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Glossary

Glossary
Abandoned – A contract that is not exercised.
American style option – An Option that can be exercised on any tradable date before expiry.
At the money (ATM) – Underlying exchange rate is trading at the breakeven rate and has no intrinsic value.
Assignment – Assignment happens when the Option writer is notified that the Option sold has been exercised by its purchaser.
Barrier rate – A level the underlying price must equal or exceed before the Option can or will be exercised. Sometimes termed a ‘ceiling’ or ‘floor.’
Best case rate – The optimum exchange rate that can be achieved.
Breakeven rate – The exchange rate at which an Option’s premium is offset.
Buyer (holder) – The party with the right of exercise.
Call – Option contract to buy underlying currency.
Close Out – The buyer of an Option deciding to drawdown from the contract.
Collateral – Something that is put up against a contract, normally money in the form of a deposit.
Contract – An agreement between two parties to exchange
Cost of carry – Costs incurred by holding the position or contract.
Counterparty – The other party in a transaction.
Currency Pair – The currencies being bought and sold, often written as GBPUSD for example.
Cut – Specific time at which an Option must be exercised, otherwise the Option will expire.
Delta – The sensitivity of an Option’s value to a change in the price of the underlying.
Derivative – A financial instrument whose price and/or value is derived from one or more underlying assets, such as a currency pair.
Effective rate – The exchange rate that takes into account the full costs of a transaction.
European style – An Option that can be exercised on its expiry date only.
Exchange rate risk – Risk arising from a change in the exchange rate.
Exercise – The buyer of a long Option actioning their right to close out the position.
Exotic Option – Complex option structures with unique attributes.
Expiry – The last date an exercise order can be taken.
Expiry time – The time of day an Option actually lapses.
Gamma – The rate of change in the delta in the underlying price.
Greeks – Greek lettering used to identify concepts in Options valuation.
Hedge – Used to reduce or remove particular risk.
Implied volatility – Estimate of an instrument’s volatility.
In the money – An option that has intrinsic value in its current state.
Intrinsic value – The inherent value of an Option.
Knock in – an Option feature that takes effect when a rate is met or a prescribed event happens.
Liability – An obligation arising from a past or current transaction or event.
Lifecycle event – An event that modifies or terminates an Option.
Long – To be ‘long’ an option is to own the contract and have the right to exercise it.
Margin – Collateral held by the counterparty to the buyer during the term of the Option.
Mark to market – Reporting or accounting valuation of an asset based on current market price.
Moneyness – An options value in its current state. In the money, at the money or out of the money.
Notional amount – Amount of currency being exchanged.
Option contract – The binding agreement between the buyer and the seller defining the terms.
Option deposit – Collateral held by the counterparty to the buyer during the term of the Option.
Option profile – Graphical representation of an Option.
Option writer – The entity, usually a bank, that has written the terms of the Option contract.
Out of the money – An Option that does not have any intrinsic value.
Over the counter (OTC) – Financial products traded between two parties not on an exchange.
Parameters – Terms that define the scope or conditions of an Option.
Pip – An acronym for percentage in point. Represents 0.0001% move in an exchange rate, e.g. if a currency moves from 1.1000 to 1.1001, it has moved 1 pip.
Position – Term used to describe a contract to buy or sell a set amount of currency.
Premium – The cost paid by the buyer to the seller of a Vanilla Option.
Prevailing rate – The underlying exchange rate at a point in time.
Protection rate – The worst case rate or floor in an Option contract.
Put – A contract to sell.
Rho – Sensitivity of an Option’s value to changes in interest rates.
Seller – The party obliged to settle upon exercise by the buyer.
Settlement date – Date on which the delivery of the currency takes place after exercise.
Short – To be ‘short’ an option is to sell the Option.
Structured Option – A non-premium paying Option.
Strike rate – The rate at which an Option can be exercised.
Theta – An Options sensitivity to the passage of time.
Time value – Portion of an Options premium decided by the amount of time remaining until expiration.
Trade date – Date an Option contract is entered into.
Trigger rate – Specific exchange rate that prompts an Option to be exercised at a pre-determined strike rate if met.
Underlying – The currency pair being exchanged. May also refer to the exchange rate.
Value date – Day of settlement.
Vanilla Option – Contract giving the buyer the right, but not the obligation to buy or sell an amount of currency.
Vega – The measurement of an Option’s sensitivity to changes in the volatility of the underlying asset.
Volatility – A measure to show how the returns from an underlying asset will fluctuate depending on the risk carried by the asset.
Worst case rate – The least favourable rate that can or will be achieved.

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