Leonard N. Stern School of Business

Glossary for International Finance

by Ian Giddy

Copyright © 2003 Ian H. Giddy. Adapted from Global Financial Markets (Houghton-Mifflin, 1994)

Absolute Purchasing Power Parity (PPP) A theory stating that the exchange rate equalizes the price of a market basket of goods in the two countries. Since the composition of market baskets and price indexes varies substantially across countries, and because many goods are non-traded or are subject to tariffs, it is unlikely that absolute PPP will hold in the real world.

Adaptive Expectations A model of price behavior in which expectations of the future spot price are formed from a weighted average of the current spot price and lagged expected prices.

African Development Bank (AfDB) A regional development bank for Africa established in 1964 and located Abidjan, Ivory Coast.

Agency Theory A theory of firms that deals with the conflict of interest between managers and stockholders.

Agent Bank A bank appointed in a syndicated credit to oversee the loan.

Allocational Efficiency A state in which resource allocation is optimal and further rearrangement of resources would not improve economic welfare.

American Depository Receipts (ADRs) Certificates, traded in the United States, that represent the ownership of foreign stocks.

American Option An option that can be exercised at any time prior to the contract's expiration date.

Amortizing Swap A swap designed to allow a floating rate borrower with a pre-set amortization schedule to swap against fixed rate interest.

Announcement Day The day on which a new issue of bonds is publicly announced, with invitation faxes sent out to prospective underwriters and sellers.

Appreciation An increase in the market value of a currency with respect to a second currency or a real asset. The term is used in reference to a market price as opposed to an official price or par value.

Arbitrage The simultaneous purchase and sale or lending and borrowing of two assets in order to profit from a price disparity.

Arbitrage Pricing Theory (APT) A theory of asset pricing in which relative pricing on a set of assets adheres to a specific return-generating process.

Arm's Length Price The price that would prevail between unrelated parties.

Articles of Agreement Specify the powers and responsibilities vested in the International Monetary Fund by members of that international organization.

Asian Development Bank (ADB) A regional development bank for Asia formed in 1966 and located in Manila, the Philippines.

Asian Option See Average Rate Option.

Asian Currency Unit A trading department of a bank in Singapore that has received a license from the monetary authorities in Singapore to deal in external currency deposits.

Asked Price The price at which a market maker in an asset will sell the asset; the price sought by any prospective seller. See Offer Price.

Asset Allocation Determination of the optimal combination of stocks and bonds, domestic and international, in which to invest.

Assignment The transfer from one bank to another of the right to receive loan principal and interest from a borrower.

At-the-money option An option with a strike price equal to the current market price of the underlying asset.

Average-Rate Option Option on foreign exchange or commodity prices that pays off the difference between the option strike price and the average price of the underlying asset, this average calculated over the life of the option. Also called Asian Option.

Back Bond A Eurobond issued together with or at the same time as a warrant.

Backwardation A relationship in which spot or cash prices are higher than futures (or forward) prices.

Balance of Payments A financial statement prepared for a given country summarizing the flows of goods, services, and funds between the residents of that country and the residents of the rest of the world during a certain period of time. The balance of payments is prepared using the concept of double-entry bookkeeping, where the total of debits equals the total of credits.

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

Baker Plan Policy proposed to reduce the exposure of commercial banks to the debt of less developed countries.

Bankers' Acceptances Drafts drawn on a bank and accepted by the bank, meaning that the bank will honor them at maturity. The maturity date is determined from that date of the acceptance or drawing of the draft plus the period of time indicated in the draft.

Basic Balance The net of the following accounts in the balance of payments: exports and imports of goods and services, unilateral transfers, and long-term capital flows.

Basis The difference between cash and futures prices for the same commodity. Specifically, the cash price minus the futures price of a specific futures contract.

Basis Point One-hundredth of one percent, or 0.0001.

Basis Rate Swap Similar to structure of interest rate swap except one floating rate is exchanged for a floating rate calculated on a different basis, eg., US dollar LIBOR for US commercial paper.

Bear Market A market in which prices are declining.

Bearer Instrument A negotiable instrument payable on demand to the individual who holds the instrument. Title passes by delivery without endorsement.

Basle Accord An agreement, reached under the auspices of the Bank for International Settlements (BIS) in Basle, among bank regulators that major banks' capital should be at least 8% of their risk-adjusted assets.

Beta A statistical measure of the risk associated with an individual stock or stock portfolio. The beta of a stock or stock portfolio is the volatility of that stock's or stock portfolio's return relative to the volatility of the overall market return.

Bid Price The price at which a market-maker in an asset will buy the asset; the price sought by any prospective buyer.

Big Bang The 1986 deregulation of British financial markets in which the stock exchange was opened to foreign investment banks and a competitive commission structure was introduced.

BIS (Bank for International Settlements) An international bank located in Basle, Switzerland, which serves as a forum for monetary cooperation among the major central banks of Europe, the United States, and Japan. It monitors and collects data on international banking activity and serves as a clearing agent for the European Monetary System. The bank was originally founded in 1930 to handle the payment of German reparations after World War I.

Black Market Any private market that operates in contravention of government restrictions. For example, such a market may involve the exchange of currencies or goods at prices that are outside government-mandated levels, the trading of prohibited goods, or trading between individuals and/or institutions that are not approved by the government.

Bond Warrant Gives holder the right to buy existing bond or new bond at a fixed price during life of warrant.

Bonds with Warrants Eurobonds are frequently issued with attached warrants that entitle the holder to engage in an additional financial transaction in the future. Some warrants can be exercised only by the bondholder, but others are detachable and separately tradeable at times during their lives. The conventional type of warrant entitles the holder to purchase additional bonds of the same issuer at the same issue price and yield as the host bond.

Bons du Tresor (French Treasury Bills) Short-term instruments traded in an interbank market. There are two types: BTF, fixed-rate discount paper with maturity of 13, 26, or 52 weeks, and BTAN, two-to five-year coupon securities.

Bonus Borrowers option for notes and underwritten standby (same as global note facility).

Bought Deal A procedure for a new bond issue whereby the lead manager or managers buy the entire issue from the borrower on previously agreed fixed terms, including coupon level and issue price.

Brady Plan A debt-reduction policy for less developed countries that entailed the conversion of bank loans into more acceptable assets.

Bretton Woods Agreement Agreement signed by forty-four nations at Bretton Woods, New Hampshire, in July 1944; basis of the post-World War II monetary system. Each participating nation declared a par value for its currency and agreed to intervene in foreign exchange markets to maintain the exchange rate with respect to the U.S. dollar within plus or minus 1 percent of the par value. The United States agreed to the obligation to convert dollars to gold at $35 per ounce. The Bretton Woods fixed exchange rate system broke down in 1971.

Bridge Financing Medium-term financing, usually at fluctuating interest rates, that customarily takes the form of renewable overdrafts or discounting facilities. It is used as a continuing source of funds while the borrower obtains medium- or long-term fixed-rate financing, usually from sources other than commercial banks.

Bulldog Bonds Sterling-denominated bonds issued in the United Kingdom by nonresidents. Many are available in either registered or bearer form and most were issued in partly paid form. As with gilts, bulldogs follow an actual/365 day-count convention and pay interest twice a year.

Bund Issues Debt obligations of the Federal Republic of Germany. Most have maturities of 10 years, but there have been some longer-term issues. Bunds are underwritten by a fixed syndicate led by the Bundesbank, which includes both West German institutions and foreign-owned banks. Members of the syndicate are allotted fixed shares of each issue, with 20 percent allotted to foreign-owned banks.

Call Protection Warrant (or Wedding Warrant) Warrant to give holder an option to buy otherwise identical non-callable bonds. During the first half of its life, to exercise the warrant the holder must sell an equal amount of the original bonds back to the borrower, during the remainder of its life, when the bonds become callable, the warrants can be exercised for cash against purchase of a new bond.

Cap A contract on a short-term interest rate under which the writer of the cap pays the cap buyer the increased borrowing cost for any interest period (occurring prior to cap expiration) in which the short-term rate is fixed at a level above the ceiling rate specified in the cap.

Capital Account A category in the balance of payments of a country that measures the flows of financial and real investments across countries' borders.

Capital Asset Pricing Model A theoretical model that relates the return on an asset to its risk. The risk is defined as the contribution of the asset to the volatility of the portfolio.

Capital Controls Governmental restrictions (such as prohibitions, taxes, quotas) on the acquisition of foreign assets or foreign liabilities by domestic citizens, or the acquisition of domestic assets or domestic liabilities by foreigners.

Capital Structure The combination of debt (of various kinds) and equity (of various kinds) in a firm's financing.

Capped Floating-Rate Notes Floating-rate notes on which the coupon payment varies directly with market rates when rates are below a predetermined level and remains at that level whenever rates exceed this value. Capped FRNs have been issued in U.S. dollar and Deutschemarks.

Caption An option on a cap.

Cash and Carry Arbitrage An arbitrage trading strategy in commodity markets that makes forward and futures prices equal to the current spot price plus the costs of carrying it forward to delivery.

Cedel One of two main clearing systems in the Eurobond market. Cedel S.A. is based in Luxembourg and began operations in January 1971.

Central Bank The institution with the primary responsibility to control the growth of its country's money stock. It might also have regulatory powers over commercial banks and sometimes over other financial institutions, and it usually serves as the fiscal agent for the government.

Certificates of Deposit (CDs) Negotiable instruments issued by a bank and payable to the bearer. CDs pay a stated amount of interest and mature on a stated date, but may be bought and sold daily in a secondary market.

Charting Interpreting foreign exchange market activity and predicting future movements, usually over a short period, from graphic depictions of prices and volumes. It is a primary tool of technical analysis.

Clearing House Interbank Payments Systems (CHIPS) An automated clearing facility operated by the New York Clearing House Association that processes international transfers among its members. It moves dollars among 100 New York financial institutions -- mostly major U.S. banks, branches of foreign banks, and Edge Act subsidiaries of out-of-state banks.

Clearing System An institutional arrangement for transferring securities and payment between sellers and buyers subsequent to the establishment of a trading price.

Clearinghouse The organization which assures the financial integrity of futures and options markets by guaranteeing obligations among its clearing members. It registers, monitors, matches, and guarantees trades, and carries out the financial settlement of futures and options transactions. The clearinghouse can be part of an exchange or can be a separate corporate entity.

Closing Day The day on which new bonds from the borrower are delivered against payment by members of a bond-issuing syndicate.

Co-manager A bank ranking just below that of lead manager in a syndicated eurocredit or an international bond issue. The status of co-manager usually indicates a larger share in the loan or a larger bond allotment, and a larger share in the fees, than banks of lower rank. Co-managers may also assist the lead managers in assessing the market or deciding borrower terms.

Collar Swap A swap of fixed rate dollars against floating rate dollars with the latter having a maximum and minimum return.

Commercial Paper A short-term unsecured debt instrument issued by a corporation and sold at a discount from its maturity value.

Commitment Fee A fee paid on the unused portion of a credit line.

Commodity Fund An entity in which funds contributed by a number of people are pooled together to trade futures and option contracts under professional management.

Commodity Futures Trading Commission (CFTC) The U.S. federal with authority to oversee futures trading.

Comparative Advantage The relative advantage of a country in producing goods and services.

Conditional Expectation The expected value of a variable, conditional on certain information being known.

Conditional Variance The calculation of variance for an economic variable that is conditioned upon a given information set.

Conditionality The International Monetary Fund's practice of requiring members to adopt changes in their domestic economic policies as a condition for receiving balance of payments loans from the fund.

Contango Market A market in which futures prices are higher for distant contracts than for nearby delivery months - just the opposite of a backwardation market.

Continuous Tender Panel (CTP) A method of Euronote distribution which combines a dominant note placing role of the arranger with competitive bidding by facility underwriters against a margin, usually related to LIBOR ['strike offered yield']. The strike offered yield is set by the arranger. The members of the underwriting group may obtain protection to be allocated a quantity of notes in proportion to their underwriting commitment.

Convenience Yield The implied yield or nonpecuniary return from holding a commodity. It is also a measure of the degree of backwardation in a market.

Conversion A trading strategy that locks in an arbitrage profit by combining a long put and a short call with the same strike price and expiration date with a long position in the underlying asset.

Convertibility Freedom to exchange a currency without government restrictions or controls.

Convertible Bond A fixed-interest security that is convertible into the borrower's common stock under stipulated conditions. The difference between the price of ordinary shares at the time of the issue of the bonds and the rate at which they can be converted is the conversion premium. The yield on convertibles is usually lower than that on comparable straight bonds, reflecting the value of the conversion option.

Convertibles Bonds that allow the investor to exchange the bond for another financial asset at a fixed rate.

Correspondent Bank A bank, located in one geographic area, that accepts deposits from a bank in another region and provides services on behalf of this other bank. Internationally, many banks maintain one account with a correspondent bank in each major country so as to be able to make payments in all major currencies. Correspondent banks are usually established on a reciprocal basis, with the two banks maintaining local currency accounts with each other.

Cost of Capital The weighted rate of return expected by the various parties financing the firm. Bondholders expect a return equivalent to the market interest rate on debt, while equity holders expect a return that is a function of dividends received and capital gains as the stock appreciates in value, adjusted for risk. The cost of capital is traditionally used as a hurdle rate that projects must yield in order to be accepted by the firm.

Cost-of-carry The costs associated with holding (or carrying) a commodity or an asset. These include financing costs, storage costs, and insurance costs.

Cost-plus Loan Pricing The interest rate on a loan is expressed as a function of some publicly known cost-of-funds measure, such as LIBOR (London interbank offered rate).

Country Risk A broad spectrum of risk, including political as well as economic risk, caused by potential conflict between corporate goals and the national aspirations of host countries. The essential element in country risk is some form of government action preventing the fulfillment of a contract or agreement. Country risk ratings are assessed annually in publications such as Euromoney and Institutional Investor.

Covenant Agreement in a syndicated loan or bond contract concerning the borrower's future conduct. Such a covenant may involve, for example, the agreement to maintain a given balance sheet ratio in the future, or the agreement to adhere to an IMF program.

Covered Interest Arbitrage Borrowing one currency, converting the proceeds into another currency, where it is invested, and simultaneously selling this other currency forward against the initial currency. Covered interest arbitrage takes advantage of and in practice quickly eliminates - any temporary discrepancies between the forward rate and the interest rate differential of two currencies.

Covered Interest Differential The deviation from interest rate parity.

Covering Protecting the value of the future proceeds of an international transaction usually by buying or selling the proceeds in the forward market.

Crawling Peg System An exchange rate system in which the exchange rate is adjusted frequently and deliberately, perhaps every few weeks, usually to reflect prevailing rates of inflation. The system has been used by high-inflation countries such as Brazil, Colombia and Turkey.

Cross Rate An exchange rate between two currencies neither of which is the U.S. dollar. A cross rate is usually constructed from the individual exchange rates of the two currencies with respect to the U.S. dollar.

Cross Hedging Hedging a commodity by using a futures contract on a different but related commodity. A cross hedge is based on the premise that the price movements of the two commodities are related.

Cross-currency Warrants Bonds with warrants exercisable into bonds denominated in a currency other than that of the host bond.

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

Currency Swap A contractual obligation entered into by two parties to deliver a sum of money in one currency against a sum of money in another currency at stated intervals. Typically, the exchange of a fixed interest rate (and principal) in some currency for a floating rate (such as LIBOR), and principal, in US dollars.

Currency Basket A method for determining the value of a financial asset or currency as a weighted average of market exchange rates. The weights in this average are often defined to be specific quantities of currencies, hence the term "currency basket". A basket can contain two or more currency components, but the number of currencies included is usually limited by practical considerations.

Currency Band A band within which a currency is allowed to fluctuate on both sides of its official parity. The central bank of the country concerned intervenes in order to maintain the value of the currency within the permissible range.

Currency Cocktail Bonds Bonds denominated in a portfolio of currencies.

Current Yield The interest yield on a bond when calculated as the annual amount of money paid on coupons, divided by the current market price of the bond.

Daily Resettlement Also known as marking-to-market, the requirement in a futures contract that traders realize gains and losses each trading day.

Debt-Equity Swap Process whereby creditors exchange bank debt for an equity interest in assets owned by the debtors. This activity has been extensively conducted by banks holding debt of less developed countries.

Deferred Swap A swap arranged now with a specified fixed-rate which will commence at a future date.

Deferred-Coupon Issues Bonds (or floating-rate notes) in which a predetermined number of coupon payments is deferred to later payment dates, usually for tax purposes.

Delayed Cap Floating-Rate Notes Similar structure to capped FRNs, except the coupon cap limitation is not effective immediately. The typical grace period is three years.

Delta The ratio of a change in the option price to a small change in the price of the asset on which the option is written. The partial derivative of the option price with respect to the price of the underlying asset.

Demand Deposit Funds in a current account (a checking account) that can be withdrawn at any time without notice, depending on local regulations. Demand deposits might or might not be interest-bearing deposits.

Depreciation A gradual decrease in the market value of a currency with respect to a second currency or a real asset. The term is used in reference to a market price as opposed to an official price or par value.

Devaluation A sudden decrease in the market value of a currency with respect to a second currency or a real asset. The term is used in reference to an official price, such as a fixed exchange rate or a declared par value, as opposed to a market price.

Dingo A zero-coupon Australian dollar issue created by stripping an Australian government bond.

Direct Quotation A rate of exchange quoted in units of foreign currency for each unit of the domestic currency.

Direct Investment Cross-border equity investment with control, through the purchase of stock, the acquisition of a foreign firm, or the establishment of a new subsidiary.

Discount The amount by which a currency is cheaper for future delivery than for immediate or spot delivery is a forward market discount. If sterling is selling for US$2.3940 on the spot market but at US$2.3920 for delivery in three months, then it is selling at a 20-point discount.

Disintermediation A process in which savers withdraw deposits from financial intermediaries (like commercial banks and thrift institutions) and lend directly to investors and consumers by purchasing debt instruments such as commercial paper, bonds, and Treasury bills.

Divergence Threshold The critical value of each European Monetary System member's divergence indicator that, when reached, establishes the presumption that domestic economic policies will be adjusted.

Divergence Indicator System One aspect of the European Monetary System that measures the departure of a country's economic policies from the European Economic Community "average." The measure of divergence is based exclusively on the movement of a country's exchange rate with respect to the ECU, which represents the community average exchange rate. In the event of excessive divergence, the country is expected to alter economic policy to conform with the EEC average.

Drawdown Swap A swap from floating to fixed rate interest designed to coincide with a planned drawdown schedule typical of some project financing.

Drop-Lock FRN A FRN carrying a higher than otherwise justified minimum coupon. The 'drop-lock' feature would trigger an automatic conversion to a fixed rate if interest rates fell below the minimum coupon rate for a predetermined period.

Dual-Currency Issue An issue denominated in one currency with a coupon and/or repayment of principal at a fixed rate in another currency, eg., yen denominated and serviced but redeemed in dollars.

Duration A measure of a bond's price sensitivity to interest rate changes. The duration of a bond is commonly defined as the weighted average of the maturities of the bond's coupon and principal repayment cash-flows, where the weights are the fractions of the bond's price that the cash flows in each time period represent.

Economic and Monetary Union (EMU) A common European currency, central bank and monetary policy which melds the separate European economies into a single unit (like the USA) that can "enable Europe to negotiate with the US and Japan as an equal, to compete more effectively and to guarantee monetary stability."

ECU (European Currency Unit) A currency basket composed of specific quantities of the currencies of European Community members. The ECU is used as part of the system's divergence indicator and provides a unit of account used to value members' exchange reserve assets and private instruments such as ECU Eurobonds.

Effective Exchange Rate A rate measuring the overall nominal value of a currency in the foreign exchange market. It is calculated by forming 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 Portfolio One of a set of portfolios that provides the highest level of return for a given level of risk.

Elasticity The degree of responsiveness of on variable to changes in another.

Entrepot Financial Centers World financial centers that play the role of bringing foreign lenders and foreign borrowers together. The countries in which these centers are located might or might not be capital exporters or importers, but they are channels through which international funds pass.

Equity Risk Premium The excess return, over the risk free rate, for holding equity.

Euro CP (Euro commercial paper) Bearer-form, short term, general obligation notes issued by corporations, banks and governments outside the country of the currency. A generic term for Euronotes issued on a non-underwritten basis.

Eurobanks Financial intermediaries that simultaneously bid for time deposits and make loans in a currency or 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. The issue is thus not subject to national restrictions.

Euroclear One of two main clearing systems in the Eurobond market. Euroclear Clearance System Limited began operations in December 1968. It is located in Brussels and managed by Morgan Guaranty.

Eurocredits Intermediate-term loans of Eurocurrencies made by banking syndicates to corporate and government borrowers.

Eurocurrency Market The money market for borrowing and lending currencies that are held in the form of deposits in banks located outside the countries in which those currencies are issued as legal tender.

Eurodollar A dollar-denominated deposit in a bank outside the United States or at International Banking Facilities (IBFs) in the United States.

Euronote Facility A facility which allows borrower to issue short-term discount notes via a variety of distribution methods, under the umbrella of a medium-term commitment from a group of banks. These agree to purchase notes at a predetermined rate (or 'maximum margin'), usually in relation to LIBOR, if the notes cannot be placed with investors at or under that rate.

Euronote A short-term fully negotiable bearer promissory note usually issued at a discount to face value of one, three, or six month maturity.

European Bank for Reconstruction and Development (EBRD) A regional development bank for the transitional socialist economies of Eastern Europe, established in 1990 and located in London.

European Economic Community (EEC) An economic association of European countries founded by the Treaty of Rome in 1957. The goals of the EEC were the removal of trade barriers among member countries, the formation of a common commercial policy toward non-EEC countries, and the removal of barriers restricting competition and the free mobility of factors of production. Original members were West Germany, France, Belgium, Luxembourg, the Netherlands, and Italy. The United Kingdom, Ireland, and Denmark joined the EEC in 1973, and Greece was added in 1981. Spain and Portugal became members in 1986.

European Free Trade Association (EFTA) Common regulations for tariffs and trade established in 1959 by Austria, Denmark, Norway, Portugal, Sweden, Switzerland, and the United Kingdom.

European Investment Bank (EIB) A regional development bank focussing on intra-EC development, established in 1958 by the members of the European Community.

European Option An option that can be exercised only on the option's expiration date.

European Monetary System A structure formed on March 13, 1979 of agreements governing the exchange market activities of participating members of the European Economic Community. Included in the arrangement are a parity grid and a divergence indicator system. These agreements currently require certain members to closely manage the exchange values of their currencies relative to other members. Ultimately, the agreements envision the creation of a European central bank and monetary unification.

Exchange Controls Governmental restrictions (such as prohibitions, taxes, quotas, or government-set prices) on the purchase of foreign currencies by domestic citizens or on the purchase of the local domestic currency by foreigners.

Exchange Risk The risk assumed by a party to an international transaction in which the party could incur an exchange loss as a result of currency movements.

Exchange Rate Overshooting Occurs when exchange rate changes are in excess of some given standard of volatility.

Exchange Rate Mechanism (ERM) The particular system by which the central banks agree to intervention levels, or upper and lower rates for each currency relative to one another (ERM "floors" or "ceilings"), at which the central banks will conduct market transactions to keep currencies within the limits.

Export-Import Bank An independent agency of the U.S. government that was established in 1934 to stimulate U.S. foreign trade. The Exim Bank supports commercial banks that are financing exports and provides direct financing, loan guarantees, and insurance to foreign buyers purchasing U.S. goods. Similar motivations exist in other countries.

Extendable/Retractable FRN The holder of the FRN can extend or retract its maturity at his option. The investor is given flexibility; the borrower hopes to get cheaper money.

External Debt Public debt owed to nonresidents.

Extrapolative Expectations A pricing model in which expectations are formed such that a change in the current spot price will lead to a further change in the same direction.

Face Value The monetary amount paid on a bond at redemption (excluding any terminal coupon payment). The face value is printed on the bond certificate.

Fair Value The theoretical value of an option or futures contract derived from a mathematical valuation model. It is also referred to as the no-arbitrage value.

Federal Funds Market Federal funds are deposits held by commercial banks at the Federal Reserve System. The federal funds market is the interbank market for borrowing and lending these deposits. Since reserve requirements of commercial banks are satisfied by federal funds, banks with deposits in excess of required reserves will lend the excess deposits to banks with a reserve shortage at a market-determined interest rate, the federal funds rate.

Filter Rule A rule for buying and selling currencies based on the premise that once a movement in a currency's exchange rate has surpassed a given percentage movement, it will continue to move in the same direction. The rule might be that if the currency's price rises by X%, the trader should buy and hold until the price drops at least X% from a previous high, in which case the currency should be sold.

Fisher Effect The theory that interest rates in any country rise by an amount approximately equal to the anticipated rate of inflation. If the basic rate of interest is 3% a year when there is no inflation, and if inflation is then anticipated to equal 5% a year, the rate of interest will rise to approximately 8% a year.

Fixed Exchange Rate System A system in which the values of various countries' currencies are tied to one major currency (such as the U.S. dollar), gold, or special drawing rights. The term should not be taken literally because fluctuations within a range of 1% or 2% on either side of the fixed rate are usually permitted in such a system.

Fixed Rate Currency Swap Exchange between two counter-parties of fixed rate interest in one currency for fixed rate interest in the other. This swap requires: an optional exchange of principal; the ongoing exchange of interest; and the re-exchange of principal amounts at maturity.

Floating Rate CD Certificate of deposit issued by a commercial bank, typically in the Eurocurrency market, paying a floating interest rate like a floating rate note.

Floating Rate Notes (FRN) A medium-to long-term security with the quarterly or semi-annual interest rate linked to the three or six month London inter-bank rate; the rate is re-fixed every three or six months at a stated margin above or below the inter-bank rate.

Floating Exchange Rate System A system in which the values of various currencies relative to each other are established by the forces of supply and demand in the market without intervention by the governments involved. In practice most floating rates are really "managed floating" with periodic ad hoc intervention by central banks.

Floor A contract on a short-term interest rate under which the writer of the floor pays the floor buyer the amount by which the reference rate falls below the floor rate for any interest period.

Fonds D'Etat (French Government Bonds) The most liquid sector of the French bond market, accounting for 60 to 70 percent of all trading activity and around 30 percent of total volume outstanding. Maturities range from 7 to 15 years, and are quoted on a 30/365 day-count basis. Most government bonds are straight bonds with annual coupons, although some floating-rate notes have been issued.

Foreign Bonds Bonds issued by nonresidents in a country's domestic capital market. Such bonds are subject to domestic regulations and are underwritten primarily by banks registered in the country where the issue is made.

Foreign Bond A long-term security issued by a borrower in the national market of another country. Underwritten by a syndicate from one country alone and sold on that country's capital market, the bond is denominated in the currency of the country in which it is sold.

Foreign Exchange Broker An individual who introduces the two parties in a currency or deposit transaction to each other. The parties could be a buyer and a seller of foreign currencies or a borrower and a lender of a given currency. The broker charges a fee for this service. Brokers seldom take a position for themselves; they only arrange for transactions among other parties.

Foreign Exchange Exposure The risk that a firm will gain or lose as a result of changes in exchange rates.

Forward Contract An agreement to exchange at a specified future date currencies of different countries at a specified contractual rate (the forward Date). Foreign currency traded for settlement beyond two working or business days from today.

Forward Discount Phrase used to describe a currency whose forward price is cheaper than its spot price.

Forward Exchange Rate Price for a currency to be delivered at a certain date in the futures.

Forward Option A forward exchange contract (as opposed to an option contract) that differs from an ordinary forward contract only in that it has a variable, instead of a fixed, maturity date. The buyer of a forward option may, for example, be entitled to take delivery of a currency at any time during a given month as opposed to a specific day.

Forward Forward Swap (or Forward Swap) A pair of forward exchange deals involving a forward purchase and a forward sale of a currency, simultaneously entered into, but of different maturities.

Forward Rate Agreement (FRA) A cash-settled interbank forward contract on interest rates. The seller pays the buyer the difference if the interest rate has risen above the agreed rate. In the reverse case, the buyer pays the seller.

Fundamental Analysis A method of analyzing and predicting price movements using information about supply and demand.

Fungible Securities Securities that are not individually designated by serial numbers belonging to a particular owner. Instead, a clearing system or depository institution credits owners with a given number of a particular bond issue (or other security issue). The owner has title to, say, fifty bonds, but not to fifty specific bonds with designated serial numbers.

Futures Contract A highly standardized foreign exchange contract written against the exchange clearing house for a fixed number of foreign currency units and for delivery on a fixed date. Because of the high level of standardization, futures contracts can be traded readily in a secondary market.

Futures Option Contract A contract giving the buyer the right to buy or sell a designated futures contract at a certain exercise price through contract expiration.

Gamma The ratio of a change in the option delta to a small change in the price of the asset on which the option is written. The second partial derivative of the option price with respect to the price of the underlying asset.

Gensaki A repurchase agreement of three months or less that is generally collateralized by government bonds, bank debentures, or municipal bonds. Securities companies are the largest fund raisers in the market. The main purchasers are business corporations, as well as pension funds and financial institutions. Non-residents are major players in the gensaki market.

Geographic Arbitrage The trading practice of buying a currency in one geographical market and selling it in another where the price is higher.

German Treasury Notes (U-Schaetze) Zero-coupon securities sold by the Bundesbank under its open-market policy. Maturities may range up to two years.

Gilts (U.K. Government Bonds) Issues are direct obligations of the government of the United Kingdom. Original maturities of 5 to 30 years, although there are a few perpetuals.

Glass-Steagall Act This U.S. law separated commercial from investment banking, preventing commercial banks from underwriting corporate bonds and equities.

Global Bond A temporary debt certificate issued by a Eurobond borrower, representing the borrower's total indebtedness. The global bond will subsequently be replaced by the individual bearer bonds.

Global Note Facility The banks' medium-term underwriting commitment is available to back up both the Euronote and a U.S. commercial paper issue. Should the issuer be unable to roll over the US CP, this will trigger off a Euronote issuance process by tender panel. Bridging finance between the time of failed US CP roll-over and provision of funds from the Euronote facility is provided by a 'swingline'.

Gold Standard A monetary agreement under which national currencies are backed by gold and the gold is utilized for international payments. Also called the Gold Exchange Standard.

Gold Warrants Bonds with detachable warrants to buy gold.

Gray Market A forward market for newly issued bonds that takes the form of forward contracting between market participants during the period between the announcement day of a new issue and the day final terms of the bond issue are signed. Bonds are traded at prices stated at a discount or premium to the (now unknown) issue price.

Gross National Product (GNP) The total market value of all goods and services which is produced in an economy in one year.

GUN (Grantor underwritten note) A floating rate note facility similar to a Euronote facility whereby a group of banks [grantors] commit to purchase any notes put back to them by investors on any FRN interest rate fixing date.

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

Harmless Warrants A callable host bond with a detachable bond warrant. The warrant can be exercised over the entire life of the bond under the following conditions: 1. Until the call date, the warrant can be exercised only by surrendering the associated bonds. 2. After the call date, the warrant can be exercised independently. Harmless warrants enable the borrower to prevent the exercise of the warrant from increasing the borrower's outstanding debt

Heaven and Hell Bonds Bonds in which redemption is quoted as a function of the difference between a specified exchange rate and the spot rate at maturity. This can be viewed as a bond with a long-dated option on the principal redemption. Redemption potentially varies between zero and a predetermined maximum value.

Hedging The process of reducing the variation in the value (from price fluctuations) of a total portfolio. Hedging is accomplished by adding to an original portfolio items such as spot assets or liabilities, forward contracts, futures contracts, or options contracts in such a way that the total variation of the new portfolio is smaller than that of the original portfolio.

Host Bond A Eurobond issue to which is attached a warrant or similar instrument.

Hot Money Speculative bank deposits that are moved around the international money markets to take advantage of currency and interest rate movements.

IBRD (International Bank for Reconstruction and Development) See World Bank.

IMM (The International Money Market of the Chicago Mercantile Exchange) The IMM is the world's largest market for foreign currency and eurodollar futures trading.

Implied Forward Rate The rate of interest at which a borrowing or a lending transaction of a shorter maturity may be rolled over to yield an equivalent interest rate with a borrowing or a lending transaction of longer maturity.

Implied Volatility The future price volatility of an asset that the market currently expects, based on the current price of a particular option contract.

In-the-Money Option An option is "in-the-money" if it has intrinsic value. A call option is in-the-money if the current asset price is above the option's strike price; a put option is in-the-money if the current asset price is below the option's price.

Index-Linked Bonds Bonds in which redemption is quoted as a function of the change in the value of a stock exchange index over time. Essentially a bond with a long-dated equity option or forward contract written on the principal amount.

Indexed Currency Option Note (ICON) A fixed rate issue carrying a coupon considerably higher than usual. For this, the investor assumes a currency risk, i.e., if the bond currency falls below a certain level, the bond holder will receive a reduced repayment of principal (according to a formula). This option can be stripped off and resold.

Indexing The practice of adjusting asset prices, liabilities or payments by some measure of inflation to preserve the purchasing power of the original amounts.

Indicator Rules Publicly announced rules that link adjustments in the par values of exchange rates to movements in economic statistics. Par values adjust automatically under this exchange rate management policy, while official intervention holds market rates in the neighborhood of the par value.

Indirect Quotation A rate of exchange quoted in units of domestic currency for each unit of foreign currency.

Initial Margin The amount of money that customers must put up when establishing a futures or options position to guarantee their contract obligations.

Interest Equalization Tax A tax imposed on U.S. residents who bought foreign securities between 1963 and 1974. The tax, designed to discourage foreign investment, reduced the after-tax yields on such bonds to the level of yields on U.S. bonds.

Interest Rate Parity The process that ensures that the annualized forward premium or discount equals the interest rate differentials on equivalent securities in two currencies.

Interest Rate Swap An exchange between two counter-parties of fixed rate interest for floating rate interest in the same currency. The principal amount relating to the underlying assets or liabilities is not exchanged.

Interest Equalization Tax A form of foreign exchange control established by the U.S. government that required U.S. residents to pay a special tax on any purchase of foreign securities. It was in effect from 1963 until the end of 1973.

International Banking Facilities (IBFs) Legal vehicles that enable bank offices in the United States to accept time deposits in dollars or in other currencies from foreign customers, free of reserve requirements, deposit insurance fees and other limitations. Designed to compete with the Eurodollar market. An IBF is a division of an existing U.S. banking operation that is allowed to conduct Eurocurrency-like business but (unlike a Caribbean Eurobank branch) is prohibited from issuing negotiable certificates of deposit. IBFs were allowed by the Federal Reserve Board beginning December 1981, and have since become popular with U.S.-based foreign banks.

International Bonds Collective term referring to both Eurobonds and foreign bonds.

International CAPM Models that account for the influence of world as well as domestic markets on the returns of securities.

International Development Association (IDA) An affiliate of the World Bank (IBRD) established to make long term low interest loans to developing countries.

International Finance Corporation (IFC) An affiliate of the World Bank (IBRD) established to make equity investments and development loans to the private sector in developing countries, in forms which can be sold to other investors and/or converted into equity.

International Fisher Effect The theory that the higher interest income (agio) received from investment in one currency will approximately equal the loss in value from the depreciation of the currency against the other.

International Monetary Fund (IMF) An international institution created to provide a forum in which nations can jointly examine each other's economic policies, discuss the operation of the international monetary system, and negotiate revisions in international monetary relations. The objectives of the Fund include supervising the exchange market intervention of member nations, providing the financing needed by members to overcome short-term payments imbalances, and encouraging monetary cooperation and international trade among nations.

International Monetary Market A centralized auction market in Chicago where currency and financial futures contracts are traded. Part of the Chicago Mercantile Exchange.

Intervention The buying and selling of currencies by central banks to influence the exchange rate.

Intrinsic Value The amount by which an option is in-the-money (see in-the-money option).

Issue Price The price, stated as a percentage of face value, at which a new bond is announced. It is used as a basis for calculating investment banking fees, but does not necessarily represent the actual price paid by any investor.

Issuer-Set Margin A note distribution method whereby the issuer sets the note margin, usually in relation to LIBOR. Underwriters are guaranteed a certain proportion of notes in proportion to their underwriting commitments. Notes not taken up or sold by the underwriters are placed with the facility arranger.

Law of Comparative Advantage According to this law, a country will specialize in producing and will export those goods that it can produce cheaply relative to the costs of producing them in foreign countries. It will import those goods that it can produce only at relatively high cost.

Lead Manager The commercial or investment bank with the primary responsibility for organizing a syndicated bank credit or bond issue. This includes the recruitment of additional lending or underwriting banks, the negotiation of terms with the borrower, and the assessment of market conditions.

Lending Margin The fixed percentage above the reference rate paid by a borrower in a rollover credit or on a floating-rate note.

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

Leveraged Buy-Outs (LBOs) The purchase of a controlling interest in a company by means of a large proportion of bank loans.

LIBOR (London Interbank Offered Rate) The interest rate at which prime banks offer dollar 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 markup over the LIBOR, and the total of LIBOR plus the markup is the effective interest rate for the loan.

LIFFE (London International Financial Futures Exchange) A London exchange where eurodollar futures are traded as well as futures-style options.

Listing The formal process required in order to have the price of a bond or other security regularly quoted on a stock exchange. Eurobonds are usually listed so that they can be purchased by those institutional investors who are constrained to invest in listed securities.

Lombard Rate The rate of interest charged on a "Lombard loan"; that is, an advance against the collateral of specific listed securities in Europe.

Long Position 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.

M1 A measure of the money supply that is composed of demand deposits at commercial banks and currency in circulation.

Maastricht Treaty A treaty agreed to by the 12 EC member countries in December 1991 at Maastricht, Holland in which the mechanisms by which the EC would proceed toward European Monetary Union (EMU), a common currency, central bank and monetary policy, by 1999 (at the latest). The treaty also provided for agreement for all member countries to adopt various EC social policies (the UK exempted itself).

Managed Float (Dirty Float) A floating exchange rate system in which some government intervention still takes place. A government could announce that it will let its currency float, but it might secretly allow its central bank to intervene in the exchange market to avoid too much appreciation or depreciation.

Management Fee The portion of total investment banking fees accruing to the managing banks in a bond issue. In a syndicated credit, the fee paid to the managing bank or banks for organizing the loan.

Margin The amount of money and/or securities that must be posted as a security bond to ensure performance on a contract. In the futures market, both short and long positions post margin. This ensures that the side with a daily cash flow loss will meet its payment obligation.

Mark to Market The daily adjustment of an open futures contract to reflect profits and losses on the contract. All futures positions are marked to market using closing (or settlement) futures prices.

Market Maker An institution that stands willing to buy or sell an asset at some price, or an institution that deals so frequently and in such volume in an asset that it makes it possible for others to buy or sell that asset at almost any time.

Market Portfolio A well-diversified portfolio of risky securities with little or no unsystematic risk, and little or no scope for further risk reduction by means of diversification.

Martingale A price series forms a martingale with drift k if, conditional on today's information, the expected price for next period is equal to 1 + k times the current price.

Master Agreement Used in swaps and other derivative contracts, this bilateral agreement provides a set of terms applicable to any such transaction between the parties. Parties can tailor the transaction by appending specific terms to the master agreement.

Merchant Bank A specialist bank that, apart from carrying out a banking business, also acts as an advisor to companies, including assisting with the flotation of new issues of shares on the stock market.

MOF (Multi-option facility) Broader than the classic underwritten Euronote facility [RUF] in that the banks' medium-term commitment is to backup not only the issuance of Euronotes, but also a wide range of other short-term instruments such as bankers acceptances and advances in a variety of currencies.

Momentum Analysis A technique used to predict short-term exchange rate changes. Momentum models study the direction and impetus behind past exchange rate movements to predict future movements.

Monetary Approach An analysis of balance of payments or exchange rates that emphasizes the factors affecting money supply and money demand.

Monetary Base The amount of central bank liabilities that will potentially serve to satisfy the required reserves of the commercial banking system. In the United States, the monetary base consists of deposits at the Federal Reserve and currency in circulation.

Money Market A financial market for short-term securities; a market in which short-term borrowings and investments are made. Negotiable certificates of deposit, acceptances, and commercial paper are some of the instruments commonly used in the money market.

Money Market Hedge The reduction of exchange risk by means of debt. Typically a foreign currency cash inflow is matched with a maturing debt so that cash inflows and cash outflows in a foreign currency are offset.

Money-Back Warrants The bond warrant can be redeemed for a set amount at different times during the life of the warrant, ensuring the investor a minimum value for the warrant.

Most-favored-nation Clause In international business treaties, a provision against tariff discrimination between tow or more nations. It provides that each participant will automatically extend to other signatories all tariff reductions that are offered to non-member nations.

Multicurrency Clause A clause that gives a Eurocurrency borrower the right to switch from one currency to another at an interest reset date.

Multiple Exchange-Rate System Under such a system, a government sets different exchange rates for different transactions.

Naked Warrants An issue of warrants without any host bond.

Negative Pledge A contractual promise by a borrower in a syndicated loan or a bond issue not to undertake some future action. One typical negative pledge is that future new creditors will not be given rights that existing creditors do not have.

Nikkei Index A measure of the level of stock prices on the Tokyo Stock Exchange.

Novation The discharge of one obligation in a debtor/creditor relationship and the creation of an entirely new one.

Offer Price The price at which a market maker will buy an asset; the price sought by any prospective buyer. See Asked Price.

Offering Day The day on which final terms of a bond issue are signed between the managing banks and the borrower.

Offering Circular A document giving a description of a new securities issue, as well as a description of the firm or entity making the issue.

Official Reserves Government-owned international assets that include convertible foreign currencies, gold and Special Drawing Rights.

Offshore Banking Banking activity that accepts deposits and makes loans in currencies other than that of the country of location of the bank. In other words, Eurocurrency banking.

Open Interest The total number of futures or options contracts on a given commodity that have not yet been offset by an opposite futures or option transaction, or fulfilled by delivery of the commodity, or by exercise of the option. Each open contract has both a buyer and a seller.

Open Position A net long or short foreign currency or futures position whose value will change with a change in the foreign exchange rate or futures prices.

Open-Market Operations Purchases or sales of securities or other assets by the central bank. Such actions change the monetary base. Usually the term is restricted to purchases and sales of domestic assets (such as government bonds), while purchases and sales of foreign exchange are called "foreign exchange intervention." Either activity changes the monetary base in a similar way.

Operational Efficiency A market in which transactions are carried out with minimum transactions costs.

Option Premium The price of an option, which the option buyer pays and the option seller receives.

Option Writer The person who sells or grants an option in return for a premium, and who is obligated to perform if the option holder exercises his right under the option contract.

Option Contract The right to buy or sell a specific quantity of a specific asset at a fixed price at or before a specified future date.

Optional Date Forward Contract (or Forward Option Contract) A forward exchange contract in which the rate is fixed but the maturity is open, within a specified range of dates.

Organization for Economic Cooperation and Development (OECD) An organization that provides for intergovernmental discussion among 24 industrialized countries in the fields of economic and social policy. It also collects and publishes data and makes short-term economic forecasts of its member countries.

Out-of-the-money option An option that has no intrinsic value: a call option with a strike price above the current asset price, or a put option with a strike price below the current asset price.

Outright Forward Rate A forward exchange rate expressed in terms of the amount of one currency required to buy a unit of another currency.

Overnight In the foreign exchange market, term used to describe a swap transaction for value today with the reverse transaction taking place the next business day. In the Eurocurrency market, term used to describe a loan or deposit for value today with maturity on the next business day.

Parallel loan (Back-to-back Loan) An arrangement in which two business firms in separate countries borrow each other's currency for a specific period of time. At an agreed terminal date they return the borrowed currencies. Such a swap creates a covered hedge against exchange loss since each company, on its own books, borrows the same currency it repays.

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 each member government is obliged to maintain the exchange value of currency in terms of every other group currency.

Participation The act of taking part in a syndicated credit or a bond issue. In a syndicated credit, participation may involve membership in the original group of lending banks, or may involve lending later via a participation certificate. In a Eurobond issue, a participation refers to the size of the underwriting commitment.

Participation Fees The portion of total fees in a syndicated credit that go to the participating banks.

Paying Agent One or a syndicate of banks responsible for paying the interest and principal of a bond issue to bondholders on behalf of the bond issuer.

Perpetual FRNs Are floating rate notes with no maturity. Pays an above-market coupon reset margin to compensate investors for the lack of a final maturity date. Issues qualify as primary capital for banks; thus, they possess certain quasi-equity features. In most cases, if an issuer cancels a dividend payment within a certain time period, he may also elect to cancel the coupon payment. However, typically the unpaid interest continues to accrue and must be paid at a specified time in the future.

Placement Memorandum A document in a syndicated Eurocredit that sets out details of the proposed loan and that gives information about the borrower.

Plain Vanilla Swap The classic fixed vs. floating interest rate swap.

Points The number of units, often expressed in terms of the last two or three significant digits, of an exchange rate. It is customary to state that a currency has appreciated or depreciated by some points from a previous exchange rate. Forward exchange-rate quotes are often expressed in terms of so many points premium or discount above or below the spot rate.

Portfolio Balance Approach An analysis of balance of payments or the exchange rate that emphasizes the determinants of demand for, and supply of, the stock of financial assets. It highlights the role of wealth and views assets as imperfect substitutes.

Price Index An index that measures the value of a representative sample of goods and services. The most popular is the Consumer Price Index (CPI).

Privatization The selling of government-owned companies to the private sector.

Product Life Cycle Theory A theory that attempts to explain prices and other features of a market over the phases of a product's life.

Purchasing Power Parity (PPP) The notion that in equilibrium the market exchange rate for any two currencies will exactly reflect the relative purchasing powers of the two currencies.

Puttable Swap A swap with an option to terminate early.

Quantity Theory of Money The theory that a proportional increase in the money supply leads to a proportionate increase in the price level.

Quota A restriction on the quantity of an item that can be imported into, or exported from, a country during a specified period of time.

Random Walk Hypothesis Changes in an asset price, such as an exchange rate, are random. The changes are independent of each other and have an identical distribution.

Rating A letter grade given to a bond by a rating agency (such as Moody's or Standard & Poor's) signifying the amount of credit risk on the bond.

Rational Expectations Expectations of economic variables that fully reflect market information. In the currency market, the forward exchange rate is often assumed to be "rational" in the sense of incorporating all available information affecting exchange rates.

Real Interest Rate The market interest rate as commonly quoted (nominal interest rate) minus the rate of inflation of the price level. The ex ante real rate is calculated by subtracting expected inflation, while the ex post real rate is calculated by subtracting actual inflation.

Real Exchange Rate The value of a currency in terms of real purchasing power determined 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 for measuring the price competitiveness of domestic goods in international markets and also for calculating the real value of investment projects.

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. This rate attempts to measure the overall competitiveness of home-country goods in international markets.

Red Herring A preliminary prospectus (offering circular) giving the expected, but not final, details of a forthcoming securities offering.

Redemption Discharge of a bond obligation by the issuer by payment of the bond's face value to the bondholder. Redemption may occur at bond maturity or earlier, under conditions stated in the bond contract.

Reference Banks The group of banks surveyed in order to determine a reference rate.

Reference Rate A market interest rate, such as LIBOR or Prime, that is periodically monitored in connection with a rollover credit or a floating rate note in order to determine the subsequent interest payment by the borrower.

Registered Term used to refer to bonds that are recorded in the bond issuer's books in the name of the bond owner. Ownership of such bonds can only be transferred by a formal transfer of the ownership name in the issuer's books.

Regulation Q. An erstwhile regulation of the U.S. Federal Reserve which limited the interest rate that U.S. banks could pay on time deposits. Phased out in 1986.

Relative Purchasing Power Parity Requires that the percentage change in the exchange rate equal the differential percentage change in the price of a market basket of goods in the two countries.

Rembrandt Bonds Dutch-guilder-denominated foreign bonds issued in Amsterdam.

Representations Statements made by a borrower in a syndicated credit or bond issue describing the borrower's current state of affairs, such as the borrower's financial condition

Repurchase Agreement An agreement by one party to sell a security with an agreement to buy it back at a specified price on a specified date. The seller gets immediate cash, for the use of which he will in return pay the difference between the repurchase price and the sale price. If the buyer takes possession of the security in the meantime, a repo represents a form of secured lending from the buyer's standpoint, since if the seller defaults on the repurchase, the buyer still has the security.

Reserve Currency A foreign currency held by a central bank (or exchange authority) for the purposes of exchange intervention and the settlement of intergovernmental claims.

Reserve Requirements Obligations imposed on commercial banks to maintain a certain percentage of deposits with the central bank or in the form of central bank liabilities.

Revaluation An official government act that produces a substantial increase in an exchange rate, usually overnight.

Revolving Credit A line of bank credit that may be used or not used at the borrower's discretion. Interest is paid on the amount of credit actually in use, while a commitment fee is paid on the unused portion.

Risk Premium In the context of foreign exchange, this is a premium embedded in a currency forward or futures price. It stems from the risk-averse nature of market participants, and may be a function of the covariance between the participant's portfolio of assets and liabilities and the exchange rate. Because of the risk premium, the forward rate or futures price may be a biased estimator of the exchange rate expected to prevail at date of delivery.

Rho A measure of the change in an option premium with respect to a percentage-point change in the interest rate.

Rollover Credit A bank loan whose interest rate is periodically updated to reflect market interest rates. The interest rate in the loan for each subperiod is specified as the sum of a reference rate and a lending margin.

Rollover A term used in short-term foreign exchange dealing. A short swap designed to employ or borrow foreign currency balances. In a rollover applied to a currency that trades on a two-day spot basis, for example, a trader can sell a currency for delivery in one business day and buy that currency back for delivery in two business days.

RUF (Revolving underwriting facility) A Note Issuance Facility that is underwritten. See Euronote facility.

Samurai Bonds Yen-denominated bonds issued in Japan by non-residents, primarily by supranational and sovereign borrowers. The market is very illiquid.

Schuldscheindarlehen German certificates of indebtedness. These are private loan agreements between borrowers and banks that are resold to other investors with the borrowers' permission. The details of the loan are set on a Schuldschein or debt certificate held by the bank.

SDR (Special Drawing Right) An artificial reserve asset created and held on the books of the IMF. At the time of first issue on January 1, 1970, the SDR was defined as having a value equal to 1/35 ounce of gold. The definition was altered in 1974 to specify the value in terms of a portfolio of sixteen currencies. Since 1981, the SDR has been defined in terms of the U.S. dollar, German mark, French franc, Japanese yen, and British pound.

Seasoned Securities Securities that have traded in the secondary market for more than ninety days.

SEC (Securities and Exchange Commission) A U.S. regulatory agency established in 1934 to regulate the issuing and trading of securities and issuers' reporting practices.

Secondary Market A market in which securities, such as bonds, are traded following the time of their original issue.

Selling Period A period following the signing of terms of a new bond issue during which bonds are bought and sold (in the form of price agreements) prior to actual payment for, and distribution of, the bonds themselves.

Selling Group All banks involved in selling or marketing a new issue of bonds. Sometimes the term is used in reference to dealers acting only as sellers, and is intended to exclude reference to underwriters or managers.

Selling Concession The share of total investment banking fees accruing to the selling group.

Semistrong Efficient Market Hypothesis An hypothesis which states that current asset prices fully reflect all public information.

Settlement Day The day on which the actual transfer of two currencies, or the transfer of money for an asset, takes place at a previously arranged price.

Shogun Bonds Foreign bonds issued in Tokyo and denominated in currencies other than the Japanese yen. The usual denomination is the U.S. dollar.

Short Position A greater outflow than inflow of a given currency. In foreign exchange operations, short positions arise when the amount of a given currency sold is greater than the amount purchased.

Smithsonian Agreement A revision to the Bretton Woods system that was signed at the Smithsonian Institution in Washington, D.C., in December 1971. Included were a new set of par values, widened bands to plus or minus 2.25 percent around par, and an increase in the official value of gold to $38/ounce. The agreement immediately preceded the collapse of the Bretton Woods system of international monetary relations.

Snake in the Tunnel A system that EC countries agreed on to allow their currencies to fluctuate a maximum of 2.25% against one another (the snake) and permitted a 4.5% band against other currencies (the tunnel). The tunnel was abandoned in 1973 and the snake ended in 1978, to be replaced by the Exchange Rate Mechanism of the European Monetary System.

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

Sovereign Risk In cross-border contracts, the risk that a country will impose foreign exchange controls. Also called country risk, it can include the risk of government default on a loan made to it or guaranteed by it.

Special Drawing Rights (SDRs) Monetary accounts held at the International Monetary Fund for payments among governments. The rights can be transferred to other countries in exchange for convertible currencies, either voluntarily or for convertible currencies supplied by countries designated by the IMF. At first, SDRs had a fixed value in gold, but later their value was determined by a weighted basket of major currencies.

Speculator A trader whose objective is to make profits by successfully anticipating future price movements.

Spot/Next In the foreign exchange market, term used to describe a swap transaction for value on the spot date with the reverse transaction taking place the next working day after the spot date. In the Eurocurrency market, term used to describe a loan or deposit for value on the spot date with maturity on the next working day after the spot date.

Spot Foreign Exchange Market A market involving an exchange of bank deposits denominated in different currencies. A spot contract implies an exchange two business days after the transaction.

Spread The difference between the buying and selling rates or prices.

Stabilization The effort by a lead manager in a bond issue to regulate the price at which bonds trade in the secondary market during the period while the bond syndicate is still in existence.

Stags/Zebras A zero-coupon sterling issue created by stripping a U.K. government bond.

Standby Facility A Euronote facility set up to act as a standby to the issuance of US Commercial Paper. Normally it is not expected to be used.

Startrek A bond priced at a level previously unexplored by the market.

Step-Up, Step-Down Issues Bonds or floating-rate notes in which the coupon rises or falls over time according to a predetermined schedule. Step-down bonds provide more current income for the investor, while step-up issues delay the income payments.

Sterilization Intervention in the foreign exchange market by a central bank where the change in the monetary base caused by the foreign exchange intervention is offset by open market operations involving domestic assets.

Straight Bonds Bonds with fixed coupon payments and without any option features (such as provisions for conversion into equity, other bonds, or other currencies).

Strike Price The price at which an option holder may buy or sell the underlying asset, which is specified in an option contract.

Strong Efficient Market Hypothesis An hypothesis that the current asset price reflects all market information, including any useful "inside" information.

Subparticipation The partial assignment by one bank of the right to receive monetary sums from a borrower to another bank.

Subscription Period The time period between the day on which a new bond issue is announced and the day on which the terms of the issue are signed and the bonds are formally offered for sale.

Subscription Agreement An agreement between a bond issuer and the managing banks that describes the terms and conditions of the issue and the obligation of the parties to the agreement.

Surety Bond A guarantee that a person or corporation will perform an obligation due to another person or corporation. It is used by a surety, which is a specialized surety company, or an insurance company.

Sushi Bond A dollar issue undertaken by a Japanese company from Japan, designed to be bought by Japanese institutions.

Swap In the interbank foreign exchange market, the simultaneous purchase and sale of identical amounts of a currency for different value dates. (The currency will be priced in terms of a second currency whose amounts will differ, depending on the relationship between the purchase price and the sale price of the first currency). More generally, a swap is a contractual obligation entered into by two parties to deliver one sum of money against another sum of money at stated intervals. See also Currency Swap and Interest Rate Swap.

Swap Lines Lines of credit extended from on government to another that can be drawn on to provide the foreign currencies needed for official intervention in the exchange market. These lines of credit, once drawn, provide very short term financing of imbalances in international payments. Swap lines are also referred to as "reciprocal currency arrangements."

Swaps Tender Panel A refinement of the standard tender panel whereby the issuer can ask for currency and/or interest rate swaps on a particular note issue tranche.

Swaption An option to enter a fixed for floating swap at a predetermined fixed rate.

SWIFT (Society for Worldwide Interbank Financial Transfers) A standardized electronic message transfer service designed to send and confirm instructions concerning funds transfers associated with international payments.

Swingline Used in a global note facility or BONUS to allow issuer to move from US CP market to the Euronote market. Available for short periods 1 week or less and priced over US prime.

Syndicate A group of banks that acts jointly to loan money in a bank credit (syndicated credit) or to underwrite a new issue of bonds (bond issuing syndicate).

Systematic Risk The risk common to all assets; risk that cannot be diversified away.

Tap Basis A frequent method of issuance in Euro Commercial Paper. The dealer approaches the issuer for notes in response to particular investor demand rather than the issuer seeking bids from the dealer.

Technical Analysis A graphical analysis of past prices and trading behavior in order to predict future price movements.

Tender Panel A group, including Euronote facility underwriters and additionally appointed banks and dealers, who are invited to bid on an issuer's notes in an open auction format. Notes are awarded to bidders in sequential order - from the most competitive bid upwards until the full tranche is allocated.

Term Credit A bank loan that is made according to a time schedule. In the initial period, increasing portions of the total loan amount become available to the borrower. In the final period the loan is repaid at scheduled intervals.

Term Premium A premium embedded in a futures or forward price that arises from liquidity premia in the term structure of interest rates when participants are risk averse.

Terms of Trade The ratio of export prices to import prices expressed in the same currency.

Theta A measure of the change in an option premium with respect to a one-day change in time-to-maturity.

Time Value The amount of money that option buyers are willing to pay for an option in anticipation that, over time, a change in the underlying asset price will cause the option to increase in value. An option's premium is the sum of time value and intrinsic value. The amount by which an option's premium exceeds the option's intrinsic value is the option's time value.

Tombstone Advertisement placed in a newspaper or magazine by banks in a syndicated credit to record their participation in the loan, or in a bond issue to record their role in managing, underwriting, or placing the bonds.

Tomorrow/Next In the foreign exchange market: term used to describe a swap transaction for value tomorrow with the reverse transaction taking place the next working day after tomorrow. In the Eurocurrency market: term used to describe a loan or deposit for value tomorrow with maturity on the next working day after tomorrow.

Translation (or Accounting) Exposure Foreign currency assets, liabilities, revenues, and expenses that are consolidated at a current exchange rates into parent currency-denominated group financial statements.

Triangular Arbitrage The process of buying and selling foreign exchange between three different currencies in order to profit from a discrepancy in cross rates.

TRUF (Transferable revolving underwriting facility) A loan facility in which the underwriting banks' contingent liability to purchase notes, in the event of issuer's failure to place them, is fully transferable.

Unbiased Forward Rate Hypothesis An hypothesis that the forward exchange rate is an unbiased predictor of the future spot rate.

Underwriting Allowance The share of total investment banking fees accruing to the underwriting group.

Underwriting Syndicate The banks, in a new bond issue, that agree to pay a minimum price to the borrower even if the bonds cannot be sold on the market at a higher price.

Unsystematic Risk The risk unique to a particular company or country; risk which can be eliminated through diversification.

Value Today A special spot foreign exchange transaction in which delivery and payment are made on the same day as the contract, instead of the normal one or two business day lag.

Value Date The contracted date on which the foreign exchange is to be delivered or received. For forward transactions, the value date and maturity date are synonymous.

Value Tomorrow A special spot foreign exchange transaction in which delivery and payment are made on the next business day after the contract.

Variation Margin The gains or losses on open futures contracts calculated by marking the contracts to the market price at the end of each trading day (or session). These gains or losses are credited or debited by the clearinghouse to each clearing member's account, and by members to their respective customers' accounts.

Volatility A measure of the amount by which an asset's price fluctuated over a given period. Normally, it is measured by the annualized standard deviation of daily returns on the asset.

Warrant A call option to buy a stated number of shares of stock at a specified price.

Weak Efficient Market Hypothesis The hypothesis that asset prices reflect all information about the history of prices of that asset.

Window Warrant A warrant exercisable on particular days or during particular periods (also European warrant).

Withholding Tax A tax collected by the source originating the income, in contrast to one paid by the recipient of the income after the funds are received. For example, a withholding tax on interest payments to foreigners means that the tax proceeds are deducted from the interest payment made to the lender and collected by the borrower on behalf of the government.

World Bank (International Bank for Reconstruction and Development) A creation of the Bretton Woods negotiations in July 1944, the bank began operations in June 1946. The original intent of the bank was to make postwar reconstruction loans, a role soon supplanted by the Marshall Plan. The bank consequently shifted its attention to development lending. Funds for lending are obtained from the paid-in capital subscriptions of member nations, from borrowings in the world's capital markets, and from net earnings.

Yankee Bond A dollar-denominated foreign bond issued in New York. These bonds are subject to U.S. law and must be registered with the Securities and Exchange Commission.

Yield Curve A diagram of interest rates prevailing on a class of securities that are alike in every respect except term to maturity. A yield curve can be sloping either upward or downward.

Yield Curve Notes Also known as "reverse floaters" or "bull FRNs." Floating-rate notes on which the coupon payment varies inversely with the level of market rates.

Yield-to-Maturity The rate of return earned by a debt instrument if held to maturity and reinvested at that same return.

Zero Coupon/Deep Discount Bond Bonds issued at a deep discount from face value, paying no interest [zero] or a lower than normal market rate [deep discount].