Forex Rollovers
In a forex transaction, you are basically long the base currency and short the quote currency. While settlement of the spot transaction is supposed to take place within two days, this does not happen because accounts are never fully funded and delivery is never actually contemplated. Accordingly, accounts are “rolled over” every night (usually [...]
Monthly Archives: June 2009
Forex Rollovers
June 1, 2009 – 6:09 pm
Forex PIPs
June 1, 2009 – 6:07 pm
Forex PIPs
Shorthand for “percentage in point.” In forex trading, a pip is the smallest incremental movement available in any currency pair. Most pips are calculated to the fourth place after the decimal point.
→ NOTE:
Pip value can be either fixed or variable depending on the currency pair.
→ EXAMPLE:
The pip value for EUR/USD is always [...]
Mark-Ups & Mark-Downs
June 1, 2009 – 6:06 pm
Mark-Ups
The difference between what the market maker/broker bought the currency for on the market and what it sold the currency to the buyer. Can be done on both the bid and ask to make more money.
→ NOTE:
A broker receives commission and a dealer receives a mark up or mark down. Can be done on [...]
Interest Rate Parity
June 1, 2009 – 6:04 pm
Interest Rate Parity
An economic concept which basically states that there should be no arbitrage opportunity through use of a foreign currency and interest rate vis-à-vis another.
The relationship can be seen when you follow the two methods an investor may take to convert foreign currency into U.S. dollars. Option A would be to invest the foreign [...]
Interest Rate Differential (IRD)
June 1, 2009 – 5:39 pm
Interest Rate Differential (IRD)
The difference between the interest rates of two similar assets and will vary based on the cross being traded; in forex the IRD may positively or negatively affect your account balance if positions are held overnight/for a long time. In the NOK/JPY trade you will get 7% (annual) interest and will pay [...]
Forward Point
June 1, 2009 – 5:37 pm
Forward Point
With regard to a specific currency, the difference between the spot price and the futures price. The forwards point may be at a premium or a discount.
→ EXAMPLE:
Spot Rate: EUR/USD = 1.2655
Forward Rate: EUR/USD = 1.2661
This means there is 6 forward basis point premium.
Study Guide >> Definitions and Terminology >> Forward Point
Forex Forward Rate
June 1, 2009 – 5:36 pm
Forex Forward Rate
The exchange rate of which a currency can be exchanged for another currency for settlement on a predetermined future date (the maturity date). The rate is the forward rate as of the time of the trade. The rate is determined with regard to the current spot exchange rate and then forward points or [...]
Exchange Rate
June 1, 2009 – 5:30 pm
Exchange Rate
This is the rate at which one currency can be converted into another.
→ EXAMPLE:
An exchange rate of 102 Japanese yen (JPY, ¥) to the United States dollar (USD, $)
This can also be expressed as: JPY 102 = USD 1.
Study Guide >> Definitions and Terminology >> Exchange Rate
Direct Quote & Indirect Quote
June 1, 2009 – 5:28 pm
Direct Quote
This is the amount of one currency (the local currency) needed to purchase one unit of a foreign currency. Domestic currency is the base currency and is in the terms of one unit.
Indirect Quote
This is the amount of one currency (the local currency) you get when you sell one unit of a foreign currency. [...]
Currency Pair
June 1, 2009 – 5:21 pm
Currency Pair
This is the individual product being bought by and sold to the customer. It is a quotation of two different currencies. The base currency (first currency also called the transaction currency) is traded against the secondary currency (also known as the counter currency, quote currency or payment currency). The currency pair is priced in [...]
Currency Crosses
June 1, 2009 – 5:20 pm
Currency Crosses
Currency pairs which do not involve the USD. Currency crosses that use the Euro are called “Euro crosses.” Currency crosses are less liquid than the major crosses and trading hours may be restricted. They represent a smaller portion of the foreign exchange markets.
→ EXAMPLE: GBP/JPY
See also: Cross Rates
Study Guide >> Definitions and Terminology >> [...]
Cross Rates
June 1, 2009 – 5:18 pm
Cross Rates
These are basically the exchange rate of two currencies when the USD is not involved. There are times when a person may want to trade a currency against another currency but the currency pair is not offered through the FDM. In these instances, a trader wishing to execute such a trade will need to [...]
Forex Counterparty & Regulated Entities
June 1, 2009 – 5:15 pm
Forex Counterparty & Regulated Entities
Counterparties or dealers act as counterparties to off-exchange retail forex transactions. Examples of counterparties are Futures Commission Merchants (FCMs), Retail Foreign Exchange Dealer (RFEDs), and other regulated entities listed in the Commodity Exchange Act
Futures Commission Merchant (FCM)
The term “futures commission merchant” means an individual, association, partnership, corporation, or trust that:
(A) is [...]
Collateral/Security Deposit/Margin
June 1, 2009 – 5:11 pm
Collateral/Security Deposit/Margin
Margin, also called collateral or security deposit, is the amount that must be deposited in a trading account in order to control a lot of a currency. If the leverage in the account is 100:1, then the margin required will be 1% of the value of the lot. If the leverage in the account [...]
Bid/Ask Spread
June 1, 2009 – 5:04 pm
Bid/Ask Spread
Like in the securities markets, the forex markets have a bid price (the price at which a broker is willing to buy the base currency) and an ask price (the price at which a broker is willing to sell the base currency). When you enter into a forex transaction you buy at the [...]
Base/Quote/Terms/Secondary Currency
June 1, 2009 – 12:45 pm
Base Currency
In Forex markets, the base currency is the first currency in a currency pair (a quotation of two different currencies, depicting how many units of the counter currency are needed to buy one unit of the base currency).
Quote Currency
The quote currency is the second currency quoted in a currency pair. In a direct quote, [...]