A
Accumulation
swing index (ASI) An oscillator based on the swing index
(SI.) A buying signal is generated when the
daily high exceeds the
previous SI significant high, and a selling
signal occurs when the
daily low dips under the significant SI low.
American style currency option An
option that may be exercised at any
valid business date throughout the life of the
option.
Arbitrage A
risk-free type of trading in which the same instrument is
bought and sold simultaneously in two different
markets in order to
cash in on the divergence between the two
markets.
Ascending triangle A
triangle continuation formation with a flat upper
trendline and a bottom sloping upward
trendline. (See Triangle.)
Ascending triple top A
bullish point-and-figure chart formation that
suggests that the currency is likely to break a
resistance line the
third time it reaches it. Each new top is
higher than the previous
one.
Atekubi A
bearish two-day candlestick combination. It consists of a
blank bar that closes at the daily high; the
current closing price
equals the previous day's low. The original
day's range is a long
black bar.
At par forward spread Forward
price is zero; therefore, the spot price is
similar to the forward price. It reflects the
fact that the foreign
interest rate is similar to the U.S. interest
rate for that particular
period.
At-the-money (ATM) option
An option whose present currency price is
approximately equal to the strike price.
At the price stop-loss order A
stop-loss order that must be executed at
the precise requested level, regardless of
market conditions.
Average options
Options that refer to the average rate of the
underlying currency that existed during the life
of the option. This
rate becomes the strike in the case of the
average strike options; or
it becomes the underlying, determining the
intrinsic value when
compared to a predetermined fixed strike in the
case of average rate
options. Average options can be based on the
spot rate (spot style)
or on the forward underlying the option
(forward style.) The average
can be calculated arithmetically or
geometrically, and the rates can
be tabulated with a variety of frequencies.
B
Balance-of-payments All
the international commercial and financial
transactions of the residents of one country.
Bank of Canada (BOC) The
central bank of Canada.
Bank of England (BOE) The
central bank of the United Kingdom. It is a
less independent central bank. The government
may overwrite its
decision.
Bank of France (BOF) The
central bank of France.
Bank of Italy (BOI) The central bank of Italy.
Bank of Japan (BOJ) The
Japanese central bank. Although its Policy Board
is still fully in charge of the monetary
policy, changes are still subject
to the approval of the Ministry of Finance
(MOF). The BOJ targets
the M2 aggregate.
Bar chart A type
of chart that consists of four significant points: the
high and the low prices, which form the
vertical bar; the opening
price, which is marked with a little horizontal
line to the left of the
bar; and the closing price, which is marked
with a little horizontal line
to the right of the bar.
Barrier options (trigger options, cutoff options, cutout
options, stop options,
down/up-and-outs/ins, knockups) Options very similar to
European style vanilla options, except that a
second strike price (the
trigger) is specified that, when reached in the
market, automatically
causes the option to be expired (knockout
options) or "inspired"
(knockin options).
Bearish tasuki A
bearish two-day candlestick combination. It consists
of a long blank bar that has a low above 50
percent of the previous
day's long black body, and closes marginally
above the previous
day's high. The second day's rally is
temporary, as it is caused only
by profit-taking. The sell-off is likely to
continue the next day.
Bearish tsutsumi (the engulfing pattern) A bearish two-day candlestick
combination. It consists of a second-day
bearish candlestick whose
body "engulfs" the previous day's
small bullish body.
Bilateral grid An
exchange rate system that links all the central
rates of the EMS currencies in terms of the
ECU.
Black closing bozu A
bearish candlestick formation that consists of a
long black bar (upper shadow).
Black marubozu (shaven head)
A bearish candlestick formation that
consists of a long black bar (no shadow).
Black opening bozu A
bearish candlestick formation that consists of a
long black bar (lower shadow).
Black-Scholes fair value model The original option pricing model, which
holds that a stock and the call option on the
stock are comparable
investments and thus a risk less portfolio may
be created by buying
the stock and selling the option on the stock,
as a hedge. The
movement of the price of the stock is reflected
by the movement of
the price of the option, but not necessarily by
the same amplitude.
Therefore, it is necessary to hold only the
amount of the stock
necessary to duplicate the movement of the
price of the option.
Blank closing bozu A
bullish candlestick formation that consists of a
long blank bar (lower shadow).
Blank marubozu (shaven head)
A bullish candlestick formation that
consists of a long blank bar (no shadows).
Blank opening bozu A
bullish candlestick formation that consists of a
long blank bar (upper shadow).
Bollinger bands A
quantitative method that combines a moving
average with the instrument's volatility. The
bands were designed to
gauge whether the prices are high or low on a
relative basis. They
are plotted two standard deviations above and
below a simple
moving average. The bands look like an
expanding and contracting
envelope model. When the band contracts
drastically, the signal is
that volatility will expand sharply in the near
future. An additional
signal is a succession of two top formations,
one outside the band
followed by one inside. If it occurs above the
band, it is a selling
signal. When it occurs below the band, it is a
buying signal.
Book method
Point-and-figure chart's original name.
Box spread A compound option strategy that consists of
four options with a
common expiration date: a long call and a short
put at one strike
price, and a long put and a short call at a
different strike price.
Breakaway gap A
price gap that occurs in the beginning of a new
trend, many times at the end of a long
consolidation period. It may
also appear after the completion of major chart
formations.
Breakout of a spread triple bottom A
bearish point-and-figure chart
formation that suggests that the currency is
likely to break a support
line the third time it reaches it. The currency
failed to reach the
support line once.
Breakout of a spread triple top A
bullish point-and-figure chart
formation that suggests that the currency is
likely to break a
resistance line the third time it reaches it.
The currency failed to
reach the resistance line once.
Breakout of a triple bottom A
bearish point-and-figure chart formation
that suggests that the currency is likely to
break a support line the
third time it reaches it.
Breakout of a triple top A
bullish point-and-figure chart formation that
suggests that the currency is likely to break a
resistance line the third
time it reaches it.
Bullish tasuki A bullish two-day candlestick combination. It consists
of a long black bar that has a high above 50
percent of the previous
day's long blank body, and closes marginally
below the previous
day's low.
Bullish tsutsumi (the engulfing bar) A bullish two-day
candlestick
combination. It consists of a second bullish
candlestick whose body
"engulfs" the previous day's small
bearish body.
Bundesbank The German central bank. In addition to its
domestic
obligations, the Bundesbank has had
international obligations since
1979 as the front player of the European
Monetary System. The
Bundesbank is a very independent central bank.
Business firms (establishment) survey Survey of the payroll, workweek,
hourly earnings, and total hours of employment
in the non farm
sector.
Business Inventories An
economic indicator that consists of the items
produced and held for future sale.
Butterfly spread A compound option strategy
that consists of a combination
of a bull spread and a bear spread, using
either calls or puts.
C
Calendar combination A
compound option strategy that consists of the
simultaneous call calendar spread and put
calendar spread, in which
the strike price of the calls is higher than
the strike price of the puts.
Calendar spread A
combination option of two similar types of options,
either calls or puts, with the same strike
price but different expiration
dates. The dissimilarity between the expiration
dates allows this type
of spread to capitalize on both the impact of
the time decay and the
interest rate differentials.
Calendar straddle A compound option strategy that consists of
simultaneous buying of a longer-term straddle
and a near-term
straddle with a common strike price.
Call ratio backspread A
compound option strategy that consists of
short calls with a lower strike price and more
long calls with a higher
strike price. The profit is twofold. The
maximum upside profit
potential is unlimited. The downside profit
potential consists of the
total premium received. The maximum loss potential
occurs when
the currency price reaches the higher strike
price at expiration.
Candlestick chart A type
of chart that consists of four major prices: high,
low, open, and close. The body (jittai) of the
candlestick bar is
formed by the opening and closing prices. To
indicate that the
opening was lower than the closing, the body of
the bar is left blank.
If the currency closes below its opening, the
body is filled. The rest
of the range is marked by two
"shadows": the upper shadow
(uwakage) and the lower shadow (shitakage).
Capacity utilization An economic indicator that consists of total
industrial
output divided by total production capability.
The term refers to the
maximum level of output a plant can generate
under normal
business conditions.
Cardinal square A Gann technique for forecasting future significant
chart points by counting from the all-time low
price of the currency.
It consists of a square divided by a cross into
four quadrants. The
all-time low price is housed in the center of
the cross. All of the
following higher prices are entered in
clockwise order. The numbers
positioned in the cardinal cross are the most
significant chart points.
Channel line A parallel line that can be traced against the
trendline,
connecting the significant peaks in an uptrend,
and the significant
troughs in a downtrend.
Chaos theory A theory that holds that statistically noisy
behavior may
occur randomly, even in simple environments.
This seemingly
random behavior may be predicted with
decreasing accuracy if the
source is known.
CHIPS (Clearing House Interbank Payments
System) A computerized
system used for foreign exchange dollar
settlements.
Christmas tree spread A
compound option strategy that consists of
several short options at two or more strike
prices.
Classes of options The
types of options: calls and puts.
Combination spread (synthetic future) A compound option strategy
that consists of a long call and a short put,
or a long put and a short
call, with a common expiration date.
Commodity Channel Index (CCI) An
oscillator that consists of the
difference between the mean price of the
currency and the average
of the mean price over a predetermined period
of time. A buying
signal is generated when the price exceeds the
upper (+100) line,
and a selling signal occurs when the price dips
under the lower (-
100) line.
Commodity Futures Trading Commission
(CFTC) An independent agency
created by Congress in 1974 with a mandate to
regulate commodity
futures and options markets in the United
States. The CFTC's
responsibilities are to ensure the economic
utility of futures markets,
via competitiveness and efficiency; ensure the
integrity of these
markets; and protect the participants against
manipulation, fraud,
and abusive practices. The Commission, based in
Washington, D.C.,
regulates the activities of 285 commodity
brokerage firms; 48,211
salespeople; 8017 floor brokers; 1325 commodity
pool operators
(CPOs); 2733 commodity trading advisers (CTAs); and
1486
introducing brokers (IBs).
Commodity Research Bureau's (CRB) Futures Index Index formed from
the equally weighted futures prices of 21
commodities. The
preponderance of food commodities makes the CRB
Index less
reliable in terms of general inflation.
Common gap A
price gap that occurs in relatively quiet periods or in
illiquid markets. It has limited technical
significance.
Condor spread A
compound option strategy that consists of either
four same-type options with a common expiration
date—two long
options with consecutive strike prices, one
short option with an
immediately lower strike price, and one short
option with an
immediately higher strike price; or four
same-type options with a
common expiration date—two short options with
consecutive strike
prices, one long option with an immediately
lower strike price, and
one long option with an immediately higher
strike price.
Consumer Price Index (CPI) An
economic indicator that gauges the
average change in retail prices for a fixed
market basket of goods
and services.
Consumer sentiment A
survey of households designed to gauge the
individual propensity for spending. There are
two studies conducted
in this area, one survey by the University of
Michigan, and the other
by the National Family Opinion for the
Conference Board. The
confidence index measured by the Conference
Board is sensitive to
the job market, whereas the index generated by
the University of
Michigan is not.
Continuation patterns
Technical signals that reinforce the current trends.
Cost of carry The
interest rate parity, whereby the forward price is
determined by the cost of borrowing money in
order to hold the
position.
Council of Ministers The
legislative body of the European Economic
Community in charge of making the
major policy decisions. It is
composed of ministers from all the 12 member
nations. The
presidency rotates every six months by all the
12 members, in
alphabetical order. The meetings take place in
Brussels or in the
capital of the nation holding the presidency.
Country (sovereign) risk A
trading risk emerging from a
government's interference in the foreign
exchange markets.
Covered interest rate arbitrage An
arbitrage approach that 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.
Covered long A
compound option strategy that consists of selling a
call against a long currency position. A
covered long is synonymous
with a short put.
Covered short A
compound option strategy that consists of shorting a
put against a short currency position. A
covered short is synonymous
with a short call.
Cox, Ross, and Rubinstein pricing
model An option pricing model that
takes into consideration the early exercise
provision of the American
style options. As it assumes that early
exercise will occur only if the
advantage of holding the currency exceeds the
time value of the
option, their binomial method evaluated the
call premium by
estimating the probability of early exercise
for each successive day.
The theoretical premium is compared to the
holding cost of the cash
hedge position, until the option's time value
is worth less than the
forward points of the currency hedge and the
option should be
exercised.
Credit risk The possibility that an outstanding currency position may
not be repaid as agreed, due to a voluntary or
involuntary action by
a counterparty.
Cross rates
Currencies traded against currencies other than the U.S.
dollar. A cross rate is a non-dollar currency.
Currency call A
contract between the buyer and seller that holds that the
buyer has the right, but not the obligation, to
buy a specific quantity
of a currency at a predetermined price and
within a predetermined
period of time, regardless of the market price
of the currency. The
writer assumes the obligation of delivering the
specific quantity of a
currency at a predetermined price and within a
predetermined period
of time, regardless of the market price of the
currency, if the buyer
wants to exercise the call option.
Currency fixings An
open auction executed in Europe on a daily basis in
which all players, regardless of size, are
welcome to participate with
any amount.
Currency futures A
specific type of forward outright deal with
standardized expiration date and size of the
amount.
Currency option A
contract between a buyer and a seller, also known
as writer, that gives the buyer the right, but
not the obligation, to
. trade
a specific quantity of a currency at a predetermined price and
within a predetermined period of time,
regardless of the market price
of the currency; and gives the seller the
obligation to deliver or buy
the currency under the predetermined terms, if
and when the buyer
wants to exercise the option.
Currency put A
contract between the buyer and the seller that holds
that the buyer has the right, but not the
obligation, to sell a specific
quantity of a currency at a predetermined price
and within a
predetermined period of time, regardless of the
market price of the
currency. The writer assumes the obligation to
buy the specific
quantity of a currency at a predetermined price
and within a
predetermined period of time, regardless of the
market price of the
currency, if the buyer wants to exercise the
call option.
Current account balance The
broadest current dollar measure of U.S.
trade, which incorporates services and
unilateral transfers into the
merchandise trade data.
D
Daylight position limit The
maximum amount of a certain currency a
trader is allowed to carry at any single time,
between the regular
trading hours.
Dead cross An
intersection of two consecutive moving averages that
move in opposite directions and should
technically be disregarded.
Dealing systems
On-line computers that link the contributing banks
around the world on a one-on-one basis.
Delta (A) (1)
The change of the currency option price relative to a change
in the currency price; (2) the hedge ratio
between the option
contracts and the currency futures contracts
necessary to establish a
neutral hedge; (3) the theoretical or
equivalent share position. In the
third case, delta is the number of currency
futures contracts a call
buyer is long or a put buyer is short. Delta
ranges between 0 and 1.
Descending triangle A
triangle continuation formation with a flat
lower trendline and a downward-sloping upper
trendline. (See
Triangle.)
Descending triple bottom
Bearish point-and-figure chart formation
that suggests that the currency is likely to
break a support line the
third time it reaches it. Each new bottom is
lower than the previous
one.
Diagonal spread A
compound option strategy that consists of several
same-type options, in which the long side and
the short side have
different strike prices and different
expirations.
Diamond A minor reversal pattern that
resembles a diamond shape.
Direct dealing An
aggressive approach in which banks contact each
other outside the brokers' market.
Directional Movement Index A
signal of trend presence in the market.
The line simply rates the price directional
movement on a scale of 0
to 100. The higher the number, the better the
trend potential of a
movement, and vice versa.
Discount forward spread A
forward price that is deducted from a
spot price to calculate a forward price. It
reflects the fact that the
foreign interest rate is lower than the U.S.
interest rate for that
particular period.
Discount rate The
interest rate at which eligible depository
institutions may borrow funds directly from the
Federal Reserve
Banks. The rate is controlled by the Federal
Reserve and is not
subject to trading.
Discretion for range to trader
stop-loss order A stop-loss order that
gives the trader a number of discretionary pips
within which the
order has to be filled.
Double bottoms A
bullish reversal pattern that consists of two bottoms
of approximately equal heights. A parallel
(resistance) line is drawn
against a line that connects the two bottoms.
The break of the
resistance line generates a move equal in size
to the price difference
between the average height of the bottoms and
the resistance line.
Double tops A
bearish reversal pattern that consists of two tops of
approximately equal heights. A parallel
(support) line is drawn
against a resistance line that connects the two
tops. The break of the
support line generates a move equal in size to
the price difference
between the average height of the tops and the
support line.
Downside tasuki gap A bearish two-day candlestick combination. It
consists of a second-day blank bar that closes
an overnight gap
opened on the previous day by a black bar.
Downward breakout of a bearish
support line A bearish point-and-
figure chart formation that confirms the
currency's breakout of a
support line the third time it reaches it.
Downward breakout of a bullish
support line A bearish point-and-
figure chart formation that confirms the
currency's breakout of a
support line the third time it reaches it. The
support line is sloped
upward.
Downward breakout from a
consolidation formation A bearish point-
and-figure chart formation that resembles the
inverse flag formation.
A valid downside breakout from the
consolidation formation has a
price target equal in size to the length of the
previous downtrend.
Durable Goods Orders An
economic indicator that measures the
changes in sales of
products with a life span in excess of three years
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