Jargon Buster

Bid and Offer

Every currency pair has a bid and an offer. This is a rate at which one can buy (offer) a currency, and the rate at which one can sell (bid) a currency. The price maker gives you a rate they are willing to buy (bid) or sell (offer) a currency pair. In simple terms you buy high and sell low whereas the price maker gets to buy low and sell high.

Basis Point or Pip

The last decimal place to which a particular exchange rate is usually quoted is referred to as a point or ‘pip’. Typically Forex is displayed to 4 decimal points.

Big Figure

A one hundred point (‘pip’) move is referred to as a one ‘big figure’ move.

Handle

When responding to a request of what ‘handle’ a currency is on, a currency dealer would respond to the big figure, this is what is known as the ‘handle’ in Forex language terms. Eg if the EUR/GBP is trading at .6700 / .6702 then its ‘handle’ is 67.

Spot Rate

The spot rate for a currency is the current exchange rate for a trade of one currency for another. The spot rate is also termed the cash price, cash rate, or today's rate. Most spot rates are actually traded with two-day settlements to allow for a reasonable amount of time to transfer the currencies for the transaction.

The spot market is a 24-hour continuous currency exchange that never closes. There are dealers in every major time zone, in every major dealing centre willing to quote two-way markets. Most transactions in the Forex market are spot rate transactions.

Forward Contract

Forward contracts are a commitment to purchase or sell a set amount of a given currency at a predetermined price on a given date in the future. These contacts can by used if you wish to protect the value of a future foreign currency purchase or sale.

A corporation or investor may take out a future contract if an international deal has been agreed in a specific currency and wants to protect itself against currency fluctuations in the future.

For example, ABC Corp. has an invoice due in Euros in 6 months. As the exchange rate may not be favourable in 6 months and ABC Corp. do not want to monitor the market they will purchase a forward contract. This means no matter how much the market has changed over the 6 months, ABC Corp. will be able to buy Euros at the rate of the forward contract, and therefore know exactly how much the invoice will cost them.

Typically traders determine a forward exchange rate 30, 60, and 90 days into the future.

Initial Margin

This initial margin is similar to a cash deposit. The deposit is used as a security to protect against an adverse movement in the exchange rate. This must be maintained by the client at all times, while the position remains open. Should this amount fall due to adverse movements, the client must top-up the account. This is known as a margin call.

If the client is unable to provide the broker with sufficient funds to cover the initial margin before it reaches a predetermined liquidation level, the broker has the right to close some or all of the open position.

Financing

Daily positions that are rolled over (i.e. held beyond one trading day) will incur financing costs or benefits based upon the interest rate differential between the two applicable currencies. Interest rate differentials between the two currencies in question will determine whether you receive or pay interest.

For example, if you have a long GBP/USD position and official cash rates are higher in the UK than in the United States, then you would receive interest if you held the position overnight. This is because you are holding the higher yielding currency e.g. USD.

Liquidity

Liquidity indicates the ease with which buyers and sellers are able to enter and exit the market. The more traders that are buying and selling a currency, the greater the likelihood of a seller wanting to sell at the same price a buyer is willing to pay. A very liquid market has numerous participants buying and selling at the same prices. An extremely liquid market is said to be 'deep', signifying the large number of buyers and sellers willing to trade at any given price.