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KNOWLEDGE BASE

Grain Glossary

Get an overview of financial terms and their definitions.

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A


At The Money (ATM)

In finance, an option is at the money if the current market price of its underlying asset equals its strike price. Because the underlying asset cannot be bought or sold at a price other than the current market price, at-the-money options have no intrinsic value.


Accounts payable

A company's accounts payable is the amount of money it owes to its creditors for goods or services it has received, but has not yet paid for. In the context of accounting, accounts payable is classified as a liability, as it represents a company's obligation to pay off its debts. It is recorded in a company's balance sheet under the category of current liabilities, along with other debts and financial obligations that are due within the next year.


Appreciation in currency A currency appreciation in the currency market refers to an increase in the value of one currency relative to another. Simultaneously, the currency appreciation benefits importers as they have to pay less in domestic currency for imported goods.


Alt 21 Alt 21 is a digital financial platform designed to let individuals and businesses hedge currency risks. The company's platform offers customizable forex hedging software including options and forwards with real-time rates for pricing in multiple currencies, enabling banks, credit unions, and corporate treasury departments to automate their forex hedging processes and deliver tailor-made financial services.


Actual/360

A day count convention is used for calculating interest accrued on Treasury bills and other money market instruments. Uses actual number of days in a month and 360 days in a year for calculating interest payments.


B


Balance sheet hedging

A balance sheet hedging technique involves using financial instruments to offset potential losses or gains on the balance sheet of a company. Companies typically use it to protect themselves against adverse movements in foreign exchange rates, interest rates, or commodity prices, which can affect the value of their assets and liabilities.


Base currency

The base currency is the primary currency that is used to quote prices for financial instruments, such as currency pairs in the foreign exchange market. It is also the currency in which financial statements, such as balance sheets and income statements, are typically reported.


Bid

Bids are offers made by buyers to purchase securities at a specified price. In an auction-style market, such as a stock exchange, bids are made by buyers who want to purchase securities, and offers (also called "asks") are made by sellers who want to sell them. "Bid-ask spread" refers to the difference between prices at which buyers and sellers are willing to buy at a particular moment. Bid prices are typically lower than ask prices, and spreads are the difference between them.


Bill of Landing

A Bill of Lading (B/L) is a document used in shipping to acknowledge the receipt of goods and to serve as proof of title. The B/L is issued by the carrier (such as a shipping company or a trucking firm) and lists the type, quantity, and destination of the goods being transported. It also serves as a contract between the carrier and the shipper, setting out the terms and conditions of the shipment.


Basis Points (bps)

Basis points are used to measure a percentage change in a financial instrument's value or rate. One basis point is equal to 1/100th of 1% or 0.01%, which is used to express very small changes in value. A basis point represents a very small percent change in an easy-to-understand manner and is often used to describe changes in interest rates, yields, and other financial metrics. 


Bond

A bond is a debt security issued by a government, municipality, or corporation for the purpose of raising capital. An investor who purchases a bond is essentially lending money to the issuer in return for interest payments and the return of principal at maturity. Companies and governments often use bonds to finance long-term projects and to smooth out their cash flow. Bonds come in many types, including corporate, municipal, and government bonds. 


Binary Option

Binary options are financial instruments that allow speculating on the movement of various assets, such as stocks, commodities, currencies, and indices. It is called a binary option because the outcome is either a fixed payout or a loss.


Broken Date

Broken dates refer to contracts and financial instruments that have a non-standard or irregular tenor, or length of time until maturity. It is possible to use broken dates in a variety of financial instruments, such as bonds, loans, and derivatives.


Butterfly Option

The butterfly option is a type of option strategy that involves combining two vertical spreads, which each have four different options with three different strike prices. This strategy takes advantage of a neutral market environment, where the underlying asset's price is expected to remain stable. It involves purchasing two call options at a lower strike price, two put options at a higher strike price, and selling one call option and one put option at the same middle strike price.


Budget Rate

In the context of foreign exchange (FX), a budget rate is a financial projection that estimates the expected exchange rate for a particular currency pair at a future point in time. It is used to help plan and manage resources for international transactions, and to ensure that the costs of the transactions are within the allocated budget. 


Blocked Currency Block currencies are effectively non-convertible or inconvertible. Generally, currencies are blocked because of government restrictions, such as foreign exchange regulations, physical barriers, political sanctions, or extremely high volatility.


Barrier Option

A barrier option is a type of derivative where the payoff depends on whether or not the underlying asset has reached or exceeded a predetermined price. A barrier option can be a knock-out, or a knock-in.


C


Cash Flow Hedge

A cash flow hedge is a type of hedge that is used to protect against potential losses or gains on a company's future cash flows. It involves using financial instruments, such as derivatives, to offset the impact of changes in foreign exchange rates, interest rates, or commodity prices on the value of the company's cash flows.


Consumer Price Index (CPI)

Consumer Price Index (CPI) measures the average price level of a basket of goods and services consumed by households. The Consumer Price Index (CPI) is a critical indicator of pricing pressures in an economy and provides a gauge of inflation. Forex traders monitor the CPI, as it can lead to changes in monetary policy by the central bank that will either strengthen or weaken the currency against others in the markets.


Collateral

In the context of foreign exchange (FX), collateral refers to assets that are pledged as security for a financial obligation, such as a loan or a derivative contract. Collateral is often used in FX transactions to reduce the risk of default by one of the parties. Collateral can be used in other types of FX transactions as well, such as currency forwards, options, and non-deliverable forwards. In these cases, the collateral may be used to cover the potential risk of loss due to changes in exchange rates or other market conditions.


Commodity

Commodities are raw materials or primary agricultural products that can be bought and sold, such as copper, oil, wheat, gold, etc. Because commodities are standardized products with little differentiation between their qualities, they can be interchanged with other commodities of the same type. They are often produced and traded in large quantities and can be used as inputs for further production or as sources of energy.


Calendar Spread

A calendar spread, also called a time spread or a horizontal spread, involves simultaneously buying and selling options on the same underlying asset but with different expiration dates. Calendar spreads aim to profit from differences in option time decay.


Call Option

Call options are financial contracts that give the holder the right, but not the obligation, to buy a specific asset at a predetermined price (the strike price) before or on a certain date (the expiration date). The underlying asset is the asset that the call option gives the holder the right to purchase.


Call Spread

The call spread is an option strategy where one call option is purchased and another call option is simultaneously sold on the same underlying asset. Call options have different strike prices, and the option that is purchased has a lower strike price than the option that is sold. Call spreads are designed to profit from an upward move in the price of the underlying asset while limiting losses.


CAPS

Caps are financial contracts used to hedge against currency fluctuations, similar to options. By using it, a currency's upside potential is limited while the holder benefits from its potential depreciation. The holder of a cap has the right to buy or sell a currency, but is not obligated to do so, at a specific strike price, on a specific date or period of time. A cap rate is the strike price that determines a currency's maximum rate.


Credit Default Swap (CDS)

Credit default swaps (CDS) are financial derivatives that are used to transfer credit risk from one party to another. A CDS provides protection against the risk of debt default by the issuer.


Cross rate

In the context of foreign exchange (FX), a cross rate is the exchange rate between two currencies, both of which are not the official currency of the country in which the exchange rate quote is given. It is calculated by using the exchange rates of the two currencies relative to a third currency, which is typically a more widely traded currency such as the US dollar.


Cross border payment

A cross border payment is a financial transaction that involves the transfer of money between countries, typically in different currencies. Cross border payments can be made for a variety of purposes, such as to pay for goods or services, to transfer money to or from foreign bank accounts, or to make international wire transfers. There are a number of factors to consider when making a cross border payment, such as exchange rates, fees, and regulatory requirements. 


Cross Border Trade As defined by the OCDE, cross-border trade is the exchange of goods and services between residents and non-residents. It is measured in USD as a percentage of GDP for net trade (exports minus imports) and also in annual growth for imports and exports.


Convertible Bond

Convertible bonds are bonds that can be converted into shares of the issuer's stock or another security at the holder's discretion. Convertible bonds are a hybrid security that combine the features of both bonds and stocks. They offer the stability and regular income of a bond, as well as the opportunity to participate in the company's potential growth.


Corporate Bond

Corporate bonds are debt securities issued by corporations to raise capital. There are a variety of maturities available for corporate bonds, ranging from a few months to more than 30 years. The bondholder receives periodic interest, known as a coupon, and the principal is returned at maturity.


Currency Forward (FX forward)

A currency forward is a financial contract that involves the exchange of two currencies at a predetermined exchange rate on a future date. It is a type of derivative instrument that is used to hedge against the risk of fluctuations in exchange rates.


Currency Hedging

Currency hedging is the practice of using financial instruments or strategies to reduce the risk of losses due to fluctuations in foreign exchange rates. It is a common risk management strategy for companies and investors with international operations or exposures, as it can help to protect against the impact of currency fluctuations on the value of their assets, liabilities, and cash flows.


Currency Volatility

Currency volatility refers to the fluctuations in the value of a currency relative to other currencies. It is a measure of the risk associated with holding or trading assets in a particular currency, and is an important consideration for companies and investors with international operations or exposures.


Currency Exposure

Currency exposure refers to the potential impact of changes in foreign exchange rates on the value of a company's assets, liabilities, and cash flows. It is a measure of the extent to which a company is exposed to risk from movements in foreign exchange rates. A company with significant foreign currency exposure may be at risk of losses due to changes in exchange rates, which can impact the value of its assets and liabilities, as well as the cash flows from its international operations. 


Currency Depreciation

Currency depreciation occurs when the value of a currency falls against other currencies. The depreciation of currencies can be caused by economic fundamentals, interest rate differentials, political instability, or investor risk aversion.


Currency Convertibility In terms of foreign transactions, currency convertibility refers to the ability to exchange one currency for another at a given conversion rate. A range of degrees of convertibility can be identified, ranging from total convertibility to total inconvertibility.


Convertible Currency

A currency is said to be freely convertible when it has an immediate value on the different international markets, and few restrictions on the manner and amount that can be traded for another currency. Free convertibility is a major feature of a hard currency.


Cross Currency Triangulation

In cross currency triangulation, monetary amounts are first converted from one national currency unit (source currency) into an intermediate currency (anchor currency). Calculation then converts the intermediate currency amount into the designated national currency unit (target currency).


Cash Collection In cash collection, companies recover money from other businesses (or individuals) to whom they have previously provided invoices. Cash collection primarily aims to get invoices paid by the due date.


Currency controls

Currency controls (or exchange controls) limit the purchase and/or sale of currencies by governments. By limiting inflows and outflows of currency, these controls help countries stabilize their economies. Exchange controls are not available to every nation, at least not legitimately; the 14th article of the IMF's Articles of Agreement only permits their use in transitional economies.


D


Day Count Convention

The day count convention is a standardized method for calculating the number of days between two dates in a given year. For financial instruments such as bonds, loans, and derivatives, day count conventions determine the number of days of interest accrual.


Delta

In finance, delta is a measure of how sensitive an option's price is to changes in the underlying asset's price. It is a Greek letter used in options pricing formulas to represent the amount by which the price of an option is expected to change in response to a $1 change in the price of the underlying asset. Delta is typically expressed as a decimal number between 0 and 1 for call options, and between 0 and -1 for put options.

Developed Markets

The developed markets are those with advanced economies and well-developed financial systems. Generally, these countries have high per capita incomes and well-developed financial markets. Japan, the United States, Canada, and Western European countries are examples of developed markets.


Discrete Hedging

Discrete hedging is a risk management strategy that involves taking specific, individual positions in financial instruments to offset losses from other positions. Unlike continuous or ongoing hedging strategies, such as dynamic hedging, discrete hedging involves specific trades in response to specific risks or events. For example, a company might use discrete hedging to protect against a potential loss from an upcoming foreign currency payment by buying a forward contract or currency option. 


Dow Jones

Dow Jones Industrial Average (DJIA) is a U.S. stock market index that consists of 30 large publicly traded companies. Stock market performance is largely influenced by the index, which is generally viewed as a leading indicator. 


Dollar DXY Index

A U.S. Dollar Index (USDX, DXY, DX, or, informally, the "Dixie") measures the value of the dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trading partners' currencies.


Direct QuotationDirect quotation is where the cost of one unit of foreign currency is given in units of local currency, whereas indirect quotation is where the cost of one unit of local currency is given in units of foreign currency.


E


Electronic Invoicing

Electronic invoicing (e-invoicing) refers to the creation, exchange, and processing of invoices electronically instead of on paper. E-invoicing involves sending invoices electronically between a supplier and a buyer, usually via the internet. There are several benefits to this method of invoicing over traditional paper invoicing, including increased efficiency, reduced errors and fraud, improved cash flow, and lower costs for printing and mailing. In addition, e-invoicing can be integrated with financial systems, making the accounts payable process easier to automate and improving cash flow visibility.


Embedded Finance

Embedded finance refers to the integration of financial services into non-financial products or services. This can take many forms, such as adding payment or lending functionality to a mobile app or website, or bundling insurance or investment products into a larger offering. Embedded finance aims to make financial services more accessible for consumers by bringing them directly into the products and services they use.


Emerging Markets

Emerging markets refer to countries that are in the process of developing their economies and are considered to be of high growth potential. These countries are often classified as being less developed than more industrialized nations and are characterized by a lower level of per capita income, less developed financial markets, and less mature political systems.


Exotic Currency

An exotic currency is a term used to describe a currency that is not widely traded or used in international transactions. These currencies are typically from smaller or less developed countries, and may be less liquid or more volatile than major currencies. Examples of exotic currencies are the Brazilian Real (BRL), South African Rand (ZAR), Mexican Peso (MXN). Turkish Lira (TRY), Indian Rupee (INR) and Russian Ruble.


Exchange Rate

An exchange rate is the price at which one currency can be exchanged for another currency. It is the value of one currency in terms of another currency, and is determined by the supply and demand for the two currencies in the foreign exchange market.

F


Federal Funds Rate

The federal funds rate is the interest rate at which banks lend and borrow overnight balances from each other, known as federal funds, in the U.S. The federal funds rate is an important benchmark for short-term interest rates in the U.S. financial market, and is used as a reference rate for various financial products, such as adjustable-rate mortgages, credit card loans, and small business loans.


Fintech

The term fintech refers to the use of technology to provide financial services. It can include everything from robo-advisors to mobile banking apps. Fintech is constantly evolving and has the potential to disrupt traditional financial systems by providing more efficient and accessible financial services.


Floor

In finance, a floor refers to a minimum that cannot be dropped below. An interest rate floor means that a loan is not subject to any other contingent interest rates. Regardless of market conditions, a price floor prevents an item's price from falling below a certain limit.


Forward Points

Forward points in finance refers to the amount added to or subtracted from the current spot rate of a currency to determine the forward exchange rate for a future delivery date. The forward exchange rate determines the rate at which a currency can be exchanged for another at a future date, based on an agreement made on the spot date. In addition to accounting for the time value of money, forward points are used to correct for differences in interest rates between the currencies being exchanged. The size of the forward point will depend on the difference between the interest rates of the two currencies and the time until the forward contract is set to expire.


Foreign Exchange (FX)

Foreign exchange (FX) refers to the buying and selling of currencies on the foreign exchange market. The foreign exchange market is a global decentralized market for the trading of currencies, and is the largest financial market in the world.


Foreign Exchange (FX) Option 

A foreign exchange (FX) option is a financial contract that gives the holder the right, but not the obligation, to buy or sell a specified currency at a predetermined exchange rate on or before a certain date. It is a type of derivative instrument that is used to hedge against the risk of fluctuations in exchange rates.


Foreign Exchange (FX) Hedging

FX hedging is a risk management strategy used by companies to protect themselves from potential losses resulting from changes in currency exchange rates. FX hedging involves buying and selling financial instruments, such as forwards, options, and futures, to offset potential currency exposures in order to minimize the impact of exchange rate fluctuations on a company's financial statements. The goal of FX hedging is to reduce or eliminate the risk of loss due to currency movements, allowing companies to better manage their financial risk and focus on their core business operations.


Foreign Exchange (FX) Swap

An FX swap is a foreign exchange derivative that allows two parties to exchange an agreed amount of one currency for another currency at a specified rate, on a specified date, and then reverse the trade at a later date. The two legs of the trade are carried out simultaneously for a fixed amount of time, and then reversed later. FX swaps are usually used to hedge currency risk or obtain financing in a different currency. FX swaps are commonly used by banks and other financial institutions, but are also used by companies and individuals to manage their foreign exchange exposures.


Foreign Exchange (FX) Risk - exchange rate riskForeign exchange (FX) risk is the risk that a company or investor will incur losses due to fluctuations in exchange rates. It is a type of market risk that can impact the value of assets, liabilities, and cash flows denominated in different currencies.


Forward 

Forwards are financial derivatives that allow two parties to exchange assets at a specified price at a specific future date. Contracts are customized to the needs of the parties involved, and terms include the type of asset, the quantity of the asset, and the delivery date. Forwards are often used to hedge against currency risk, commodity price risk, or interest rate risk. In a forward contract, one party agrees to buy the asset at the agreed-upon price on a specific date from the other party. The other party agrees to sell the asset at that price on that date. The forward contract is not traded on an exchange, and the terms of the contract are not standardized. The terms are negotiated between the two parties, and the contract is usually customized to meet their specific needs. Although forward contracts are similar to futures contracts, they differ in some important ways. A futures contract is standardized and traded on an exchange, whereas a forward contract is customized and traded over the counter. Additionally, futures contracts have margin requirements and are marked to market daily, whereas forwards do not.


Foreign Exchange (FX) Forward Contract

FX forwards are contracts between clients and their bank, or non-bank provider, to exchange currencies at a set rate on a future date. Contract pricing is determined by the exchange spot price, interest rate differentials between the two currencies, and the length of the contract, which is determined by the buyer and seller.


Future

Futures contracts are financial derivatives that obligate the buyer or seller to purchase or sell an asset at a predetermined price at a future date. The terms of futures contracts, including the quantity and quality of the assets, the delivery date, and the price, are all determined in advance. Futures contracts are standardized and traded on exchanges. Futures contracts are used to hedge against price risk, or to speculate on the price movements of an asset. The buyer and seller of a futures contract are required to put up a margin, which is a small percentage of the value of the contract. The margin is used to cover any potential losses on the contract. 


Functional Currency

A functional currency is the currency of the primary economic environment in which an entity operates. It is the currency in which an entity primarily generates and expends cash, and the currency in which it primarily holds assets and liabilities. For a business, the functional currency is typically the currency of the country in which the business is headquartered. The functional currency is used to determine the appropriate exchange rate to use when translating the financial statements of an entity into a different currency. The functional currency is also known as accounting currency.


FX Translation Currency translation is the process of converting one currency in terms of another, often in the context of the financial results of a parent company's foreign subsidiaries into its functional currency.


FX Swap

In a foreign currency swap, two foreign parties agree to swap interest payments on a loan made in one currency for interest payments on a loan made in another currency. Foreign currency swaps can also involve exchanging principal. When the agreement ends, this will be exchanged back. In most cases, however, notional principal is just used to calculate interest and is not actually exchanged.


Floating Exchange Rate In a floating exchange rate system, the currency price of a nation is set according to supply and demand relative to other currencies. A fixed exchange rate, on the other hand, is determined entirely or predominantly by the government.


FX Forward Transaction The FX Forward Deal is a foreign exchange transaction based on a foreign exchange rate agreed by the buyer and seller under a foreign exchange contract, delivered on a specified date after the second working day of the transaction, in most cases.


FX Netting Netting FX (or Forex Netting ) involves offsetting receivables and payables in one currency with receivables and payables in the same currency. As currency rates move, FX gains (losses) on one position should be offset by FX losses (gains) on the other.


Foreign Transaction Fee A foreign transaction fee is a charge assessed by a financial institution to a consumer who uses an electronic payment card to make a purchase in a foreign currency. Foreign transaction fees usually apply to card purchases made in foreign countries while traveling, but they can also apply to purchases made online from your home country where the vendor is foreign and processes the transaction in its local currency.


FX Gain / FX Loss

An FX gain or loss is reflected in the income statement as a change in value of a foreign exchange-denominated transaction. A sales transaction creates a foreign exchange gain (loss) when the foreign currency appreciates (depreciates) against the company's home currency.


Fedwire Fedwire is a real-time gross settlement funds transfer system operated by the United States Federal Reserve Banks that allows financial institutions to transfer funds electronically between the system's more than 9,289 participants (as of March 19, 2009). Upon receiving the proper wiring instructions from the receiving bank, the sending bank can initiate transfers. Foreign Exchange Broker


A forex broker, or currency trading broker is a financial services company that provides traders access to a platform for buying and selling currencies. Transactions in the foreign exchange market are always between a pair of two different currencies.


G


Gamma

A gamma is a measure of how sensitive the delta of an option is to changes in the price of the underlying asset, used in options pricing formulas to represent the amount by which the delta of an option is expected to change in response to a $1 change in the price of the underlying asset. Gamma is typically expressed as a decimal number, and it reflects the impact that changes in the price of the underlying asset can have on the delta of an option.


Government Bond

A government bond is a debt security issued by the government to raise capital. Due to the fact that government bonds are backed by the full faith and credit of the issuing government, they are considered a safe investment.


Greeks in Finance Variables used to assess risk in the options market are commonly referred to as "the Greeks." A Greek symbol represents each risk. Greek variables result from imperfect assumptions or relationships between the option and another underlying variable. Greek values, such as delta, theta, and others, are used by traders to assess options risk.


G10 Currencies

The G10 currencies are a group of selected major currencies that are used in international marketplaces. The name of the group originated from a meeting of finance ministers from the G10 nations on the 10th of September of 1975. The G10 currencies are: United States Dollar (USD), Euro (EUR), Pound Sterling (GBP), Japanese Yen (JPY), Australian Dollar (AUD), New Zealand Dollar (NZD), Canadian Dollar (CAD), Swiss Franc (CHF), Norwegian Krone (NOK), Swedish Krona (SEK).

H


Hedger

Hedgers are investors or financial institutions that engage in financial transactions to reduce the risk of potential losses on assets. Hedging involves taking offsetting positions in financial instruments to mitigate the impact of price movements on the underlying asset. There are many different ways that investors and financial institutions can hedge their risks, depending on their specific needs and the nature of the underlying asset. Some common hedging strategies include the use of financial derivatives such as options and futures, as well as the use of diversification and portfolio optimization techniques.

Historical Volatility

Historical volatility refers to the fluctuations in the price of a security over a specific period of time. Calculated by taking the standard deviation of the natural logarithm of the asset's price over a specified number of trading days. The higher the historical volatility, the greater the price fluctuations of the asset. Historical volatility can be used to help predict future volatility and risk, but it is important to note that past performance is not necessarily indicative of future results.

I


International Monetary Fund (IMF)

The International Monetary Fund (IMF) is an international organization that promotes global monetary cooperation, financial stability, and international trade. The IMF was founded in 1944 at the Bretton Woods Conference and is headquartered in Washington, D.C. It is funded and owned by its member countries, which contribute financial resources to the organization and are represented by a board of directors.


Implied Volatility

The implied volatility of a financial instrument, such as a stock or an option, indicates its expected volatility over its lifetime. Due to its derived nature, it is implied as it cannot be observed directly. Options contracts are commonly priced using implied volatility because it determines the likelihood that the underlying asset will reach a certain price by a certain date. An asset with a high implied volatility is likely to experience price swings in the future, while one with a low implied volatility is less likely to experience price movements. Implied volatility is typically expressed as an annualized percentage.


Interest Rate Curve

An interest rate curve represents the relationship between interest rates and debt maturity. The curve plots the interest rates of securities with different maturities on the y-axis and the maturities of the securities on the x-axis. Several factors, such as monetary policy, inflation expectations, and market conditions, can influence the shape of the interest rate curve over time.


Interest Rate Swap (IRS)

Interest rate swaps are financial derivatives that allow two parties to exchange or swap cash flows based on a notional principal amount. During the inception of the swap, the parties agree on a set of fixed or floating interest rates. The swap involves one party paying a fixed rate of interest on the notional amount, while the other party pays a floating rate. Floating rates are typically based on an index, such as London Interbank Offered Rate (LIBOR), which is the average rate at which banks can borrow funds. By using interest rate swaps, parties can hedge against changes in interest rates, manage the risk of fluctuating interest rates, or speculate on future changes in interest rates.


In The Money (ITM)

In finance, an option is considered to be in the money if the current market price of the underlying asset is higher than the strike price for a call option, or lower than the strike price for a put option. For example, if a stock is trading at $60 per share, and a call option with a strike price of $50 is available, the option is in the money. Similarly, if a put option with a strike price of $70 is available, it is also in the money.

In-the-money options have intrinsic value, which is the difference between the current market price of the underlying asset and the strike price of the option. 


International TransactionInternational transactions are cross-border trade agreements or credit operations involving a foreign currency. A typical international transaction involves the exchange of goods or services, and the settlement date is the last step. ISO 4217A standard published by the International Organization for Standardization (ISO) provides information about the relationships between individual currencies and their minor units by defining alpha and numeric codes.


J

K


Knock-in Option

A knock-in option is a type of option that becomes active or "knocks in" to the market only when the price of the underlying asset reaches a predetermined trigger price. Until the trigger price is reached, the option remains dormant and has no value.


Knock out Option

A knock-out option is a type of option that becomes inactive or "knocks out" of the market when the price of the underlying asset reaches a predetermined trigger price. When the trigger price is reached, the option is automatically exercised, and the trader either receives a payout or incurs a loss, depending on the terms of the option.


Kantox Kantox is a multinational fintech company that offers Currency Management Automation software for corporate clients. Their software automates the pre-trade, trade, and post-trade stages of the corporate foreign exchange workflow.


L


Landed Cost

A landed cost is the total cost of bringing a product from the origin to its destination, including transportation, insurance, duties, tariffs, and other fees. Importing businesses must consider the landed cost, as it affects the final price of the product and ultimately their competitiveness. By calculating the landed cost, companies can determine the true cost of their imports, make informed purchasing decisions, and price their products accurately.


Letter of Credit

A Letter of Credit (LOC) is a document issued by a bank on behalf of a buyer, guaranteeing payment to a seller under the terms and conditions agreed upon by the buyer and seller. The seller can use the LOC as a guarantee of payment as long as they meet the conditions outlined in it. If the buyer fails to pay the seller, the issuing bank will pay the seller. It is commonly used in international trade transactions to mitigate the risk of non-payment by the buyer.


Liquidity

Liquidity refers to the ease with which an asset can be bought or sold in the market without affecting its price. Highly liquid assets, such as cash, can be easily bought or sold with minimal impact on the price, while less liquid assets, such as real estate or collectibles, may take longer to sell and may be subject to larger price fluctuations. There are several measures of liquidity, including the bid-ask spread (the difference between the highest price that a buyer is willing to pay for an asset and the lowest price that a seller is willing to accept), the volume of trading activity, and the speed at which an asset can be bought or sold.


Local currency payment

Local currency payments are financial transactions that are conducted in the local currency of a client or supplier, rather than the company's own functional currency. These payments can be made for sales transactions, exports, or purchases transactions, imports. Operating in the local currency allows companies to avoid costly markups and expand sales by avoiding passing on exchange rate markups to clients. Effective currency hedging is necessary for companies to protect against exchange rate risk when making local currency payments.


London Interbank Offered Rate (LIBOR)

The London Interbank Offered Rate (LIBOR) is a benchmark interest rate that is used as a reference rate for short-term interest rates around the world. It is calculated and published daily by the ICE Benchmark Administration (IBA), a financial services company, based on the interest rates at which a panel of banks in London are willing to lend to each other. There are different LIBOR rates for different currencies and maturities, ranging from overnight to one year. The most commonly quoted LIBOR rate is the three-month U.S. dollar rate. LIBOR is used as a reference rate for a wide variety of financial products, including adjustable rate mortgages, student loans, and floating rate bonds. It is also used as a benchmark for the pricing of derivatives such as interest rate swaps.


Long

In finance, the term "long" refers to the buying of a security or other financial instrument with the intention of holding it for an extended period of time. The term "going long" or "taking a long position" refers to investing in a security with the expectation that it will appreciate in value over the long term. By holding the security, the investor hopes to sell it at a higher price in the future and make a profit.


Live exchange rate

The live exchange rate is a currency exchange rate that is updated in real time. The current exchange rate on the market or between banks. Customers of money transfer companies receive exchange rates that change in real time, but also include a small margin.

M


Market Maker

A market maker is a firm or individual that buys or sells securities at any time with the goal of providing liquidity to the market and facilitating trade. Market makers typically hold an inventory of securities that they buy and sell, and they provide quotes to buyers and sellers using their capital and liquidity. Market makers play a crucial role in facilitating price discovery and trade execution by providing a source of demand and supply for securities. Market makers may operate on exchanges or in the over-the-counter (OTC) market.


Market Taker

A market taker buys or sells securities by accepting the price quoted by market makers or other traders. By contrast to market makers, who can buy and sell securities at any time and provide quotes to the market, market takers are passive participants who rely on quotes provided by others in order to execute trades. Market takers do not provide liquidity to the market in the same way that market makers do, but they can benefit from the liquidity provided by market makers and other traders by being able to quickly and easily buy and sell securities at quoted prices. Market takers may also be referred to as "buyers" and "sellers," depending on whether they are buying or selling securities.


Major Currency

A major currency is a term used to describe a currency that is widely traded and used in international transactions. Major currencies are typically from economically and politically stable countries, and are considered to be relatively liquid and stable compared to other currencies.


Mark to Market

Mark to market (MTM) is a method of measuring the fair value of accounts that can fluctuate over time, such as assets and liabilities. Mark to market aims to provide a realistic appraisal of an institution's or company's current financial situation based on current market conditions.


Monetary AssetsA monetary asset is one that is readily convertible into money, such as cash on hand, bank deposits, investment accounts, accounts receivable (AR), and notes receivable.


Midmarket Exchange Rate

The midmarket exchange rate (sometimes called the interbank or middle rate) is the midpoint between any two currencies' buy and sell prices. As the demand for and supply of a currency is constantly changing, the mid-market rate is also constantly changing.


Managed floating exchange rateA managed floating exchange rate, or "dirty float," blends elements of fixed and floating rates. Central banks, like China's, intervene to keep the currency within a set range against others, such as the USD, with daily fluctuations capped at 2%. This system helps prevent extreme currency misvaluations. For credibility, it relies on a central bank with ample reserves and a market-aligned exchange rate corridor.


N


Negative Carry

A negative carry occurs when the cost of holding a financial asset exceeds the income generated by it. It occurs typically when an asset pays a lower return than what it costs to finance its purchase.


Nominal Effective Exchange Rate

An unadjusted weighted average rate at which one country's currency exchanges for a basket of multiple foreign currencies is called the nominal effective exchange rate (NEER). Nominal exchange rates indicate the amount of domestic currency needed to purchase foreign currency.


Non-Deliverable Forward

Non-deliverable forwards (NDF) are cash-settled, and usually short-term, forward contracts. The notional amount is never exchanged, hence the name "non-deliverable." Two parties agree to take opposite sides of a transaction for a set amount of money—at a contracted rate, in the case of a currency NDF.


Notional Value

The notional value of an underlying asset is often used by derivatives traders to refer to the contract's value. This can be the total value of a position, the amount that a position controls, or an agreed-upon amount. A financial asset's face value is used to determine its payment. In the options, futures, forward, and currency markets, this term describes derivative contracts.


O


OECD

The Organisation for Economic Co-operation and Development (OECD) is an international organization that promotes economic and social well-being around the world. It was founded in 1961 and is headquartered in Paris, France. The OECD is made up of 36 member countries, which are primarily developed countries, but also include a few emerging economies.


Offer

An offer is a proposal from a seller to sell a product or service at a specified price. In securities trading, an offer is often expressed as an "ask," which is the price at which a seller is willing to sell a particular security. In an auction-style market, such as a stock exchange, offers are made by sellers and paired with bids made by buyers. The lowest ask and the highest bid at a given time make up the "bid-ask spread," which is the difference between the prices at which buyers are willing to buy and sellers are willing to sell. The ask price is typically higher than the bid price, and the difference between the two is called the "spread."


Option

Options are financial instruments that give the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a certain date. A call option gives the holder the right to buy the underlying asset; a put option gives the holder the right to sell the underlying asset. Options are often used to hedge against potential price movements in other assets, or to speculate on price movements.


Off the Run

In finance, "off the run" refers to securities that have not been issued most recently. In the case of government bonds issued every year, for example, the most recently issued bond would be considered "on the run," but all previous bonds would be considered "off the run." Due to their limited trading, off-the-run securities are usually considered less liquid than on-the-run securities.


On the Run

"On-the-run" is a term used in the bond market to refer to the most recently issued bonds in a particular series or issuer. On-the-run bonds are typically the most liquid and widely traded bonds in a given market, and they are usually considered to be the benchmark or reference bonds for that market.


Out Off The Money (OTM)

In finance, an option is considered to be out of the money if the current market price of the underlying asset is lower than the strike price for a call option, or higher than the strike price for a put option. Out-of-the-money options have no intrinsic value, because the holder of the option is not entitled to buy or sell the underlying asset at a price that is different from the current market price.


Over The Counter Market (OTC)

The OTC (over-the-counter) market is a decentralized market where financial instruments are traded directly between two parties without a central exchange. Alternatively, it is known as the "off-exchange" market. The OTC market is typically facilitated by market makers, who act as intermediaries between buyers and sellers and help match buyers and sellers.


Over Hedged

Risk management strategy over-hedging involves taking an offsetting position that exceeds the size of the original position being hedged. It may result in a net position opposite to the initial position. Overhedging can be inadvertent or intentional.


Option Currency Trading

Currency options are derivatives based on underlying currency pairs. Trading currency options involves a wide variety of strategies available for use in FX markets, where foreign currencies are traded.


P


Pips

Pips are units of measurement used to express the change in value between two currencies. Pips represent the smallest increments of difference in exchange rates and they represent the change in value between two currencies. For most currency pairs, a pip is equal to the fourth decimal place of the exchange rate, but it can vary depending on the pair being traded and the size of the trade. A one-pip change in the EUR/USD exchange rate, for example, would be 1.1234 to 1.1235. A pip is a unit of measurement used in forex trading to calculate profit and loss. It is a crucial concept for traders to grasp.


Positive Carry

A positive carry occurs when the income generated by holding a financial asset exceeds its cost. This typically occurs when the asset pays a higher rate of return or yield than the cost of financing the purchase of the asset.


Put Option

Put options are financial contracts that give the holder the right, but not the obligation, to sell a specific asset at a predetermined price (the strike price) before a specific date (the expiration date). The asset that the put option gives the holder the right to sell is known as the underlying asset. Put options are often used as a way to hedge against potential price declines in the underlying asset, or to speculate on price declines.


Put Spread

A put spread is an option strategy that involves purchasing one put option while simultaneously selling another put option on the same underlying asset. The put options have different strike prices, and the option that is purchased has a higher strike price than the option that is sold. The goal of a put spread is to profit from a downward move in the price of the underlying asset, while also limiting potential losses.


Primary Dealer

A primary dealer is a financial institution that is authorized to buy and sell securities directly with a central bank, such as the Federal Reserve in the United States. Primary dealers are an important part of the financial system because they help to facilitate the implementation of monetary policy by the central bank. Primary dealers are typically large, well-capitalized banks or securities firms that are able to make markets in a wide range of securities, including U.S. government securities, agency securities, and mortgage-backed securities. They also act as market makers in these securities, providing liquidity to the market and helping to ensure that prices remain stable.


Pegged Exchange RateThe pegged exchange rate system incorporates aspects of floating and fixed exchange rate systems. Smaller economies that are particularly susceptible to currency fluctuations will “peg” their currency (pegged currency) to a single major currency or a basket of currencies. These currencies are chosen based on which country the smaller economy experiences a lot of trade activity with or on which currency the nation’s debt is denominated in.

Q


Quote CurrencyIn foreign exchange (Forex), the quote currency, also known as the counter currency, is the second currency in both direct and indirect currency pairs. A quote currency determines the value of a base currency. When currency exchange rates are quoted, the quote currency is listed after the base currency.

R

Real-time gross settlement (RTGS)

Real-time gross settlement (RTGS) systems are specialist funds transfer systems that allow money or securities to be transferred from one bank to another in real time and on a gross basis to avoid settlement risk. When a payment transaction is settled "in real time," there is no waiting period. Transactions are settled as soon as they are processed. The term "gross settlement" means the transaction is settled one-to-one, without bundling or netting with any other transaction. "Settlement" refers to payments that are final and irrevocable once processed.


Repurchase Agreement (REPO)

Repo transactions involve one party selling securities to another with the agreement to buy them back later at a higher price. Often, repos are used to raise short-term capital or finance the purchase of securities. There are two types of repos: term repos, which have a fixed maturity date, and open repos, which have no fixed maturity date and can be terminated at any time. A repos is most commonly used by banks, hedge funds, and other financial institutions as a way to raise short-term capital, and they are considered a low-risk investment because they are usually secured with high-quality securities.


Reverse Repurchase Agreement (Rev REPO)

A reverse repo is a financial transaction where one party purchases securities from another party and then sells them back at a lower price at a later date. Like regular repos, reverse repos can be either term repos or open repos, depending on whether they have a fixed maturity date. Reverse repos are typically used by banks, hedge funds, and other financial institutions as a way to invest short-term excess cash or to finance the purchase of securities. 


Rho

Rho is a measure of the sensitivity of an option's price to changes in the risk-free interest rate. It is a Greek letter used in options pricing formulas to represent the amount by which the price of an option is expected to change in response to a 1% change in the risk-free interest rate. Rho is typically expressed as a percentage, and it reflects the impact that changes in the risk-free interest rate can have on the value of an option.


Risk Reversal

Risk reversals are financial transactions in which two parties exchange risk. It is generally used to hedge against or speculate on changes in the value of an underlying asset. One common type of risk reversal is an options strategy that involves the simultaneous purchase of a put option and the sale of a call option on the same underlying asset. This strategy is also known as a short straddle or a short combination. The put option gives the holder the right to sell the underlying asset at a predetermined price (the strike price), while the call option gives the holder the right to buy the underlying asset at the same strike price.


Run on the Bank

A run on the bank is a situation where a large number of depositors attempt to withdraw their money from a bank at the same time due to concerns about the bank's solvency or financial stability. This can be triggered by rumors or actual news of the bank's financial difficulties or instability.

A run on the bank can have serious consequences, as it can lead to the bank's inability to fulfill the withdrawal requests of its depositors, resulting in a liquidity crisis that can spread to other banks and the wider financial system. In some cases, governments or central banks may step in to provide support and prevent a wider financial crisis.


Profit Repatriation

The repatriation of profits means that a firm can send earnings or assets from abroad back to its home country in hard currency such as USD, EUR, and others.


Rolling Option

A rolling option is an options contract that grants a buyer the right to purchase something at a future date, as well as the choice to extend the expiration date of that right, for a fee.


S


Sharpe Ratio

The Sharpe ratio is a measure of risk-adjusted return, which compares the expected returns of an investment to the risk it carries. It is calculated by dividing the expected excess return (the return of the investment minus the risk-free rate) by the standard deviation of returns. A higher Sharpe ratio indicates a better risk-to-return tradeoff.


Short

In finance, the term "short" refers to the selling of a security or other financial instrument that the seller does not own. This is also known as "short selling" or "going short." Short selling is typically done in anticipation of a decline in the price of the security or instrument. The seller borrows the security from someone else, sells it on the market, and then buys it back at a later time (hopefully at a lower price) in order to return it to the lender. If the price of the security does indeed decline, the seller can profit by buying it back at a lower price than they sold it for. If the price goes up instead, the seller incurs a loss.


S&P 500

Standard & Poor's 500 (S&P 500) is a stock market index containing 500 large publicly traded companies in the United States. It is widely considered a leading indicator of U.S. stock market performance. The companies in the S&P 500 are chosen by Standard & Poor's (S&P), a financial services company, based on their market size, liquidity, and industry group representation. The index is weighted by market capitalization, which means that the larger companies have a greater influence on the index's performance. The S&P 500 is typically used as a benchmark for the performance of actively managed large-cap mutual funds and exchange-traded funds (ETFs).


The Secured Overnight Financing Rate (SOFR)

The Secured Overnight Financing Rate (SOFR) is a benchmark interest rate for the U.S. dollar overnight lending market. It is calculated and published by the Federal Reserve Bank of New York (FRBNY) based on the interest rates at which banks lend overnight funds to each other using U.S. Treasury securities as collateral.


Speculator

Speculators buy and sell financial instruments to profit from changes in the price of the underlying asset. In order to achieve higher returns, speculators often take on greater risks than traditional investors. Speculators can trade a wide variety of financial instruments, including stocks, bonds, currencies, commodities, and derivatives.


Supply Chain

Supply chains refer to the flow of goods, services, and information from the raw material suppliers to the customer's final product. It involves all activities involved in the sourcing, procurement, production, and delivery of a product or service, as well as the coordination and collaboration of all parties involved, including suppliers, manufacturers, distributors, and customers. A successful supply chain delivers the right product, at the right time, in the right quantity, and at the lowest price.


Swaption

A swaption is a financial derivative that gives the holder the right, but not the obligation, to enter into an interest rate swap at a later date. An interest rate swap is a financial instrument that allows two parties to exchange a stream of fixed-rate payments for a stream of floating-rate payments, or vice versa.


Spot Rate

Spot rates are the current market prices at which financial instruments, such as currencies, commodities, and securities, can be bought or sold for immediate delivery. Spot rates are affected by market forces, such as supply and demand, and are commonly used as benchmarks for forward, futures, and options contracts. The spot rate can be quoted in either direct or indirect terms, depending on the conventions of the market in which the instrument is traded.


Straddle

The straddle strategy involves simultaneously purchasing a put option and a call option for the underlying security with the same strike price and expiration date. When the price of the security rises or falls from the strike price by more than the total premium paid, a trader will profit from a long straddle. As long as the underlying security's price moves sharply, the profit potential is virtually unlimited.


T


Take Rate

A take rate is the fee that a marketplace charges for a transaction that is carried out by a third-party seller or service provider. The take rate is a determining factor in a marketplace's revenue as reported on its income statement: Take rate * GMV (gross merchandise volume) = revenue.


Tenor

Tenor refers to the time between the maturity date and the maturity date of a financial instrument, such as a bond or loan. The tenor of a financial instrument can be expressed in various ways, such as years, months, or even days.


Theta 

In finance, theta is a measure of an option's sensitivity to time-based changes in price. The Greek letter used in options pricing formulas to represent the amount by which the price of an option is expected to decline over a given period of time, due to the passage of time and the decay of the option's extrinsic value.Theta is typically expressed as a negative number, and it reflects the impact that the passage of time can have on the value of an option.


Tick

Ticks are units of measurement that represent the minimum price change for a security. Ticks are commonly used for expressing changes in a financial instrument's price, such as a stock, bond, commodity, or derivative, and they represent the smallest increment in a security's price. The value of a tick can vary depending on the security being traded and the market in which it is traded, but it is typically very small. For example, in the stock market, a tick may be equal to one cent for some stocks and $0.01 for others. Ticks are often used by traders and investors to track the performance of a security and to make decisions about buying and selling.


Treasury bill (T-bill)

T-bills are short-term debt securities issued by the U.S. government. T-bills are sold in denominations ranging from $100 to $1,000,000, and their maturities range from a few days to 52 weeks. Since T-bills are backed by the full faith and credit of the United States government, they are considered to be very safe investments. Investors often use them to park money or diversify their portfolios for a short period of time. T-bills do not pay interest, but they are sold at a discount to their face value, and the difference between the purchase price and the face value represents the return to the investor. T-bills are issued through competitive and noncompetitive bidding processes.


Transaction Exposure 

Transaction exposure is the potential loss a company may incur due to changes in foreign exchange rates on existing financial obligations or expected future cash flows. Companies can use a variety of financial instruments and strategies to manage transaction exposure. Transaction exposure is also known as economic exposure. 


Trader 

A trader is a person who buys and sells financial instruments such as stocks, bonds, currencies, commodities, or derivatives in an attempt to make a profit. Traders can work on their own or as part of a larger financial institution, such as a bank or brokerage firm. 


Translation Exposure / Transaction Risk

The translation exposure (also known as the translation risk) is the possibility that an organization's assets, liabilities, or income will change in value as a result of changes in exchange rates. Translation risk occurs when a company has equities, assets, liabilities, or income denominated in a foreign currency.

U


U.S. Dollar IndexU.S. Dollar Index measures the dollar's value relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies.


V


Value at Risk (VaR)

Value at Risk (VaR) measures the risk of loss on an investment or portfolio over a specified period. Based on the performance of the investment or portfolio over a given period, it estimates the likelihood of a loss of a certain magnitude over a given period. VaR is typically expressed as a dollar amount or as a percentage of the total value of the investment or portfolio.


Vega

In finance, vega measures how sensitive an option price is to changes in the volatility of the underlying asset. It is a Greek letter used in options pricing formulas to represent the amount by which the price of an option is expected to change in response to a 1% change in the volatility of the underlying asset. Vega is typically expressed as a percentage, and it reflects the impact that changes in volatility can have on the value of an option.


Volatility

In finance, volatility refers to the amount of risk or uncertainty associated with the price of a security. It is a measure of how much the price of a security, such as a stock or bond, fluctuates over time. A security with high volatility experiences significant price changes over a short period of time, while a security with low volatility experiences less significant price changes. Volatility can be measured using a variety of statistical techniques, such as standard deviation or the variance of returns.


Volatility Surface

In finance, a volatility surface is a graphical representation of the implied volatilities of a group of options on a particular underlying asset, as a function of the options' expiration dates and strike prices. The volatility surface is used to help visualize the relationships between the implied volatilities of options with different expiration dates and strike prices, and can be used to model the expected volatility of the underlying asset over time.  

Z


Zero Coupon Bond

A zero-coupon bond is a type of bond that does not pay periodic interest to the bondholder. Instead, the bond is issued at a discount to its face value, and the bondholder receives the face value of the bond at maturity. The difference between the purchase price and the face value represents the return to the bondholder, which is the equivalent of the interest that would have been paid out in periodic coupons.




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