Glossary of Terms

Smart Currency Options Ltd

This glossary is offered for your assistance but is not offered by way of advice. In the event of any inconsistency between this Glossary and the Agreement, the Agreement will prevail.

 

Agreement

Means for each client of our clients the formal legal agreement between them and us for the establishment of a Trading Facility to be used by them for trading currency options.

American style / American

An Option than can be exercised on any tradable date on or before its expiry.

At-the-money

The underlying exchange rate is trading at the strike rate and the option has no intrinsic value. Any value is derived by the time value.

Assignment

The act of being assigned a position following the exercise of an Option. The notice made to an Option writer than an Option has been exercised.

Barrier rate

An Option characteristic that requires the Underlying price to meet or pass a certain level (barrier rate) before the Option can or will be exercised. It may also act as a ‘ceiling’ or ‘floor’.

Best-case rate

The optimum rate that may be achieved.

Buyer (holder)

The party with the right of exercise in an option contract. The buyer is said to have a long position in the option.

Call

‘Call’ or ‘buy’ from the market. A Call option is an option that grants the holder the right but not the obligation to buy the underlying at a predetermined price at or by a predetermined time.

Cash Settled

The payment of any Immediate Profit by SCOL or the client as appropriate upon the exercise of a Contract

Contract

An Option contract entered into between SCOL and a client subject to all the legal terms and conditions of the Agreement.

Counterparty

The other party that participates in a financial transaction. For example, you would be a counterparty for SCOL in any transaction we agree, and vice-versa.

Currency pair

The respective currencies being exchange or transacted.

Cut

The specific time(s) at which an Option must be exercised, otherwise the Option will expire unexercised. See expiry time.

Delivered

The payment of the full amount of an exercised Option by SCOL or the client to the other with the prior written consent of SCOL (in which case no Immediate Profit is required to be paid).

Delta

The sensitivity of an Option’s value to changes in the price of the underlying.

Derivative

A financial instrument whose price and/or value is derived from one or more underlying assets, such as a currency pair. A derivative is itself a contract between two parties.

Effective rate

The exchange rate that takes into effect the full costs of a transaction.

European style / European

An Option that can be exercised on its expiry only and at no time before.

Exchange rate

The number of units of one currency needed to buy/sell in order to acquire one unit of another currency. May also reference the prevailing (interbank) rate, subject to applicable bid/ask spread

Exercise

The invoking of a right provided by a long Option position or as the result of an event, such as a ‘knock-in’.

Exotic Option

A broad category of Options that may include complex structures with unique attributes, such as specific risk and reward and/or cost and benefit profiles.

Expiry / Expiry Date

The final date(s) on which an exercise decision can be taken.

Expiry time (‘expire’)

The time of day when an Option actually lapses on expiry. See cut.

Initial Margin

An amount that is determined by SCOL (at its own discretion) and must be paid as a precondition to SCOL’s entering into an Option contract

In-the-money

An Option that has ‘intrinsic value’ in its current state.

Intrinsic value

The inherent/actual (‘economic’) value of an Option.

Liability

An obligation arising from a past or current transaction or event.

Lifecycle event

An event that brings into existence, amends, modifies, or terminates a particular Option or Option contract.

Margin / Collateral (sometimes also referred to as Option Deposit)

In relation to any Options Contract means the advance payment of such amount as SCOL may determine at its absolute discretion. This is to provide SCOL with security in respect of the risk SCOL is incurring on that Contract prior to you making full payment.

Margin call (Additional Margin)

A request for additional funds during the time period of an option contract in order to maintain an agreed deposit/collateral level due to volatile exchange rate fluctuations. This is not an extra cost as the additional funds are deducted from the net balance due on the settlement date.

Mark-to-market

An objectively assessed reporting or accounting of the ‘fair value’ of an asset or liability based on the current market price, or similar assets and liabilities.

Market rate / Spot rate

See exchange rate.

Moneyness

Describes an Options value in its current state. See in-the-money, at-the-money and out-of-the-money.

Notional amount

The amount of currency/currencies being exchanged.

Option

The referenced foreign exchange Option product(s).

Option contract

A contract giving the holder the right but not the obligation to buy {call} or sell {put} an amount of the Target Currency at a quoted foreign exchange rate   either a fixed point in the future (European-style) or at a number of specified times in the future (Bermudan-style) or at a time chosen by the holder up to maturity (American-style), subject to the Agreement.

Option deposit (Collateral)

One or more payment of such amounts as calculated by SCOL which must be provided as a security in respect of the risk that SCOL faces under the Option contracts. This can be made up of a combination of elements including the Initial margin and the Margin call.

Out-of-the-money

An Option that does not have any Intrinsic value in its current state. Any value is derived by Time value. If exercised in its current state, the Option will not provide any ‘profit’.

Position

A binding commitment to buy or sell a given amount of currency. It may also refer to an amount of currency held by you, or an exposure you have to, or a hedge of, an amount of currency.

Premium

A non-refundable payment made by the buyer to the seller to procure an Option (its cost).

Premium payment date

The date by which premium payable for an Option contract is due

Prevailing rate

The underlying exchange rate at a particular or referenced time.

Protected rate

See strike rate.

Put

‘Put’ or ‘sell’ to the market. A Put option is an option that grants the holder the right but not the obligation to sell a pre-agreed amount of a specified underlying at a pre- determined price or rate at or by a predetermined time.

Put-call parity

The proposition that the value of a put option is equal to the value of a call option with the same strike price and time to expiration plus a riskless investment of the discounted value of the exercise price and short position in the underlying. That is, the value of a long call option and short put option both struck at-the-money forward is zero.

Seller (writer)

The party obliged to settle if a right of exercise is invoked. The seller is known to have a short position in the option or alternatively to have written an option

Settlement date

The date on which an Option is Cash Settled, or with the prior agreement of SCOL is Delivered after exercise.

Source Currency

The currency that the client has to begin with and wishes to exchange into the Target currency.

Strike rate (Strike price)

The specific exchange rate at which an Option(s) can or will be exercised.

Target Currency

The currency that the client wishes to exchange into from the Source currency.

Time value

The portion of an Option’s premium that is directly attributable to the amount of time remaining until the expiration of the Option contract.

Trade date

The date on which an Option transaction is entered into.

Trigger rate

A specific exchange rate that prompts an Option to be exercised at a predetermined strike rate if met. Usually triggers a knock-in feature.

Underlying

The specific currency pair being exchanged. May also refer to the exchange rate of the currency pair being exchanged.

Value date

The date on which settlement usually takes place.

Vanilla Option

A ‘long call’ or ‘long put’ Option whereby the buyer has the right, but not the obligation, to buy/sell a particular underlying financial instrument.

Worst-case rate

The least favourable rate that can or will be achieved.

 

Please note that this Glossary of Terms may be updated from time to time and the date of issue of the current version will appear at the end of the document in each case.

Last update: December 2015.