Glossary [A-B]

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Appreciation: A currency is said to ‘appreciate’ when it's price increases against a specific currency or group of currencies in response to market demand.

Arbitrage: The purchase or sale of an instrument and simultaneous taking of an equal and opposite position in a related market, in order to take advantage of small price differentials between markets.

Around: Jargon used by dealers in quoting when the forward premium/discount is near parity. For example, “two-two around” would translate into 2 points to either side of the present spot price.

Ask Rate: The rate at which a financial instrument if offered for sale (as in bid/ask spread).
Asset Allocation: Division of funds among different markets (forex, stocks, bonds, commodity, real estate), instruments or investments to diversify risk and/or create exposure to areas considered attractive, consistent with an investor’s objectives.

Back Office: The departments and processes related to the settlement of financial transactions.

Balance of Trade: The value of a country’s exports minus its imports.

Base Currency: The base currency is usually the currency in which an investor or issuer maintains its book of accounts. In the FX markets, the US Dollar is normally considered the ‘base’ currency for quotes, meaning that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair. The main exceptions to this rule are the Sterling, the Euro and the Australian Dollar.

Bear Market: A market in which prices decline (opposite of Bull market).
Bid Rate: The rate at which a trader is willing to buy a currency.
Bid/Ask Spread: The difference between the bid and offer price, and the most widely used measure of liquidity.

Big Figure: The first few digits of an exchange rate, as referred to by dealers for simplicity. These digits change relatively slowly, and are omitted in dealer quotes, especially in times of high market activity when time is tight. For example, a USD/Yen rate might be 105.20/105.25, but would be quoted verbally without the first three digits i.e. “20/25”.

Bonds: tradable instruments (debt securities) which are issued by a borrower to raise capital. They pay either fixed or floating interest, known as the coupon. As interest rates fall, bond prices rise and vice versa.

Book: In a professional trading environment, the ‘book’ is the net positions of a dealing desk.

Broker: An individual or firm that acts as an intermediary, putting together buyers and sellers for a fee or commission. In contrast, a ‘dealer’ commits capital and takes one side of a position, hoping to earn a spread (profit) by closing out the position in a subsequent trade.

Bretton Woods Agreement of 1944: The agreement that established fixed foreign exchange rates for major currencies, provided for central bank intervention in the currency markets, and pegged the price of gold at US$35 per ounce. The agreement lasted until 1971, when President Nixon overturned the Bretton Woods agreement and established a floating exchange rate for the major currencies.

Bull Market: A market in which prices rise (opposite of Bear market).

Bundesbank: Germany’s Central Bank.