities.

Treasury Bond - Obligations of the U.S. government that mature in 15 or more years and pay a specified coupon.

Treasury Note - Obligations of the U.S. government that mature in 2 to 10 years and pay a specified coupon.

Trend - The direction of the currency market, usually broken down to three categories….major, intermediate and short-term trends. Three directions are also associated with an uptrend, downtrend, and a sideways trend.

US Prime Rate (Similar to UK Base Rate) - The rate at which banks will lend to their prime corporate customers.

Value Date - The date that both parties of a transaction agree to exchange payments.

Wire Draft