Alphabetical A - M

Abandon OptionAn option holder chooses not to exercise their option
Absolute RiskThe volatility of total returns
AcceptanceShort-term debt instruments, drawn on a bank for future payment
Acceptance HouseGuarantees payment of trade bills used to finance trade deals and goods in shipment
AcceptingSigning a Bill of Exchange signifying an agreement to pay. Subsequent or alternative signature by a bank virtually guarantees payment.
Account??
Accreted Value??
Accreting SwapA swap in which the principal increases in each time period.
Accrual SwapAn interest rate swap where interest on one side accrues only when a certain condition is met.
Accrued InterestInterest that has been earned but not yet paid
ActuaryA statistician who calculates risk
AdministratorAn Administrator is responsible for ensuring the efficient day-to-day operation of a fund including the accounting.
AlphaA measure of performance on a risk adjusted basis.
Alternative Investment MarketA market dedicated to smaller companies.
Alternative Minimum Tax??
American Depository ReceiptThe form in which foreign shares can be traded in the US without a formal listing.
American OptionAn option that can be exercises at any time during its life.
AmortisationRepayment of the principal on a loan or bond installments over a period of time.
Amortising??
Amortising SwapA swap where the notional principal decreases in a predetermined way as time passes.
Annual Percentage RateUsed to describe the true cost of the money borrowed on mortgages, loans and credit cards.
Annual Yield??
AnnuitySomething that pays regular cash flows at fixed periods over a given period of time.
APACSControlling cheque clearing, BACS and CHAPS in the UK
ArbitrageTaking advantage of an anomaly in prices or rates in different markets.
ArbitrageurA person who engages in arbitrage opportunities.
Article 65Article for the Japanese Financial Code - prevents commercial banks from engaging in some investment banking
Asian OptionAn option with a payoff dependent on the average price of an underlying asset during a specified period.
Ask PriceThe price that a dealer is offering to sell a security.
Ask RateOffer Rate
Asset Backed Securities??
Asset Pricing??
Asset-Or-Nothing Call OptionAn option that provides a payoff equal to the asset price if the asset price is above the strike price and zero otherwise.
Asset-Or-Nothing Put OptionAn option that provides a payoff equal to the asset price if the asset price is below the strike price and zero otherwise.
AssetsThe side of the balance sheet dealing with lending
AssuranceThe business of life insurance and pensions
As-You-Like-It OptionChooser Option
At-Best OrderAn order to a broker to buy and or sell a contract at the best price available.
At-The-Money OptionAn option in which the strike price equals the price of the underlying asset.
Auction Market Preferred Stock??
AuditInspection of a companys books by independent accountants
Automated Clearing House??
Automated Pit TradingA computerised trading system used at the LIFFE in addition to open cry
Automatic ExerciseWhen the clearing house automatically exercises in-the-money options at expiry.
Average-Price Call OptionAn option giving a payoff equal to the greater of zero and the amount by which the average price of the asset exceeds the strike price.
Average-Price Put OptionAn option giving a payoff equal to the greater of zero and the amount by which the strike price axceeds the average price of the asset.
Average-Strike OptionAn option that provides a payoff dependent on the difference between the final asset price and the average asset price.
Back OfficeAccounting and Settlements
Back-TestingTesting a value-at-risk or other model using historic data.
BackwardationWhen the spot or near term price of a commodity is higher than the forward rate.
Backwards InductionA procedure for working from the end of a tree to its neginning in order to value an option.
Bank BillA Bill of Exchange accepted by a bank on the central bank's "eligible" list. The central bank itself would rediscount a bill of this type. Also called an Eligible Bill
Bankers AcceptanceBills of exchange acceppted by large banks
Bankers Automated Clearing Services??
Barrier OptionAn option whose payoff depends on whether the path of the underlying asset has reached a barrier (i.e. a certain predetermined level).
Base Currency??
Base Rate??
BasisThe difference between the spot price and the futures price of the commodity.
Basis PointOne hundredth of a percent (0.01%)
Basis RiskWhen relationships between products used to hedge each other change or break down
Basis SwapSwap where cash flows determined by one floating reference rate are exchanged for cash flows determined by another floating reference rate.
Basket OptionAn option that provides a payoff dependent on the value of a portfolio of assets.
BearA pessimist - selling securities in the belief of a falling stock and bond market, hence a "Bear" market
Bear MarketA falling market
Bear SpreadA short position in a put option with a strike price X1 combined with a long position in a put option with strike price X2 where X2 > X1. (A bear spread can also be created with call options).
Bearer BondA bond payable to whoever is in possession - that is no central register
Bed and BreakfastSelling shares one day and buying them back the next - at the end of the tax year to maximise Capital Gains Tax allowance or claim losses against profits
Bermudan OptionAn option that can be exercides on specified dates during its life.
BetaA measure of systematic risk of an asset.
Bid PriceThe price that a dealer is prepared to pay for an asset.
Bid RateRate of interest offered for deposits in banking. Generally the dealer's buying price for equities, bonds, foreign exchange etc
Bid-Ask SpreadThe amount by which the ask price exceeds the bid.
Bid-Offer Spreadsame as Bid-Ask Spread
Big BangDeregulation of the UK Stock Market 27 October 1986. New regulation and an automated price quotation system. The day when minimum commissions were abolished
BillA short-term (3 months or so) instrument which pays interest to the holder and can be traded. Some bills do not pay interest but are issued at a discount to their face value.
Bill of ExchangeA signed promise to pay by a receiver of goods or services and kept by the supplier.
Binary OptionOption with discontinuous payoff; for example a cash-or-nothing option or an asset-or-nothing option.
Binomial ModelA model where the price of an asset is monitored over successive short periods of time. In each short period of time it is assumed that only two price movements are possible.
Binomial TreeA tree that represents how an asset price can evolve under the binomial model.
Blacks ApproximationAn approximate procedure developed by Fischer Black for valuing a call option on a dividend paying stock.
Blacks ModelAn extension of the Black Scholes model for valuing European Options on futures contracts.
Black-Scholes ModelThe original European Stock Option pricing model written by Black and Schole in 1972
Blue ChipLarge established companies. The most highly regarded shares.
Board WashingThe individual who handles limit orders in some exchanges. The board broker makes information on outstanding limit orders available to other traders.
BOBLShort name for the short-term German government bond contract on the DTB
BondAn instrument that pays a fixed amount of interest to the holder.
Bond Factor??
Bond Ladder ??
Bond OptionAn option where a bond is the underlying asset.
Bond Provisions??
Bond Stripping??
Bond WashingSelling a bond prior to the ex dividend date to take a capital gain instead of receiving income.
BonosSpanish Government Bonds
Bonus IssueA free issue of shares to existing shareholders
Bonus Value??
Book Entry??
Book ValueThe value of an asset as entered in a company's balance sheet
Bootstrap MethodA procedure for calculating the zero-coupon yield curver from market data.
Boston Optionsee Deferred payment option
Break Forwardsee Deferred payment option
BrokerAn individual (or firm) that acts as an intermediary putting buyers and sellers together for a brokerage fee.
Building SocietyInstitutions whose primary function is to accept the savings of small investors and channel them to house buyers in return for the security of a mortgage on the property.
BullAn optimist, buying securities in the belief of a rising (stock and bond) market, hence a bull market
Bull MarketA rising market
Bull SpreadBuying a call option (a long position in a call) with a strike X1 combined with selling a call (short position in a call) with a strike price X2 where X2>X1 (a bull spread can also be created using put options).
Bullet RepaymentThe whole of a bond or bank loan is repaid at maturity (instead of staged payments in the last few years)
BundesbankThe German Central Bank
Butterfly SpreadA position that is created by taking a long position in a call with strike price X1, a long position in a call with strike price X3 and a short position in two calls with strike price X2 where X3 > X2 > X1 and X2 = 0.5(X1 + X2).
CableShorthand for dollar/sterling rate
Calendar SpreadA position that is created by taking a long position in a call option that matures at one time and a short position in a similar call option that matures at a different time.
Call Date??
Call MoneyMoney lent by banks to other banks or discount houses which can be recalled at noon each day
Call OptionAn option to buy an asset at a certain price on a certain date some time in the future.
Call Protection??
Call Risk??
Call Schedule??
Callable BondThe issuer has the right to redeem the bond at a specified earlier date than the one orginally fixed as the final maturity.
Callable Credit Products??
Cancelable SwapSwaps that can be cancelled by one side of prespecified dates.
CapAn agreement with a counterparty which sets an upper limit to interest rates for the cap buyer for a stated time period.
Cap RateThe rate determining payoffs in an interest rate cap
Capital AdequacyThe need to maintain adequate capital to cover counterparty risk and position risk
Capital Asset Pricing ModelA model relating the expected return on an asset to its beta.
Capital Gains TaxA tax on the profit when you sell (or 'dispose of') something (an 'asset') that's increased in value.
Capital Growth BondIssue price at par (100%) with redemption at a multiple of that amount.
Capital MarketsThe market for medium and long term securities
Capital RatioThe ratio of a banks primary capital to a weighted value of assets
CapitalisationMarket capitalisation of a company is the number of shares multiplied by the current price
Capitalisation IssueAn issue where funds from a company's reserves are converted into shares and offered free of charge to shareholders.
CapletOne component on an interest rate cap
Cash Flow MappingA procedure for representing an instrument as a portfolio of zero-coupon bonds for the purpose of calculating value at risk.
Cash RatioThe proportion of a bank's liabilities which it considers prudent to keep in the form of cash.
Cash SettlementWhere the product is settled at expiry, based on the differential between the fixed/guaranteed price and the underlying instrument. Procedure for settling a futures contract in cash rather than by delivering the underlying asset.
Cash-Or-Nothing Call OptionAn option that provides a fixed predetermined payoff if the final asset price is above the strike price and zero otherwise.
Cash-Or-Nothing Put OptionAn option that provides a fixed predetermined payoff if the final asset price is below the strike price and zero otherwise.
CAT BondBond where the interest, and possibly, the principal paid are reduced if a particular category of "catastrophic" insurance claims exceed a certain amount.
CDOA security based on a mix of debt and credit risk. Different laters often referred to as tranches (or slices) each having different risk and maturities.
Central Counterparty ModelSet up by the Stock Exchange to remove credit risk when buying and selling.
Certificate of DepositA tradeable deposit issued by banks and building societies.
Certificates of ParticipationA type of municipal bond that are often used to finance capital improvement projects or equipment.
CHAPSClearing House Automated Payments System - for electronic clearing of payments the same day (UK)
Cheapest-To-Deliver BondThe bond that is cheapest to deliver in the Chicago Board of Trade bond futures contract.
Chinese WallA theoretical barrier between different sections of a firm to avoid fraud (i.e. conflicts of interest or insider dealing). One part of the firm may not pass sensitive information to another if it is against a client's interest.
CHIPSClearing House Interbank Payments - electronic bank clearing in New York
Chooser OptionAn option where the holder has the right to choose whether it is call or a put at some point during its life.
CIRCUSCombined Interest Rate and Currency Swap
Clean PricePrice of a bond not including the accrued interest element. This is the quoted price. The cash price paid for the bond (or dirty price) is calculated by adding the accrued interest to the clean price.
Clearing BankBanks which are part of the clearing system which significantly reduces the number of interbank payments.
Clearing HouseA firm that guarantees the performance of the parties in an exchange-traded derivatives transaction. Central Body guaranteeing contracts in a traded options/futures market. Also known as clearing corporation.
Clearing MarginA margin posted by a member of a clearing house.
CLOCollateralized Loan Obligation - is a single security backed by a pool of debt.
Closing OutFor futures market - taking the opposite contract for example having previously bought 100 tons of cocoa for June delivery, the buyer now sells 100 tons for the same delivery (or vice-versa)
CMEChicago Mercantile Exchange
CMOCollaterized Mortgage Obligation - A mortgage backed security where investors are divided into classes and there are rules for determining how principal repayments are channeled to the classes.
Collarsee Interest Rate Collar
Collateral??
Collaterised??
CombinationA position involving both calls and puts on the same underlying asset.
Commercial BankingThe classic banking business of taking deposits and lending money, either retail or wholesale
Commerical PaperAn unsecured IOU issued by large companies and banks.
Commission BrokersIndividuals who execute trades for other people and charge a commission for doing so.
Commodity SwapA swap where cash flows depend on the price of a commodity.
Complex Power Duals??
Compound OptionAn option on an option. The holder (buyer) has an option to purchase another option on a pre-set date at a pre-agreed premium.
Compounding FrequencyThis defines how an interest rate is measured.
Compounding SwapSwap where interest compounds instead of being paid.
Concert PartyA group acting together (secretly) in a takeover situation for example three people each buy 2.9% of shares to avoid no longer being able to hide behind nominee status.
ConfirmationContract confirming verbal agreement between two parties to a trade in the over-the-counter market.
ConsolidationReorganising share holdings so that, for example 10 shares at 10p are replaced by a one £1 nominal
Constant Maturity SwapA swap where a swap rate is exchanged for eother a fixed rate or a floating rate on each payment date.
Constant Maturity Treasury SwapA swap where the yield on a Treasury Bond is exchanged for either fixed rate or floating rate on each payment date.
Consumption AssetAn asset held for consumption rather than investment
ContangoA situation where the futures price is above the expected future spot price.
Continuous CompoundingA way of quoting interest rates. It is the limit as the assumed compounding interval is made smaller and smaller.
Contract for DifferenceA derivative product to trade the price differential over an indefinite time period.
Contract SizeThe unit of trading on a derivatives contract.
Control Variate TechniqueA technique that can sometimes be used for improving the accuracy of a numerical procedure.
Convenience YieldA measure of the benefits from ownership of an asset that are not obtained by the holder of a long futures contract on the asset.
Conversion FactorA factor used to determine the number of bonds that must be delivered in the bond futures market.
ConvertibleA convertible bond may be converted later into equity, some other bond or even a commodity
Convertible BondA corporate bond that can be converted into a predetermined amount of the company's equity at certain times during its life.
Convertible Rate FRNAn issue which carries the option to convert either from an initial floating rate note into a fixed rate bond or from a fixed rate bond into a floating rate note.
ConvexityA measure of the curvature in the relationship between bond prices and bond yields.
Convexity AdjustmentAn overworked term. It can refer to the adjustment necessary to convert a futures interest rate to a forward interest rate.
Corporate Bond??
Corporate FinanceThe department of an investment bank dealing with takeovers, mergers and strategic advice to companies
Cost of CarryThe storage costs plus the cost of financing as asset minus the income earned on the asset.
CounterPartyThe opposite side in a financial transaction.
CounterParty RiskThe risk involved if a counterparty fails to settle
CouponInterest payment made on a bond.
Coupon Rate??
Coupon StrippingDetaching the coupons from a bond and selling the coupons and the principal as individual zero coupon bonds
CouponsIssued with bearer bonds to enable the holder to claim the interest.
CoverAn abbreviation of "short cover".
Covered BondIs a bond issued by a financial institution that remains on its balance sheet.
Covered CallA short position in a call option on an asset combined with a long position in the asset.
Covered WarrantA warrant issued by a party other than the originator or issuer of the underlying asset
Covered WritingWhere an option is sold against an existing position.
Credit Default SwapAn instrument that gives the holder the right to dell a bond for its face value in the event of a default by the issuer.
Credit DerivativeA derivative whose payoff depends on the creditworthiness of the one or more entities
Credit Enhancement??
Credit RatingsA measure of the creditworthiness of a bond issue.
Credit RiskThe risk that a loss will be experienced because of the default by the counterparty in a derivatives transaction.
Credit SpreadThe interest rate spread between 2 debt issues of similar duration, maturity etc.
Credit Spread OptionOption whose payoff depends on the spread between the yields earned on two assets.
Credit Valuation AdjustmentThis is the market value of the counterparty credit-risk.
CRESTThe new UK Electronic settlement registering system introduced in July 1996.
CTDCheapest To Deliver bond
Cum DividendMeans the buyer will get the recently announced dividend.
CumulativeApplied to a Preference Share - if dividend is missed it is still owed to the holder.
Currency RiskThe risk of losses resulting from movements in currency exchange rates.
Currency Swap??
Currency Warrants??
Current Yield??
CUSIP??
Custodian??
Cyclical StockThe share prices of these companies move dramatically (up and down) relative to the economy.
CylinderName used for a collar in currency markets.
Dated Date??
DAXAn index of 30 top German shares traded on the Frankfurt exchange.
Day CountA convention used for quoting interest rates.
Day TradeA position opened and closed on the same day.
Dealing SpreadThe difference between a trader's bid and offer price.
DebentureA long-term bond issues by a UK company and secured on fixed assets.
Debt ConvertibleBond which can be converted by an investor into another bond with a different interest rate or maturity
Deep Discount BondThis is a bond with issue price significanly below maturity price, due to lack of coupon or a coupon below the market rate.
Default??
Defensive StockThe share prices of these companies does not move dramatically (up and down) relative to the economy.
Deferred Payment OptionAn option where the price paid is deferred until the end of the option's life.
Deferred SwapAn agreement to enter into a swap at some time in the future.
Delivery??
DeltaThe rate of change of the price of a derivative with the price of the underlying asset.
Delta HedgingA hedging scheme that is designed to make the price of a portfolio of derivatives insensitive to small changes in the price of the underlying asset.
Delta Neutral PortfolioA portfolio with a delta of zero so that there is no sensitivity to small changes in the price of the underlying asset.
Depository ReceiptCertificates which represent ownership of a given number of company's shares which can be listed and traded separately from the underlying shares (eg ADRs and GDR)
DepreciationAn accounting term which allows for the run-down in values of a company's assets.
DerivativesAn instrument whose price depends on, or is derived from, the price of another asset.
DevaluationTerm usually applies to currencies, which means simply a one-off loss in value (fall in price) of the currency concerbed.
Diagonal SpreadA position in two calls where both the strike prices and times to maturity are different (this can also be created with put options).
Differential SwapA swap where a floating rate in one currency is exchanged for a floating rate in another currency and both rates are applied to the same principal.
DilutionThe reduction in earnings per share caused by the creation of new shares.
Dirty PriceBond prices including the accrued interest element.
DiscountThe margin by which the purchase price is cheaper than the redemption price
Discount Bondsee Zero-coupon bond
Discount BrokerA broker who offers a no-frills, dealing-only service for a cheap price.
Discount HouseTakes the liquid money of the banking system and uses it to discount bills of exchange but Treasury Bills, etc.
Discount InstrumentAn instrument such as a Treasury Bill that provides no coupon.
Discount Margin??
Discount RateThe annualised dollar return on a Treasury Bill or similar instrument expressed as percentage of the final face value.
DiscountingBuying / Selling a security at less than face value.
DisintermediationDirect market borrowing or lending by companies without going through a bank.
DividendA cash payment made to the owner of a stock (or equity)
Dividend Paying Stock??
Dividend YieldThe annual percentage return on a share price represented by the current dividend - usually gross.
Down-and-In OptionAn option that comes into existence when the price of the underlying asset falls to a certain level.
Down-and-Out OptionAn option that ceases to exist when the price of the underlying asset falls to a certain level.
Downside RiskThe risk of making a loss on a position or an investment.
DurationA measure of the average life of a bond.
Duration MatchingA procedure for matching the durations of assets and liabilitites in a finanical institution.
Dynamic HedgingA procedure for hedging an option position by periodically changing the position held in the underlying assets.
Early ExerciseExercising before the maturity date.
Earnings YieldEarnings per share (after tax) expressed as a percentage of share price
EBITDAEarnings Before Interest, Tax, Depreciation and Amortisation
ECGDExport Credit Guarantee Department - government agency which provides trade insurance for exporters.
ECUEuropean Currency Unit - a weighted basket of currencies to give an "average" value especially against the dollar.
EDREuro Depositary Receipt
Efficient Market TheoryTheory that asset prices reflect currently available information and fully discount expected future cash flows.
EFTPOSElectronic Funds Transfer at Point Of Sale - a scheme which allows customers to pay retailers with an electronic card. The funds are automatically debited from a client's account and credited to the retailer's.
Eligible BillBills of Exchange eligible for sale to a central bank when acting as "lender of last resort".
Embedded OptionAn option that is an inseparable part of another instrument
Empirical ResearchResearch based on historical market data.
EMSEuropean Monetary System - general agreement on monetary cooperation. Includes official use the Ecu.
EMUEuropean Monetary Union
Endowment MortgageMortgage linked to a life-assurance scheme.
EPSEarnings Per Share
EquityGeneral terms of shares.
Equity Collar??
Equity ConvertibleBond which can be converted into the shares of the issuing company.
Equity SwapA swap where the return on an equity portfolio is exchanged for either a fixed or a floating rate of interest.
ERMExchange Rate Mechanism
ETFExchange Traded Fund
EurexThe merged German-Swiss electronic derivatives exchange.
EURIBORRate at which banks in the eurozone borrow from one another.
EuroThe European single currency
EuroBondA bond issued in the Euromarket. A bond sold in a market outside that of the domestic currency
EuroClearSecondary market clearing and settlement system
EuroCurrenciesAny currency held by banks, companies or individuals outside its country of origin.
EuroCurrencyA currency that is outside the formal control of the issueing country's monetary authorities.
EuroDollarA dollar held in a bank outside the US.
EuroDollar Futures ContractA futures contract written on a Eurodollar receipt.
EuroDollar Interest RateThe interest rate on a eurodollar deposit
EuroMarketThe offshore international financial market
EuroNext??
EuroNoteShort-term security denominated in a Eurocurrency.
European OptionAn option that can only be exercised at the end of its life.
EWMAExponentially Weighted Moving Average
Exchange OptionAn option to exchange one asset for another
Exchange RateThe price at which one currency can be exchanged for another.
Exchange TradedA transaction where a specific instrument is bought or sold on a regulated exchange
Ex-Dividendsee XD-Dividend
Ex-Dividend DateWhen a dividend is declared, an ex-dividend date is specified.
Executive Stock OptionA stock option issued by a company on its own stock and given to its executives as part of their renumeration.
Exercise PriceThe price at which an option can be exercised (i.e. bought or sold).
Exotic OptionA non standard option
Exotics??
Expectations TheoryThe theory that forward interest rates equal expected future spot interest rates.
Expected Value of a VariableThe average value of the variable obtained by weighting the alternative values by their probabilities.
Expiry DateThe end of the life of the contract.
Exponential WeightingsA weightings scheme where the weight given to an observation depends on how recent it is.
Exponentially Weighted Moving Average ModelA model where exponential weighting is used to provide forecasts for a variable from histrical data.
Extendable BondA bond whose life can be extended at the option of the holder.
Extendable SwapA swap whose life can be extended at the option of one side to the contract.
FactoringBuying trade debts on a regular basis to assist cash flow - usually done by subsidiaries of banks.
Fair ValueThis is calculated as the level where the contract should trade taking into account the cost of carry.
FASBFinancial Accounting Standards Board.
Federal ReserveThe US monetary authority which plays a role similar to that of the Bank of England.
FedWireElectronic payments system between Federal Reserve banks in the US
Fill-or-KillAn order on an exchange which is either executed in its entirety at the stipulated price or cancelled.
Finance HousesInstitutions which specialise in funding hire-purchase agreements
Financial IntermediaryA bank or other financial institution that facilitates the flow of funds between different entities in the economy.
First Coupon Date??
FIXElectronic Communication Protocol
Fixed Commissions??
Fixed Exchange RatesCurrencies with set values against each other which vary only in times of crisis when one or more currencies are revalued or devalued.
Flat VolatilityThe name given to a volatility used to price a cap when the same volatility is used for each caplet.
Flat YieldThe annual percentage return on a bond taking into account the buying price, for example if £100 nominal worth of an 8% bond is bought for $50, the yield is 16%. Also called the running and interest yield (see redemption yield)
Flex OptionAn option traded on an exchange with terms that are different from the standard options traded by the exchange.
Flip Flop FRNA Floating Rate Note that has a very long final maturity or even a perpetual issue with an option to convert after a fixed period into a Short Dated FRN.
Floating Exchange RatesCurrencies whose values against each other are set by market forces.
Floating RateA loan with the interest rate varied at agreed intervals, linked to a base rate for example LIBOR
Floating Rate NoteA medium to long term debt obligation with a variable interest rate which is adjusted periodically.
FloorAn agreement with a counterparty which sets an upper limit to interest rates for the cap buyer for a stated time period.
Floor RateThe interest rate in an interest rate floor agreement.
Floor-Ceiling Agreementsee Interest Rate Collar
Floored Floaters??
FloorletOne component of a Floor
Foreign BondA bond issued in a domestic market other than its own.
Foreign Currency OptionAn option on a foreign exchange rate.
ForfaitingRaising money by selling a company's invoices
Forward ContractA contract to buy or sell a commodity or security for future delivery at a price agreed today
Forward Exchange RateThe forward price of one unit of a foreign currency
Forward MarketMarket in which currencies are traded months or years ahead.
Forward PriceThe delivery price in a forward contract that causes the contract to be worth zero.
Forward RateA rate agreed now for a future purchase or sale of a currency.
Forward Rate AgreementAgreement that a certain interest rate will apply to a certain principal amount for a certain time period in the future.
Forward Start OptionAn option designed so that it will be at the money at some point in the future.
Forward Swapsee Deferred Swap
Forward-Forward AgreementArrangement to lend or borrow a set sum at a date in the future for a set period at a set rate.
FOXLondon Futures and Options Exchange (commodities)
Fraud??
Freddie MacFederal National Mortgage Association (FNMA)
FSAFinancial Services Authority
FTSE IndexFinancial Times ?? Index that tracks the share prices of 100 leading company.
FungibleExchangeable - for example, a contract of one futures exchange and another will be identical. Can be opened in one and closed in the other exchange (or vice versa). Also used for further issues of bonds on exactly the same terms (and accrued interest) as those issued earlier.
FuturesInstruments which give the buyer the right to purchase a commodity at a future date
Futures ContractSimilar to forward but not expected to go to delivery as the position will be closed out with the opposite contract.
Futures OptionAn option on a futures contract.
Futures PriceThe delivery price currently applicable to a futures contract
GammaThe rate of change of delta with respect to the underlying
Gamma Neutral PortfolioA portfolio with a gamma of zero
GearingCarrying out financial transactions on the basis of a deposit or borrowed money (US term is leverage).
Gearing RatioRatio of equity and long term debt.
General Obligation Bonds??
Gilt Edged SecurityA bond issued by the UK government.
Gilt Warrants??
GiltsBonds issued by the UK government.
Global BondInternational bond placed at the same time in the euro and one or more domestic markets ???
Global Depository ReceiptA form in which foreign shares can be traded outside their domestic markets.
GlobalisationThe movement to integration of world markets regardless of national boundaries
GLOBEX??
Golden HelloPayment made to an employee of a rival firm to entice him or her to transfer.
GoodwillAn accounting term which describes the intangible assets of a company (e.g. brand names, skillful staff etc)
GreeksHedge parameters such as delta, gamma, vega, theta and rho
Gross Redemption YieldThe return which an investor will receive on a bond, allowing for both interest and capital growth as a percentage of the bonds price.
Guaranteed BondBonds that have their interest, principal or both guaranteed by another corporation.
Hard Currencies??
Harrison and Kreps??
HedgeA trade designed to reduce risk
Hedge FundA fund which takes both long and short positions
Hedge RatioThe ratio of the size of a position in a hedging instrument to the size of the position being hedged.
HedgerA person who enters into hedging trades.
HedgingA technique for limiting risk.
High Yield Bonds??
Historic VolatilityA volatility estimated from historical data
Historical DividendThe total dividend the company paid for its last financial year
Historical SimulationA simulation based on historical data
Holiday CalendarCalendar defining which days are holidays for the purpose of determing payment dates in a swap.
Hybrid Products??
IDBsee Inter-Dealer Broker
IMPAInternational Primary Markets Association (for Eurobond dealers)
Implied DistributionA distribution for a future asset price implied from option prices
Implied VolatilityVolatility implied from an option price using the Black-Scholes or a similar model
Implied Volatility Trees??
Index Amortizing Swapsee Indexed Principal Swap
Index ArbitrageAn arbitrage involving a position in the stocks comprising a stock index and a position in a futures contract on the stock index.
Index FuturesA futures contract on a stock index or other index.
Index OptionAn option contract on a stock index or other index
Indexed Principal SwapA swap where the principal declines over time.
Indiceslike the S&P 500, CAC 40, FTSE 100 etc
Ineligible Bank BillsBills of exchange accepted by a bank, but one not on the central bank's list
Inflationwhether a given rate of interest represents good value or not will depend on the rate of inflation
Initial MarginInitial deposit required by a Clearing House (as opposed to variation margin)
Initial Public OfferingAmerican term for Offer for Sale
Insider DealingThe buying and selling of securities by someone with inside information.
InsolventUnable to meet your financial obligations/debts.
InsuranceIf contrasted with assurance, this is the business other than life assurance
Insured Bonds??
InterBank MarketBank lending and borrowing to one another
Inter-Dealer BrokerAn offical broker in the government securities (gilts and treasury bills) market.
InterestA payment made in return for the use of money.
Interest OnlyA mortgage backed security where the holder receives only interest cash flows on the underlying mortgage pool.
Interest Rate Cap??
Interest Rate CollarA combination to an interest-rate cap and an interest rate floor
Interest Rate DerivativeA derivative whose payoffs are dependend on future interest rates.
Interest Rate FloorAn option that provides a payoff when an interest rate is below a certain level.
Interest Rate OptionAn option where the payoff is dependent on the level of interest rates
Interest Rate SwapAn exchange of a fixed rate of interest on a certain notional principa for a floating rate of interest on the same notional principal.
Interest YieldFlat Yield
International BondBond issued by a borrower in a foreign country
International Monetary FundSupranatural organisation which plays an important role in troubled economies ??
InternationalisationGlobalisation
In-The-Money OptionEither - a call option where the asset price is greater than the strike price or - a put option where the asset price is less than the strike price.
Intrinsic ValueThe amount by which a call option exercise price is below the market price (or a put option exercise price is above).
Inverted MarketA market where the futures price decreases with maturity.
Investment AssetAn asset held by at least some individuals for investment purposes.
Investment Grade??
Investment TrustA company whose whole business is running a wide portfolio of shares. A "closed-ended" fund.
Iron ButterflyA short straddle combined with a long strangle on the same underlying and with the same time to expiry.
IrredeemablePerpetual
ISDAInternational Securities and Derivatives Association
Issue by ProspectusMethod of selling shares in a company.
Issuer??
Issuer Warrant??
IssuingOffering a security in the market in the first instance, primary market
Joint StockHaving shareholders
Junk BondSpecifically bonds with rating of BB or less. Generally high risk, high yield bonds
Kappasee Vega
Ladder OptionWhenever the underlying hits a "rung" or threshold price level the strike is reset and gains to that point cannot be lost.
LagThe time between making the actual trade and settling
Lamdasee Vega
LCELondon Commodity Exchange - cocoa, coffee, sugar, etc Merged with LIFFE in 1996
LDC??
Lead ManagerBank(s) taking a key role in a syndicated loan or issue of securities like eurobonds
LEAPSLong-term Equity Anticipation Securities - These are relatively long-term options on individual stocks or stock indices.
LeasingA kind of rental agreement whereby companies purchase land or equipment and pay for it by instalments.
Letter of CreditA method of financing a trade
LeverageAmerican term for gearing or making a small amount of money go a long way
LiabilityThe side of the bank's balance sheet dealing with borrowings - that is deposits, formal loans to others. Also share capital.
LIBIDLondon Interbank Bid Rate
LIBORLondon Interbank Offered Rate most common maturity is 3 months
LIBOR CurveLIBOR zero-coupon interest rates as a function of maturity.
LIBOR-In-Arrears SwapSwap where the LIBOR rate observed on a date is paid on that date rather than one accrual period later.
Life AssuranceA form of saving whereby individuals invest a small monthly premium in return for a much larger sum later on.
Life InsuranceA scheme whereby individuals pay a premium to a company which guarantees to pay their dependents a lump sum in the veent of death.
LIFFELondon International Financial Futures Exchange.
LIMEANAverage of the LIBOR and LIBID rates
Limit MoveThe maximum price move permitted by the exchange in a single trading session.
Limit OrderAn order that can be executed only at a specified price or one more favourable to the investor.
LiquidityThis is how quickly would the lender get their money back. The longer the notice period the higher the interest rate
Liquidity Preference TheoryA theory leading to the conclusion that forward interest rates are above expected future spot interest rates.
Liquidity PremiumThe amount that forward interest rates exceed expected future spot interest rate.
Liquidity RatioUsually a percentage relationship between a banks liquid assets and its eligible liabilities.
Liquidity RiskThe risk that trading in an asset dries up and prices cannot be found or are subject to sharp fluctuations.
Liquidity TheoryThe principle that investors will demand a greater reward for investing their money for longer periods of time.
Lloyds of LondonThe insurance market
LMELondon Metal Exchange
Loan??
Local Currency??
Local Market Products??
LocalsTraders dealing for themselves as speculators
London Clearing HouseThe main operating company of ICCH
LongTo be long in shares, bonds or foreign exchange is it own more than you have sold
Long Bond??
Long HedgeA hedge involving a long futures position
Long Only Fundrelative to an underlying index - constrained by index weights
Long PositionThe agreement to buy
Long Protection??
Long Short FundLong short portfolios are infinitely riskier than long only because losses on short-positions are unlimited.
Lookback Option??
LOROAlternative form of Vostro
LYONLiquid Yield Option Note
Maintenance MarginWhen the balance in a traders margin account falls below the maintenance margin level the trader receives a margin call requiring the account to be topped up to the intial margin level.
Making a MarketBuying or selling a financial instrument no matter what the market conditions are.
Managing AgentRun and administer Lloyds syndicates on behalf of the names
Mandatory Liquid AssetThe charge for a sterling loan in the UK to cover non-interest bearing deposits at the Bank of England
MarginThe deposit required by clearing houses
Margin CallA request for extra margin when the balance in the margin account falls below the maintenance margin level.
Mark to MarketThe practice of revaluing an instrument to reflect the current values of the relevant market variables.
Market MakerThe dealers in stocks and shares as principals - that is taking the risk in their own name
Market ModelA model most commonly used by traders.
Market Neutral Portfolio??
Market Segmentation TheoryA theory that short interest rates are determined independently of long interest rates by the market.
Matador BondPeseta bonds issued in Spain by non residents
MaturityThis is when the lender expects to be paid
Maturity DateThe end of the life of the contract.
Mean ReversionThe tendency of a market variable (such as an interest rate) to revert back to some long-run average level.
Medium-Term NotesA flexible facility to issue notes of varying maturity, varying currency and either fixed or floating - all within one set of legal documentation
Merchant BanksUK Term for an Investment Bank
Minimum Lending RateThe rate at which the Bank of England will lend to discount houses. Only published as an "official" rate in emergencies, for example when the UK joined the ERM and September 1992 when there was an ERM crisis.
Modified DurationA modification to the standard duration measure so that it more accurately describes the relationship between proportional changes in a bond price and absolute changes in its yield. The modification takes account for the compounding frequency with which the yield is quoted.
Money BrokerIntermediary putting borrowers in touch with lenders for a small commission
Money MarketThe market for money instruments with a maturity of less than one year.
Money-at-CallMoney lent overnight It can be recalled in the morning.
Monte Carlo Simulation??
Mortgage Backed SecuritiesDebt security backed by a pool of mortgages.
Multiple Option FacilityA revolving facility from a syndicate of banks permitting the raising of finance with various options - bank loan, bankers acceptance or commercial paper.
Municipal BondsMunicipal bonds are issued by state, county, or city governments.
MutualA bank or insurance company not a public company but owned by its members
Mutual FundsGeneral name for pooled funds, such as investment trusts and unit trusts
Abandon Option
An option holder chooses not to exercise their option
Absolute Risk
The volatility of total returns
Acceptance
Short-term debt instruments, drawn on a bank for future payment
Acceptance House
Guarantees payment of trade bills used to finance trade deals and goods in shipment
Accepting
Signing a Bill of Exchange signifying an agreement to pay. Subsequent or alternative signature by a bank virtually guarantees payment.
Account
??
Accreted Value
??
Accreting Swap
A swap in which the principal increases in each time period.
Accrual Swap
An interest rate swap where interest on one side accrues only when a certain condition is met.
Accrued Interest
Interest that has been earned but not yet paid
Actuary
A statistician who calculates risk
Administrator
An Administrator is responsible for ensuring the efficient day-to-day operation of a fund including the accounting.
Alpha
A measure of performance on a risk adjusted basis.
Alternative Investment Market
A market dedicated to smaller companies.
Alternative Minimum Tax
??
American Depository Receipt
The form in which foreign shares can be traded in the US without a formal listing.
American Option
An option that can be exercises at any time during its life.
Amortisation
Repayment of the principal on a loan or bond installments over a period of time.
Amortising
??
Amortising Swap
A swap where the notional principal decreases in a predetermined way as time passes.
Annual Percentage Rate
Used to describe the true cost of the money borrowed on mortgages, loans and credit cards.
Annual Yield
??
Annuity
Something that pays regular cash flows at fixed periods over a given period of time.
APACS
Controlling cheque clearing, BACS and CHAPS in the UK
Arbitrage
Taking advantage of an anomaly in prices or rates in different markets.
Arbitrageur
A person who engages in arbitrage opportunities.
Article 65
Article for the Japanese Financial Code - prevents commercial banks from engaging in some investment banking
Asian Option
An option with a payoff dependent on the average price of an underlying asset during a specified period.
Ask Price
The price that a dealer is offering to sell a security.
Ask Rate
Offer Rate
Asset Backed Securities
??
Asset Pricing
??
Asset-Or-Nothing Call Option
An option that provides a payoff equal to the asset price if the asset price is above the strike price and zero otherwise.
Asset-Or-Nothing Put Option
An option that provides a payoff equal to the asset price if the asset price is below the strike price and zero otherwise.
Assets
The side of the balance sheet dealing with lending
Assurance
The business of life insurance and pensions
As-You-Like-It Option
Chooser Option
At-Best Order
An order to a broker to buy and or sell a contract at the best price available.
At-The-Money Option
An option in which the strike price equals the price of the underlying asset.
Auction Market Preferred Stock
??
Audit
Inspection of a companys books by independent accountants
Automated Clearing House
??
Automated Pit Trading
A computerised trading system used at the LIFFE in addition to open cry
Automatic Exercise
When the clearing house automatically exercises in-the-money options at expiry.
Average-Price Call Option
An option giving a payoff equal to the greater of zero and the amount by which the average price of the asset exceeds the strike price.
Average-Price Put Option
An option giving a payoff equal to the greater of zero and the amount by which the strike price axceeds the average price of the asset.
Average-Strike Option
An option that provides a payoff dependent on the difference between the final asset price and the average asset price.
Back Office
Accounting and Settlements
Back-Testing
Testing a value-at-risk or other model using historic data.
Backwardation
When the spot or near term price of a commodity is higher than the forward rate.
Backwards Induction
A procedure for working from the end of a tree to its neginning in order to value an option.
Bank Bill
A Bill of Exchange accepted by a bank on the central bank's "eligible" list. The central bank itself would rediscount a bill of this type. Also called an Eligible Bill
Bankers Acceptance
Bills of exchange acceppted by large banks
Bankers Automated Clearing Services
??
Barrier Option
An option whose payoff depends on whether the path of the underlying asset has reached a barrier (i.e. a certain predetermined level).
Base Currency
??
Base Rate
??
Basis
The difference between the spot price and the futures price of the commodity.
Basis Point
One hundredth of a percent (0.01%)
Basis Risk
When relationships between products used to hedge each other change or break down
Basis Swap
Swap where cash flows determined by one floating reference rate are exchanged for cash flows determined by another floating reference rate.
Basket Option
An option that provides a payoff dependent on the value of a portfolio of assets.
Bear
A pessimist - selling securities in the belief of a falling stock and bond market, hence a "Bear" market
Bear Market
A falling market
Bear Spread
A short position in a put option with a strike price X1 combined with a long position in a put option with strike price X2 where X2 > X1. (A bear spread can also be created with call options).
Bearer Bond
A bond payable to whoever is in possession - that is no central register
Bed and Breakfast
Selling shares one day and buying them back the next - at the end of the tax year to maximise Capital Gains Tax allowance or claim losses against profits
Bermudan Option
An option that can be exercides on specified dates during its life.
Beta
A measure of systematic risk of an asset.
Bid Price
The price that a dealer is prepared to pay for an asset.
Bid Rate
Rate of interest offered for deposits in banking. Generally the dealer's buying price for equities, bonds, foreign exchange etc
Bid-Ask Spread
The amount by which the ask price exceeds the bid.
Bid-Offer Spread
same as Bid-Ask Spread
Big Bang
Deregulation of the UK Stock Market 27 October 1986. New regulation and an automated price quotation system. The day when minimum commissions were abolished
Bill
A short-term (3 months or so) instrument which pays interest to the holder and can be traded. Some bills do not pay interest but are issued at a discount to their face value.
Bill of Exchange
A signed promise to pay by a receiver of goods or services and kept by the supplier.
Binary Option
Option with discontinuous payoff; for example a cash-or-nothing option or an asset-or-nothing option.
Binomial Model
A model where the price of an asset is monitored over successive short periods of time. In each short period of time it is assumed that only two price movements are possible.
Binomial Tree
A tree that represents how an asset price can evolve under the binomial model.
Blacks Approximation
An approximate procedure developed by Fischer Black for valuing a call option on a dividend paying stock.
Blacks Model
An extension of the Black Scholes model for valuing European Options on futures contracts.
Black-Scholes Model
The original European Stock Option pricing model written by Black and Schole in 1972
Blue Chip
Large established companies. The most highly regarded shares.
Board Washing
The individual who handles limit orders in some exchanges. The board broker makes information on outstanding limit orders available to other traders.
BOBL
Short name for the short-term German government bond contract on the DTB
Bond
An instrument that pays a fixed amount of interest to the holder.
Bond Factor
??
Bond Ladder
??
Bond Option
An option where a bond is the underlying asset.
Bond Provisions
??
Bond Stripping
??
Bond Washing
Selling a bond prior to the ex dividend date to take a capital gain instead of receiving income.
Bonos
Spanish Government Bonds
Bonus Issue
A free issue of shares to existing shareholders
Bonus Value
??
Book Entry
??
Book Value
The value of an asset as entered in a company's balance sheet
Bootstrap Method
A procedure for calculating the zero-coupon yield curver from market data.
Boston Option
see Deferred payment option
Break Forward
see Deferred payment option
Broker
An individual (or firm) that acts as an intermediary putting buyers and sellers together for a brokerage fee.
Building Society
Institutions whose primary function is to accept the savings of small investors and channel them to house buyers in return for the security of a mortgage on the property.
Bull
An optimist, buying securities in the belief of a rising (stock and bond) market, hence a bull market
Bull Market
A rising market
Bull Spread
Buying a call option (a long position in a call) with a strike X1 combined with selling a call (short position in a call) with a strike price X2 where X2>X1 (a bull spread can also be created using put options).
Bullet Repayment
The whole of a bond or bank loan is repaid at maturity (instead of staged payments in the last few years)
Bundesbank
The German Central Bank
Butterfly Spread
A position that is created by taking a long position in a call with strike price X1, a long position in a call with strike price X3 and a short position in two calls with strike price X2 where X3 > X2 > X1 and X2 = 0.5(X1 + X2).
Cable
Shorthand for dollar/sterling rate
Calendar Spread
A position that is created by taking a long position in a call option that matures at one time and a short position in a similar call option that matures at a different time.
Call Date
??
Call Money
Money lent by banks to other banks or discount houses which can be recalled at noon each day
Call Option
An option to buy an asset at a certain price on a certain date some time in the future.
Call Protection
??
Call Risk
??
Call Schedule
??
Callable Bond
The issuer has the right to redeem the bond at a specified earlier date than the one orginally fixed as the final maturity.
Callable Credit Products
??
Cancelable Swap
Swaps that can be cancelled by one side of prespecified dates.
Cap
An agreement with a counterparty which sets an upper limit to interest rates for the cap buyer for a stated time period.
Cap Rate
The rate determining payoffs in an interest rate cap
Capital Adequacy
The need to maintain adequate capital to cover counterparty risk and position risk
Capital Asset Pricing Model
A model relating the expected return on an asset to its beta.
Capital Gains Tax
A tax on the profit when you sell (or 'dispose of') something (an 'asset') that's increased in value.
Capital Growth Bond
Issue price at par (100%) with redemption at a multiple of that amount.
Capital Markets
The market for medium and long term securities
Capital Ratio
The ratio of a banks primary capital to a weighted value of assets
Capitalisation
Market capitalisation of a company is the number of shares multiplied by the current price
Capitalisation Issue
An issue where funds from a company's reserves are converted into shares and offered free of charge to shareholders.
Caplet
One component on an interest rate cap
Cash Flow Mapping
A procedure for representing an instrument as a portfolio of zero-coupon bonds for the purpose of calculating value at risk.
Cash Ratio
The proportion of a bank's liabilities which it considers prudent to keep in the form of cash.
Cash Settlement
Where the product is settled at expiry, based on the differential between the fixed/guaranteed price and the underlying instrument. Procedure for settling a futures contract in cash rather than by delivering the underlying asset.
Cash-Or-Nothing Call Option
An option that provides a fixed predetermined payoff if the final asset price is above the strike price and zero otherwise.
Cash-Or-Nothing Put Option
An option that provides a fixed predetermined payoff if the final asset price is below the strike price and zero otherwise.
CAT Bond
Bond where the interest, and possibly, the principal paid are reduced if a particular category of "catastrophic" insurance claims exceed a certain amount.
CDO
A security based on a mix of debt and credit risk. Different laters often referred to as tranches (or slices) each having different risk and maturities.
Central Counterparty Model
Set up by the Stock Exchange to remove credit risk when buying and selling.
Certificate of Deposit
A tradeable deposit issued by banks and building societies.
Certificates of Participation
A type of municipal bond that are often used to finance capital improvement projects or equipment.
CHAPS
Clearing House Automated Payments System - for electronic clearing of payments the same day (UK)
Cheapest-To-Deliver Bond
The bond that is cheapest to deliver in the Chicago Board of Trade bond futures contract.
Chinese Wall
A theoretical barrier between different sections of a firm to avoid fraud (i.e. conflicts of interest or insider dealing). One part of the firm may not pass sensitive information to another if it is against a client's interest.
CHIPS
Clearing House Interbank Payments - electronic bank clearing in New York
Chooser Option
An option where the holder has the right to choose whether it is call or a put at some point during its life.
CIRCUS
Combined Interest Rate and Currency Swap
Clean Price
Price of a bond not including the accrued interest element. This is the quoted price. The cash price paid for the bond (or dirty price) is calculated by adding the accrued interest to the clean price.
Clearing Bank
Banks which are part of the clearing system which significantly reduces the number of interbank payments.
Clearing House
A firm that guarantees the performance of the parties in an exchange-traded derivatives transaction. Central Body guaranteeing contracts in a traded options/futures market. Also known as clearing corporation.
Clearing Margin
A margin posted by a member of a clearing house.
CLO
Collateralized Loan Obligation - is a single security backed by a pool of debt.
Closing Out
For futures market - taking the opposite contract for example having previously bought 100 tons of cocoa for June delivery, the buyer now sells 100 tons for the same delivery (or vice-versa)
CME
Chicago Mercantile Exchange
CMO
Collaterized Mortgage Obligation - A mortgage backed security where investors are divided into classes and there are rules for determining how principal repayments are channeled to the classes.
Collar
see Interest Rate Collar
Collateral
??
Collaterised
??
Combination
A position involving both calls and puts on the same underlying asset.
Commercial Banking
The classic banking business of taking deposits and lending money, either retail or wholesale
Commerical Paper
An unsecured IOU issued by large companies and banks.
Commission Brokers
Individuals who execute trades for other people and charge a commission for doing so.
Commodity Swap
A swap where cash flows depend on the price of a commodity.
Complex Power Duals
??
Compound Option
An option on an option. The holder (buyer) has an option to purchase another option on a pre-set date at a pre-agreed premium.
Compounding Frequency
This defines how an interest rate is measured.
Compounding Swap
Swap where interest compounds instead of being paid.
Concert Party
A group acting together (secretly) in a takeover situation for example three people each buy 2.9% of shares to avoid no longer being able to hide behind nominee status.
Confirmation
Contract confirming verbal agreement between two parties to a trade in the over-the-counter market.
Consolidation
Reorganising share holdings so that, for example 10 shares at 10p are replaced by a one £1 nominal
Constant Maturity Swap
A swap where a swap rate is exchanged for eother a fixed rate or a floating rate on each payment date.
Constant Maturity Treasury Swap
A swap where the yield on a Treasury Bond is exchanged for either fixed rate or floating rate on each payment date.
Consumption Asset
An asset held for consumption rather than investment
Contango
A situation where the futures price is above the expected future spot price.
Continuous Compounding
A way of quoting interest rates. It is the limit as the assumed compounding interval is made smaller and smaller.
Contract for Difference
A derivative product to trade the price differential over an indefinite time period.
Contract Size
The unit of trading on a derivatives contract.
Control Variate Technique
A technique that can sometimes be used for improving the accuracy of a numerical procedure.
Convenience Yield
A measure of the benefits from ownership of an asset that are not obtained by the holder of a long futures contract on the asset.
Conversion Factor
A factor used to determine the number of bonds that must be delivered in the bond futures market.
Convertible
A convertible bond may be converted later into equity, some other bond or even a commodity
Convertible Bond
A corporate bond that can be converted into a predetermined amount of the company's equity at certain times during its life.
Convertible Rate FRN
An issue which carries the option to convert either from an initial floating rate note into a fixed rate bond or from a fixed rate bond into a floating rate note.
Convexity
A measure of the curvature in the relationship between bond prices and bond yields.
Convexity Adjustment
An overworked term. It can refer to the adjustment necessary to convert a futures interest rate to a forward interest rate.
Corporate Bond
??
Corporate Finance
The department of an investment bank dealing with takeovers, mergers and strategic advice to companies
Cost of Carry
The storage costs plus the cost of financing as asset minus the income earned on the asset.
CounterParty
The opposite side in a financial transaction.
CounterParty Risk
The risk involved if a counterparty fails to settle
Coupon
Interest payment made on a bond.
Coupon Rate
??
Coupon Stripping
Detaching the coupons from a bond and selling the coupons and the principal as individual zero coupon bonds
Coupons
Issued with bearer bonds to enable the holder to claim the interest.
Cover
An abbreviation of "short cover".
Covered Bond
Is a bond issued by a financial institution that remains on its balance sheet.
Covered Call
A short position in a call option on an asset combined with a long position in the asset.
Covered Warrant
A warrant issued by a party other than the originator or issuer of the underlying asset
Covered Writing
Where an option is sold against an existing position.
Credit Default Swap
An instrument that gives the holder the right to dell a bond for its face value in the event of a default by the issuer.
Credit Derivative
A derivative whose payoff depends on the creditworthiness of the one or more entities
Credit Enhancement
??
Credit Ratings
A measure of the creditworthiness of a bond issue.
Credit Risk
The risk that a loss will be experienced because of the default by the counterparty in a derivatives transaction.
Credit Spread
The interest rate spread between 2 debt issues of similar duration, maturity etc.
Credit Spread Option
Option whose payoff depends on the spread between the yields earned on two assets.
Credit Valuation Adjustment
This is the market value of the counterparty credit-risk.
CREST
The new UK Electronic settlement registering system introduced in July 1996.
CTD
Cheapest To Deliver bond
Cum Dividend
Means the buyer will get the recently announced dividend.
Cumulative
Applied to a Preference Share - if dividend is missed it is still owed to the holder.
Currency Risk
The risk of losses resulting from movements in currency exchange rates.
Currency Swap
??
Currency Warrants
??
Current Yield
??
CUSIP
??
Custodian
??
Cyclical Stock
The share prices of these companies move dramatically (up and down) relative to the economy.
Cylinder
Name used for a collar in currency markets.
Dated Date
??
DAX
An index of 30 top German shares traded on the Frankfurt exchange.
Day Count
A convention used for quoting interest rates.
Day Trade
A position opened and closed on the same day.
Dealing Spread
The difference between a trader's bid and offer price.
Debenture
A long-term bond issues by a UK company and secured on fixed assets.
Debt Convertible
Bond which can be converted by an investor into another bond with a different interest rate or maturity
Deep Discount Bond
This is a bond with issue price significanly below maturity price, due to lack of coupon or a coupon below the market rate.
Default
??
Defensive Stock
The share prices of these companies does not move dramatically (up and down) relative to the economy.
Deferred Payment Option
An option where the price paid is deferred until the end of the option's life.
Deferred Swap
An agreement to enter into a swap at some time in the future.
Delivery
??
Delta
The rate of change of the price of a derivative with the price of the underlying asset.
Delta Hedging
A hedging scheme that is designed to make the price of a portfolio of derivatives insensitive to small changes in the price of the underlying asset.
Delta Neutral Portfolio
A portfolio with a delta of zero so that there is no sensitivity to small changes in the price of the underlying asset.
Depository Receipt
Certificates which represent ownership of a given number of company's shares which can be listed and traded separately from the underlying shares (eg ADRs and GDR)
Depreciation
An accounting term which allows for the run-down in values of a company's assets.
Derivatives
An instrument whose price depends on, or is derived from, the price of another asset.
Devaluation
Term usually applies to currencies, which means simply a one-off loss in value (fall in price) of the currency concerbed.
Diagonal Spread
A position in two calls where both the strike prices and times to maturity are different (this can also be created with put options).
Differential Swap
A swap where a floating rate in one currency is exchanged for a floating rate in another currency and both rates are applied to the same principal.
Dilution
The reduction in earnings per share caused by the creation of new shares.
Dirty Price
Bond prices including the accrued interest element.
Discount
The margin by which the purchase price is cheaper than the redemption price
Discount Bond
see Zero-coupon bond
Discount Broker
A broker who offers a no-frills, dealing-only service for a cheap price.
Discount House
Takes the liquid money of the banking system and uses it to discount bills of exchange but Treasury Bills, etc.
Discount Instrument
An instrument such as a Treasury Bill that provides no coupon.
Discount Margin
??
Discount Rate
The annualised dollar return on a Treasury Bill or similar instrument expressed as percentage of the final face value.
Discounting
Buying / Selling a security at less than face value.
Disintermediation
Direct market borrowing or lending by companies without going through a bank.
Dividend
A cash payment made to the owner of a stock (or equity)
Dividend Paying Stock
??
Dividend Yield
The annual percentage return on a share price represented by the current dividend - usually gross.
Down-and-In Option
An option that comes into existence when the price of the underlying asset falls to a certain level.
Down-and-Out Option
An option that ceases to exist when the price of the underlying asset falls to a certain level.
Downside Risk
The risk of making a loss on a position or an investment.
Duration
A measure of the average life of a bond.
Duration Matching
A procedure for matching the durations of assets and liabilitites in a finanical institution.
Dynamic Hedging
A procedure for hedging an option position by periodically changing the position held in the underlying assets.
Early Exercise
Exercising before the maturity date.
Earnings Yield
Earnings per share (after tax) expressed as a percentage of share price
EBITDA
Earnings Before Interest, Tax, Depreciation and Amortisation
ECGD
Export Credit Guarantee Department - government agency which provides trade insurance for exporters.
ECU
European Currency Unit - a weighted basket of currencies to give an "average" value especially against the dollar.
EDR
Euro Depositary Receipt
Efficient Market Theory
Theory that asset prices reflect currently available information and fully discount expected future cash flows.
EFTPOS
Electronic Funds Transfer at Point Of Sale - a scheme which allows customers to pay retailers with an electronic card. The funds are automatically debited from a client's account and credited to the retailer's.
Eligible Bill
Bills of Exchange eligible for sale to a central bank when acting as "lender of last resort".
Embedded Option
An option that is an inseparable part of another instrument
Empirical Research
Research based on historical market data.
EMS
European Monetary System - general agreement on monetary cooperation. Includes official use the Ecu.
EMU
European Monetary Union
Endowment Mortgage
Mortgage linked to a life-assurance scheme.
EPS
Earnings Per Share
Equity
General terms of shares.
Equity Collar
??
Equity Convertible
Bond which can be converted into the shares of the issuing company.
Equity Swap
A swap where the return on an equity portfolio is exchanged for either a fixed or a floating rate of interest.
ERM
Exchange Rate Mechanism
ETF
Exchange Traded Fund
Eurex
The merged German-Swiss electronic derivatives exchange.
EURIBOR
Rate at which banks in the eurozone borrow from one another.
Euro
The European single currency
EuroBond
A bond issued in the Euromarket. A bond sold in a market outside that of the domestic currency
EuroClear
Secondary market clearing and settlement system
EuroCurrencies
Any currency held by banks, companies or individuals outside its country of origin.
EuroCurrency
A currency that is outside the formal control of the issueing country's monetary authorities.
EuroDollar
A dollar held in a bank outside the US.
EuroDollar Futures Contract
A futures contract written on a Eurodollar receipt.
EuroDollar Interest Rate
The interest rate on a eurodollar deposit
EuroMarket
The offshore international financial market
EuroNext
??
EuroNote
Short-term security denominated in a Eurocurrency.
European Option
An option that can only be exercised at the end of its life.
EWMA
Exponentially Weighted Moving Average
Exchange Option
An option to exchange one asset for another
Exchange Rate
The price at which one currency can be exchanged for another.
Exchange Traded
A transaction where a specific instrument is bought or sold on a regulated exchange
Ex-Dividend
see XD-Dividend
Ex-Dividend Date
When a dividend is declared, an ex-dividend date is specified.
Executive Stock Option
A stock option issued by a company on its own stock and given to its executives as part of their renumeration.
Exercise Price
The price at which an option can be exercised (i.e. bought or sold).
Exotic Option
A non standard option
Exotics
??
Expectations Theory
The theory that forward interest rates equal expected future spot interest rates.
Expected Value of a Variable
The average value of the variable obtained by weighting the alternative values by their probabilities.
Expiry Date
The end of the life of the contract.
Exponential Weightings
A weightings scheme where the weight given to an observation depends on how recent it is.
Exponentially Weighted Moving Average Model
A model where exponential weighting is used to provide forecasts for a variable from histrical data.
Extendable Bond
A bond whose life can be extended at the option of the holder.
Extendable Swap
A swap whose life can be extended at the option of one side to the contract.
Factoring
Buying trade debts on a regular basis to assist cash flow - usually done by subsidiaries of banks.
Fair Value
This is calculated as the level where the contract should trade taking into account the cost of carry.
FASB
Financial Accounting Standards Board.
Federal Reserve
The US monetary authority which plays a role similar to that of the Bank of England.
FedWire
Electronic payments system between Federal Reserve banks in the US
Fill-or-Kill
An order on an exchange which is either executed in its entirety at the stipulated price or cancelled.
Finance Houses
Institutions which specialise in funding hire-purchase agreements
Financial Intermediary
A bank or other financial institution that facilitates the flow of funds between different entities in the economy.
First Coupon Date
??
FIX
Electronic Communication Protocol
Fixed Commissions
??
Fixed Exchange Rates
Currencies with set values against each other which vary only in times of crisis when one or more currencies are revalued or devalued.
Flat Volatility
The name given to a volatility used to price a cap when the same volatility is used for each caplet.
Flat Yield
The annual percentage return on a bond taking into account the buying price, for example if £100 nominal worth of an 8% bond is bought for $50, the yield is 16%. Also called the running and interest yield (see redemption yield)
Flex Option
An option traded on an exchange with terms that are different from the standard options traded by the exchange.
Flip Flop FRN
A Floating Rate Note that has a very long final maturity or even a perpetual issue with an option to convert after a fixed period into a Short Dated FRN.
Floating Exchange Rates
Currencies whose values against each other are set by market forces.
Floating Rate
A loan with the interest rate varied at agreed intervals, linked to a base rate for example LIBOR
Floating Rate Note
A medium to long term debt obligation with a variable interest rate which is adjusted periodically.
Floor
An agreement with a counterparty which sets an upper limit to interest rates for the cap buyer for a stated time period.
Floor Rate
The interest rate in an interest rate floor agreement.
Floor-Ceiling Agreement
see Interest Rate Collar
Floored Floaters
??
Floorlet
One component of a Floor
Foreign Bond
A bond issued in a domestic market other than its own.
Foreign Currency Option
An option on a foreign exchange rate.
Forfaiting
Raising money by selling a company's invoices
Forward Contract
A contract to buy or sell a commodity or security for future delivery at a price agreed today
Forward Exchange Rate
The forward price of one unit of a foreign currency
Forward Market
Market in which currencies are traded months or years ahead.
Forward Price
The delivery price in a forward contract that causes the contract to be worth zero.
Forward Rate
A rate agreed now for a future purchase or sale of a currency.
Forward Rate Agreement
Agreement that a certain interest rate will apply to a certain principal amount for a certain time period in the future.
Forward Start Option
An option designed so that it will be at the money at some point in the future.
Forward Swap
see Deferred Swap
Forward-Forward Agreement
Arrangement to lend or borrow a set sum at a date in the future for a set period at a set rate.
FOX
London Futures and Options Exchange (commodities)
Fraud
??
Freddie Mac
Federal National Mortgage Association (FNMA)
FSA
Financial Services Authority
FTSE Index
Financial Times ?? Index that tracks the share prices of 100 leading company.
Fungible
Exchangeable - for example, a contract of one futures exchange and another will be identical. Can be opened in one and closed in the other exchange (or vice versa). Also used for further issues of bonds on exactly the same terms (and accrued interest) as those issued earlier.
Futures
Instruments which give the buyer the right to purchase a commodity at a future date
Futures Contract
Similar to forward but not expected to go to delivery as the position will be closed out with the opposite contract.
Futures Option
An option on a futures contract.
Futures Price
The delivery price currently applicable to a futures contract
Gamma
The rate of change of delta with respect to the underlying
Gamma Neutral Portfolio
A portfolio with a gamma of zero
Gearing
Carrying out financial transactions on the basis of a deposit or borrowed money (US term is leverage).
Gearing Ratio
Ratio of equity and long term debt.
General Obligation Bonds
??
Gilt Edged Security
A bond issued by the UK government.
Gilt Warrants
??
Gilts
Bonds issued by the UK government.
Global Bond
International bond placed at the same time in the euro and one or more domestic markets ???
Global Depository Receipt
A form in which foreign shares can be traded outside their domestic markets.
Globalisation
The movement to integration of world markets regardless of national boundaries
GLOBEX
??
Golden Hello
Payment made to an employee of a rival firm to entice him or her to transfer.
Goodwill
An accounting term which describes the intangible assets of a company (e.g. brand names, skillful staff etc)
Greeks
Hedge parameters such as delta, gamma, vega, theta and rho
Gross Redemption Yield
The return which an investor will receive on a bond, allowing for both interest and capital growth as a percentage of the bonds price.
Guaranteed Bond
Bonds that have their interest, principal or both guaranteed by another corporation.
Hard Currencies
??
Harrison and Kreps
??
Hedge
A trade designed to reduce risk
Hedge Fund
A fund which takes both long and short positions
Hedge Ratio
The ratio of the size of a position in a hedging instrument to the size of the position being hedged.
Hedger
A person who enters into hedging trades.
Hedging
A technique for limiting risk.
High Yield Bonds
??
Historic Volatility
A volatility estimated from historical data
Historical Dividend
The total dividend the company paid for its last financial year
Historical Simulation
A simulation based on historical data
Holiday Calendar
Calendar defining which days are holidays for the purpose of determing payment dates in a swap.
Hybrid Products
??
IDB
see Inter-Dealer Broker
IMPA
International Primary Markets Association (for Eurobond dealers)
Implied Distribution
A distribution for a future asset price implied from option prices
Implied Volatility
Volatility implied from an option price using the Black-Scholes or a similar model
Implied Volatility Trees
??
Index Amortizing Swap
see Indexed Principal Swap
Index Arbitrage
An arbitrage involving a position in the stocks comprising a stock index and a position in a futures contract on the stock index.
Index Futures
A futures contract on a stock index or other index.
Index Option
An option contract on a stock index or other index
Indexed Principal Swap
A swap where the principal declines over time.
Indices
like the S&P 500, CAC 40, FTSE 100 etc
Ineligible Bank Bills
Bills of exchange accepted by a bank, but one not on the central bank's list
Inflation
whether a given rate of interest represents good value or not will depend on the rate of inflation
Initial Margin
Initial deposit required by a Clearing House (as opposed to variation margin)
Initial Public Offering
American term for Offer for Sale
Insider Dealing
The buying and selling of securities by someone with inside information.
Insolvent
Unable to meet your financial obligations/debts.
Insurance
If contrasted with assurance, this is the business other than life assurance
Insured Bonds
??
InterBank Market
Bank lending and borrowing to one another
Inter-Dealer Broker
An offical broker in the government securities (gilts and treasury bills) market.
Interest
A payment made in return for the use of money.
Interest Only
A mortgage backed security where the holder receives only interest cash flows on the underlying mortgage pool.
Interest Rate Cap
??
Interest Rate Collar
A combination to an interest-rate cap and an interest rate floor
Interest Rate Derivative
A derivative whose payoffs are dependend on future interest rates.
Interest Rate Floor
An option that provides a payoff when an interest rate is below a certain level.
Interest Rate Option
An option where the payoff is dependent on the level of interest rates
Interest Rate Swap
An exchange of a fixed rate of interest on a certain notional principa for a floating rate of interest on the same notional principal.
Interest Yield
Flat Yield
International Bond
Bond issued by a borrower in a foreign country
International Monetary Fund
Supranatural organisation which plays an important role in troubled economies ??
Internationalisation
Globalisation
In-The-Money Option
Either - a call option where the asset price is greater than the strike price or - a put option where the asset price is less than the strike price.
Intrinsic Value
The amount by which a call option exercise price is below the market price (or a put option exercise price is above).
Inverted Market
A market where the futures price decreases with maturity.
Investment Asset
An asset held by at least some individuals for investment purposes.
Investment Grade
??
Investment Trust
A company whose whole business is running a wide portfolio of shares. A "closed-ended" fund.
Iron Butterfly
A short straddle combined with a long strangle on the same underlying and with the same time to expiry.
Irredeemable
Perpetual
ISDA
International Securities and Derivatives Association
Issue by Prospectus
Method of selling shares in a company.
Issuer
??
Issuer Warrant
??
Issuing
Offering a security in the market in the first instance, primary market
Joint Stock
Having shareholders
Junk Bond
Specifically bonds with rating of BB or less. Generally high risk, high yield bonds
Kappa
see Vega
Ladder Option
Whenever the underlying hits a "rung" or threshold price level the strike is reset and gains to that point cannot be lost.
Lag
The time between making the actual trade and settling
Lamda
see Vega
LCE
London Commodity Exchange - cocoa, coffee, sugar, etc Merged with LIFFE in 1996
LDC
??
Lead Manager
Bank(s) taking a key role in a syndicated loan or issue of securities like eurobonds
LEAPS
Long-term Equity Anticipation Securities - These are relatively long-term options on individual stocks or stock indices.
Leasing
A kind of rental agreement whereby companies purchase land or equipment and pay for it by instalments.
Letter of Credit
A method of financing a trade
Leverage
American term for gearing or making a small amount of money go a long way
Liability
The side of the bank's balance sheet dealing with borrowings - that is deposits, formal loans to others. Also share capital.
LIBID
London Interbank Bid Rate
LIBOR
London Interbank Offered Rate most common maturity is 3 months
LIBOR Curve
LIBOR zero-coupon interest rates as a function of maturity.
LIBOR-In-Arrears Swap
Swap where the LIBOR rate observed on a date is paid on that date rather than one accrual period later.
Life Assurance
A form of saving whereby individuals invest a small monthly premium in return for a much larger sum later on.
Life Insurance
A scheme whereby individuals pay a premium to a company which guarantees to pay their dependents a lump sum in the veent of death.
LIFFE
London International Financial Futures Exchange.
LIMEAN
Average of the LIBOR and LIBID rates
Limit Move
The maximum price move permitted by the exchange in a single trading session.
Limit Order
An order that can be executed only at a specified price or one more favourable to the investor.
Liquidity
This is how quickly would the lender get their money back. The longer the notice period the higher the interest rate
Liquidity Preference Theory
A theory leading to the conclusion that forward interest rates are above expected future spot interest rates.
Liquidity Premium
The amount that forward interest rates exceed expected future spot interest rate.
Liquidity Ratio
Usually a percentage relationship between a banks liquid assets and its eligible liabilities.
Liquidity Risk
The risk that trading in an asset dries up and prices cannot be found or are subject to sharp fluctuations.
Liquidity Theory
The principle that investors will demand a greater reward for investing their money for longer periods of time.
Lloyds of London
The insurance market
LME
London Metal Exchange
Loan
??
Local Currency
??
Local Market Products
??
Locals
Traders dealing for themselves as speculators
London Clearing House
The main operating company of ICCH
Long
To be long in shares, bonds or foreign exchange is it own more than you have sold
Long Bond
??
Long Hedge
A hedge involving a long futures position
Long Only Fund
relative to an underlying index - constrained by index weights
Long Position
The agreement to buy
Long Protection
??
Long Short Fund
Long short portfolios are infinitely riskier than long only because losses on short-positions are unlimited.
Lookback Option
??
LORO
Alternative form of Vostro
LYON
Liquid Yield Option Note
Maintenance Margin
When the balance in a traders margin account falls below the maintenance margin level the trader receives a margin call requiring the account to be topped up to the intial margin level.
Making a Market
Buying or selling a financial instrument no matter what the market conditions are.
Managing Agent
Run and administer Lloyds syndicates on behalf of the names
Mandatory Liquid Asset
The charge for a sterling loan in the UK to cover non-interest bearing deposits at the Bank of England
Margin
The deposit required by clearing houses
Margin Call
A request for extra margin when the balance in the margin account falls below the maintenance margin level.
Mark to Market
The practice of revaluing an instrument to reflect the current values of the relevant market variables.
Market Maker
The dealers in stocks and shares as principals - that is taking the risk in their own name
Market Model
A model most commonly used by traders.
Market Neutral Portfolio
??
Market Segmentation Theory
A theory that short interest rates are determined independently of long interest rates by the market.
Matador Bond
Peseta bonds issued in Spain by non residents
Maturity
This is when the lender expects to be paid
Maturity Date
The end of the life of the contract.
Mean Reversion
The tendency of a market variable (such as an interest rate) to revert back to some long-run average level.
Medium-Term Notes
A flexible facility to issue notes of varying maturity, varying currency and either fixed or floating - all within one set of legal documentation
Merchant Banks
UK Term for an Investment Bank
Minimum Lending Rate
The rate at which the Bank of England will lend to discount houses. Only published as an "official" rate in emergencies, for example when the UK joined the ERM and September 1992 when there was an ERM crisis.
Modified Duration
A modification to the standard duration measure so that it more accurately describes the relationship between proportional changes in a bond price and absolute changes in its yield. The modification takes account for the compounding frequency with which the yield is quoted.
Money Broker
Intermediary putting borrowers in touch with lenders for a small commission
Money Market
The market for money instruments with a maturity of less than one year.
Money-at-Call
Money lent overnight It can be recalled in the morning.
Monte Carlo Simulation
??
Mortgage Backed Securities
Debt security backed by a pool of mortgages.
Multiple Option Facility
A revolving facility from a syndicate of banks permitting the raising of finance with various options - bank loan, bankers acceptance or commercial paper.
Municipal Bonds
Municipal bonds are issued by state, county, or city governments.
Mutual
A bank or insurance company not a public company but owned by its members
Mutual Funds
General name for pooled funds, such as investment trusts and unit trusts

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