Foreign Exchange

Glossary of Key Terms

American option. An option that can be exercised at any Euro (E R). A single currency introduced to replace
time up until the expiration date. the individual national currencies of EMU mem-
ber countries. The national currencies are convert-
Call option. The right (but not the obligation to buy a fxed ible into euros at an irrevocable fxed exchange rate.
amount of currency from the option writer (option seller at The euro replaced the ECU (European Currency
a predetermined exchange rate and/or exercise price prior Unit , a composite basket currency used as a unit of
to the expiration date stipulated in the contract. account, at a one-to-one rate on January 1, 1999.

Central bank. The only institution that has the right to Eurodollar. Name for U.S. dollar–denominated deposits
issue bank notes and that constitutes the monetary and and claims held outside the U.S.
credit policy authority of a currency zone. Apart from this,
it supplies the economy with money and credit, regulates European option. An option that can only be exercised on
domestic and foreign payments transactions and maintains the expiration date, not during the option period as with an
internal and external monetary stability. American option.

Collar. An option contract that sets upper and lower Exchange control. State control of all payment and asset
exchange rate parameters that will be adhered to even transactions with foreign countries.
if the market rate lies outside this range. Cross-rate
exchange rate between two non–U.S. dollar currencies. Exchange rate. Price of a foreign currency expressed
in domestic currency, e.g., $/CHF = 1.5 means that one
Currency basket. Various weightings of other currencies U.S. dollar costs 1.5 Swiss francs.
grouped together in relation to a basket currency, such as
the ECU. Exercise price. Strike price of an option.

Devaluation. Reduction in the external value of a cur- Expiration date. The last day on which an option can
rency. This occurs with free exchange rates via the foreign be exercised.
exchange market, in that the price of the domestic currency
drops against a specifc unit of foreign currency. With fxed Foreign exchange. Worldwide system of contacts between
exchange rates, the parity of the domestic against the for- non-bank foreign exchange dealers and foreign exchange
eign currency is lowered administratively. traders (bank and non-bank that are executed by tele-
phone, telex or personal market computer; place or entity
Discount. The amount the forward rate is reduced relative where foreign exchange rates are determined.
to the spot rate, i.e., the forward rate is lower than the
spot rate. Foreign exchange trading. Buying and selling of foreign
currency, holding currency positions, trading foreign
EM . Economic and Monetary Union of Europe. EMU’s exchange arbitrage, or foreign exchange speculation in
goal is to create a single European market for goods and the foreign exchange market.
services. As of January 1, 2008, the following countries
were EMU members: Austria, Belgium, Cyprus, Finland, Forward contract. A contractual obligation to buy or sell
France, Germany, Greece, Ireland, Italy, Luxembourg, a foreign currency at an agreed upon rate for settlement in
Malta, the Netherlands, Portugal, Slovenia, and Spain. the future (more than two business days after the rate was
agreed upon .

continued on reverse side

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FX-1011 - 11/10
Option. The contractually agreed upon right to buy (call Spot contract. A contractual obligation to buy or sell
or sell (put a specifc amount of currency at a predeter- foreign currency for settlement two business days after the
mined price on (European option or up to (American trade was made.
option a future date.
– In-the-money call option When the market price is Strike price. Price at which the option buyer can purchase
greater than the strike price. (call option or sell (put option the underlying currency.

– In-the-money put option When the market price is Swap tran action. Sale of one currency against
less than the strike price. another currency at a specifc maturity and the simul-
– Out-of-the-money call option When the market price taneous repurchase from the same counterparty at a
is less than the strike price. different maturity.
– Out-of-the-money put option When the market price
is greater than the strike price. Technical analy i . Analysis of past price and volume
trends—often with the help of chart analysis—in a market
Premium. Forward points corresponding to interest rate in order to make forecasts about the future price develop-
differentials that are added to the spot rate; price of an ments of the commodity being traded. Often used in
option that the option buyer pays to the option writer. short-term exchange rate forecasts.

Put option. The right (but not the obligation to sell a fxed Value date. The date on which the spot or forward
amount of currency to the option writer (option seller at a contract settles.
predetermined exchange rate and/or exercise price prior to
the expiration date stipulated in the contract.

For more information about Wells Fargo’s foreign exchange products and ser ices, contact the International Financial Ser ices
Customer Support Team at (877) 201-9639 or call your local foreign exchange offce:
Atlanta (800 520-7058 Houston (800 357-3249 St. Louis (800 832-6554
Charlotte (866 803-6722 Los Angeles (800 932-5239 Salt Lake City (800 274-1046
Chicago (877 443-9134 Minneapolis (800 299-5810 San Francisco (800 548-1163
Dallas (800 793-7124 New York (800 650-8217 Seattle (800 985-8427
Denver (800 477-9989 Phoenix (800 711-9050
Or e-mail us at forex@wellsfargo.com

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©2010 Wells Fargo Bank, N.A. All rights reserved. Member FDIC.
FX-1011 - 11/10