Glossary of Terms

All or None A trade entry which requires that the order be treated as a limit order and that the entire quantity of the order be filled at that limit price or better, or none of the order will be executed. Arbitrage A position where a profit can be made from a temporary price disparity between two markets (or two products within the same market), by taking the long and short side simultaneously. Assignment The notification to an option seller that the buyer has exercised his right to buy (call) or sell (put) the underlying futures contract. This notification is made by an exchange clearing house. Associated Person An employee of an FCM, or other accredited professional, whose job is to accept customer orders for trade execution. At-the-Money (options) An option whose strike price is equivalent to the underlying futures contract market price value. Bear Spread (options) An option position established by simultaneously buying and selling options in order to profit from a market price decline. One leg will profit from a decline in the underlying currency prices. The other leg of the option spread will profit if the underlying currency value unexpectedly increases.  Bid The price at which a dealer is willing to buy a currency, and at which a trader must sell to enter or exit a currency position.

Black-Scholes Options Pricing Model The theory and formula developed in 1973 by Messers F.Black and M. Scholes that assigns a market value for an option’s premium based on the underlying futures price. Bollinger Bands A technical analysis study which creates moving average and volatility bands above and below the price range so that over 95 percent of the prices are contained within this envelope. A price move outside of the bands can be a trend change indicator. Bretton Woods, 1944 The agreement to establish fixed exchange rates for the world’s major currencies. The U.S. dollar became, de facto, the world’s reserve currency and was redeemable for gold from the U.S. Treasury at a guaranteed rate of $35 per ounce. The agreement dissolved in 1971, as the world transitioned to the floating exchange rate system in use today. Broker A person who matches buyers and sellers in the currency markets, and who does not profit from the price movements in currencies, but rather earns commissions from the trades he matches. The quotes for the orders he executes are established by a dealer, rather than him.  Brokers can be Associated Persons, and as such oversee the taking of orders from clients. They can also be on the floor of an exchange, executing orders received from online clients, or FCMs. Bull Spread An option position established by the simultaneous buying and selling of options in a way that will profit from an increase in the underlying currency market prices. One leg of the option spread will profit if the underlying currency increases. The other leg will gain if the market unexpectedly declines. Thus the two legs together produce an option spread that will on balance, gain from a market increase, while protecting against a market decline by limiting losses in that event.  Call Option A contract that gives authority to the holder of an option to buy the underlying currency at a predetermined price (strike price) at any time until the expiration of the contract. The seller of the option then may be required to take a short position in the underlying currency if the call is subsequently exercised.  CFTC The Commodity Futures Trading Commission was authorized by the Federal Commodity Exchange Act in 1974 and administers the provisions of that act.

Clearing (Member, House) Clearing is the process by which a Clearing House assumes responsibility for guaranteeing futures transactions at its exchange by taking both the buyer’s and the seller’s side of a transaction. The Clearing House oversees margin administration and the orderly flow of exchange trading execution. A Clearing Member clears all trades of a non Clearing member.  Commitment of Traders Report A report published by the CFTC weekly that accumulates total long or short positions of futures and options traders in U.S. exchange futures markets. Categories are Large Commercial, Large Speculators, and Small Speculators.  Convergence The reduction in the disparity between the (higher) futures contract price and the cash market value of a currency. At expiration, the two prices converge to equivalence.  Dealer A person who functions as a principal in a trade by taking one side, with the intention of quickly offsetting that position through a counterparty, with the goal of profiting from this “dealing.”  Delta (options) A fractional value which references the rate of increase (or decrease) in an option premium as the market value of the futures contract increases or decreases. The option premium will rise or fall according to this Delta value.  Dow Theory A theory of market analysis originated by Charles Dow in 1897 which holds that market prices can be categorized into trends that he described as similar to waves. Each wave has its own distinctive characteristic. By identifying those characteristics, you can identify the direction of market prices.  Elliott Wave Named after Ralph Elliott, who believed that financial market price valuations follow the same cyclical patterns found in nature. For example, the Elliott Wave Theory advances the belief that charts can identify discernable price movements according to a pattern of waves: five waves advancing and three waves declining.  Euro The new currency in Europe introduced on Janaury 1, 1999, that combines the values of the member nations’ individual currencies into a new, single currency, the euro.  Exercise Price (options) Equivalent to the strike price.  FIA The Futures Industry Association is a professional education and public information group composed of Futures Commission Merchants.  Fibonacci Numbers A sequence of numbers dating back to the 13th century Italian mathematician who posited that formulaic ratios exist in nature that can be applied to almost anything, including currency markets.  Floor Broker An exchange member in the pits who executes trades for other persons.  Floor Trader An exchange member who executes trades in the open outcry pits for his own account. Also referred to as a “local.”  Futures Contract A contract to purchase or sell a specified amount of currency on a specified date at the agreed upon price. The futures contract, among other purposes, is used to shift risk that arises from holding assets in the cash markets. This contract defines a standardized framework delineating delivery dates, trading lot sizes, and terms and conditions for contract execution.

Globex 2 The international electronic trading system introduced by the Chicago Mercantile Exchange in 1992 to trade currency futures worldwide after closing hours of the open outcry pit trading on the exchange floor. Participating global exchanges use the system to contribute liquidity to the electronic futures trading markets.  Hedging To take a position in the futures market opposite a position in the cash market for the purpose of minimizing loss from adverse cash market price changes. A hedge may also take the form of a having a position in the futures market to use as a surrogate for a cash transaction that will occur later.  Initial Margin The level of money required by the exchange (or forex dealer) to serve as a surety bond against potential losses resulting in the market.  In-the-Money (options) An option with intrinsic value. For a Call, that means the strike price will be below the underlying contract price. For a Put, the strike price will be above the underlying price of the currency futures contract.  Intrinsic Value (options) The component in an option premium that can be expressed as follows: a value equal to the difference between the strike price and the underlying currency’s price level.  Introducing Broker A person other than an Associated Person, who takes and solicits orders for currency contracts at an exchange, but who does not hold money or manage margin.  Limit Order A restrictive order specifying a price at which the trade must be executed by the broker. A limit order protects the fill from being executed at a price worse than the one specified. For instance, a buy limit order will be below the market price of the a currency. When the market reaches the specified fill price, the broker will try to fill the order. If, however, the market then precipitously rises, preventing a fill at the price limit specified or better, then the broker will return the order to the trader as unfilled. So a limit order protects against an adverse market move at the time it is triggered. A sell limit order will specify a price above the underlying currency value.  Liquidation A term used interchangeably with offset. It means to close or offset an existing position in a cash-settled market.  Local See Floor Trader.  MACD A technical analysis study developed in the 1960s that stands for Moving Average Convergence Divergence. This oscillator-based format helped popularize histograms, a bar chart on the bottom of a graph which is used to anticipate price trend changes.  Margin A specified amount of money required by the forex dealer, exchange futures broker or Introducing Broker, to insure against potential losses from outstanding currency market positions. The Initial Margin is established by the various exchanges according to the SPAN formula. A 25 percent reduction establishes a Maintenance Margin level requirement. If a trader’s account reaches the Maintenance Margin level, it triggers a margin call. The margin account must then be brought up to the Initial Margin requirement, or the broker/dealer has the right to liquidate all current positions.  Market Maker A dealer in forex who will risk his own capital by offering both buy and sell quotes in a currency market. Such market makers have the effect of adding liquidity to the overall market environment.  Market Order An order which instructs a broker to execute the trade at the best available price immediately and without restrictions.

Mark-To-Market A valuation system that takes place daily. The closing prices of a futures contract or option premium is revalued at the hour of the exchange’s daily closing. It is used to determine daily margin and cash settlement requirements for the exchange futures markets. In a marked-to-market system, the current daily value of all positions is established, regardless of whether the positions are settled that day or remain outstanding as of the close of business.  Momentum A technical analysis study tool that measures the relative change in price within a specific time interval.  Naked Option An option position where the trader sells an option but does not hold the underlying futures contract as a backstop against possible exercise of the option he has sold. Naked options have unlimited potential losses.  National Futures Association A self-regulating organization to which all trading professionals employed in the futures business must belong. It is organized under CFTC authority by federal law. It conducts arbitration and mediation services for traders and others who may have a complaint involving exchange futures trading or relationships.  Not Held Order This is an order that brokers and dealers may accept from a client, but that they do not obligate themselves to abide by in the same way they would for the execution of a market order. A Not Held order means the broker who accepts it is not held responsible if the order cannot, or is not, executed at the specified price, or time, or for any other reason. An OCO, or order cancels order trade entry could be an example of a “not held” order by a broker.  Offer The price at which a dealer would be willing to sell a currency; also the price at which traders must buy a currency.  Order Cancels Order This instruction to the broker has two parts. If one order is executed, then the remaining order is to be canceled. Also referred to as “One Cancels Other.”  Option A contract which gives the holder a right, but not an obligation, to purchase the underlying futures contract, at a price and time specified in the option. Thus a 90 March Call option will give the buyer the “option” to buy a futures contract at a price level of 0.9000 before the option expires in March.  Out-of-the-Money (options) An option whose premium value has no intrinsic worth, but does have time value. For a call, that would mean the strike price is higher than the underlying currency futures price. For a put, the strike price is lower than the underlying currency futures price level. The premium value for an out-of-the-money option is referred to as having only “time value.”  Pip The smallest incremental value by which an exchange rate move is measured in forex markets.  Point and Figure Charts A method of charting that uses price levels to generate patterns and where price trends are discerned by direction alone and not in relationship to time.

Premium (options) The price that must be paid to acquire rights to hold an option against an underlying futures contract. For the buyer of an option, the premium is the price paid. For the seller or writer of an option, the premium is the price received.  Purchasing Power Parity This theory of fundamental analysis suggests that the exchange rates between two currencies will adjust so that goods in both countries will cost the same.  Put Option A contract that gives an authority to the buyer of this option a right to sell the underlying currency future at a predetermined price (strike price) at any time up to the expiration of the contract. The seller of the option may then be required to take a long position in the underlying currency if the put is exercised.  Random Walk A current theory which holds that price movements cannot be predicted from past history or trends, and that future market values will be determined by totally random factors that cannot be defined through either technical or fundamental analysis.  Resistance A price level in technical analysis which anticipates that selling pressure may reverse an upward price movement. A resistance level is where selling in the past has in fact resisted an uptrending price pattern.  Retracement A price move reversal within a major price trend.  RSI A technical analysis study known as the Relative Strength Index. The RSI scale is 0 to 100, and uses an oscillator form of moving averages to signal overbought and oversold market price conditions.  Scalper A person who is generally found on the trading floor and who gets into and out of positions rapidly. A scalper seeks to garner very small profits as frequently as possible during the trading day. For instance, a scalper will initiate purchases only fractions below the last transaction price and then seek to sell at only a fraction above the last traded price. Scalpers do, from the standpoint of the other market participants, produce liquidity for the broader market.  Settlement Price (futures) The Clearing House clears all trades and settles all positions. A settlement process involves those trades that have been liquidated or offset, so that the buyer and seller can have their accounts credited or debited as the case may be on a daily basis. If some positions have not been traded, they will be assigned a settlement price as that option’s designated closing price for the day, in order to permit the mark-to-market requirement.  SPAN The Standard Portfolio of Risk Analysis. This model factors in various elements of the market environment to establish a standardized valuation for margin requirements at an exchange.  Spot Price The execution price for a currency which then will be delivered or settled two days hence, or in the case of USD/CAD, one day.

Stochastics A technical analysis study originated by George Lane. A Stochastics chart measures the position of a currency price in relation to its own recent trading range. Like all oscillators it uses a range, in this case, 0 percent to 100 percent, for overbought and oversold signals. There are multiple variations including fast and slow Stochastics studies.  Stop Order An order entry which is designed to be executed when the market price reaches a predetermined level. For an existing position, the stop will specify a price level which when reached by the market, will trigger a market order for immediate fill at the best available price to exit the position. When used to enter a position, a stop will become a market order for execution when the market reaches a predetermined price level the trader wishes to have as an entry point in a currency.  Straddle (options) An option position designed to take advantage of a market price move either up or down. It consists of two options, one a call and the other a put, having the same expiration contract date and the same strike prices.  Strangle (options) An option position designed to profit from a range-bound market price environment. It consists of two options, one a call and the other a put, both having the same contract expiration dates, but different strike prices. A strangle can be either a long or a short spread.  Strike Price (options) Also referred to as the exercise price. The strike price is the price in the option contract at which the holder of the option may buy or sell an underlying futures contract by exercising his option. Hence, a Dec 90 call has a 90 strike price. This call option contract grants the holder a right to buy the underlying futures contract at the price level of 0.9000 anytime during the life of the option contract.  Support A technical analysis term meaning a price level where buying may be expected to reverse a downward trending market. Support is the level where buying in the past has in fact halted a downtrending market price direction.  Technical analysis An evaluation of market prices that anticipates future price movements based on previous patterns of market price history. This can include momentum, volume open interest, and many other types of studies.  Tick The smallest increment of price change in an exchange traded futures contract or option.  Time Value (options) Refers to that value of an option premium that is separate from and, for the case of an in-the-money option, in addition to, intrinsic value. Time value includes volatility, time until expiration, and other factors that are extrinsic in the sense that they are distinct from the intrinsic value in the option premium.  Volatility The degree of price movement within a range of time.

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