A strategy whereby an investor simply invests in a number of different assets and hopes that the variance of the expected return on the portfolio is lowered. Related: Markowitz diversification

An unhedged strategy making exclusive use of one of the following: long call strategy (buying call options), short call strategy (selling or writing call options), long put strategy (buying put options), and short put strategy (selling or writing put options). By themselves, these positions are called naked strategies because they do not involve an offsetting or risk-reducing position in another option or the underlying security. Related: Covered, Hedge option strategies

An electronic quotation system that provides price quotations to market participants about the more actively traded common stock issues in the OTC market. About 4,000 common stock issues are included in the NASDAQ system.

When several futures contracts are considered, the contract with the closet settlement date is called the nearby futures contract. The next futures contract is the one that settles just after the nearby contract. The contract farthest away in time from settlement is called the most distant futures contract.

The nearest active trading month of a financial or commodity futures market. Related: Deferred futures

A bond characteristic such that the price appreciation will be less than the price depreciation for a large change in yield of a given number of basis points.

The tendency of firms that are neglected by security analysts to outperform firms that are the subject of considerable attention.

The basis of a mutual fund’s share price, which is found by subtracting from the market value of the portfolio the mutual fund’s liabilities and then dividing by the number of mutual fund shares outstanding.

Also called the cost of carry or, simply, carry, the difference between the cost of financing the purchase of an asset and the asset’s cash yield. Positive carry means that the yield earned is greater than the financing cost; negative carry means that the financing cost exceeds the yield earned.

Preferred stock whose holders must forgo dividend payments when the company misses a dividend payment. Related: Cumulative preferred stock

A shift in the yield curve in which yields do not change by the same number of basis points for every maturity. Related: Parallel shift in the yield curve

A customized benchmark that includes all the securities from which a manager normally chooses, weighted as the manager would weight them in a portfolio.

A day on which notices of intent to deliver pertaining to a specified delivery month may be issued. Related: Delivery notice.

In an interest rate swap, the predetermined dollar principal on which the exchanged interest payments are based.

Elimination of a current long or short position by making an opposite transaction. Related: Buy in, Evening up, Liquidation

An account carried by one futures commission merchant with another futures commission merchant in which the transactions of two or more persons are combined and carried in the name of the originating broker, rather than designated separately. Related: Commission house, Futures commission merchant

Contracts which have been bought or sold without the transaction having been completed by subsequent sale or purchase, or by making or taking actual delivery of the financial instrument or physical commodity.

Also called a mutual fund, an investment company that stands ready to sell new shares to the public and to redeem its outstanding shares on demand at a price equal to an appropriate share of the value of its portfolio, which is computed daily at the close of the market.

The total number of futures contracts traded in a given commodity that have not yet been liquidated either by an offsetting futures transaction or by delivery. Related: Liquidation

The method of trading used at futures exchanges, typically involving calling out the specific details of a buy or sell order, so that the information is available to all traders.

The period at the beginning of the trading session officially designated by the exchange during which all transactions are considered made "at the opening". Related: Close, the

The range of prices at which the first bids and offers were made or first transaction were completed. Related: Range

The average time intervening between the acquisition of materials or services and the final cash realization from those acquisitions.

Also called an internally efficient market, one in which investors can obtain transactions services that reflect the true costs associated with furnishing those services.

The difference in the performance of an actual investment and a desired investment adjusted for fixed costs and execution costs. The performance differential is a consequence of not being able to implement all desired trades.

An efficient portfolio most preferred by an investor because its risk/reward characteristics approximate the investor’s utility function. A portfolio that maximizes an investor’s preferences with respect to return and risk.

An approach to indexing which seeks to Optimize some objective, such as to maximize the portfolio yield, to maximize convexity, or to maximize expected total returns.

The margin needed to cover a specific new position. Related: Margin, Security deposit (initial)

The spread over an issuer’s spot rate curve, developed as a measure of the yield spread that can be used to convert dollar differences between theoretical value and market price.

Also called the option premium, the price paid by the buyer of the options contract for the right to buy or sell a security at a specified price in the future.

Also called the option writer, the party who grants a right to trade a security at a given price in the future.

A contract that, in exchange for the option price, gives the option buyer the right, but not the obligation, to buy (or sell) a financial asset at the exercise price from (or to) the option seller within a specified time period, or on a specified date (expiration date).

A constant, set at $100, which when multiplied by the cash index value gives the dollar value of the stock index underlying an option. That is, dollar value of the underlying stock index = cash index value x $100 (the options contract multiple).

Interest rate options written on fixed-income securities, as opposed to those written on interest rate futures contracts.

A put option with a strike price lower than the underlying futures price, or a call option with a strike price higher than the underlying futures price. Related: In-the-Money

A decentralized market (as opposed to an exchange market) where geographically dispersed dealers are linked together by telephones and computer screens.

A strategy of using futures for asset allocation by pension sponsors to avoid disrupting the activities of money managers.

The supposition that investors overreact to unanticipated news, resulting in exaggerated movement in stock prices followed by corrections.

Purchase and sale statement. A statement provided by the broker showing change in the customer’s net ledger balance after the offset of a previously established position(s).

Also called the maturity value or face value, the amount that the issuer agrees to pay at the maturity date.

A shift in the yield curve in which the exchange in the yield on all maturities is the same number of basis points. Related: Non-parallel shift in the yield curve

A strategy that involves minimal expectational input, and instead relies on diversification to match the performance of some market index. A passive strategy assumes that the marketplace will reflect all available information in the price paid for securities. Related: Active portfolio strategy

The decomposition of a money manager’s performance results to explain the reasons why those results were achieved. This analysis seeks to answer the following questions: (1) What were the major sources of added value? (2) Was short-term factor timing statistically significant? (3) Was market timing statistically significant? and (4) Was security selection statistically significant?

A specific area of the trading floor that is designated for the trading of an individual futures or options contract.

A committee of the exchange that determines the daily settlement price of futures contracts.

A long-term asset allocation method, in which the investor seeks to assess an appropriate long-term "normal" asset mix that represents an ideal blend of controlled risk and enhanced return.

A strategy using a leveraged portfolio in the underlying stock to create a synthetic put option.

The rate of return computed by first determining the cash flows for all the bonds in the portfolio and then finding the interest rate that will make the present value of the cash flows equal to the market value of the portfolio.

A market commitment; the number of contracts bought or sold for which no offsetting transaction has been entered into. The buyer of a commodity is said to have a long position and the seller of a commodity is said to have a short position. Related: Open contracts

A property of option-free bonds whereby the price appreciation for a large change in interest rates will be greater (in absolute terms) than the price depreciation for the same change in interest rates.

The price of an options contract; also, in futures trading, the amount the futures price exceeds the price of the spot commodity. Related: Inverted market premium payback period. Also called break-even time, the time it takes to recover the premium per share of a convertible security.

The limitation of the price appreciation potential for a callable bond in a declining interest rate environment, based on the expectation that the bond will be redeemed at the call price.

The process of determining the prices of the assets in the marketplace through the interactions of buyers and sellers.

The current market price of the stock divided by some measure of earnings per share.

The risk that the value of a security (or a portfolio) will decline in the future.

Also called the dollar value of an 01, a measure of the change in the price of the bond if the required yield changes by one basis point.

A relationship espoused by some technical analysts that signals continuing rises and falls in security prices based on accompanying changes in volume traded.

Also called external efficiency, a market characteristic where prices at all times fully reflect all available information that is relevant to the valuation of securities.

The principal underlying market for a financial instrument or physical commodity.

Also called basket trades, orders requiring the execution of trades in a large number of different stocks at as near the same time as possible. Related: Block trade

A strategy that involves buying a put option on the underlying security that is held in a portfolio. Related: Hedge option strategies

A feature in a convertible issue that allows the issuer to call the issue during the non-call period if the price of the stock reaches a certain price.

A theory that asserts that the forward rates exclusively represent the expected future rates. Related: Biased expectations theories

A portfolio that is managed so as to perfectly replicate the performance of the market portfolio.

An option granting the right to sell the underlying futures contract. Opposite of a call. Related: Call

The relationship between the price of a put and the price of a call on the same underlying with the same expiration date, which prevents arbitrage opportunities.

A swaption in which the buyer has the right to enter into a swap as a floating-rate payer. The writer of the swaption therefore becomes the floating-rate receiver/fixed-rate payer.

Also called the swap option, the seller’s choice of deliverables in Treasury bond and Treasury note futures contract. Related: Cheapest to deliver issue

Also called credit spread, the spread between Treasury securities and non-Treasury securities that are identical in all respects except for quality rating. For instance, the difference between yields on Treasuriers and those on single A-rated industrial bonds.

The high and low prices, or high and low bids and offers recorded during a specified time.

An exchange of bonds in a portfolio for new bonds that will achieve the target portfolio duration, based on the investor’s assumptions about future changes in interest rates.

A benchmark interest rate (such as LMOR), used to specify conditions of an interest rate swap or an interest rate agreement.

The redemption of a bond with proceeds received from issuing lower-cost debt obligations ranking equal to or superior to the debt to be redeemed.

A person registered with the CFTC who is employed by, and soliciting business for, a commission house or futures commission merchant. Related: CFTC, Futures commission merchant

Also called price momentum or price persistence, the ratio of the price of a stock to some price index. Changes in the ratio can be interpreted as uptrends or downtrends relative to the price index.

The dollar amounts based on reserve ratios that banks are required to keep on deposit at a Federal Reserve Bank.

Generally referring to bonds, the yield required by the marketplace to match available returns for financial instruments with comparable risk.

An accounting entry that properly reflects the contingent liabilities of an insurance company.

Specified percentages of deposits, established by the Federal Reserve Board, that banks must keep in a non-interest-bearing account at one of the twelve Federal Reserve Banks.

The change in the value of a portfolio over an evaluation period, including any distributions made from the portfolio during that period.

A variant of pure expectations theory which suggests that the return that an investor will realize by rolling over short-term bonds to some investment horizon will be the same as holding a zero-coupon bond with a maturity that is the same as that investment horizon.

A bond issued by a municipality to finance either a project or an enterprise where the issuer pledges to the bondholders the revenues generated by the operating projects financed, for instance, hospital revenue bonds and sewer revenue bonds.

A fund accounting for all revenues from an enterprise financed by a municipal revenue bond.

Trading arenas located on the floor of an exchange in which traders execute orders. Sometimes called a pit. Related: Pit

A risk-averse investor is one who when faced with two investments with the same expected return but two different risks will prefer the one with the lower risk.

An asset whose future return is known today with certainty. The risk free asset is commonly defined as short-term obligations of the U.S. government.

Categories of risk used to calculate fundamental beta, including (1) market variability, (2) earnings variability, (3) low valuation and unsuccess, (4) immaturity and smallness, (5) growth orientation, and (6) financial risk.

The reward for holding the risky market portfolio rather than the risk-free asset. The spread between Treasury and non-Treasury bonds of comparable maturity.

The most common approach for tactical asset allocation to determine the relative valuation of asset classes based on expected returns.

A trading order typically of 100 shares of a stock or some multiple of 100. Related: Odd lot

Costs of completing a transaction, including commissions, market impact costs, and taxes.

Procedure by which the long or short position of an individual is offset by an opposite transaction or by accepting or making delivery of the actual financial instrument or physical commodity.

To trade for small gains. It normally involves establishing and liquidating a position quickly, usually within the same day.

The use of horizon analysis to project bond total returns under different reinvestment rates and future market yields.

Costs associated with locating a counterparty to a trade, including explicit costs (such as advertising) and implicit costs (such as the value of time). Related: Information costs

The market where securities are traded after they are initially offered in the primary market.

The process of creating a passthrough, such as the mortgage pass-through security, by which the pooled assets become standard securities backed by those assets.

Synonymous with the term margin. A cash amount of funds that must be deposited with the broker for each contract as a guarantee of fulfillment of the futures contact. It is not considered as part payment or purchase. Related: Margin

Related: Maintenance margin security market line (SML).

A description of the risk return relationship for individual securities, expressed in a form similar to the capital market line.

Conditional trading order that indicates that a security may be sold at the designated price or higher. Related: Buy limit order

Also called a Wall Street analyst, a financial analyst who works for a brokerage firm and whose recommendations are passed on to the brokerage firm’s customers.

A trade in which the investor (working through a broker) borrows a security, sells it, repurchases it at a later time, and then returns it to the party who initially loaned the security. If the price has fallen, the short seller profits. When the security is returned, the investor is said to have "covered the short position."

A form of pricing efficiency where the price of the security fully reflects all public information (including, but not limited to, historical price and trading patterns). Compare weak form efficiency and strong form efficiency.

Corporate bonds arranged so that specified principal amounts become due on specified dates. Related: Term bonds

Also called the delivery date, the designated date at which the parties to a futures contract must transact.

A figure determined by the closing range which is used to calculate gains and losses in futures market accounts. Settlement prices are used to determine gains, losses, margin calls, and invoice prices for deliveries. Related: Closing range

The rate suggested in Financial Accounting Standard Board (FASB) 87 for discounting the obligations of a pension plan. The rate at which the pension benefits could be effectively settled if the pension plan wished to terminate its pension obligation.

A statistically created benchmark that adjusts for a manager’s index-like tendencies.

A measure of a portfolio’s excess return relative to the total variability of the portfolio. Related: Treynor Index

One who has sold a contract to establish a market position and who has not yet closed out this position through an offsetting purchase; the opposite of a long. Related: Long

The sale of a futures contract(s) to eliminate or lessen the possible decline in value ownership of an approximately equal amount of the actual financial instrument or physical commodity. Related: Long hedge

In the cash market, a sale of securities not owned. The securities sold are borrowed. In the futures market, the sale of a futures contract with no offsetting long position. In the options market, the sale of an option with no offsetting long position.

A situation in which a lack of supply tends to force prices upward.

Ratios used to judge the adequacy of liquid assets for meeting short-term obligations as they come due, including (1) the current ratio, (2) the acid-test ratio, (3) the inventory turnover ratio, and (4) the accounts receivable turnover ratio.

A condition included in some corporate bond indentures that requires the issuer to retire a specified portion of debt each year. Any principal due at maturity is called the balloon maturity.

The tendency of small firms (in terms of total market capitalization) to outperform the stock market (consisting of both large and small firms).

On an exchange, the member firm that is designated as the market maker (or dealer for a listed common stock. Only one specialist can be designated for a given stock, but dealers may be specialists for several stocks. In contrast, there can be multiple market makers in the OTC market.

One, who attempts to anticipate price changes and, through buying and selling contracts, aims to make profits. A speculator does not use the market in connection with the production, processing, marketing or handling of a product.

The current market price of the actual physical commodity. Also called cash price.

The theoretical yield on a zero-coupon Treasury security.

The graphical depiction of the relationship between the spot rates and maturity.

The simultaneous purchase and sale of separate futures or options contracts for the same commodity for delivery in different months. Also known as a straddle.

Also called margin income, the difference between income and cost. For a depository institution, the difference between the assets it invests in (loans and securities) and the cost of its funds (deposits and other sources).

A strategy that involves a position in one or more options so that the cost of buying an option is funded entirely or in part by selling another option in the same underlying.

The square root of the variance. A measure of dispersion of a set of data from their mean.

Also called the normal deviate, the distance of one data point from the mean, divided by the standard deviation of the distribution.

At the time of issuance of a convertible security, the price the issuer effectively grants the securityholder to purchase the common stock, equal to the par value of the convertible security divided by the conversion ratio.

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

A bond that pays a lower coupon rate for an initial period which then increases to a higher coupon rate. Related: Deferred-interest bond, Payment-in-kind bond

Liability-matching models that assume that the liability payments and the asset cash flows are uncertain. Related: Deterministic models

A strategy for enhancing a portfolio’s return, employed when the futures contract is expensive based on its theoretical price, involving a swap between the futures, Treasury bills portfolio and a stock portfolio.

A stop order that designates a price limit. In contrast to the stop order, which becomes a market order if the stop is reached, the stop-limit order becomes a limit order if the stop is reached.

An order to buy or sell at the market when a definite price is reached, either above (on a buy) or below (on a sell) the price that prevailed when the order was given.

Purchase or sale of an equal number of puts and calls with the same terms at the same time. Related: Spread

Also called investment value, the value of a convertible security without the conversion option.

A method of constructing a replicating portfolio in which the stocks in the index are classified into stratum, and each stratum is represented in the portfolio.

An approach in which the index is divided into cells, each representing a different characteristic of the index, such as duration or maturity.

A method of bond indexing that divides the index into cells, each cell representing a different characteristic, and that buys bonds to match those characteristics.

For a stock index option, the index value at which the buyer of the option can buy or sell the underlying stock index. The strike index is converted to a dollar value by multiplying by the option’s contract multiple. Related: Strike price

The price at which an option can be converted by exercise into the underlying futures contract.

Pricing efficiency, where the price of a security reflects all information, whether or not it is publicly available. Related: Weak form efficiency, Semistrong form efficiency

A strategy in which a portfolio is designed to achieve the performance of some predetermined liabilities that must be paid out in the future.

An interest rate swap designed to end a counterparty’s role in another interest rate swap, accomplished by counterbalancing the original swap in maturity, reference rate, and notional amount.

Also called a swap assignment, a transaction that ends one counterparty’s role in an interest rate swap by substituting a new counterparty whose credit is acceptable to the other original counterparty.

Options on interest rate swaps. The buyer of a swaption has the right to enter into an interest rate swap agreement by some specified date in the future. The swaption agreement will specify whether the buyer of the swaption will be a fixed-rate receiver or a fixed-rate payer. The writer of the swaption becomes the counterparty to the swap if the buyer exercises.

Liquidating an existing position and simultaneously reinstating a position in another futures contract of the same type.

An extension of cash flow matching that allows for the short-term borrowing of funds to satisfy a liability prior to the liability due date, resulting in a reduction in the cost of funding liabilities.

Also called undiversifiable risk or market risk, the minimum level of risk that can be obtained for a portfolio by means of diversification across a large number of randomly chosen assets. Related: Unsystematic risk

An asset allocation strategy that allows active departures from the normal asset mix based upon rigorous objective measures of value.

An asset whose value depends on particular physical properties. These include reproducible assets such as buildings or machinery and non-reproducible assets such as land, a mine, or a work of art. Related: Intangible asset

Also called chartists or technicians, analysts who use mechanical rules to detect changes in the supply of and demand for a stock and capitalize on the expected change.

In the model for calculating fundamental beta, ratios in the market variability risk index which rely on market-related data.

Often referred to as bullet-maturity bonds or simply bullet bonds, bonds whose principal is payable at maturity. Related: Serial bonds

A repurchase agreement with a term of more than one day.

The relationship between the yields on otherwise comparable securities with different maturities, often depicted as a yield curve.

The time remaining on a bond’s life, or the date on which the debt will cease to exist and the borrower will have completely paid off the amount borrowed.

A curve derived from theoretical considerations as applied to the yields of actually traded Treasury debt securities because there are no zero-coupon Treasury debt issues with a maturity greater than one year. Like the yield curve, this is a graphical depiction of the term structure of interest rates.

Also called time decay, the ratio of the change in an option price to the decrease in time to expiration.

A version of the dividend discount model which applies a different expected dividend rate depending on a company’s life-cycle phase, growth phase, transition phase, or maturity phase.

SEC-imposed restrictions on when a short sale may be executed, intended to prevent investors from destabilizing the price of a stock when the market price is falling. A short sale can be made only when either (1) the sale price of the particular stock is higher than the last trade price (referred to as an uptick trade) or (2) if there is not change in the last trade price of the particular stock, the previous trade price must be higher than the trade price that preceded it (referred to as a zero uptick).

An indexing strategy that is linked to active management through the emphasis of a particular industry sector, selected performance factors such as earnings momentum, dividend yield, price-earnings ratio, or selected economic factors such as interest rates and inflation.

Also called time value, the amount by which the option price exceeds its intrinsic value.

The market value of an option minus its intrinsic value; that is, the difference between the option premium and the amount, if any, that the option is in-the-money. Related: In-the-Money

For a Treasury bond or note futures contract, the seller’s choice of when in the delivery month to deliver.

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

In performance measurement, the actual rate of return realized over some evaluation period. In fixed income analysis, the potential return that considers all three sources of return (coupon interest, interest on interest, and any capital gain/loss) over some investment horizon.

In an indexing strategy, the difference between the performance of the benchmark and the replicating portfolio.

A phase of development in which the company’s earnings begin to mature and decelerate to the rate of growth of the economy as a whole. Related: Three-phase DDM

Debt obligations of the U.S. Treasury that have maturities of more than 2 years but less than 10 years.

A measure of the excess return per unit or risk, where excess return is defined as the difference between the portfolio’s return and the risk-free rate of return over the same evaluation period and where the unit of risk is the portfolio’s beta. Related: Sharpe Index

Mutual funds that do not charge an upfront or back-end commission, but instead take out up to 1.25% of average daily fund assets each year to cover the costs of selling and marketing shares, an arrangement allowed by the SEC’s 12b-I (passed in 1980).

The theoretical result that all investors will hold a combination of the risk-free asset and the market portfolio.

Also called the diversifiable risk, residual risk, or company-specific risk, the risk that is unique to a company such as a strike, the outcome of unfavorable litigation, or a natural catastrophe. Related: Systematic risk

A network of trading desks for the major brokerage firms and institutional investors that communicate with each other by means of electronic display systems and telephones to facilitate block trades and program trades.

A manager who seeks to buy stocks that are at a discount to their "fair value" and sell them at or in excess of that value. Also called contrarians because they see value where many other market participants do not.

A whole life insurance policy that provides a death benefit that depends on the market value of the insured’s portfolio at the time of the death. Typically the company invests premiums in common stocks, and hence variable life policies are referred to as equity-linked policies.

An approach to bond indexing that uses historical data to estimate the variance of the tracking error.

An additional required deposit to bring an investor’s equity account up to the initial margin level when the balance falls below the maintenance margin requirement.

An investment in a start-up business that is perceived to have excellent growth prospects but does not have access to capital markets.

The process of dividing each expense item in the income statement of a given year by net sales to identify expense items that rise faster or slower than a change in sales.

An options contract often sold with another security. For instance, corporate bonds may be sold with warrants to buy common stock of that corporation. Warrants are generally detachable.

A form of pricing efficiency where the price of the security reflects the past price and trading history of the security. Related: Semistrong form efficiency, Strong form efficiency

The right of the seller of a Treasury bond futures contract to give notice of intent to deliver at or before 8:00 p.m. Chicago time after the closing of the exchange (3:15 p.m. Chicago time) when the futures settlement price has been fixed. Related: Timing option

A guaranteed investment contract purchased with deposits over some future designated time period (the "window"), usually between 3 and 12 months. All deposits made are guaranteed the same credit rating. Related: Bullet contract

A firm operating a private wire to its own branch offices or to other firms, commission houses or brokerage houses.

The graphical depiction of the relationship between the yield on bonds of the same credit quality but different maturities: Related: Term structure of interest rates

Also called arbitrage-free option-pricing models, models that can incorporate different volatility assumptions along the yield curve, such as the Black-Derman-Toy model.

Positioning a portfolio to capitalize on expected changes in the shape of the Treasury yield curve.

Strategies that involve positioning a portfolio to capitalize on expected changes in yield spreads between sectors of the bond market.

The interest rate that will make the present value of a bond’s remaining cash flows (if held to maturity) equal to the price (plus accrued interest, if any).

The bond yield computer by always using the lower of either the yield to maturity or the yield to call on every possible call date.

A portfolio constructed to represent the risk-free asset, that is, having a beta of zero.

A bond in which no periodic coupon is paid over the life of the contract. Instead, both the principal and the interest are paid at the maturity date.