The Way of the Dollar

common. In fact, when you trade a currency, you have to choose two currencies, on to sell as well as one to buy.

It followed that allowing currency preferences to influence choice of securities resulted in a muddle of apples and pears, and made no sense. The solution was, having selected one’s asset portfolio, to then assess the resulting currency exposure; and where it conflicted with your currency preferences, you superimposed you preferred currency over-coat, so as to achieve exactly the currency exposure you desired.

International fund managers are coming round to the sense in this approach. In fact, it iis becoming fashionable to refer to currencies as “a new asset class”. That phrase and “currency overlay” are likely to be investment buzzwords of the 1990s.

De Bono, edward 115 . An engaging Maltese psychologist who popularised the notion of “lateral thinking” (LT), which is the opposite of “vertical thinking” (VT), VT is easy to define: it’s logical, step-by-step, left-brain, analytical reasoning.

Many problems of the non-linear kind (like price movements) are effectively insoluble by VT. LT sees the answer in the same whole picture as the question. It is holistic, right-brain thinking.

Edward De B has written scores of books. Best sellers include The Use of Lateral Thinking and a fistful of others.

Dennis, richard 74. Legendary trend-following futures fund manager, and one of the first to understand and preach the over-riding importance ofdiscipline in trading.

Differential 36 . Mostly used of the difference or gap between the yield structure in one country versus another. It is basic to ex-change rates, because one currency quoted against another in the future, accurately reflects the yield differential.Also used of relative inflation rates or relative anything you like.

Drawdown 94,99,100 . A useful word meaning reduction in equity value from any given level. Not the same as loss; more like potential loss or “paper loss”. Maximum drawdown” from peak equity to trough is a

commonly used measure of historical risk.

Discipline 8 6 . The quality that makes the difference between successful and unsuccessful traders, as opposed to good and bad forecasters: adhering rigidly to a prepared formula of trading rules.

Discounted 3 . price being a function of the expectations of traders, whatever is generally expected is already reflected or discounted in price.

EFP (“exchange for physical”) 93 . At a certain cost, futures traders can deal 24 hours a day. There are dealers who are prepared to trade futures contracts 24 hours a day because they can offset the risk in the interbank market at some centre or another 24 hours a day. They are arbitraging between the cash and futures market.The cost to the trader comes in the spread . normally the spread between bid and offer price is a mere 1 point (about 0.015% or $12.50) in Chicago’s IMM. in the efp market, the spread is more typically 3 points ($37.50) to 5 points.

Elliot, r a lp h n 65 . A chartist who proposed that prices moved in more or less predictable wave patterns.

EMS. the european Monetary System.

ERM. the exchange rate Mechanism of the EMS binds the partners to keep their currencies within certain fixed ranges against each other – by intervention or other means. Since it takes two currencies to make an exchange rate, the central banks of both sides are obliged to take steps to maintain the agreed ranges. If they fail, at least one currency must be realigned.

The normal permitted fluctuation range is 2.25%. The Lira originally had a wider 6% fluctuation range, as did the Peseta and sterling into 1991. Meanwhile, the Benelux countries have move towards an almost fixed rate with the D-Mark.

Eurodollar 22 US dollars outside America, simply.

Extreme (price extreme) 54 . In other market prices one would talk of a peak or a trough – either within an underlying trend or a the end of it. In the currencies, a peak for one is of course a trough for the other: the word “extreme” avoids the ambiguity. Price extremes coincide with extremes of sentiment, which can vary from euphoria to revulsion .

Fixing 71 . The setting of an agreed price for currency transactions with a central bank (or bullion dealer in

the case of gold).

Flag 6 5 . Chartist term for a tight fluctuation range atop a sharp move, implying consolidation or reversal pattern.

Flat 30 , Having no position.

Float (ing) 20 . When currencies are not fixed in relation to gold or another currency.

Floor. metaphor for a limit on the downside, which might call for central bank intervention in the case of the EMS, or a G7 agreement. opposite is ‘ceiling’.

Forex 47 . Short for foreign exchange.

Forward 17, 92 . You can sell one currency and buy another at a price fixed today with a bank, for delivery at a specified future date. If you wish to be free to close the transaction before the specified date, you indicate “at my option”.

The forward rate will only be the same as the going spot rate if the interest rates over the period for the two currencies happen to be exactly the same. Otherwise the forward rate will reflect the difference between the respective interest rates. E.g. if the interest rate on the currency being sold is higher, the forward price will be lower (because you are getting the benefit of the higher yield meantime). Thus sterling quoted 3 months forward against the dollar is a couple of cents lower than the going spot rate (as at June 1991).