Forex Jargon

Barrier options: A type of “exotic” option that comes into existence or ceases to exist once a certain price is reached. They are often added to a “vanilla” or typical option to make the premium less expensive. For example, a 1.4000 EUR/USD call purchased when spot is at 1.3500 would be cheaper if there were a “knockout” embedded in the option, for example at 1.3300. If 1.3300 trades before the expiration of the options, the whole structure would be “knocked out” and the seller of the option would be able to pocket the entire premium.

Bid: A buy order placed at or below the market.

Corporates: The treasury departments of large multinational corporations. They are responsible for hedging the forex exposures of their firms, which can have dramatic impacts on earnings for firms with large overseas sales. For example, a company like Airbus has massive revenues in dollars but has most of its cost base in euros. They must hedge their currency exposures to try and offset this mis-match.

Custody bank: A bank which holds securities in custody for other financial institutions, does their bookkeeping and settles their trading activity. Examples include Bank of New York Mellon, State Street and Northern Trust Co.

Delta The ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative. Sometimes referred to as the “hedge ratio”. Thanks to Investopia.com

Fixing: A preset time of day when bids and offers are aggregated and cleared at a published price. Popular fixings are the “ECB fix” at 12:15 GMT and the London fixing at 16:00 GMT. Fixings are used primarily by asset managers. They have a fiduciary responsibility to get their clients the best possible execution and the thinking is the fixing price is the most transparent of the day. The benchmark price is published by the WM Company.

Gamma Concepts in the options markets are expressed in terms of the Greek alphabet. Gamma refers to the rate of change in an option’s delta relative to the price of the underlying asset. A short gamma position will become shorter as the price of the underlying asset increases. As the market rallies, you are effectively selling more and more of the underlying asset as the delta becomes more negative.

Model fund: Hedge fund which uses some form of quantitative model to initiate and liquidate trades. The most familiar type of funds are trend-followers like J.W. Henry and Co. Many of these funds trade at set times during the day, often at 10 am New York time.

Offer: A sell order places at or above the market price.

Prime brokers: Firms which allow clients like hedge funds to use their credit facilities to access financial markets. For example, a hedge fund client of Bank X can trade in the interbank FX market using Bank X’s name in return for a fee.

Stop-loss: An order which closes out a market position once a certain price level trades in the market. For example, a sell order placed below the market price to protect against accelerating losses.

Sovereign wealth fund (SWF): A fund set up by a country with large foreign exchange reserves to help manage those reserves. Typically SWFs purchase long-term securities to try and enhance investment returns beyond what central banks typically earn holding government debt. Examples include the Government of Singapore Investment Company and the Abu Dhabi Investment Authority.

Sovereign names: Used interchangeably for sovereign wealth funds or central banks.

Real money; Nick name for “end users” of foreign exchange, who trade to pay for transactions or liquidate proceeds from transactions in other markets like equities, fixed income and commodities. We typically use real money as shorthand for institutional asset managers like pension funds, mutual funds and endowments.