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International Trading Glossary

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A"eri#an o$tionAn option that can be exercised at any time up to and including the expiry time on theexpiration date. Also see European option.

At t%e &oney 'AT&(A currency option whose strike price is equal to the prevailing spot rate or the prevailing ratecorresponding to the contracts expiry date.

Call o$tionAn option that gives the holder the right (but not the obligation) to buy a fixed amount ofcurrency from the option writer (option seller) at a predetermined exchange rate (strikeprice) prior to the options expiry stipulated in the contract.

Central )an*he only institution that has the right to issue banknotes and that constitutes the monetaryand credit policy authority of a country or currency !one. he central bank also supplies the

economy with money and credit" regulates domestic and foreign payment transactions" andmaintains internal and external monetary stability.

CollarAn option contract that sets upper and lower exchange rate parameters that will apply evenif the market rate lies outside this range.

+is#o,nthe amount a forward rate is reduced relative to the spot rate" i.e." the forward rate is lowerthan the spot rate.

E,roonehe Euro!one specifically refers to the member countries that belong to the Economic and#onetary $nion of European and which have adopted the Euro in place of having a nationalcurrency.

E,rodollar%ame for $.&. dollar'denominated deposits and claims held outside the $.&.

E,ro$ean o$tion

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An option that can be exercised only on the expiration date" not during the option period aswith an American option.

E.#%ange #ontrol&tate control of all payment and asset transactions with foreign countries.

E.#%ange ratehe price or ratio of one currency in relation to another currency. or example" the$&*+,- exchange rate represents the price of one $.&. dollar expressed in +apanese-en.

E.er#ise $ri#ehe price at which the option buyer can purchase (call option) or sell (put option) theunderlying currency. Also called the strike price.

E.$iration datehe last day on which an option can be exercised.

E.$ort letters o/ #reditAn export letter of credit is used in trade transactions" and guarantees payment to the &elleras long as proper documentation regarding the transaction is received and is provided tothe issuer of the letter of credit. An export letter of credit is used to reduce the suppliers(exporters) risk of non'payment from their overseas buyers and can expedite payments tothe supplier when they comply with the requirements of the letter of credit. he buyers bankcommits to ensuring payment to the supplier when the terms and conditions of the letter ofcredit have been met" usually based on presenting the correct documents as required in theletter of credit.

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FOForeign e.#%ange/orldwide system of contracts between non'bank foreign exchange dealers and foreignexchange traders (bank and non'bank) that are executed by telephone" telex" internet orpersonal market computer0 place or entity where foreign exchange rates are determined.

Foreign dra/tA foreign draft is a draft drawn on a bank in a country outside of the $.&." which is payablein the currency of the country where such foreign bank is located. A foreign draft is aconvenient way to make payment in a foreign currency.

Forard #ontra#tAn agreement to convert (1buy1 or 1sell1) a set amount of a foreign currency on a future" or1forward 1" date at a specified exchange rate. orward window and non'delivery forwardcontracts are types of forward contracts.

Foreign e.#%ange tradinguying and selling of foreign currency" holding currency positions" trading foreign exchangearbitrage" or foreign exchange speculation in the foreign exchange market.

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F,n#tional #,rren#yhe working or operating currency of a corporate affiliate" as defined by inancial

Accounting &tandards oard &tatement %o. 23

I"$ort letters o/ #redit#ethod of payment that obligates buyers to pay only when the seller makes a compliantpresentation of documents required in the letter of credit to the buyers bank in lieu of acash payment in advance. 4mport letters of credit help buyers (importers) purchase goods ormaterials from suppliers abroad who want payment guaranteed by a reputable bank. hisextension of credit on behalf of the buyer helps the buyer expand its network of foreignsuppliers and reduces its trading partners risk of not getting paid. his is particularlyimportant when working with new suppliers.

etter o/ #reditocument issued by a bank stating its commitment to pay someone(supplier*exporter*seller) a stated amount of money on behalf of a buyer (importer) so long

as the seller meets very specific terms and conditions as detailed in the letter of credit.#any suppliers (exporters) require letters of credit from their buyers (importers) to reducethe risk of non'payment by the buyers. &ee also 4mport letters of 5redit and Export 6ettersof 5redit.

&ar*-to-"ar*ethe current market value of a contract based on current market prices.

2otional a"o,nthe value or quantity of the currency or other asset that is being delivered or used tocalculate payments due on a contract.

O$tionhe contractually agreed'upon right to buy (call) or sell (put) a specific amount of currencyat a predetermined price on (in the case of a European'style option) or up to (in the case ofan American'style option) a future date. A fee (premium) is paid up front for an option.

4n'the'money call option is when the market price is greater than the strike price.

4n'the'money put option is when the market price is lower than the strike price.

7ut'of'the'money call option is when the market price is lower than the strike price.

7ut'of'the'money put option is when the market price is greater than the strike price.

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!re"i,"orward points corresponding to interest rate differentials that are added to the spot rate0also the price of an option that the option buyer pays to the option writer.

,t o$tionhe right (but not the obligation) to sell a fixed amount of currency to the option writer(option seller) at a predetermined exchange rate (strike rate) prior to the expiration date

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stipulated in the contract.

e$orting #,rren#yhe currency in which a parent firm prepares its financial statements.

4$ot #ontra#tA contractual obligation to buy or sell foreign currency for settlement on a date whichtypically is two business days after the trade was made.

4tri*e $ri#e,rice at which the option buyer can purchase (call option) or sell (put option) the underlyingcurrency. Also called the exercise price.

4a$ transa#tionA foreign exchange swap transaction is an exchange one currency against another currencyon a specified date and a reverse exchange of those two currencies at a later date specifiedin the contract.

al,e datehe date on which a spot or forward contract settles.