A Forex Broker’s Dictionary
Forex brokers are highly motivated and specialized professionals who deal in the foreign exchange market. As such, they have their own set of trade related jargon that most consumers will not understand. This is either because the words make no apparent sense or that the words used has derived a technical meaning different or distinct from the general definition. This article is by no means a complete dictionary of forex jargon, but will provide a primer on the same.
Arbitration
Forex arbitrage means settling disputes outside the judicial system but within the National Futures Association (NFA) arbitration program. Disputes for arbitration are related to “futures” related concerns by different Forex entities which may or may not include Forex brokers.
Back Spread
This is a type of spread wherein more options are purchased than sold. This is a type of “delta neutral” and “spread” that increases in profitability in proportion to the increase in the volatility of the market.
Binary Option
Otherwise known as a digital option that allows payoff at a fixed amount or none at all depending on the happening on an unknown and/or future event. For example, an option allows for a $100,000 profit on a trade if 5 new investing houses are put up in Asia by 2015. Otherwise, there is zero profit on the particular trade.
Call
This is a contract that allows the buyer the right but not the obligation to exercise an option to buy futures or commodities at a specified price or for specific terms and conditions.
Delta
An expected change in the price of an option vis-à-vis a change in price of the underlying commodity or futures contract price. For example, Forex brokers provide an option that has a delta of 0.5 and changes at $.50 if an underlying commodity generates movement at $1.00. A delta is neutral when the positive and the negative positions result in zero.
Futures Contract
A contract to buy or sell commodities at a future date and time provided that:
1. The price is determined or determinable at the time the contract is perfected;
2. There is a resulting obligation that is created between each and every party;
3. The contract is used to assume or shift risk in prices;
4. Satisfaction can be made thru specific delivery or offsetting.
Option
An option is a right but not an obligation to exercise an ability to buy or sell a particular commodity or futures contract within specified limits such as price of sale, time of sale, conditions of the sale, etc. This is regardless of the actual market value at the time of the creation of the contract.
Put
This means the exercise of an option to sell commodities or futures contracts. Of course, sellers or Forex brokers have the right but not an absolute obligation to sell for a specified price at a specified time.
Spread
A.K.A. straddle, is the purchase of a commodity/futures against the sale of another commodity/futures. The commodity or futures maybe the same or not, but the point of a spread is to generate profits from the difference between the purchase price and the selling price or vice versa. This is the bread and butter of most Forex brokers since this is where they derive commissions.
