Glossary

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

A

Absolute purchasing power parity A form of purchasing power parity which claims that under a fully floating exchange rate regime the ratio between domestic and foreign price levels equals the equilibrium rate of exchange between the domestic and foreign currencies.

Acceleration In relation to a loan, the action of a lender in demanding early repayment of principal in the event of default.

Acceptance The signing of a bill of exchange in formal acknowledgement of the obligation to honour the bill.

Acceptance credit A UK money-market term for a bill of exchange drawn by a customer on its bank, which is accepted and then discounted by the bank, the proceeds being paid to the customer.

Accounting exposure Exposure which arises from the process of consolidating items denominated in foreign currency into the group financial accounts denominated in the parent's currency. Sometimes called translation exposure.

Alienation of assets The risk that a borrower may realize some or all of the assets that form the lender's security.

All-current rate method A foreign currency translation method. All items denominated in foreign currency are translated at current exchange rates. Sometimes called the closing rate method or current rate method – but not to be confused with the current/non-current rate method.

American depository receipt (ADR) Certificate of ownership issued by a US bank to investors in place of the underlying corporate shares, which are held in custody.

American option An option which may be exercised on any business day within the option period.

Amortization The repayment of, or obligation to repay, the principal of a loan in more than one instalment.

Appreciation An increase in the value of a currency.

Arbitrage A purchase of foreign exchange, securities or commodities in one market coupled with immediate resale in another market in order to profit risklessly from price discrepancies. The effect of arbitrageurs' actions is to equate prices in all markets for the same commodity.

Arm's-length price The price at which a willing seller and an unrelated willing buyer will freely agree a transaction.

Ask price The larger price in a foreign exchange quotation. Sometimes called the offer price.

Asset-based swap An interest rate or cross-currency interest rate swap entered into by a party to convert the coupon on an asset to another rate or another currency rate basis.

At the money An option when the value of its underlying security is equal to the option strike price.

Average life The effective life of a bond issue calculated as the average of the time-periods for which funds are made available to the borrower, weighted by the amount available in each such period.

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B

Back-to-back loan One of two loans of the same initial amount made by one party to another in different countries, the loans being denominated in different currencies and each maturing on the same date. Used as a method of borrowing foreign currency and unblocking funds.

Balance of payments A financial statement prepared for a country summarizing the flow of goods, services and funds between the residents of that country and the residents of the rest of the world during a particular period.

Balance of trade The net of imports and exports of goods reported in the balance of payments.

Balance sheet exposure Exposure which arises from the process of translating balance sheet items denominated in foreign currency into the group accounts denominated in the parent's currency.

Balloon The principal amount repaid on maturity of a loan that is significantly larger than the annual repayments. For example an issue could have six payments of 10 per cent, followed by a balloon of 40 per cent at maturity.

Basis The difference between cash and futures prices. Also the difference between yields on similar but different financial instruments.

Basis point A hundredth of 1 per cent. Used in relation to interest rates.

Basis risk With respect to futures contracts, the basis represents the difference between the price of the cash commodity and a related futures contract, a difference that widens or narrows as the cash and futures prices fluctuate. Basis risk refers to the possibility that this difference will change during the life of the contract, resulting in an unexpected loss or gain. The basis is the key to hedging: if it remains constant over the life of a position, a perfect hedge (losses exactly equal to gains) results. Basis risk results when a particular futures contract is used to hedge a portfolio that differs from the underlying futures instrument.

Basis swap An interest rate or cross-currency swap in which the payment obligations of each of the parties are determined on the basis of a floating rate index. A US dollar LIBOR/sterling LIBOR swap would be a basis swap, as would a LIBOR/CD swap in which both parties' payment obligations were in US dollars.

Basket An artificial currency based on a mixture of actual currencies. For example, the ECU is an artificial currency based upon a basket of EU currencies.

Bearer bond or bearer security A negotiable security that is presumed in law to be owned by the holder. Title to bearer securities is effected by delivery.

Bearer instrument A negotiable instrument on which title passes by mere delivery without endorsement or registration.

Bells and whistles The additional features of a security intended to attract investors or reduce issue costs or both.

Benchmark security The choice of a security as a standard for the return on a particular class of securities that serves as a guide for other comparable issues.

Beta A measure of the sensitivity of an asset to changes in the market. A beta of 0.5 means that on average a 1 per cent change in the market in the short run implies a 0.5 per cent change in the value of the asset. See also Systematic risk.

Bid–ask spread or bid–offer spread The difference between the prices quoted by a dealer for buying and selling a security.

Bid price The smaller price in a foreign exchange quotation.

Bill of exchange A negotiable instrument, used mainly in international trade, instructing one person, the drawee, to pay a certain sum of money to another named person, the drawer, on demand or at a certain future time. If the drawee, or acceptor, of the bill is a bank, the bill is a bank bill (known as a banker's acceptance); if it is a trader, the bill is a trade bill; if it is the UK or US government, it is a treasury bill. Such bills are normally issued with 90-day lives, and their marketability depends on the standing of the drawee or acceptor, the nature of the underlying transaction and whether the bill is eligible for rediscounting with the central bank.

Black and Scholes model A model that provides a means by which to value option contracts. It involves using information on the underlying asset, the strike price, volatility, time to expiry and risk-free interest rates. First formulated by Fischer Black and Myron Scholes in 1973.

Blocked currency A currency that is not freely convertible to other currencies due to exchange controls.

Blue chip An equity share that is considered to be of the highest quality.

Bond A promise under seal to pay money. The term is generally used to designate the promise made by a corporation, either public or private, or a government to pay money, and it generally applies to instruments with an initial maturity of one year or more.

Bond basis The method used to compute accrued interest on some bonds and on some short-term money-market instruments. In the Eurobond market the accrued interest calculated on the bond basis is equal to the coupon rate multiplied by the number of lapsed bond days divided by 360 (known as the 360-day year convention). See also Money-market basis.

Bonus issue An issue of shares to existing holders, usually in some set proportion to the holding, but requiring no payment. This has the effect of increasing the company's issued capital and is normally made possible by the capitalization of reserves. Sometimes known as a scrip or capitalization issue.

Bretton Woods Conference A meeting of representatives of non-communist countries in Bretton Woods, New Hampshire, USA, in 1944. Representatives agreed on the characteristics of the international monetary system, effectively the fixed exchange rate system, which prevailed until 1971.

Bridge financing A type of loan, usually at fluctuating interest rates, that takes the form of renewable overdrafts or discounting facilities. It is used as a continuing source of funds until the borrower obtains medium- or long-term financing to replace it.

Bulldog bond A sterling-denominated bond issue made in the UK market by a foreign (non-UK) borrower.

Bullet A straight debt issue with repayment in one go at maturity.

Buyer credit One of the two main techniques by which the United Kingdom supports UK companies in winning and financing engineering and construction projects overseas. Under a buyer credit, the customer settles with the supplier on a cash basis, funds for this purpose being provided to the customer directly by a bank under ECGD guarantee.

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C

Callable bond A bond with a call provision giving the issuer the right to redeem the bonds under specified terms prior to the normal maturity date.

Call option The right, but not the obligation, to buy an amount of foreign exchange at a specified price within a specified period.

Cap A limit on the upward movement of a coupon or interest rate.

Capital account A balance of payments term meaning the part of the balance of payments which records the changes in financial assets and liabilities. The capital account is divided into long-term flows and short-term flows.

Capital adequacy The minimum amount of capital that bank, non-bank financial intermediaries and other financial market operators must maintain in proportion to the risks that they assume.

Capital asset pricing model (CAPM) A model that promotes a basis for pricing risk associated with holding securities. Its essence is that rates of return are directly related to a single common factor: namely, the return on the market portfolio adjusted for non-diversifiable risk.

Capital mobility The extent to which private capital is free to be invested abroad. Capital mobility is predicated upon well-developed foreign exchange and financial markets, freedom from official restrictions on foreign investment and confidence that future government policies will not obstruct the repatriation of invested funds.

Capital structure The distribution of a company's issued capital as between bonds, debentures, preferred and ordinary shares, earned surplus and retained income.

Capped FRN An issue with an upper limit on the coupon rate. Under this type of issue, the lender forgoes the possibility of receiving a return above the cap rate should the market interest rate exceed the cap rate.

Cash flow exposure This is concerned with the effect of currency changes on the present value of future cash flows generated by a company's domestic and foreign operations. Sometimes called economic exposure.

Cash market Where delivery and settlement of the deal is immediate, or within a few days, as compared with the future and options markets where delivery and settlement are delayed.

Central bank The institution with the primary responsibility to control the growth of a country's money stock. It also has regulatory powers over commercial banks and over other financial institutions. It usually serves as the monetary agent for the government.

Certificate of deposit (CD) A placement of money for a specified period of time with a bank. The depositor receives a confirmation, the deposit receipt, which is a negotiable instrument. Bankers dealing in CDs make a secondary market where they may be sold and purchased prior to maturity. Investors usually accept a smaller interest rate on CDs than on regular time deposits because the investment has greater liquidity via the secondary market.

CHAPS See Clearing house automated payments system.

Chartism Interpreting foreign exchange (and other) market activity and predicting future movements over the near term from graphic depictions of past prices and volumes. Sometimes called technical analysis or momentum analysis.

CHIPS See Clearing house inter-bank payments system.

Clean float An exchange rate system characterized by the absence of government intervention. Sometimes called a free float.

Cleared balance The true balance of a customer's account with its banker on which its funds' availability depends.

Clearing house An institution through which Eurobond contracts, futures contracts and other financial instruments, including cheques, are cleared.

Clearing house automated payments system (CHAPS) A network of linked computers operated by UK clearing banks which provides for the rapid transfer of large balances.

Clearing house inter-bank payments system (CHIPS) An automated clearing facility set up in 1970 and operated by the New York Clearing House Association. It processes international money transfers for its membership which includes over a hundred US financial institutions – mostly major US banks and branches of foreign banks.

Clearing system A transaction or depository system set up for efficient physical delivery.

Close out For a futures contract this means taking a second offsetting position in order to remove the delivery obligation.

Closing exchange rate The exchange rate prevailing at a financial reporting date.

Closing price The price, or spread of prices, at which deals are made just before the close of official business in a particular market.

Closing rate method See All-current rate method.

Collar A transaction that combines a cap and a floor so as to provide cap or floor protection at a lower cost. For example, the buyer of a cap might give up some of the benefits of a decline in interest rates by selling a floor to the writer of the cap, thereby reducing the cost of the cap by the value of the floor. Or, the purchaser of the floor might be willing to give up some benefits of a rise in interest rates by selling a cap to reduce the floor purchase price. The cap and floor portions of a collar operate as described in the definitions of those terms if actual interest rates rise above the agreed cap rate or decline below the agreed floor rate, respectively, for any period. Sometimes called a floor/ceiling arrangement.

Collateral Security placed with a lender to assure the performance of the obligation. Assuming that the obligation is satisfied, the collateral is returned by the lender.

Comfort letter A formal letter written to a lender, normally by a parent company, indicating its willingness to accept some responsibility to honour the borrowing obligations of a subsidiary or associate company, but without constituting a legal obligation to do so. Such letters may be written in varying degrees of strength. At one extreme, there is the letter of awareness, which does no more than acknowledge the existence of the relevant borrowing, while at the other comes the unenforceable guarantee. In this latter form, the writer would indicate that it undertook to meet the borrower's obligations in the event of its failing to do so, but that the recipient could not use the letter as a means of forcing it to do so. The essential point is that, while such letters constitute a significant moral obligation, they do not constitute a legally binding obligation. For this reason, they have come to be known in the United States as LOMIs, letters of moral intent. They do not have to be treated as contingent liabilities and have no impact on the parent company's balance sheet.

Commercial paper An unsecured promissory note issued usually for maturities of 60 days or less.

Commitment fee A percentage per annum rate charged by a lender on the daily undrawn balance of a borrowing facility.

Compensating balance A minimum sum of money which, as a condition of a term loan, the borrower undertakes to maintain on current account with the lender, in theory to increase the bank's security by reducing the risk that the account will be overdrawn. The effect of maintaining a non-interest-bearing deposit is to reduce the true sum borrowed: since interest is payable on the gross sum, the effective rate on the net amount is higher than that quoted. This mechanism was common in the United States until the end of the 1970s but has now gone out of general use, maybe because of the growth in professionalism among treasury staff.

Confirmation The written document confirming the oral foreign exchange contract agreed by telephone between either dealer and dealer or dealer and client.

Confirmed irrevocable letter of credit A type of credit issued by the importer's bank and confirmed by a bank in the exporter's country. The importer's bank commits itself irrevocably to pay the exporter's draft, and the confirming bank (the exporter's bank) adds to this commitment by assuming the responsibility to pay the exporter's draft, provided that all conditions contained in the letter of credit are satisfied.

Convertibility The ability to convert one currency into another without special permission from exchange control authorities.

Convertible bond A fixed interest security that is exchangeable into equity shares under stipulated conditions.

Convertible Eurobond A Eurobond that can be converted into equity under stipulated conditions.

Convertible FRN A floating rate note that can be converted into a fixed rate bond or into another FRN with a different maturity or a different currency denomination.

Correlation A standardized statistical measure of the dependence of two random variables. It is defined as the covariance divided by the standard deviations of two variables.

Correspondent bank A bank that handles the business of a foreign bank.

Cost of capital The rate of return expected by a party financing the firm.

Cost-plus loan pricing The interest rate on a loan expressed as a function of some publicly available cost-of-funds measure, such as LIBOR.

Countertrade A generic term for a range of commercial mechanisms for reciprocal trade that include barter, counterpurchase, offsets buy-back and switch trading. The common characteristic of these arrangements is that export sales to a particular market are made conditional upon undertakings to accept imports from that market. Latterly, they are used as a way of promoting trade between developed and less-developed nations, and are intended to avoid, or mitigate, the problems associated with sovereign debt by allowing settlement in the produce of the buying country. A number of specialist intermediaries have grown up prepared to exchange the output/produce received by the seller for money/currency, and then to place the output/commodities with the ultimate user for a fee, known as disagio, or by discounting the value of the output.

Country risk A wide range of risk, including political as well as economic risk. Corporate goals of multinationals and the national aspirations of host countries may not be congruent; the essential element in country risk is the possibility of some form of government action preventing the fulfilment of a contract.

Coupon or coupon rate The fixed interest rate attached to a loan.

Covariance A statistical measure of the degree to which random variables move together.

Covenant An obligation in writing. There are covenants in term loan agreements, deeds, mortgages and other similar instruments.

Covered interest arbitrage The process of borrowing a currency, converting it to a second currency where it is invested, and selling this second currency forward against the initial currency. Riskless profits are derived from discrepancies between interest differentials and the percentage discount or premium between the currencies involved in the forward transaction. Covered interest arbitrage is based on disequilibrium in interest rate parity.

Covered position A position in a security that is matched by a counter position in another security, thereby neutralizing the initial position.

Covering Protecting the cash value of future proceeds usually from an international trade transaction, by buying or selling the proceeds in the forward market. Although used interchangeably with the term ‘hedging', covering is, strictly speaking, protecting a future cash flow amount whereas hedging refers to the protection of foreign-denominated accounting assets or liabilities against pure translation losses.

Crawling peg system An exchange rate system in which the exchange rate is adjusted frequently and deliberately, perhaps many times a year, usually to reflect prevailing rates of inflation.

Credit risk The likelihood, in lending operations, that a borrower will not be able to repay the principal or pay the interest.

Cross default provision A clause in a loan agreement that allows the lender to declare the loan immediately repayable and to terminate any further extension of credit if the borrower defaults on any other debt.

Cross-rate The exchange rate between currencies A and B based upon the rates between currencies A and C and currencies B and C.

Currency basket A means of expressing the value of a financial asset or currency as a weighted average of more than one foreign exchange rate. The weights in this average are usually defined as specific quantities of currencies, hence the term ‘currency basket'.

Currency option A contract conferring the right, but not the obligation, to buy or sell a specified currency against another currency at a specific price on or prior to a specified date.

Currency swap The simultaneous borrowing and lending operation in which parties transfer currencies from one to the other at the spot rate and agree to reverse the exchange at a future date and at an agreed exchange rate.

Current account As used in the balance of payments, it is that section that records the trade in goods and services and the exchange of gifts among countries.

Current/non-current method A foreign currency translation method in which current items in balance sheets denominated in foreign currencies are translated at current exchange rates and long-term items are translated at historical rates.

Current rate method See All-current rate method.

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D

Dealer A specialist in a bank or company who is authorized to undertake foreign exchange transactions.

Debenture In the United Kingdom, a fixed interest secured loan which can be for a fixed maturity or irredeemable. There are two main types: mortgage debentures, which are secured against a specific asset of the issuer; and floating debentures, which are secured against the entire asset base of the issuer.

Debt capacity The total amount which a company is capable of borrowing.

Debt–equity swaps A secondary debt market involving the trading of sovereign debt as between the major lending banks. Recognizing that large parts of Third World debts will not be readily cleared from their books, banks have sought new ways of trading their positions by swapping and selling debts between one another and to corporations desiring to undertake projects in the Third World countries concerned. The corporation offers the acquired debt to the less-developed country (LDC) in return for local currency: the LDC thereby redeems the debt.

Debt factoring The purchasing, normally with recourse to the seller, of accounts receivable as a mechanism for providing short-term finance on a continuing basis. The practice is common among small companies in the United Kingdom.

Debt service ratio A ratio used to assess a country's creditworthiness. It is the ratio of a country's debt service payments to exports.

Deep discount bond A low- or zero-coupon bond issued at a discount.

Deep market The situation in which it is possible to trade large amounts of securities without significantly affecting the price.

Default The act of breaching a covenant or warranty in a loan agreement.

Delivery risk The risk, on a payment date when each party has an obligation to make a payment, that one party will make its required payment but the other party will fail to do so. In swaps, this risk is often avoided by providing for net payments. In a currency swap, delivery risk is increased because net payments are often not acceptable, since the parties want to receive actual payments in different currencies. Additional risk results from the fact that the payments may be due in different time zones so they cannot, even in theory be made simultaneously. On the maturity date of a currency swap the notional amounts are usually exchanged, thus further increasing the magnitude of the risk.

Delta The change in the value of an option given a change in the value of the underlying security. The inverse of the delta gives the hedge ratio.

Delta hedge A method of hedging risk exposure for option writers, involving buying or selling the underlying security in proportion to the delta. For example, when a call option writer is committed on an option with a delta of 0.5, it may effect a delta hedge by buying an amount of the underlying security equal to one-half of the amount of the underlying currency that must be delivered on exercise.

Demand deposit Funds in a current account that may be withdrawn at any time without notice. Demand deposits may or may not be interest-bearing deposits.

Depreciation See Devaluation.

Deregulation The removal or relaxation of the barriers or rules that have previously restricted the scope of securities trading and the nature of the operations undertaken by financial institutions.

Derivative products A generic term for the range of traded instruments that have grown up around securities and currency and commodity trading.

Devaluation A substantial decline in an exchange rate, usually effected in one go by government decree.

Direct investment Purchase of a foreign financial asset in which substantial involvement in the management of the foreign asset is presumed. In practice, it is any holding that represents more than 10 per cent ownership of the foreign asset. Also termed foreign direct investment.

Direct quote A rate of exchange quoted in terms of x units of home currency to 1 unit of foreign currency.

Dirty float See Managed float.

Discount house A UK institution that acts as an intermediary between the Bank of England and the banking system. Discount houses participate in auctions of gilt-edged stock, enjoy lender-of-last-resort facilities with the Bank of England and discount bills.

Discounting Where a sale is to be settled by a bill of exchange, the seller may surrender it to a financial institution in exchange for immediate payment of an amount less than the face value to reflect interest.

Discount market UK institutions and dealers that trade bills of exchange.

Disintermediation The process of bypassing normal financial intermediaries.

Double taxation Taxes paid twice, once abroad where income is earned and a second time in the United Kingdom, if the company is UK owned. A principle of tax law is that double taxation should be avoided. If the UK company has already paid taxes abroad, it should only pay enough taxes in the United Kingdom to bring the overall rate up to the UK rate.

Drawdown When a part of a borrowing facility is used.

Drop-lock bond A bond or similar instrument which initially bears interest at a variable rate as if it were a floating rate obligation, but which will change to bear interest at a predetermined fixed rate in the event that a defined market rate falls to a stated level.

Dual currency bond A security denominated in one currency with interest or principal or both paid in another at a pre-agreed rate.

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E

ECB See European Central Bank.

ECGD See Export Credit Guarantee Department.

Economic and Monetary Union A plan to create a single European market with a single currency, to be called the ‘euro'. The detailed plan for the single currency was first formulated in the 1989 Delors report. It was refined in the Maastricht Treaty which came into effect on 1 November 1993.

Economic exposure The extent to which the value of the firm will change due to an exchange rate change. This arises due to the effect of currency changes upon the parent currency present value of expected future cash flows to be generated by a company's operations.

ECU See European currency unit.

Effective exchange rate A rate measuring the overall nominal value of a currency over time in the foreign exchange market. It is calculated via a weighted average of bilateral exchange rates, using a weighting scheme that reflects the importance of each country's trade with the home country.

Efficient market A market in which there is a sufficiently large number of buyers and sellers to eliminate an incentive for arbitrage transactions, and in which the trade-off between return and risk is fully reflected in prices.

Electronic funds transfer at point of sale (EFTPOS) A system that allows funds to be moved automatically from a buyer's account to a seller's, the transfer taking place at the time of the transaction.

EMS See European Monetary System.

EMU See Economic and Monetary Union.

ERM See Exchange rate mechanism.

EURIBOR European interbank-offered rate sponsored by the European Banking federation, the Association Cambiste Internationale, and the European Savings and Cooperative Organization as a reference rate for the euro zone. EURIBOR is to be set using quotations from a panel of banks from across the euro zone.

Euro The currency unit that will replace the currencies of the (so far) eleven subscribing EU countries to EMU. The euro replaced the ECU on a one for one basis. So one euro equals one ECU.

Eurobanks Financial intermediaries that bid for time deposits and make loans in currencies other than that of the country in which they are located.

Eurobond A bond underwritten by an international syndicate of banks and marketed internationally in countries other than the country of the currency in which it is denominated. This issue is thus not subject to national restrictions.

Euroclear One of the Eurobond market's two clearing systems. It is provided by Morgan Guaranty for over 100 banks and is based in Brussels.

Eurocommercial paper A generic term used to describe Euronotes that are issued without being underwritten.

Eurocredit The Eurocredit market is where highly rated borrowers can gain access to medium-term (one to fifteen years) bank lending. The loan can be denominated in one or several Eurocurrencies as can the interest and the principal. The interest rate is normally fixed as a margin over LIBOR.

Eurocurrency A time deposit in a bank account located outside the banking regulations of the country which issues the currency.

Eurodollars Dollars held in time deposits in banks outside the United States. These banks may be foreign owned or overseas branches of US banks. But see international banking facilities.

Euroland The name for the eleven countries as a whole adopting EMU in full.

Euro LIBOR London interbank-offered rate for euro.

Euromarkets A collective term used to describe a series of offshore money and capital markets operated by international banks. They comprise Eurocurrency, Eurocredit and Eurobond markets. The centre of these markets is London, except for the Eurosterling market which is centred in Paris.

Euronote The Euronote market is one in which borrowers raise money by the issue of short-term notes, generally with maturities of three and six months, that are negotiable like certificates of deposit. As one issue of notes matures, the borrower issues some more so that, while the holders of the debt change over time, the total amount outstanding can be maintained in the medium term. A group of commercial banks may ensure that the borrower in a particular issue will be able to place such notes by standing by ready to purchase the paper should the appetite of short-term investors wane.

Euronote facility This allows borrowers to issue short-term notes through a variety of note distribution mechanisms, under the umbrella of a medium-term commitment from banks.

European Central Bank (ECB) The European Central Bank, which determines monetary policy for the participating member states in EMU from 1 January 1999.

European currency unit (ECU) A currency basket composed of specific quantities of the currencies of European Monetary System members. Following EMU, the euro replaced the ECU one for one.

European Monetary System (EMS) A structure of agreements governing the exchange market activities of participating members of the European Union. Agreements require members closely to manage the exchange values of their currencies relative to those of other members.

European option An option that can be exercised on the fixed expiration date only.

Euro zone The name for the eleven countries as a whole adopting EMU in full.

Exchange controls Restrictions imposed by the central bank or other government authorities on the convertibility of a currency, or on the movement of funds in that currency.

Exchange rate The number of units of one currency expressed in terms of a unit of another currency.

Exchange rate mechanism (ERM) A system of intervention in the foreign exchange markets designed to keep participating EU currencies within a narrow range versus the old ECU.

Exercise To carry out a transaction, usually applied to the options market.

Exercise price The exchange rate at which a foreign exchange option may be exercised.

Expiry or expiration date The date upon which an option or warrant contract terminates.

Export–Import Bank (Eximbank) US government agency established in 1934 to stimulate US foreign trade. The Eximbank supports commercial banks that are financing exports and provides direct financing, loan guarantees and insurance to exporters and foreign buyers of US goods. Similar to the ECGD in the United Kingdom.

Export Credit Guarantee Department (ECGD) A UK agency dedicated to facilitating UK exports primarily through subsidized export financing and offering export credit insurance to UK exporters.

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F

Factoring A financing method in which the borrower assigns or sells its receivables as collateral to a firm, called a factor, which normally assumes responsibility for collection.

FASB 8 A US accounting standard in force from 1976 to 1981 that required companies to translate their foreign-affiliate financial statements using the temporal method. Foreign currency translation gains and losses were reported in the income statement as ordinary income.

FASB 52 See SFAS 52.

Federal funds Money deposited with the Federal Reserve Bank, the central bank of the United States. This money is available on demand. Purchases of US treasury bills and most other money-market instruments in the domestic US money market may only be made with Federal funds.

Federal Reserve System (Fed) The central banking system of the United States.

Filter rule A rule for buying and selling securities based on the premise that, once a movement in a currency's exchange rate has exceeded a given percentage, it will continue to move in the same direction.

Finance vehicle An operation involving the setting up of an offshore subsidiary for the purpose of issuing debt and lending the borrowings on to the parent or another subsidiary. The parent normally guarantees the debt issues.

Fisher effect The hypothesis that the nominal interest rate differential between two countries should equal the expected inflation differential between those countries. Also called Fisher's closed hypothesis.

Fisher's closed hypothesis See Fisher effect.

Fisher's open hypothesis See International Fisher effect.

Fixed exchange rate system A system in which the value of a country's currency is tied to a major currency, such as the US dollar, gold or the SDR. The term usually allows for fluctuations within a range of 1 or 2 per cent on either side of the fixed rate.

Fixed rate interest When the interest on a security is calculated as a constant specified percentage of the principal and is paid at the end of stated periods until maturity.

Fixed rate payer A party that makes swap payments calculated on the basis of a fixed rate.

Floating exchange rate system A system in which the value of a currency relative to others is established by the forces of supply and demand in the foreign exchange markets. Strictly speaking, this implies that intervention by the government should be absent.

Floating or variable rate interest Interest on an issue of securities which is not fixed for the life of the issue, but is periodically set according to a predetermined formula. The rate is usually set at a margin or spread in relation to a specified money-market rate, such as LIBOR.

Floating rate note (FRN) A short-term floating interest rate security. The interest rate is pegged to LIBOR, and is adjusted semi-annually. These securities are attractive to investors during periods of rising interest when fixed rate bonds are subject to depreciation.

Floating rate payer A party that makes swap payments calculated on the basis of a floating rate.

Floor A minimum interest rate.

Flowback The sale of shares, originally placed with overseas investors, back into the domestic market by those investors.

Foreign bond A long-term security issued by a borrower in the capital market of a country other than the borrower's. Usually underwritten by a syndicate from one country and sold on that country's capital market, the bond is denominated in the currency of the country in which it is sold.

Foreign Credit Insurance Corporation A private association of leading US insurance companies, affiliated to Eximbank, that provides short- and medium-term credit insurance to exporters, enabling them to obtain or offer better financing terms.

Foreign currency bond An issue where the coupon is paid in a different currency from that of denomination of principal.

Foreign direct investment See Direct investment.

Foreign exchange Currency other than the one used internally in a given country.

Foreign exchange trader One who stands ready to buy and sell currencies out of inventory and expects to earn a profit for the costs and risks incurred.

Foreign tax credit Home country tax credit given against domestic tax in respect of foreign taxes already paid on foreign-source earnings.

FOREX Foreign exchange.

Forfaiting The discounting at a fixed rate of interest of term bills of exchange without recourse to the drawer.

Forward contract An agreement to exchange specified amounts of currencies of different countries at a specified contractual rate (the forward rate) at a specified future date.

Forward exchange market The market involved with forward contracts for exchange of currency at some future date. The usual forward maturities are for one, two, three, six and twelve months, although contracts for other maturities may be negotiated.

Forward/forward swap A pair of forward exchange contracts involving a forward purchase and a forward sale of a currency, simultaneously entered into, but for different maturities. Sometimes called a forward swap.

Forward margin The difference between the forward rate and the spot rate of currency.

Forward option contract See Optional date forward contract.

Forward premium (or discount when negative) The difference between the forward and spot rates, expressed either as an annualized percentage of the spot exchange rate or as so many cents or pfennigs. When forward currencies are worth more than the corresponding spot amount, the stronger currency is at a premium; the weaker currency is at a discount.

Forward rate The rate quoted today for delivery at a fixed future date of a specified amount of one currency against another.

Forward swap See Forward/forward swap.

FRA Forward rate agreement or future rate agreement. Essentially an over-the-counter version of a short interest rate future.

Franked income Income that has already been subject to corporation tax.

Free cash flow The net figure obtained by deducting from cash generated by operations or by an investment that cash which has been absorbed by operations or by the investment. Free cash flow disregards all cash flows to do with financing.

FRN See Floating rate note.

Front-end fee The commission payable at the start of a financial arrangement.

FT-SE100 A real-time weighted arithmetic average of the equity market capitalizations of the 100 largest UK companies on the International Stock Exchange, London.

Functional currency The currency of the main economic environment in which a multinational operates. It is normally the currency of the environment in which the firm primarily generates and expends cash.

Fundamental analysis A branch of security analysis based upon attempts to value securities in accordance with estimated future profits and cash outturns.

Futures contract A standardized foreign exchange or interest rate contract written against the exchange clearing house for a fixed number of foreign currency or interest rate units and for delivery on a fixed date. Because of their standardization, futures contracts have a deep secondary market.

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G

G7 See Group of Seven.

G10 See Group of Ten.

Gamma The rate of change of an option's delta with respect to the underlying price.

Gilt or gilt-edged Fixed interest, sterling-denominated securities issued by the UK government. They derive their name from the gold edge on the original certificates, subsequently replaced by green certificates.

Glass–Steagall Act The US legislation which prevents commercial banks from owning, underwriting or dealing in corporate shares and bonds. There have been recent moves to amend this legal restriction.

Globalization The trend of bringing major financial markets across the world closer together through technological innovations in communications.

Gold standard A monetary agreement under which national currencies are backed by gold and gold is utilized for international payments.

Group of Seven Seven major industrial nations whose ministers meet on a periodic basis to discuss and agree on economic and political issues. It comprises Germany, France, Italy, the United Kingdom, Canada, Japan and the United States.

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H

Hard A market is said to be hard if prices are rising.

Hard currency A strong, freely convertible currency. A strong currency is one that is not expected to devalue within the foreseeable future.

Head and shoulders A chart pattern which approximates to the shape of a person's head and shoulders, implying a fall in share prices.

Hedging The generation of a position in a given currency in the forward market or in the money market with the purpose of matching it against the net exposure position as evidenced by the balance sheet. The purpose of hedging is to make the net position for a particular currency at a given date equal to zero. The accounts included in the exposed balance sheet items are determined in accordance with accounting rules. See also Covering.

Historical exchange rate The foreign currency exchange rate in effect on the date when an asset or liability was acquired.

Holding company A legally constituted company that may not carry on any trade or industry, but has a controlling interest in one or more subsidiary companies.

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I

IBFs See International banking facilities.

ICCH See International Commodities Clearing House.

Illiquid A security or a market that is lacking activity.

IMF See International Monetary Fund.

IMM See International Monetary Market.

Income statement exposure Arises as a result of the process of translating income statement items denominated in foreign currency into group income statements denominated in the parent currency.

Inconvertible currency A currency that cannot be converted into other currencies because of exchange control restrictions.

Indexing In some countries the practice of adjusting debt by some measure of inflation to preserve the purchasing power of the debt in constant monetary units. In Brazil, indexing is applied to wages, business accounts and debt.

Indirect quote A rate of exchange quoted in terms of x units of foreign currency per 1 unit of home currency.

Initial margin The amount of margin needed to set up a position in a futures market.

Instrument A generic term for securities, ranging from debt to negotiable deposits and bonds.

Inter-bank rate The rate at which banks offer and bid for funds as between each other.

Inter-company trade Trade flows between fellow affiliates of the same group of companies.

Interest arbitrage The international transfer of funds to a foreign centre, or the maintenance of funds in a foreign centre with the intention of benefiting from the higher yield on short-term investment in that centre. See Covered interest arbitrage and Uncovered interest arbitrage.

Interest rate differential The difference between short-term interest rates prevailing in two money centres at a given moment. Sometimes called interest rate spread.

Interest rate exposure The risk of loss arising from possible interest rate movements.

Interest rate futures Futures contracts which relate wholly to levels of interest rates.

Interest rate guarantee (IRG) An indemnity sold by a bank or other financial institution protecting the purchaser against the effect of future movements in interest rates.

Interest rate parity The condition that the interest differential should equal the forward differential between two currencies.

Interest rate spread See Interest rate differential.

Interest rate swap An agreement between two parties in which each agrees to pay to the other an amount calculated by reference to interest that would accrue over a given period on the same notional amount but using a different rate of interest.

Intermediary company A vehicle company used as a conduit for the transfer of funds between fellow affiliate companies.

Intermediation The activity of a bank or similar financial institution in taking a position between the two parties to a transaction in such a way as to accept a credit or other commercial risk.

Internal exposure management technique Tactics related to the business of the multinational which do not use third-party contracts, but are aimed at reducing exposed positions or preventing exposure from arising or exploiting possible future exchange rate movements.

International Banking Act 1978 US legislation designed to remove many of the competitive advantages that foreign banks had over their domestic US counterparts. Thus the Federal Reserve Bank is now authorized to impose reserve requirements on foreign banks and there are restrictions on their ability to take deposits nationwide.

International banking facilities (IBFs) Free monetary zones in the United States that can be established by certain corporations and by US branches and agencies of foreign banks. The IBFs accepting foreign deposits are exempted from reserve requirements and interest rate restrictions and can make loans to foreign borrowers. The impact of their operations is that some dollars deposited in time deposits in the United States effectively become Eurodollars.

International Commodities Clearing House (ICCH) The central guarantee organization which clears contracts on LIFFE.

International Fisher effect The hypothesis that the interest differential between two countries should reflect the future change in the spot rate. Also called Fisher's open hypothesis.

International Monetary Fund (IMF) An international organization created by the Bretton Woods Agreement in 1944 to promote exchange rate stability. The objectives of the fund include supervising exchange market intervention by member countries, providing the finance needed by members to overcome short-term payments imbalances, and encouraging monetary co-operation and international trade among nations.

International Monetary Market (IMM) A centralized market in Chicago where currency and financial futures contracts, among others, are traded.

In the money A call option when its strike price is less than the value of the underlying security price. It also applies to a put option when the strike price is higher than the current price of the underlying security.

Intrinsic value The difference between the strike price of an option and the current market price of the underlying security where the option has value.

Investment bank A US term for a merchant bank.

Investment grade A bond rated BAA or above by Moody's or BBB or above by Standard and Poor's.

Issue price The price at which securities are sold on issue.

Issuing bank The bank that issues a letter of credit. It is usually the buyer's bank.

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J

Junk bond A high-yield bond that is deemed to be below investment grade which became popular as a means of financing corporate takeovers and management buyouts.

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K

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L

Lag To defer payment of a debt. A firm with a subsidiary in a country with a hard currency may encourage the subsidiary to lag its payments in order to take advantage of a possible revaluation of the hard currency or devaluation of the subsidiary's currency.

Law of comparative advantage According to this hypothesis, a country will specialize in producing, and will export, those goods that it can produce relatively cheaply compared with foreign countries. It will import those goods that it can produce only at relatively high cost.

Lead To prepay a debt. A company with a subsidiary in a country with a soft currency may encourage the subsidiary to prepay money due to countries with harder currency to avoid the adverse impact on cash flow of devaluation by the country with soft currency.

Lead manager The main organizer of a new issue, such as a bank or broker, responsible for the overall co-ordination and distribution of an issue and the documents associated with it. The lead manager is also likely to appoint co-managers, to determine the initial and final terms of the issue, and to select the underwriters and the selling group.

Lender of last resort A concession given to a select number of financial institutions whereby their central bank agrees to provide them with funds if they should get into difficulties.

Letter of awareness A formal letter written to a lender, normally by a parent company, acknowledging its relationship with another group company and its awareness of a loan being made to that company. It is the weakest form of comfort letter. Such letters do not constitute a guarantee, but may nevertheless involve a significant moral commitment on the part of the writer.

Letter of comfort A document that indicates one party's intention to try to ensure that another party complies with the terms of a financial transaction without guaranteeing performance in the event of default.

Letter of credit A letter issued by a bank, usually at the request of an importer, indicating that the opening bank or another will honour drafts if they are accompanied by specified documents under specified conditions.

LIBOR See London inter-bank offered rate.

LIFFE See London International Financial Futures Exchange.

Liquidity The ability of a business to pay its debts as they fall due.

Liquidity preference A wish to hold near-liquid assets at the cost of a lower return.

Liquidity premium Normally, the degree by which prices are reduced and interest rates raised because a fixed income security is not easily traded.

Listed security A security that is quoted and traded on a major stock exchange.

LOC backed Letter of credit backed. An issue, usually of commercial paper, backed by a bank letter of credit – effectively a bank guarantee.

Lock box system A method of centralized collection of remittances operated by banks in the United States on behalf of their corporate customers in order to reduce the float time on inter-state money transfers.

Lombard rate A German term for the rate of interest charged for a loan against the security of a pledged promissory note. Particularly used by the Bundesbank, which normally maintains its Lombard rate at about 0.5 per cent above its discount rate.

London inter-bank bid rate (LIBID) The rate at which the major banks will bid to take deposits from each other for a given maturity, normally between overnight and five years.

London inter-bank mean rate (LIMEAN) The average of LIBID and LIBOR.

London inter-bank offered rate (LIBOR) The interest rate at which prime banks offer deposits to other prime banks in London. This rate is often used as the basis for pricing Eurodollar and other Eurocurrency loans. The lender and the borrower agree to a mark-up over LIBOR: the total of LIBOR plus the mark-up is the effective interest rate for the loan.

London International Financial Futures Exchange (LIFFE) A centralized market in London where standardized currency, currency options and financial futures are traded.

Long In the UK government bond market, a security with a maturity of more than fifteen years. In the US treasury bond market, a security with a thirty-year maturity.

Long position Having greater inflows than outflows of a given currency, or more assets than liabilities in a given currency.

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M

Maintenance margin The amount by which an initial margin for a future position must be topped up.

Managed float A floating exchange rate system in which some government intervention takes place. Also called a dirty float.

Marginal tax rate The rate of tax due on additional amounts of taxable income.

Margin call In futures contracts, a requirement to provide more maintenance margin.

Marker rate A generic term for a base interest rate defined in a loan agreement to which the spread is added in order to establish the interest rate payable on a variable rate loan.

Mark to market The procedure for revaluing a security, swap, commodity or futures contract according to current market prices.

Matching A process whereby a firm balances its long positions in a given currency (assets, revenues or cash inflows) with its offsetting short positions (liabilities, expenses or cash outflows). The remaining (unmatched) position is the net exposure in that currency.

Material adverse change The clause in a loan agreement or similar contract under which the loan will become repayable in the event that there should be a serious (or material) deterioration in the borrower's credit standing. The clause is used by banks as a substitute where they are not able to negotiate a stronger covenant such as a borrowings limitation clause or a ratio covenant. The difficulty with such clauses lies in the definition of materiality. The normal wording in the loan agreement gives no indication of how to interpret the clause. Attempts to define materiality are almost certain to have the effect of changing the clause into a ratio covenant.

Maturity or final maturity The date when the principal or nominal value becomes payable to the holder of a loan or bond.

Maturity (or settlement) date The date on which a contract is due to be settled.

Maturity structure The expression used to describe the borrower's repayment obligation. The term may be used either in relation to a specific loan or to describe the composite repayment obligation arising from a company's total portfolio obligations.

Medium term In bond markets, bonds with initial maturities of between three and seven years. In money markets, maturities of more than one year.

Merchant bank A specialist bank that carries on a bank business and also acts as an adviser to companies, including assisting on flotations of new issues of shares and bonds.

Middle price The average of a bid and an offer price.

Mismatch A situation where assets and liabilities in a currency do not balance in either size or maturity.

Momentum analysis See Chartism.

Monetary/non-monetary method A foreign currency translation method. Non-monetary assets and liabilities are translated at their historical exchange rates, while monetary items are translated at current exchange rates.

Monetary policy Those instruments, such as interest rates and term controls, at the disposal of government for influencing the timing, availability and cost of money and credit in an economy.

Money market Financial institutions and dealers in money and credit.

Money market basis The method used to compute accrued interest on CDs and FRNs. The rate is multiplied by the number of days elapsed and divided by the number of days in the accounting year.

Moratorium Authorization of suspension of payments by a debtor for a stated time.

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N

National Association of Securities Dealers Automated Quotations (NASDAQ) A US automated securities price collection and dissemination service for over-the-counter securities traders.

Negatively sloping yield curve A yield curve where interest rates in the shorter dates are above those in the longer. This occurs when interest rates are expected to fall.

Negative pledge The covenant in a loan agreement by which a borrower undertakes that no secured borrowings will be made during the life of the loan, or ensures that the loan is secured equally and rateably with any new secured borrowings.

Negotiable instrument Any financial instrument such as bills of exchange, promissory notes, cheques, bank notes, CDs, share warrants, bearer shares or bearer bonds, the title of which passes by mere delivery, without notice to the party liable on the instrument, and in which the transferee in good faith and for a consideration of value acquires an indefeasible title against the whole world.

Net position The overall position given by the sum of long and short positions.

Netting A procedure by which affiliates within a multinational group net out inter-company trade or financial flows and only pass the net amount due.

Nominal exchange rate The actual exchange rate.

Non-callable An issue of securities where the holders cannot redeem the security before its stated maturity date.

Non-performing loan A bank loan that has stopped earning interest and where the borrower is likely to default on the principal.

Note See Promissory note.

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O

OECD See Organization for Economic Co-operation and Development.

Off-balance sheet finance Any form of finance that does not result in a corresponding liability appearing on the company's published balance sheet. Obviously, on double-entry principles the asset being financed cannot appear either. The impact of such financing methods is to show the company's gearing at a lower level than it usually is. Lenders are rarely deceived by such transparent devices.

Offer price See Ask price.

Official reserves Holdings of gold and foreign currencies by the official monetary institutions of a country.

Offshore finance subsidiary A subsidiary company incorporated overseas, usually in a tax-haven country, whose function is to issue securities abroad for use in either the parent's domestic or foreign business.

Open contract A futures contract that has been bought or sold without the deal having been completed or offset by subsequent sale, purchase, actual delivery or receipt of the underlying financial instrument.

Open interest Contracts not yet offset by futures contracts or fulfilled by delivery.

Open outcry A kind of auction system used by futures markets under which all bids and offers are made openly by public, competitive outcry and hand signals.

Open position The difference between the amount of a foreign currency owned or receivable and the total of the same currency payable under definite contracts. If one exceeds the other, there is an open position. If the amount held and receivable exceeds the amount payable, there is said to be a long position; if the amount held or receivable is less than the amount payable, it constitutes a short position.

Opportunity cost The rate of return on the best alternative investment available, or the highest return that will not be earned if funds are invested in a particular project or security.

Option A contract providing the holder with the right but not the obligation either to buy from or sell to the issuer a given number of securities at a fixed price at or over a specified time.

Optional date forward contract A forward exchange contract in which the rate is fixed but the maturity is open, within a specified range of dates. Sometimes called a forward option contract or an option forward contract.

Option forward contract See Optional date forward contract.

Option premium The price paid to the seller of a foreign exchange option for the rights involved.

Option swap A right to enter into a swap on or before a particular date. Also called a swaption.

Organization for Economic Co-operation and Development (OECD) An organization that provides for inter-governmental discussion in the fields of economic and social policy. It collects and publishes data and makes short-term economic forecasts about its member countries.

Out-of-the-money A call option when its strike price is greater than the current price of the underlying security. It also applies to a put option when its strike price is less than the current price of the underlying security. In other words the option has no intrinsic value.

Outright forward rate The forward rate expressed in pounds or dollars per currency unit, or vice versa.

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P

Parent country The country in which the parent company of a multinational group is located.

Parent currency The currency of the parent company of a multinational group.

Pari passu clause The covenant in a loan agreement by which a borrower binds itself to ensure that the loan will rank equally with its other defined debts.

Parity The official rate of exchange between two currencies.

Parity grid The matrix of bilateral par values for the currencies of members of the European Monetary System. This grid establishes the intervention prices between which member governments are obliged to maintain the exchange value of their currency in terms of every other group currency.

Par value Under the Bretton Woods fixed exchange rate system, the par value of a currency was that value measured in terms of gold or the US dollar that was maintained at a fixed rate relative to gold or the dollar.

Pip The most junior digit in a currency quotation.

Plain vanilla An issue of securities that lacks any special features.

Point and figure chart A type of chart in the form of Xs and 0s which represent price changes independent of time.

Pooling The transfer of excess affiliate cash into a central account – the pool – usually located in a low-tax country, where all corporate funds are managed by corporate staff.

Portfolio investment The purchase of a foreign financial asset with the purpose of deriving returns from the security without intervening in the management of the foreign operation.

Positively sloping yield curve A yield curve where interest rates in the shorter periods are below those in the longer. This is the normal form of yield curve.

PPP See Purchasing power parity.

Premium The amount by which a currency is more expensive in the forward market relative to the spot price.

Prime rate A US banking term to indicate the rate at which banks are prepared to lend to borrowers of the highest standing.

Private placement A type of placement where new securities are sold by the lead manager to a limited number of investors, usually its own clients, rather than being offered to a wide public.

Project finance A term financing arrangement, usually on a limited recourse basis, under which funds are provided for a specified project by banks against the security of the project cash flows.

Promissory note An unconditional promise in writing signed by one party engaging to pay on demand or at a fixed or determinable time a sum certain in money to or to the order of a specified person or to the bearer, but not legally binding until delivered to the payee or bearer.

Prospectus A document that details the nature, price and timing of an issue of securities to be made to a wide public. It is usually prepared by the issuer's adviser or sponsor and contains an historical record of earnings performance and, possibly, some form of future profit.

Purchasing power parity (PPP) The hypothesis that, over time, the difference between the inflation rates in two countries tends to equal the rate of change of the exchange rate between the currencies of the countries concerned.

Put option The right, but not the obligation, to sell an amount of foreign exchange at a specified price within a specified time.

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R

Random walk A term implying that there is no discernible pattern of travel. The last step, or even all the previous steps, cannot be used to predict either the size or the direction of the next step.

Ratio covenant An undertaking given in a loan agreement by the borrower that it will operate its business within a financial constraint specified in the form of balance or other financial ratios.

Rational expectations A concept implying that the market forms expectations in a way that is consistent with the actual economic structure of the market. The prices that result in the market place represent an average of all investors expectations.

Real effective exchange rate A rate calculated by dividing the home country's nominal effective exchange rate by an index of the ratio of average foreign prices to home prices. If purchasing power parity is holding, the real effective exchange rate should remain constant.

Real exchange rate The value of a currency in terms of real purchasing power. It is calculated by comparing the price of a hypothetical market basket of goods in two different countries, translated into the same currency at the prevailing exchange rate. It is useful in measuring the price competitiveness of domestic goods in international markets.

Real return The rate of return of an asset after adjusting for inflation.

Recourse A source of help should, for example, a bill be dishonoured at maturity. The holder would have the right of recourse against any of the other parties to the bill, unless expressly negated.

Redemption The purchase and cancellation of outstanding securities through a cash payment to the holder.

Registered security A security where ownership is recorded by a registrar in the name of the holder or a nominee. Title can be transferred only with the endorsement of the registered holder.

Regulation Q A US regulation, now phased out, of the Federal Reserve system that established a ceiling on interest rates on time deposits. Banks were forbidden to pay interest on deposits with maturities of less than 30 days. Regulations played a significant role in the original growth of the Eurodollar market.

Reinvoicing vehicle A vehicle company that performs group exposure or liquidity management functions. Goods exported from or imported to an associated company are shipped direct to the third party or to the associate as the case may be, but invoicing is performed via the reinvoicing vehicle. Title to the goods and payment are thus channelled through the vehicle.

Rescheduling The renegotiation of the terms of an existing debt obligation, often in the area of sovereign debt.

Reserve requirements or reserve asset ratio The percentage of different types of deposit or eligible asset which member banks must hold with their central bank.

Resistance level A chartism term denoting a level of prices at which a movement has historically faltered or stabilized.

Revaluation An increase in the spot value of a currency (UK parlance). A change – either an increase or a decrease – in the spot value of a currency (US parlance).

Revolver See Revolving credit facility.

Revolving credit facility A loan that allows the borrower to draw down and repay at its discretion for a specified period. Sometimes called a revolver.

Roll over When a forward exchange contract is about to mature a new forward contract is entered into to extend the original maturity date.

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S

Same-day funds Funds with good value at the end of the business day on which the order to transfer the funds is made.

Samurai bond A yen-denominated bond issue made in the Japanese market by a foreign (non-Japanese) issuer.

SDR See Special drawings right.

Second Amendment This amendment to the Articles of Agreement of the International Monetary Fund, ratified in 1978, allows members more flexibility in the management of exchange rates than under the Bretton Woods system. It also increases the supervisory responsibilities of the IMF and makes the special drawing rights more attractive as reserve assets.

Secondary market The market in which securities are traded after issue. Also called the ‘after-market'.

Securitization The process of packaging assets and liabilities such that they can be sold and traded in markets. This allows the financial institution that originates the deal – a mortgage, a car loan, etc. – to sell the asset to other investors, thus freeing its capital for alternative uses.

Self-financing loan or self-liquidating loan A loan that is to be used to acquire assets that will produce sufficient return to meet the interest obligations and repay the principal.

Settlement date The day upon which payment is effected and securities are delivered.

SFAS 52 A US accounting standard in force from December 1981, concerning translation of foreign currency financial statements. Results must be measured in the functional currency of the foreign entity, except in the case of high-inflation countries. Translation is done using the all-current method, with transaction losses showing up on the group's income statement and translation losses on the group's balance sheet.

Shallow discount bond An expression used for UK tax purposes to refer to a bond issued in the primary market at a price exceeding 90 per cent of its face value.

Short A UK government bond with a maturity of less than five years.

Short dates A dealing term meaning periods up to one week, but sometimes used to refer to periods up to a month.

Short position A situation in which the anticipated outflows of a currency exceed the anticipated inflows of that currency over a period of time. Also refers to a net liability, net expense or net cash outflow position in a currency.

Short term In bond markets, bonds with initial maturities of less than two years. In company balance sheets, debt with a remaining maturity of less than a year.

Sight deposits Current accounts, overnight deposits and money at call. Deposits with longer maturities are term deposits.

Sight draft A bill of exchange that is due when presented.

Sinking fund An amount in cash or securities periodically set aside by a borrower to redeem all or part of its long-term debt issues.

Smithsonian Agreement This began the first stage of the multilateral exchange rate realignments that followed the collapse of the Bretton Woods system of international monetary relations.

Snake The European system of exchange rate setting created in April 1972 and superseded in 1979 by the European Monetary System.

Society for Worldwide Inter-bank Financial Transfers (SWIFT) A standardized electronic message transfer service designed to send and confirm instructions concerning funds transfers associated with international payments in the major industrial countries.

Soft A market is said to be soft if prices are declining. A currency may also be described as soft if there is excess supply and an expectation that its value will fall in relation to other currencies.

Soft currency A weak currency whose convertibility is, or is expected to become, restricted.

Sovereign debt The loans outstanding of individual countries, usually negotiated by their respective governments.

Sovereign risk (a) The risk of government default on a loan made or guaranteed by it. (b) The risk that the country of origin of the currency being bought or sold will impose foreign exchange regulations that will reduce the value of the contract.

Special drawing rights (SDRs) A form of international reserve asset created and ratified by the IMF in 1969. SDRs have their value based on a weighted average of five widely used currencies.

Specific risk Another name for unsystematic risk.

Spot/forward swaps The simultaneous spot purchase or sale of a currency and a countering sale or purchase of the same currency in the forward market.

Spot market The currency market for immediate delivery, although, in the spot market, delivery is usually two working days after the transaction date.

Spot rate The price at which foreign exchange can be bought or sold for immediate delivery. In practice spot deals are settled two working days after the transaction date.

Spread The difference between bid and ask prices in a price quote. Also the amount of interest, expressed in percentage terms or basis points, over the marker rate which the borrower must pay on a short-term or variable rate loan.

Standard deviation The positive square root of the variance. This is the standard statistical measure of the spread of a sample.

Stop loss An order to sell a financial instrument when its price falls to a specified level.

Straight bond A bond issued in the primary market which carries no equity or other incentive to attract the investor, the only reward being an annual or semi-annual interest coupon.

Strike price The price at which an option may be exercised.

Subordinated security An issue that ranks below other debt in right of repayment on liquidation.

Sub-underwriter A member of a new issue syndicate who agrees to buy a certain proportion of the issue from the managers should the issue be undersubscribed. They receive an underwriting fee and a selling concession on the principal amount of the securities for which they may subscribe.

Supplier credit One of the two main techniques by which the ECGD supports UK companies in winning and financing projects overseas, where credit terms form an integral part of the commercial contract between supplier and customer. Under such an arrangement, that part of the contract price for which the supplier is at risk is secured by promissory notes issued by the customer and guaranteed unconditionally by the ECGD.

Support level A term used in chartist analysis to describe when a security or commodity price has repeatedly fallen to a certain price, but has then recovered.

Swap Where a given currency is simultaneously purchased and sold, but the maturity for each of the transactions is different. The term is also used, generically, to cover interest rate swaps and currency swaps.

Swap rate The difference between spot and forward rates expressed in points – that is, in terms of 0.0001 of a currency unit.

Syndicated loan A loan by a group of banks, normally on a floating rate basis, at a predetermined margin over short-term interest rates.

Synthetic position An option or futures position that has the same risk–return characteristics as another position.

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T

TARGET Trans-European Automated Real-time Gross settlement Express Transfer system, a payment system linking together one real-time gross settlement system in each participating member state in EMU to enable same-day, cross-border transfers throughout the euro zone. TARGET is open 7am–6pm Central European Time, each TARGET operating day.

Tax break A generic term for specific financial arrangements or instruments that attract an exemption from or reduced liability to different forms of taxation.

Tax haven A country that imposes little or no tax on the profits from transactions carried on or routed through that country, especially income from dividends and interest.

Tax sparing A Euromarket term (mainly) for a debt that is covered by a double exemption from withholding tax, enabling lenders to offer narrow margins over the reference rate.

Technical analysis A branch of market analysis based upon the study of price movements and the forecasting of future movemen