Investors need to know this terminology before investing in

Arbitrage the market
Arbitrage is to take advantage from existence of different prices for the same product at the same time but in different market. The different markets can be at different geographic locations for the same financial assets or different financial assets in one or more geographical locations for the same financial asset or different financial assets in one or more geographic locations. Arbitrage between locations can involve two or more currencies.

Bid Rate

It is the rate at which the quoting party or bidder is prepared to purchase currency or accept a deposit or any other contract. If the party to whom it was quoted accepts the bid rate then that party will sell currencies, area, land or money as well other many commodities at the price.

Call Money

Funds placed with a financial institution for a short period without a fixed maturity date is called call money. The money can be called withdrawn at any time. Normally 48 hours notice is required prior to withdrawal of such funds. Such fund attracts little interest.

Confirmation

Before execution of the actual transaction the terms in which foreign exchange or money market transaction sent out by each party about the transaction to each other. The confirmation contains the exact details of the transaction and thus several legal, practical and antifraud purposes.

Cover

To fix an exchange rate on funds which will be matured or be required at some future date.

Cross Rate

An exchange rate arrived by calculating two other bilateral exchange rates (two different currencies compared to the same third currency) is cross rate. For example, if we known the exchange rates for both Pounds and EURO against US dollars, we can compute the exchange rate for Pounds against EURO.

Depreciation

Depreciation is the gradual decline, usually occurring over several days or weeks on account of market forces of supply or demand.

Discount

The amount by which the forward exchange rate of one currency against another currency is less than the spot exchange rate between the two currency.

Discount (As a verb)

When a loan is made, the task to subtract interest from the loan amount is discount.

Exchange Rate

The amount of one currency that can be bought or sold for certain amount of another currency.

Exposure

The amount which inflows in a given currency are less or greater than outflows in that currency.

Float (As a Noun)

The money available between actual receipt of funds and scheduled payment of those fund. During this interval, the beneficiary of that float can deposit the funds in the money market and earn interest. Thus, it can be said that a positive float earns money and negative float costs money.

Float

To move value of exchange rate up or down according to the forces of supply and demand in the market.

Foreign Exchange

The currencies of all other countries traded are call foreign exchange.

Forward Exchange Rate

The price of foreign currency, which must be delivered sometime in the future. Normally, transactions, which mature within two business days, are called spot transaction. Any transaction, with a longer value date than that of spot, is called forward exchange contract.

Gap

The period in foreign exchange transaction between the maturities for purchase and the maturities for sale of each foreign currency. In money market transactions the period between the maturities of placement and the maturities of each currency. The former occurs when a currency is purchased against one currency and sold against another, each time for different maturities. Leading a certain amount of a certain currency for a larger or shorter period than the corresponding borrowing for the same currency creates the money market gap.

Liquidity

The ability to meet financial obligations without any delay in payment if required.

Long

To have greater inflows than outflows of a given currency. In foreign exchange operations, long positions arise when the amount purchased of a given currency is greater than the amount sold. In money market operation a long position arises from investing a given currency for a shorter period of time than it is borrowed.

Net Exchange Position

An imbalance that arises between all assets and purchases of a currency and all the liabilities and sales of that currency.

Offer Rate

The price at which quoting party is prepared to sell lends currency.

Options

It is hedging product which gives the right to use it. If there is gain from it with the option that it might not be used in case of loss. Therefore it gives the right to exercise without any obligation to perform.

Outright Forward Rate

A forward exchange rate which is expressed in terms of the actual price of one currency against another rather than as it is customary by the swap rate.

Overbought

The position of foreign exchange operator, who has been bought large amount of a certain currency than he has sold.

Overbought Position

An overbought position in any currency is the excess of assets plus exchange bought contracts over liabilities plus exchange sold contracts in that foreign currency while an oversold position represents the reverse.

Overnight Position

A foreign exchange or money market position held overnight. There is more risk associated in such position than one matured during the day because political and economic event may changes at night. In this condition when the trader cannot react immediately against the volatility of price.

Overnight Position Limit

The overnight position limit for a currency sets the maximum overnight or oversold position that may be carried overnight in the foreign exchange. Depending on requirement and turnover the limits may be set by currency or by groups of currency or by groups of currencies. The limit for the currencies is fixed based on volume of transaction and volatility of currency situation.