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Glossary

The glossary with insights and facts
that make it easy to understand FX
and currency hedging

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

At the money

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At the money is a term used in options trading. Options are contracts that allow you to buy or sell an asset at a pre-agreed price. For example, you could buy an option that gives you the right to exchange £4,000 into US Dollars at an exchange rate of 1.45.

Arbitrage

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Arbitrage simply means exploiting price variations in different markets. In forex trading, this typically entails buying foreign currency – or a derivative such as an option or forward – in one market, and selling it at a profit in another market.

Barrier

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Barriers are a feature of some options, where the option is activated or deactivated if the price of the underlying asset reaches or breaches a specific level – the “barrier.

Base currency

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The base currency is the first currency shown in a foreign exchange quotation. The second currency in the quotation is called the quote currency, or counter currency.

Collar

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A collar is a hedging strategy that helps you manage your foreign exchange risk by limiting your exposure to currency fluctuations to within a certain range.

Derivative

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A derivative is a type of financial contract that gets its value from an underlying asset. In foreign exchange transactions, the underlying asset is typically a currency’s exchange rate.

Exposure

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In foreign exchange transactions, exposure is the risk that you could lose money due to the exchange rate evolving in a way that is unfavourable to you.

Forward contract

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Forward contracts are a type of derivative – a financial contract that gets its value from an underlying asset such as a company share or a loan or coffee beans.

Greeks

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On the options markets, the so-called “Greeks” are the numerical indicators that traders use to measure the risks a particular type of trade entails.

Hedge

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A hedge is an investment that you make in order to manage your risk. When you hedge, you’re minimising or offsetting the possibility you’ll lose money should things go wrong.

Initial Margin

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Initial margin is the amount you have to pay a broker to open a trade on the forex market. It’s worked out as a percentage of the total value of your trade.

Japanese Yen Carry Trade

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A carry trade is a type of foreign exchange trade in which you borrow money in one currency at low interest and use it to make high-interest investments in another currency (Yen — Japan’s currency).

Knock-in Option

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A knock-in option is an option that only comes into force — or knocks in — if the underlying asset reaches a certain price. In foreign exchange, the underlying asset is an exchange rate.

Leverage

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Leverage means investing using money you’ve borrowed, usually from a broker. When you trade on leverage, you pay your broker a sum of money called initial margin.

Mark-to-market

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Mark-to-market is the accounting process that measures the real-world value of foreign exchange trades. It shows whether you’ve made a profit or a loss on a trade and whether your broker should credit your trading account or make a margin call.

Non-deliverable forward

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A non-deliverable forward is a forward contract which is settled in your local currency. Like standard forward contracts, non-deliverable forwards are agreements to buy or sell X amount of a certain currency at a predetermined exchange rate on X date in the future.

Out of the money

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‘Out of the money’ is one of three terms used to describe an option’s value, or ‘moneyness’. The other two terms are ‘at the money ‘ and ‘in the money’. When an option is out of the money, its strike price — that is, the price at which you’d exercise the option — is lower than the market price.

Participating Forward

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A participating forward is a Hybrid FX Forward and Option instrument. The amount you want to protect — or hedge — is split into two parts. One part works like a standard forward contract. In other words, you enter a legal obligation to exchange a specified amount of foreign currency on a certain date at a specified rate.

Quarterly roll

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The quarterly roll is a period of heightened market activity that happens every quarter, when forex traders roll their trades.

Ratio forward

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A ratio forward is a type of structured, or ‘exotic’ option. Exotic options are derivative contracts in which two or more options are combined to create a more complex arrangement.

Straddle

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A straddle is a strategy that traders typically use when they want to bet on the price of an asset but aren’t sure if it’s likely to go up or down — if they are buying the straddle, or have a high conviction that the price will remain stable — if they sell the straddle.

Theta

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Theta (Θ) is one of the so-called Greeks. These are numerical indicators that traders use to measure the risks of a particular options trade. Theta represents time-sensitivity, or time-decay.

US Dollar Index

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The US Dollar Index measures the US Dollar’s value relative to a basket of six currencies: Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, Swiss Franc.

Volatility

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Volatility is a measure of how much the price of an instrument moves. It is usually expressed as an annualised %. It is often calculated as the standard deviation of the daily moves in price of an asset from its average.

Warrant

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A warrant is a type of derivative : a financial instrument that gets its value from an underlying commodity. In foreign exchange transactions, the underlying commodity is a currency pair.

Xenocurrency

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Xenocurrency is another name for foreign currency — a currency that is traded, invested, deposited, or used outside the country where it’s issued.

Yield

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Yield is how much you’ve earned or can expect to earn from an investment over a specific period of time, expressed as a percentage of the amount you originally invested or your investment’s current market value.

Zero-cost hedge

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A zero-cost hedge is a hedging strategy that doesn’t have upfront costs. The hedge is constructed in such a way that any premium you have to pay to set up the hedge cancels itself out.

Regulatory disclaimer

ALT 21 Limited is authorised and regulated by the Financial Conduct Authority under both the Markets in Financial Instruments Directive and the Payment Services Directive (FRN: 783837). ALT21 Limited is authorised and regulated by the Financial Conduct Authority as an investment Firm to execute trades in FX Spot, Forwards and Options.

The information provided on this website is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject ALT21 Limited or its affiliates to any registration requirement within such jurisdiction.

ALT 21 Limited may provide general commentary or educational material available on its website or otherwise, which is not intended as investment advice. The information provided on this website is provided for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to buy any products referenced. Eligibility criteria and T&Cs apply for all products referenced.

ALT 21 Limited assumes no liability for errors, inaccuracies or omissions; does not warrant the accuracy, completeness of information, text, graphics, links or other items contained within these materials. You should read and understand ALT 21 Limited’s Terms and Conditions prior to taking any further action.​

Risk Disclaimer (Options): 
Trading in leveraged financial derivatives such as Options carries a high level of risk and may not be suitable for everyone. Using such financial products may run the risk of substantial capital losses which may exceed your initial deposit. You should carefully consider your financial situation and needs and seek independent advice from a duly authorised financial adviser. For more information read our complex products risk warning.

Partnerships Disclaimer: 
Approved partners refer potential customers to ALT 21 Limited under a shared revenue agreement. Any customer (person or entity) which purchases a product or service on the ALT 21 Limited platform enters a direct client relationship with ALT 21 Limited and as such must first satisfy our stringent point-of-entry processes as well as meet all ongoing customer due diligence requirements thereafter.

Frauds & Scams: 
Protect yourself and read more here.

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