Glossary And Foreign Exchange Terms (A-C)

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.
• 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 toreach 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.