tags:Implied volatility,In-the-money (ITM) call,In-the-money (ITM) put,Industrial Production,Interest rate risk,International Monetary MarketImplied volatility,In-the-money (ITM) call,In-the-money (ITM) put,Industrial Production,Interest rate risk,International Monetary Market,Intrinsic value,Inverse head-and-shoulders,Irikubi ,ISO codes,Jittai Body of the candlestick ,Journal of Commerce Index,Karakasa,Kenuki ,Key reversal day,Knockin,Larry Williams %R,Leading Indicators Index,Long straddle,Long strangle,M2,M3,Margin,Maturity date,Momentum,Moving average,National Futures Association,Neural networks,Nonfarm sector,Nostro account,Open interest,Overnight position limit,Pennants,Premium ,Producer Price Index,Rate of change,Replacement risk,Reversal patterns,
I
Implied volatility Method of measuring volatility by considering the
premiums currently trading in the market and calculating the figure
based on the level of the option premium.
In-the-money (ITM) call A call whose present currency price is higher
than the strike price.
In-the-money (ITM) put A put whose present currency price is lower than
the strike price.
Industrial Production An economic indicator that consists of the total
output of a nation's plants, utilities, and mines.
Initiation margin A margin paid by the trading party in order to trade
currency futures. A trader's daily loss cannot exceed the size of this
margin.
Interest rate risk Amount of mismatches and maturity gaps among
transactions in the foreign exchange book.
International Fisher effect Theory holding that investors will hold assets
denominated in depreciating currencies only to the extent that
interest rates are sufficiently high to balance the expected currency
losses.
International Monetary Market The major currency futures and
options on currency futures market in the world. It is a division of
the Chicago Mercantile Exchange in Chicago.
Intrinsic value The amount by which an option is in-the-money. In
the case of a call, the intrinsic value equals the difference between
the underlying currency price and the strike price. In the case of the
put, the intrinsic value equals the difference between the strike price
and the present currency price, when beneficial.
Inverse head-and-shoulders A bullish reversal pattern that consists of a
series of three consecutive sell-offs. Among the three consecutive
sell-offs, the shoulders have approximately the same amplitude, and
the head is the lowest. The formation is based on a resistance line
called the neckline. After the neckline is penetrated, the target is
approximately equal in amplitude to the distance between the top of
the head and the neckline.
Irikubi A bearish two-day candlestick combination. It consists of a
modified atekubi bar. All the characteristics are the same, except
that the second day's closing high is marginally higher than the
original day's low.
Island reversal An isolated range or ranges that occur at the tip of a
V-formation.
ISO codes Standardized currency codes developed by the International
Organization for Standardization (ISO).
J
J-Curve theory Devaluation of a currency will trigger export gains in
the long term, rather than the short term, because of previous
contracts, existing inventories, and behavior modification.
Jittai Body of the candlestick (See Candlestick charts.)
Journal of Commerce Index Index that consists of the prices of 18
industrial materials and supplies used in the initial stages of
manufacturing, building, and energy production. It is more sensitive
than other indexes, as it was designed to signal changes in inflation
prior to the other price indexes.
K
Kabuse (dark cloud cover) A bearish two-day candlestick
combination. It consists of a second-day long black bar that opens
above the high of the previous day's blank bar and closes within the
previous day's range (in an uptrend).
Karakasa (hangman at the top, hammer at the bottom) A bearish
candlestick at the top of the trend, bullish at the bottom of the trend.
The candlestick can be either blank or black. The body of the
candlestick is very small and only half the length of the shadow.
Kenuki (tweezers) A "wait-and-see" two-day candlestick combination. It
consists of consecutive bars that have matching highs or lows. In a
rising market, a tweezers top occurs when the highs match. The
opposite is true for a tweezers bottom.
Key reversal day The daily price range on the bar chart of the reversal
day fully engulfs the previous day's range; also, the close is outside
the preceding day's range.
Kirikomi A bullish two-day candlestick combination. It consists of a
blank marubozu bar that opens the second day lower (than the
previous low of a long black line) and closes above the 50 percent
level of the previous day's range.
Knockin A plain vanilla option that does not exist until the trigger is
reached. Knockout a plain vanilla option that goes away if the trigger
is reached.
Koma (spinning tops) A reversal candlestick formation that consists of
a short bar, either blank or black. This candlestick may also suggest
lack of direction.
L
Larry Williams %R A version of the stochastics oscillator. It consists
of the difference between the high price of a predetermined number
of days and the current closing price; that difference in turn is
divided by the total range. This oscillator is plotted on a reversed 0
to 100 scale. Therefore, the bullish reversal signals occur at under 80
percent and the bearish signals appear at above 20 percent. The
interpretations are similar to those discussed under stochastics.
Leading Indicators Index An economic indicator designed to offer a
six- to nine-month future outlook of economic performance. It
consists of the following economic indicators: average workweek of
production workers in manufacturing; average weekly claims for
state unemployment; new orders for consumer goods and materials
(adjusted for inflation); vendor performance (companies receiving
slower deliveries from suppliers); contracts and orders for plant and
equipment (adjusted for inflation); new building permits issued;
change in manufacturers' unfilled orders for durable goods; change
in sensitive materials prices; index of stock prices; money supply,
adjusted for inflation; and the index of consumer expectations.
Line chart The line connecting single prices for each of the time
periods selected.
Linearly weighted moving average A moving average that assigns more
weight to the more recent closings.
Long legged shadows' doji A reversal candlestick formation that
consists of a bar in which the opening and closing prices are equal.
Long straddle A compound option that consists of a long call and a
long put on the same currency, at the same strike price, and with the
same expiration dates. The maximum loss for the buyer is the sum of
the premiums. The upside break-even point is the sum of the strike
price and the premium on the straddle. The downside break-even
point is the difference between the strike price and the premium on
the straddle. The profit is unlimited.
Long strangle A compound option that consists of a long call and a
long put on the same currency, at different strike prices, but with the
same expiration dates. The profit is unlimited.
M
Ml Money supply measure that is composed of currency in circulation
(outside the Treasury, the Fed, and depository institutions),
traveler's checks, demand deposits, and other checkable deposits
[negotiable order of withdrawal (NOW) accounts, automatic transfer
service (ATS) accounts, etc.].
M2 Money supply measure that consists of Ml plus repurchase
agreements, overnight Eurodollars, money market deposit accounts,
savings and time deposits (in amounts under $100,000), and
balances in general accounts.
M3 Money supply measure that is composed of M2 plus time deposits
over $100,000, term Eurodollar deposits, and all balances in
institutional money market mutual funds.
Margin The amount of money or collateral deposited by a customer with
a broker, by a broker with a clearing member, or by a clearing
member with the clearinghouse in order to insure the broker or
clearinghouse against loss on outstanding futures positions.
Mark-to-market Daily cash flow system used by the U.S. futures
exchanges to maintain a minimum level of margin equity for a
specific currency future or option by calculating the profit and loss at
the end of each trading day in each contract position resulting from
the price fluctuation.
Matched sale-purchase agreements Daily operations executed by the
Federal Reserve, in which the Fed sells a security for immediate
delivery to a dealer or a foreign central bank, with the agreement to
buy back the same security at the same price at a predetermined
time in the future (generally within seven days). This arrangement
amounts to a temporary drain of reserves.
Matching systems Electronic systems duplicating the traditional
brokers' market. A price shown by a bank is available to all traders.
Maturity date The date when a foreign exchange contract expires.
Merchandise Trade Balance An economic indicator that consists of the
net difference between the exports and imports of a certain
economy. The data includes food, raw materials and industrial
supplies, consumer goods, autos, capital goods, and other
merchandise.
Momentum An oscillator designed to measure the rate of price change,
not the actual price level. This oscillator consists of the net difference
between the current closing price and the oldest closing price from a
predetermined period. The momentum is measured on an open scale
around the zero line.
Moving average An average of a predetermined number of prices over
a number of days, divided by the number of entries.
Moving average convergence-divergence (MACD) An oscillator that
consists of two exponential moving averages (other inputs may be
chosen by the trader as well) plotted against the zero line. The zero
line represents the times the values of the two moving averages are
identical. A buying signal is generated when this intersection is
upward, whereas a selling signal occurs when the intersection takes
place on the downside.
Moving averages oscillator An oscillator in which the values of two
consecutive moving averages are subtracted from each other (the
larger number of days from the previous one) and the new values
are plotted.
N
Naked intervention (unsterilized intervention) A central bank
intervention in the foreign exchange market that consists solely of
the foreign exchange activity. This type of intervention has a
monetary effect on the money supply and a long-term effect on
foreign exchange.
National Association of Purchasing Managers Index (NAPM) A survey of 250
industrial purchasing managers, conducted in order to gauge the
changes in new orders, production, employment, inventories, and
vendor delivery speed.
National Futures Association (NFA) A self-regulatory organization
that consists of futures commission merchants (FCMs), commodity
pool operators (CPOs), commodity trading advisers (CTAs),
introducing brokers (IBs), leverage transaction merchants (LTMs),
commodity exchanges, commercial firms, and banks. It is responsible
for certain aspects of the regulation of FCMs, CPOs, CTAs, IBs, and
LTMs, focusing primarily on qualifications and proficiency, financial
conditions, retail sales practices, and business.
Netting A process that enables institutions to settle only their net
positions with one another at the end of the day, in a single
transaction, not trade by trade.
Neural networks Computer systems that recognize patterns. They may be
used to generate trading signals or to be part of trading systems.
Neutral spread (delta-neutral spread) A compound option strategy that
consists of a long option position and a short option position whose
respective total delta positions are relatively equal.
Next best price stop-loss order A stop-loss order that must be
executed after the requested level is reached.
Nonfarm sector Jobs in government, manufacturing, services,
construction, mining, retail and others.
Nostro account (clearing account) The account for each foreign
currency in the country of origin maintained by the financial
institutions for purchase and receiving (P&R) purposes.
O
Open interest The total outstanding position in a currency.
Open Market Investment Committee (OMIC) Committee established in 1923
in order to coordinate the Reserve Bank operations. It was composed
of the Governors of the Federal Reserve Banks in New York, Boston,
Philadelphia, Chicago, and Cleveland. Not currently active.
Open Market Policy Conference (OMPC) Committee established in 1930
to replace the OMIC. It consisted of 12 Federal Reserve Banks
governors and the members of the Board. Not currently active.
Optimal options Options that refer to the most favorable rate of the
underlying currency that existed (from the holder's perspective)
during the life of the option. This rate becomes the strike in the case
of optimal strike options, or it becomes the underlying, determining
the intrinsic value when compared to a predetermined fixed strike in
the case of optimal rate options. Optimals can be based on the spot
rate (spot style) or the forward rate (forward style).
Option currency spread A long currency option and an offsetting short
currency option, generally in the same currency.
Option writers Option sellers.
Oscillators Quantitative methods designed to provide signals regarding
overbought and oversold conditions.
Out-of-the-money (OTM) call A call whose present currency price
is lower than the strike price.
Out-of-the-money (OTM) put A put whose present currency price
is higher than the strike price.
Overnight position limit A position kept overnight by traders.
P
Parabolic system A stop-loss technical system, based on price and time.
The system was devised to supplement the inadvertent gaps of the
other trend-following systems. Although not technically an oscillator,
the parabolic system can be used with the oscillators. SAR stands for stop-and-reverse. The stop moves daily in the direction of the new
trend. The built-in acceleration factor pushes the SAR to catch up with the currency price. If the new trend fails, the SAR signal will be generated. The name of the system is derived from its parabolic shape, which follows the price gyrations. It is represented by a
dotted line. When the parabola is placed under the price, it suggests
a long position. Conversely, a price above the parabola indicates a
short position.
Pennants A continuation formation that resembles the outline of a
pennant. It consists of a brief consolidation period within a solid and
steep upward trend or downward trend. The consolidation itself
tends to be sloped in the opposite direction from the slope of the
original trend, or simply flat. The consolidation is bordered by a
support line and a resistance line, which converge, creating a
triangle. The previous sharp trend is known as the pennant pole.
When the currency resumes its original trend by breaking out of the
consolidation, the price objective is the total length of the pole,
measured from the breakout price level.
Personal Income An economic indicator that consists of the income
received by individuals, nonprofit institutions, and private trust funds.
Some of the components of this indicator are wages and salaries,
rental income, dividends, interest earnings, and transfer payments
(Social Security, state unemployment insurance, and veteran's
benefits).
Philadelphia Stock Exchange (PHLX) The oldest U.S. securities exchange,
it offers currency futures and options on currency futures.
Point-and-figure chart A type of chart that plots price activity without
regard to time. When the currency moves up, the fluctuations are
marked with X's. The moves on the downside are plotted with O's.
The direction on the chart only changes if the currency reverses by a
certain number of pips.
Premium The price of the option paid by the buyer to the seller.
Premium forward spread Forward price that is added to a spot price
to calculate a forward price. It reflects the fact that the foreign
interest rate is higher than the U.S. interest rate for that particular
period.
Prime rate The rate that commercial banks charge customers, which is
based on the discount rate.
Producer Price Index An economic indicator that gauges the average
changes in prices received by domestic producers for their output at
all stages of processing.
Purchasing power parity (PPP) Model of exchange rate
determination stating that the price of a good in one country should
equal the price of the same good in another country, exchanged at
the current rate (the law of one price).
Put-call-forward exchange parity (PCFP) theory A relationship between
a call option and a put option established through the forward
market. The theory holds that the option of buying the domestic
currency with a foreign currency at a certain price X is equivalent to
the option of selling the foreign currency with the domestic currency
at the same price X. Therefore, the call option in the domestic
currency becomes the put option in the other, and vice versa.
Put ratio backspread A compound option strategy that consists of
short puts with a higher strike price and more long puts with a lower
strike price. The profit is twofold. The maximum upside profit
potential consists of the total premium received. The downside profit
potential is unlimited. The maximum loss potential occurs when the
currency price reaches the lower strike price at expiration.
R
Random walk theory An efficient market hypothesis, stating that
prices move randomly versus their intrinsic value. Therefore, no one
can forecast market activity based on the available information.
Rate of change A momentum oscillator in which the oldest closing
price is divided into the most recent one.
Ratio call spread A compound option strategy that consists of a number
of long calls with lower strike prices and a larger number of short
calls with a higher strike price. The maximum profit is realized when
the currency price is at the higher strike price. This combination has
two break-even points. The downside break-even point consists of
the sum of the lower strike price and the debit, divided by the
number of long calls. The upside break-even point consists of the
sum of the higher strike price and the maximum profit potential,
divided by the number of naked calls. The maximum loss is twofold.
The maximum downside risk is the net premium. The upside risk is
unlimited.
Ratio put spread A compound option strategy that consists of a number
of long puts with higher strike prices and a larger number of short
puts with a lower strike price. The maximum profit is realized when
the currency price is at the lower strike price. This combination has
two break-even points. The downside break-even point consists of
the difference between the lower strike price and the maximum
profit potential, divided by the number of naked puts. The upside
break-even point consists of the difference between the higher strike
price and the debit, divided by the number of long calls. The
maximum loss is twofold. The maximum downside risk is unlimited.
The upside risk is the net premium.
Ratio spread A compound option strategy in which the number of
long options is different from the number of short options.
Rectangle A continuation formation that resembles the outline of a
parallelogram. The price objective is the height of the rectangle.
Regulation Q Regulation passed by the Federal Reserve that
prohibited payment of interest on demand deposits and prescribed
maximum rates banks could pay on time deposits. These ceilings had
been imposed since 1933 by the U.S. government. The regulation is
not currently in effect.
Relative Strength Index An oscillator that measures the relative
changes between the higher and lower closing prices. The RSI is
plotted on a 0 to 100 scale. The 70 and 30 values are used as
warning signals, whereas values above 85 indicate an overbought
condition (selling signal), and values under 15 suggest an oversold
condition (buying signal).
Replacement risk A form of credit risk that holds that
counterparties of failed banks will find their books unbalanced to the
extent of their exposure to the insolvent party. In order to rebalance
their books, these banks must enter new transactions.
Repurchase agreements (repos) Daily operations executed by the
Federal Reserve. A repurchase agreement between the Federal
Reserve and a government securities dealer consists of the Fed's
purchasing a security for immediate delivery, with the agreement to
sell the same security back at the same price at a predetermined
date in the future (usually within 15 days). This arrangement
amounts to a temporary injection of reserves in the banking system.
Resistance level The peaks representing the price level at which supply
exceeds demand.
Reversal patterns Patterns that occur at the end of the trend,
signaling the trend change.
Rollover (tomorrow/next or torn/next) swap A swap designed for spot
trades' maintenance. It was designed to change the old spot date to
the current spot date (on the front office's side) and to enable the
bank to make the payments to the counterparty (on the back office's
side).
Rounded bottom A bullish reversal pattern that consists of a very slow
and gradual change in the direction of the market.
Rounded top (saucer) A bearish reversal pattern that consists of a very
slow and gradual change in the direction of the market.
Runaway or measurement gap A price gap that occurs within solid
trends. It is also called a measurement gap because it tends to occur
about midway through the life of a trend.
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