A means of compensating the broker of a program trade solely on the basis of commission established through bids submitted by various brokerage firms.

A means of compensating the broker of a program trade using benchmark prices for issues to be traded in determining commissions or fees.

In a Jensen Index, a factor to represent the portfolio’s performance that diverges from its beta, representing a measure of the manager’s performance.

The U.S. version of the International Depositary Receipt.

An option that may be exercised at any time up to and including the expiration date. Related: European options

For investment companies, the management fee and "other expenses," including the expenses for maintaining shareholder records, providing shareholders with financial statements, and providing custodial and accounting services. For 12b-1 funds, selling and marketing costs are included.

The simultaneous buying and selling of a security at two different prices in two different markets, resulting in profits without risk. Perfectly efficient markets present no arbitrage opportunities.

Yield curve option-pricing models.

An alternative model to the capital asset pricing model developed by Stephen Ross and based purely on arbitrage arguments.

An average of the subperiod returns, calculated by summing the subperiod returns and dividing by the number of subperiods.

The decision regarding how the institution’s funds should be distributed among the major classes of assets in which it may invest.

Securities backed by assets that are not mortgage loans. Examples include assets backed by automobile loans and credit card receivables.

Also called surplus management, the task of managing funds of a financial institution to accomplish the two goals of a financial institution: (1) to earn an adequate return on funds invested and (2) to maintain a comfortable surplus of assets beyond liabilities.

An interest rate swap used to alter the cash flow characteristics of an institution’s assets so as to provide a better match with its liabilities.

The tendency of stocks preferred by the dividend discount model to share certain equity attributes such as low price-earnings ratios, high dividends yield, high book-value ratio, or membership in a particular industry sector.

An estimation of price that uses the average or representative price or a large number of trades.

A mutual fund that charges investors a fee to sell (redeem) shares, often ranging from 4% to 6%. Some back-end load funds impose a full commission if the shares are redeemed within a designated time period after purchase, such as one year, reducing the commission the longer the investor holds the shares. The formal name for the back-end load is the contingent deferred sales charge, or CDSC.

A market condition in which futures prices are lower in the distant delivery months than in the nearest delivery month.

Also called the statement of financial condition, a summary of the assets, liabilities, and owners’ equity.

A convention used for quoting bids and offers for Treasury bills in terms of annualized yield based on a 360-day year.

A security representing a bank’s promise to repay a loan created in a commercial transaction in case the debtor fails to perform. Commonly used in international transactions.

A strategy in which the maturities of the securities included in the portfolio are concentrated at two extremes.

A method developed by BARRA, a consulting firm in Berkeley, California, which is commonly used by institutional investors applying performance attribution analysis to evaluate their money managers’ performances.

Regarding a futures contract, the difference between the cash price and the futures price observed in the market.

The uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for price risk.

The performance of a predetermined set of securities, for comparison purposes. Such sets may be based on published indexes or may be customized to suit an investment strategy.

Also called the base interest rate, the minimum interest rate that investors will demand for investing in a non-Treasury security. The yield to maturity offered on a comparable-maturity Treasury security that was most recently issued ("on-the-run").

Also called on-the-run or current coupon issues or bellwether issues. In the secondary market, the most recently auctioned Treasury issues for each maturity.

The slope of the market model for the asset, which measures the degree to which the historical returns on the asset change systematically with changes in the market portfolio’s return. Hence, beta is referred to as an index of that systematic risk due to general market conditions that cannot be diversified away.

A model for pricing call options based on arbitrage arguments that uses the stock price, the exercise price, the risk-free interest rate, the time to expiration, and the standard deviation of the stock return.

A large trading order, defined on the New York Stock Exchange as an order that consists of 10,000 shares of a given stock or that has a total market value of $200,000 or more.

An instrument in which the issuer (debtor/borrower) promises to repay to the lender/investor the amount borrowed plus interest over some specified period of time.

The contract that sets forth the promises of a corporate bond issuer and the rights of investors.

Designing a portfolio so that its performance will match the performance of some bond index.

The ratio of stockholder’s equity to the average number of common shares. Book value per share should not be thought of as an indicator of economic worth, since it reflects accounting valuation (and not necessarily market valuation).

A process of creating a theoretical spot rate curve, using one yield projection as the basis for the yield of the next maturity.

A management style that de-emphasizes the significance of economic and market cycles and focuses instead on the analysis of individual stocks.

An individual who is paid a commission for executing customer orders. Either a Floor Broker who executes orders on the floor of the Exchange, or an Upstairs Broker who handles retail customers and their orders.

A spread strategy in which an investor buys an out-of-the-money put option and finances this purchase by selling an out-of-the-money call option on the same underlying.

A guaranteed investment contract purchased with a single (one-shot) premium. Related: Window contract

A strategy in which a portfolio is constructed so that the maturities of its securities are highly concentrated at one point on the yield curve.

A passive investment strategy with no active buying and selling of stocks once the portfolio is created until the end of the investment horizon.

To cover, offset or close out a short position. Related: Evening up, Liquidation, Offset

A conditional trading order that indicates that a security may be purchased only at the designated price or lower. Related: Sell limit order

A financial analyst employed by a non-brokerage firm, typically one of the larger money management firms that purchase securities on their own accounts.

To buy at the end of the trading session at a price within the closing range.

A transaction in which an investor borrows to buy additional shares using the shares themselves as collateral.

The tendency of stocks to perform differently at different times, including such anomalies as the January effect, month-of-the-year effect, day-of-the-week effect, and holiday effect.

An option that gives the right to buy the underlying futures contract.

A date before maturity, specified at issuance, when the issuer of a bond may retire part of the bond for a specified call price.

Also called the broker loan rate, the interest rate that banks charge brokers to finance margin loans to investors. The broker charges the investor the call money rate plus a service charge. Buying on margin.

Also called a call, an option that grants the buyer the right to purchase the underlying from the writer.

The price, specified at issuance, at which the issuer of a bond may retire part of the bond at a specified call date.

A feature of some callable bonds that establishes an initial period when the bonds may not be called.

An embedded option granting a bond issuer the right to buy back all or part of the issue prior to maturity.

The combination of cash flow uncertainty and reinvestment risk introduced by a call provision.

The market for trading long-term debt instruments (those that mature in more than one year).

The line defined by every combination of the risk-free asset and the market portfolio.

A method of constructing a replicating portfolio in which the manager purchases a number of the largest-capitalized names in the index stock in proportion to their capitalization.

Also called financial leverage ratios, ratios that compare debt to total capitalization and thus reflect the extent to which a corporation is trading on its equity. These ratios can be interpreted only in the context of the stability of industry and company earnings and cash flow.

Recorded in asset accounts and then depreciated or amortized, as is appropriate for expenditures for items with useful lives greater than one year.

A loose quantity term sometimes used to describe a contract, e.g., "a car of bellies". Derived from the fact that quantities of the product specified in a contract used to correspond closely to the capacity of a railroad car.

Temporary investments of currently excess cash in short-term, high-quality investment media such as Treasury bills and bankers acceptances.

Also called spot markets, markets that involve the immediate delivery of a security or instrument. Related: Derivative markets

Futures contracts, such as stock index futures, which settle for cash, not involving the delivery of the underlying.

Also called a time deposit, a certificate issued by a bank or thrift that indicates a specified sum of money has been deposited at the issuing depository institution. A CD bears a maturity date and a specified interest rate, and can be issued in any denomination.

The Commodity Futures Trading Commission, the federal agency created by Congress to regulate futures trading. The Commodity Exchange Act of 1974 became effective April 21, 1975. Previously, futures trading had been regulated by the Commodity Exchange Authority of the USDA.

The market model applied to a single security. The slope of the line is a security’s beta.

The acceptable Treasury security with the highest implied repo rate, the rate that a seller of a futures contract can earn by buying an issue and then delivering it at the settlement date.

An adjunct to a futures exchange through which transactions executed on the floor of the exchange are settled using a process of matching purchases and sales. A clearing organization is also charged with the proper conduct of delivery procedures and the adequate financing of the entire operation.

A member firm of the Clearing House. Each Clearing Member must also be a member of the exchange. Not all members of the Exchange, however, are members of the clearing organization. All trades of a non-clearing member must be registered with and eventually settled through a Clearing Member.

The period at the end of the trading session. Sometimes used to refer to closing price. Opening, the

An investment company that sells shares like any other corporation and usually does not redeem its shares. A publicly traded fund sold on stock exchanges or over the counter that may trade above or below its net asset value. Open-end fund.

Also known as the range. The high and low prices, or bids and offers, recorded during the period designated as the official close. Related: Settlement price

A statistical technique that identifies clusters of stocks whose returns are highly correlated within each cluster and relatively uncorrelated between clusters. Cluster analysis has identified groupings such as growth, cyclical, stable, and energy stocks.

A strategy in which a put and a call on the same underlying stock with the same strike price and expiration are either both bought or both sold. Related: Straddle

Short-term unsecured promissory notes issued by a corporation. The maturity of commercial paper is typically less than 270 days; the most common maturity range is 30 to 50 days or less.

Also known as round-turn. The one-time fee normally charged by a broker to a customer when a futures or options position is liquidated either by offset or delivery. Related: Offset, Delivery

A firm which buys and sells futures contracts for customer accounts. Related: Futures commission merchant, Omnibus account

A trader is said to have a commitment when he assumes the obligation to accept or make delivery on a futures contract. Related: Open interest

A convertible security that is traded like an equity issue because the optioned common stock is trading high.

A market condition in which futures prices are higher in the distant delivery months.

A term of reference describing a unit of trading for a financial or commodity future. Also, the actual bilateral agreement between the buyer and seller of a transaction as defined by an exchange.

The month in which futures contracts may be satisfied by making or accepting a delivery. Related: Delivery month contrarians also called value managers, those who assemble portfolios with relatively lower betas, lower price-book and P/E ratios and higher dividend yields, seeing value where others do not.

Rules set by the Chicago Board of Trade for determining the invoice price of each acceptable deliverable Treasury issue against the Treasury bond futures contract.

The number of shares of common stock that the security holder will receive from exercising the call option of a convertible security.

The risk that the other party to an agreement will default. In an options contract, the risk to the option buyer that the option writer will not buy or sell the underlying as agreed.

The periodic interest payment made to the bondholders during the life of the bond.

The rate of interest that, when multiplied by the par value, indicates the dollar value of the coupon payment.

A strategy that involves writing a call option on securities that the investor owns in his or her portfolio. See covered or hedge option strategies.

Strategies that involve a position in an option as well as a position in the underlying stock, designed so that one position will help offset any unfavorable price movement in the other, including covered call writing and protective put buying. Related: Naked strategies

The practice of hedging with a futures contract that is different from the underlying being hedged.

A benchmark that is designed to meet a client’s requirements and long term objectives.

An order that is placed for execution, if possible, during only one trading session. If the order cannot be executed that day, it is automatically canceled.

Refers to establishing and liquidating the same position or positions within one day’s trading.

An entity that stands ready and willing to buy a security for its own account (at its bid price) or sell from its own account (at its ask price).

Over-the-counter options, such as those offered by government and mortgage backed securities dealers.

An asset requiring fixed dollar payments, such as a government or corporate bond.

Also referred to as credit risk (as gauged by commercial rating companies), the risk that an issuer of a bond may be unable to make timely principal and interest payments.

The most distant months of a futures contract. Related: Nearby deferred-interest bond. A bond that sells at a discount and does not pay interest for an initial period, typically from three to seven years. Compare step-up bond and payment-in-kind bond.

The tender and receipt of an actual commodity or financial instrument in settlement of a futures contract.

The written notice given by the seller of his intention to make delivery against an open, short futures position on a particular date. Related: Notice day

The options available to the seller of an interest rate futures contract, including the quality option, the timing option, and the wild card option. Delivery options make the buyer uncertain of which Treasury bond will be delivered or when it will be delivered.

Those points designated by futures exchanges at which the financial instrument or commodity covered by a futures contract may be delivered in fulfillment of such contract.

The price fixed by the Clearing house at which deliveries on futures are in invoiced; also the price at which the futures contract is settled when deliveries are made.

Also called the hedge ratio, the ratio of the change in price of a call option to the change in price of the underlying stock.

Contracts such as options and futures whose price is derived from the price of the underlying financial asset.

Markets for derivative instruments.

A conception of the way a stock’s price changes that assumes that the price takes on all intermediate values.

Referring to the selling price of a bond, a price below its par value. Related: Premium

The interest rate that the Federal Reserve charges a bank to borrow funds when a bank is temporarily short of funds. Collateral is necessary to borrow, and such borrowing is quite limited because the Fed views it as a privilege to be used to meet short-term liquidity needs, and not a device to increase earnings.

Accounts over which an individual or organization, other than the person in whose name the account is carried, exercises trading authority or control.

The cash yield of a stock or stock index, used in determining the net financing cost for a stock index future contract.

Eurobonds that pay coupon interest in one currency but pay the principal in a different currency.

A common gauge of the price sensitivity of an asset or portfolio to a change in interest rates.

An asset allocation strategy in which the asset mix is mechanistically shifted in response to changing market conditions, as in a portfolio insurance strategy, for example.

A strategy that involves rebalancing hedge positions as market conditions change; a strategy that seeks to insure the value of a portfolio using a synthetic put option.

Earnings calculated by dividing the earnings available to common stock holders by the weighted average number of common shares outstanding over the year for which the calculation takes place.

For an entity, the difference between the market value of all its assets and the market value of its liabilities.

The duration calculated using the approximate duration formula for a bond with an embedded option, reflecting the expected change in cash flow caused by the option.

A portfolio that provides the greatest expected return for a given level of risk, or equivalently, the lowest risk for a given expected return.

An option that is part of the structure of a bond, as opposed to a bare option, which trades separately from any underlying security.

Also called indexing plus, an indexing strategy whose objective is to exceed the total return performance of the index.

The slope of the capital market line (CML). Since the CML represents the return offered to compensate for a perceived level of risk, each point on the line is a balanced market condition, or equilibrium. The slope of the line determines the additional return needed to compensate for a unit change in risk.

The residual dollar value of a futures trading account, assuming its liquidation at the going market price.

The simultaneous purchase of an equity floor and sale of an equity cap.

An agreement in which one party agrees to pay the other at specific time periods if a specific stock market benchmark is less than a predetermined level.

A swap in which the cash flows that are exchanged are based on the total return on some stock market index and an interest rate (either a fixed rate or a floating rate). Related: Interest rate swap

A bond that is (1) underwritten by an international syndicate, (2) offered at issuance simultaneously to investors in a number of countries, and (3) issued outside the jurisdiction of any single country.

Securities sold in the Euromarket. That is, securities initially sold to investors simultaneously in several national markets by an international syndicate.

Buying or selling to offset an existing market position. Related: Buy in, Liquidation, Offset

The risk that the ability of an issuer to make interest and principal payments will change because of (1) a natural or industrial accident or some regulatory change or (2) a takeover or corporate restructuring.

Also called currency risk, the risk of an investment’s value changing because of currency exchange rates.

A security that grants the security holder the right to exchange the security for the common stock of a firm other than the issuer of the security.

The difference between the execution price of a security and the price that would have existed in the absence of a trade, which can be further divided into market impact costs and market timing costs.

The conversion of the option by the holder into the appropriate long or short underlying futures contract.

The price at which the underlying future or options contract may be bought or sold.

Theories including the pure expectations theory, the liquidity theory of the term structure, and the preferred habitat theory, which share a hypothesis about the behavior of short-term forward rates and also assume that the forward rates in current long-term contracts are closely related to the market’s expectations about future short-term rates. These three theories differ, however, on whether other factors also affect forward rates, and how.

The return expected on a risky asset based on a probability distribution for the possible rates of return.

Also referred to as the international market, the offshore market, or, more popularly, the Euromarket, the mechanism for trading securities that (1) at issuance are offered simultaneously to investors in a number of countries and (2) are issued outside the jurisdiction of any single country. Related: Internal market

The equilibrium price for futures contracts. Also called the theoretical futures price.

Deposits held in reserve for depository institutions at their district Federal Reserve Bank.

The market where banks can borrow or lend reserves, allowing banks temporarily short of their required reserves to borrow reserves from banks that have excess reserves.

A trading order that is canceled unless executed within a designated time period. Related: Open order

The percentage by which the price of a security must change in order to trigger its purchase or sale.

An organized institutional structure or mechanism for creating and exchanging financial assets.

The risk that the cash flow of an issuer will not be adequate to meet its financial obligations.

A method of valuing the costs of goods sold that uses the cost of the oldest item in inventory first.

The first day, varying by contracts and exchanges, on which notices of intent to deliver actual financial instruments or physical commodities against futures are authorized.

Also called a busted convertible, a convertible security that is trading like a straight security because the optioned common stock is trading low.

Assets that pay a fixed-dollar amount, such as bonds and preferred stock.

In an interest rate swap the counterparty who pays a fixed rate, usually in exchange for a floating-rate payment.

A change in the yield curve where the spread between the yield on a long-term and short-term Treasury has decreased. Compare steepening of the yield curve and butterfly shift.

A guaranteed investment contract where the crediting rate is tied to some variable ("floating") interest rate benchmark, such as a specific-maturity Treasury yield.

In an interest rate swap, the counterparty who pays a rate based on a reference rate, usually in exchange for a fixed-rate payment

A member who is paid a fee for executing orders for clearing members of their customers. A floor broker executing customer orders must be licensed by the CFTC.

A member who generally trades only for his own account, for an account controlled by him or who has such a trade made for him. Also referred to as a "local".

Part of a nation’s internal market, representing the mechanisms for issuing and trading securities of entities domiciled outside that nation. Compare external market and domestic market.

A cash market transaction in which delivery of the commodity is deferred until after the contract has been made. It is not standardized and is not traded on organized exchanges.

A projection of future interest rates calculated from either the spot rates or the yield curve.

The security pledges for larger municipal bond issuers, such as states and large cities which have diverse funding sources.

Also called dirty price, the price of a bond including accrued interest.

Set of funds with different investment objectives offered by one management company. In many cases, investors may move their assets from one fund to another within the family at little or no cost.

The product of a statistical model to predict the fundamental risk of a security using not only price data but other market-related and financial data.

In the model for calculating fundamental beta, ratios in risk indexes other than market variability, which rely on financial data other than price data.

A term used to designate all contracts covering the sale of financial instruments or physical commodities for future delivery on a commodity exchange.

A firm or person engaged in soliciting or accepting and handling orders for the purchase or sale of futures contracts, subject to the rules of a futures exchange and, who, in connection with such solicitation or acceptance of orders, accepts any money or securities to margin any resulting trades or contracts. The FCM must be licensed by the CFTC. Related: Commission house, Omnibus account

A standardized, transferable legal agreement to make or take delivery of a specified amount of a certain commodity of a certain grade or type at a specific point in the future. The price is determined at the time the agreement is made. Futures contracts must be traded on organized futures exchanges.

A constant, set by an exchange, which when multiplied by the futures price gives the dollar value of a stock index futures contract.

The price at which the parties to a futures contract agree to transact on the settlement date.

The ratio of the change in a call option’s delta to the change in price of underlying stock.

A debt instrument of a municipality which is secured by the issuer’s unlimited taxing power.

Risk that arises when an insurer has policies concentrated within certain geographic areas, such as the risk of damage from a hurricane or an earthquake.

An order executed by one brokerage house, but cleared by another house at the request of the customer.

A top-down manager who infers the phases of the business cycle and allocates assets accordingly.

A money manager who seeks to buy stocks that are typically selling at relatively high P/E ratios due to high earnings growth, with the expectation of continued high (or higher) earnings growth.

A phase of development in which a company experiences rapid earnings growth as it produces new products and expands market share. Related: Three-phase DDM

A pure investment product in which a life company agrees, for a single premium, to pay the principal amount and a predetermined annual crediting rate over the life of the investment, all of which is paid at the maturity date.

One who purchases or sells a futures contract as a temporary substitute for a transaction to be made at a later date. Related: Hedge

A convertible security whose optioned common stock is trading in a middle range, causing the convertible security to trade with the characteristics of both a fixed-income security and a common stock instrument.

A bond portfolio strategy whose goal is to immunize a portfolio against a general change in the rate of interest.

The rate that a seller of a futures contract can earn by buying an issue and then delivering it at the settlement date. Related: Cheapest to deliver issue

The expected volatility in a stock’s return derived from its option price, using an option-pricing model.

A statement showing the revenues, expenses, and income (the difference between revenues and expenses) of a corporation over some period of time.

A passive instrument strategy consisting of the construction of a portfolio of stocks designed to track the total return performance of an index of stocks.

The graphical expression of a utility function, where the horizontal axis measures risk and the vertical axis measures expected return.

Also called purchasing-power risk, the risk that changes in the real return the investor will realize after adjusting for inflation will be negative.

Trades in which an investor believes he or she possesses pertinent information not currently reflected in the stock’s price.

Trades that are the result of either a reallocation of wealth or an implementation of an investment strategy that only utilizes existing information.

When buying securities on margin, the proportion of the total market value of the securities that the investor must pay for in cash. The Security Exchange Act of 1934 gives the board of governors of the Federal Reserve the responsibility to set initial margin requirements, but individual brokerage firms are free to set higher requirements. In futures contracts, initial margin requirements are set by the exchange.

Tables that indicate how much each industry requires of the production of each other industry in order to produce each dollar of its own output.

Organizations that invest, including insurance companies, depository institutions, pension funds, investment companies, and endowment funds.

The gradual domination of financial markets by institutional investors, as opposed to individual investors. This process has occurred throughout the industrialized world.

A municipal bond backed both by the credit of the municipal issuer and by commercial insurance policies.

A legal claim to some future benefit, typically a claim to future cash. Financial assets, also called financial instruments or securities, are intangible assets.

The ratio of the earnings available for paying the interest for a given year to the annual interest expense.

An agreement whereby one party, for an upfront premium, agrees to compensate the other at specific time periods if a designated interest rate (the reference rate) is different from a predetermined level (the strike rate).

Also called an interest rate ceiling, an interest rate agreement in which payments are made when the reference rate exceeds the strike rate.

An interest rate agreement in which payments are made when the reference rate falls below the strike rate.

For a bond, the risk that a rise in interest rates will decrease the bond’s price. For a depository institution, also called funding risk, the risk that spread income will suffer because of a change in interest rates.

A binding agreement between counterparties to exchange periodic interest payments on some predetermined dollar principal, which is called the notional principal amount.

The spread between the interest rate offered in two sectors of the bond market for issues of the same maturity.

An exchange of one bond for another based on the manager’s projection of a realignment of spreads between sectors of the bond market.

The mechanisms for issuing and trading securities within a nation, including its domestic market and foreign market. Compare external market.

A receipt issued by a bank as evidence of ownership of one or more shares of the underlying stock of a foreign corporation that the bank holds in trust. The advantage of the IDR structure is that the corporation does not have to comply with all the regulatory issuing requirements of the foreign country where the stock is to be traded. The U.S. version of the IDR is the American Depositary Receipt (ADR).

A put option that has a strike price higher than the underlying futures price, or a call option with a strike price lower than the underlying futures price. For example, if the march COMEX silver futures contract is trading at $6 an ounce, a March call with a strike price of 550 would be considered in-the-money by $0.50 an ounce. Related: Put

The spread between two issues of the same maturity within a market sector. For instance, the difference in interest rates offered for five-year industrial corporate bonds and five-year utility corporate bonds.

The amount by which an option is in-the-money. An option which is not in-the-money has no intrinsic value. Related: In-the-Money

A futures market in which the nearer months are selling at price premiums to the more distant months. Related: Premium

A bond that is assigned a rating in the top four categories by commercial credit rating companies. Related: High-yield bond

An index that uses the capital asset pricing model to determine whether a money manager outperformed a market index.

The ratio of the dollar price change in the price of an option to a 1% change in the expected price volatility.

A bond portfolio strategy in which the portfolio is constructed to have approximately equal amounts invested in every maturity within a given range.

The final day under an exchange’s rules during which trading may take place in a particular futures or options contract. Contracts outstanding at the end of the last trading day must be settled by delivery of underlying physical commodities or financial instruments, or by agreement for monetary settlement depending upon futures contract specifications.

An economic rule stating that a given security must have the same price regardless of the means by which one goes about creating that security. This implies that if the payoff of a security can be synthetically created by a package of other securities, the price of the package and the price of the security whose payoff it replicates must be equal.

A transaction used for taking a public corporation private, financed through the use of debt funds: bank loans and bonds. Because of the large amount of debt relative to equity in the new corporation, the bonds are typically rated below investment grade, properly referred to as high-yield bonds or junk bonds. Investors can participate in an LBO through either the purchase of the debt (i.e., purchase of the bonds or participation in the bank loan) or the purchase of equity through an LBO fund that specializes in such investments.

A financial obligation, or the cash outlay that must be made at a specific time to satisfy the contractual terms of such an obligation.

Investment strategies that select assets so that cash flows will equal or exceed the client’s obligations.

An interest rate swap used to alter the cash flow characteristics of an institution’s liabilities so as to provide a better match with its assets.

An order given to a broker by a customer which has restrictions upon its execution. The customer specifies a price and the order can be executed only if the market reaches or betters that price.

A record of unexecuted limit orders that is maintained by the specialist. These orders are treated equally with other orders in terms of priority of execution.

Any transaction that offsets or closes out a long or short position. Related: Buy in, Evening up, Offset

A market is liquid when it has a high level of trading activity, allowing buying and selling with minimum price disturbance. Also a market characterized by the ability to buy and sell with relative ease.

The risk that arises from the difficulty of selling an asset. It can be thought of as the difference between the "true value" of the asset and the likely price, less commissions.

A biased expectations theory that asserts that the implied forward rates will not be a pure estimate of the market’s expectations of future interest rates because they embody a liquidity premium.

A mutual fund that tends to impose large commissions, typically ranging from 8.5% on small amounts invested down to 1% on amounts of $500,000 or over. Related: No-load fund

The amount a policyholder may borrow against a whole life insurance policy at the interest rate specified in the policy.

A form of the pure expectations theory which suggests that the returns on bonds of different maturities will be the same over a short-term investment horizon.

One who has bought a contract(s) to establish a market position and who has not yet closed out this position through an offsetting sale; the opposite of short. Related: Short

The purchase of a futures contract(s) in anticipation of actual purchases in the cash market. Used by processors or exporters as protection against an advance in the cash price. Related: Hedge, Short hedge

In the cash market, the ownership of securities. In the futures market, the purchase of a futures contract with no offsetting short position. In the options market, the purchase of an option with no offsetting short position. Related: Short position

A straddle in which a long position is taken in both a put and call option.

A capitalization ratio comparing long-term debt to shareholders’ equity.

The tendency of portfolios of stocks with a low price earnings ratio to outperform portfolios consisting of stocks with a high price-earnings ratio.

The effective reductions or risk (variance) of a portfolio, achieved without reduction to expected returns through the combination of assets with low or negative correlations (covariances). Related: Markowitz diversification

A sum, usually smaller than – but part of the original margin, which must be maintained on deposit at all times. If a customer’s equity in any futures position drops to, or under, the maintenance margin level, the broker must issue a margin call for the amount at money required to restore the customer’s equity in the account to the original margin level. Related: Margin, Margin call

An investment advisory fee charged by the financial advisor to a fund based on the fund’s average assets, but sometimes determined on a sliding scale that declines as the dollar amount of the fund increases.

Also called security deposit. An amount of funds that must be deposited with the broker for each contract as a good faith deposit on the contract. Related: Security deposit (initial).

A demand for additional funds because of adverse price movement. Maintenance margin requirement, Security deposit maintenance.

A price order, below market if a buy or above market if a sell, that automatically becomes a market order if the specified price is reached. Related: Market order

Also called conversion parity price, the price that an investor effectively pays for common stock by purchasing a convertible security and then exercising the conversion option. This price is equal to the market price of the convertible security divided by the conversion ratio.

Also called price impacts costs, the result of a bid/ask spread and a dealer’s price concession.

This relationship is sometimes called the single-index model. The market model says that the return on a security depends on the return on the market portfolio and the extent of the security’s responsiveness as measured, by beta (i). In addition, the return will also depend on conditions that are unique to the firm. Graphically, the market model can be depicted as a line fitted to a plot of asset returns against returns on the market portfolio.

An order for immediate execution given to a broker to buy or sell at the best obtainable price.

A portfolio consisting of all assets available to investors, with each asset held in proportion to its market value relative to the total market value of all assets.

The classification of bonds by issuer characteristics, such as state government, corporate, or utility.

A biased expectations theory that asserts that the shape of the yield curve is determined by the supply of and demand for securities within each maturity sector.

A money manager who assumes he or she can forecast when the stock market will go up and down.

Costs that arise from price movement of the stock during the time of the transaction which is attributed to other activity in the stock.

The degree to which the prices of assets reflect the available marketplace information. Marketplace price efficiency is sometimes estimated as the difficulty faced by active management of earning a greater return than passive management would, after adjusting for the risk associated with a strategy and the transactions costs associated with implementing a strategy.

A strategy that seeks to combine assets a portfolio with returns that are less than perfectly positively correlated, in an effort to lower portfolio risk (variance) without sacrificing return. Related: Naïve diversification

The graphical depiction of the Markowitz efficient set of portfolios representing the boundary of the set of feasible portfolios that have the maximum return for a given level of risk. Any portfolios above the frontier cannot be achieved. Any below the frontier are dominated by Markowitz efficient portfolios.

Also called a mean-variance efficient portfolio, a portfolio that has the highest expected return at a given level or risk.

The collection of all efficient portfolios, graphically referred to as the Markowitz efficient frontier.

The accounting principle that requires the recognition of all costs that are associated with the generation of the revenue reported in the income statement.

For a bond, the date on which the principal is required to be repaid. In an interest rate swap, the date that the swap stops accruing interest.

A phase of company development in which earnings continue to grow at the rate of the general economy. Related: Three-phase DDM

The maximum amount the contract price can change, up or down, during one trading session, as fixed by exchange rules in the contract specification. Related: Limit price

A corporate debt instrument that is continuously offered to investors over a period of time by an agent of the issuer. Investors can select from the following maturity bands: 9 months to 1 year, more than 1 year to 18 months, more than 18 months to 2 years, etc., up to 30 years.

Smallest increment of price movement possible in trading a given contract. Also called point or tick. Related: Point, Tick minimum variance zero-beta portfolio. The zero-beta portfolio with the least risk.

The ratio of Macaulay duration to (1 + y), where y = the bond yield. Modified duration is inversely related to the approximate percentage change in price for a given change in yield.

Banks that raise most of their funds from the domestic and international money markets, relying less on depositors for funds.

The market for trading short-term debt instruments (those that mature in less than one year). Related: Capital market

A bond in which the issuer has granted the bondholders a lien against the pledged assets. Collateral trust bonds.

Also called a passthrough, a security created when one or more mortgage holders form a collection (pool) of mortgages and sell shares or participation certificates in the pool.

When several futures contracts are considered, the contract settling last. Related: Nearby futures contract

A portfolio strategy in which a portfolio is created that will be capable of satisfying more than one predetermined future liability regardless if interest rates change.

A technical trading strategy that combines mechanical rules, such as the CRISMA (cumulative volume, relative strength, moving average) Trading System of Pruitt and White.

A system, such as the arrangement between the CME and SIMEX, which allows trading positions established on one exchange to be offset or transferred on another exchange.