Agency
basis
A
means of compensating the broker of a program trade solely on
the basis of commission established through bids submitted by
various brokerage firms.
Agency
incentive arrangement
A
means of compensating the broker of a program trade using
benchmark prices for issues to be traded in determining
commissions or fees.
Alpha
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.
American
Depository Receipt (ADR)
The
U.S. version of the International Depositary Receipt.
American
option
An
option that may be exercised at any time up to and including the
expiration date. Related: European options
Annual
fund operating expenses
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.
Arbitrage
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.
Arbitrage-free
option-pricing models
Yield
curve option-pricing models.
Arbitrage
pricing theory (APT)
An
alternative model to the capital asset pricing model developed
by Stephen Ross and based purely on arbitrage arguments.
Arithmetic
mean return
An
average of the subperiod returns, calculated by summing the
subperiod returns and dividing by the number of subperiods.
Arithmetic
average (mean) rate of return
Arithmetic
mean return.
Ask
price
A
dealer’s price to sell a security.
Bid
price.
Asset
Any
possession that has value in an exchange.
Asset
allocation decision
The
decision regarding how the institution’s funds should be
distributed among the major classes of assets in which it may
invest.
Asset-backed
securities.
Securities
backed by assets that are not mortgage loans. Examples include
assets backed by automobile loans and credit card receivables.
Asset
classes
Categories
of assets, such as stocks, bonds, real estate, and foreign
securities.
Asset/equity
ratio
The
ratio of total assets to stockholders’ equity.
Asset/liability
management
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.
Asset
swap
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.
Asset
turnover
The
ratio of net sales to total assets.
At-the-Money
An
option which has a strike price that is nearest to the
underlying futures price.
Attribute
bias
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.
Average
(across-day) measures
An
estimation of price that uses the average or representative
price or a large number of trades.
Back-end
loan fund
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.
Backwardation
Balance
sheet
Also
called the statement of financial condition, a summary of the
assets, liabilities, and owners’ equity.
Balanced
fund
An
investment company that invests in both stocks and bonds.
Balloon
maturity
Any
principal due at maturity for a bond with a sinking fund
requirement.
Bank
discount basis
A
convention used for quoting bids and offers for Treasury bills
in terms of annualized yield based on a 360-day year.
Bankers
acceptance
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.
Barbell
strategy
A
strategy in which the maturities of the securities included in
the portfolio are concentrated at two extremes.
BARRA’s
performance analysis (PERFAN) factor model
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.
Base
interest rate
Related:
Benchmark interest rate
Base
probability of loss
The
probability of not achieving a portfolio expected return.
Basis
Regarding
a futures contract, the difference between the cash price and
the futures price observed in the market.
Basis
risk
The
uncertainty about the basis at the time a hedge may be lifted.
Hedging substitutes basis risk for price risk.
Basket
trades
Program
trades.
Bear
One
who believes prices will move lower. Related: Bull
Bear
market
Any
market in which prices are in a declining trend.
Before-tax
profit margin
The
ratio of net income before taxes to net sales.
Bellwether
issues
Related:
Benchmark issues
Benchmark
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.
Benchmark
interest rate
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").
Benchmark
issues
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.
Beta
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.
Bid
A
proposal to buy at a specified price. Related: Ask, Offer
Break
A
rapid and sharp price decline.
Black-Scholes
option-pricing model
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.
Block
trade
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.
Bond
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.
Bond-equivalent
basis
The
method uses for computing the bond-equivalent yield.
Bond-equivalent
yield
The
annualized yield to maturity computed by doubling the semiannual
yield.
Bond
indenture
The
contract that sets forth the promises of a corporate bond issuer
and the rights of investors.
Bond
indexing
Designing
a portfolio so that its performance will match the performance
of some bond index.
Book
value
The
total owners’ equity shown in the balance sheet.
Book
value per share
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).
Bootstrapping
A
process of creating a theoretical spot rate curve, using one
yield projection as the basis for the yield of the next
maturity.
Bottom-up
equity management style
A
management style that de-emphasizes the significance of economic
and market cycles and focuses instead on the analysis of
individual stocks.
Break-even
time
Related:
Premium payback period
Broker
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.
Broker
loan rate
Related:
Call money rate
Break
A
rapid and sharp price decline.
Bull
One
who expects prices to rise. Related:
Bear
Bull
market
Any
market in which prices are in an upward trend.
Bull
spread
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.
Bulldog
market
The
foreign market in the United Kingdom.
Bullet
contract
A
guaranteed investment contract purchased with a single
(one-shot) premium. Related: Window contract
Bullet
strategy
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.
Butterfly
shift
A
non-parallel shift in the yield curve involving the humpedness
of the curve.
Buy-and-hold
strategy
A
passive investment strategy with no active buying and selling of
stocks once the portfolio is created until the end of the
investment horizon.
Buy
hedge
See
long hedge.
Buy
in
To
cover, offset or close out a short position. Related:
Evening up, Liquidation, Offset
Buy
limit order
A
conditional trading order that indicates that a security may be
purchased only at the designated price or lower. Related:
Sell limit order
Buy-side
analyst
A
financial analyst employed by a non-brokerage firm, typically
one of the larger money management firms that purchase
securities on their own accounts.
Buy
on close
To
buy at the end of the trading session at a price within the
closing range.
Buy
on margin
A
transaction in which an investor borrows to buy additional
shares using the shares themselves as collateral.
Buy
on opening
To
buy at the beginning of a trading session at a price within the
opening range.
Calendar
effect
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.
Call
An
option that gives the right to buy the underlying futures
contract.
Call
date
A
date before maturity, specified at issuance, when the issuer of
a bond may retire part of the bond for a specified call price.
Call
money rate
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.
Call
option
Also
called a call, an option that grants the buyer the right to
purchase the underlying from the writer.
Call
price
The
price, specified at issuance, at which the issuer of a bond may
retire part of the bond at a specified call date.
Call
protection
A
feature of some callable bonds that establishes an initial
period when the bonds may not be called.
Call
provision
An
embedded option granting a bond issuer the right to buy back all
or part of the issue prior to maturity.
Call
risk
The
combination of cash flow uncertainty and reinvestment risk
introduced by a call provision.
Capital
market
The
market for trading long-term debt instruments (those that mature
in more than one year).
Capital
market line (CML)
The
line defined by every combination of the risk-free asset and the
market portfolio.
Capitalization
method
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.
Capitalization
ratios
Capitalized
Recorded
in asset accounts and then depreciated or amortized, as is
appropriate for expenditures for items with useful lives greater
than one year.
Car
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.
Carry
Related:
Net financing costs
Cash
commodity
The
actual physical commodity as distinguished from a futures
contract.
Cash-equivalent
items
Temporary
investments of currently excess cash in short-term, high-quality
investment media such as Treasury bills and bankers acceptances.
Cash
markets
Also
called spot markets, markets that involve the immediate delivery
of a security or instrument. Related: Derivative markets
Cash
settlement contracts
Futures
contracts, such as stock index futures, which settle for cash,
not involving the delivery of the underlying.
Certificate
of deposit (CD)
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.
CFTC
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.
Characteristic
line
The
market model applied to a single security. The slope of the line
is a security’s beta.
Cheapest
to deliver issue
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.
Clearinghouse
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.
Clearing
member
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.
Close,
the
The
period at the end of the trading session. Sometimes used to
refer to closing price. Related: Opening, the
Closed-end
fund
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. Related: Open-end fund.
Closing
range
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
Cluster
analysis
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.
Combination
strategy
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
Commercial
paper
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.
Commission
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
Commission
house
A
firm which buys and sells futures contracts for customer
accounts. Related: Futures commission merchant, Omnibus
account
Commitment
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
Common
stock equivalent
A
convertible security that is traded like an equity issue because
the optioned common stock is trading high.
Common
stock market
The
market for trading equities, not including preferred stock.
Company-specific
risk
Related:
Unsystematic risk
Consensus
forecast
The
mean of all financial analysts’ forecasts for a company.
Contango
A
market condition in which futures prices are higher in the
distant delivery months.
Contract
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.
Contract
month
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.
Conversion
factors
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.
Conversion
ratio
The
number of shares of common stock that the security holder will
receive from exercising the call option of a convertible
security.
Corporate
bonds
Debt
obligations issued by corporations.
Cost
of carry
Related:
Net financing cost
Counterparties
The
parties to an interest rate swap.
Counterparty
risk
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.
Coupon
The
periodic interest payment made to the bondholders during the
life of the bond.
Coupon
rate
The
rate of interest that, when multiplied by the par value,
indicates the dollar value of the coupon payment.
Cover
The
purchase of a contract to offset a previously established short
position.
Covered
call writing strategy
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.
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
Cross
hedging
The
practice of hedging with a futures contract that is different
from the underlying being hedged.
Currency
risk.
Related:
Exchange rate risk
Current-coupon
issues.
Related:
Benchmark issues
Current
ratio
The
ratio of current assets to current liabilities.
Customized
benchmarks
A
benchmark that is designed to meet a client’s requirements and
long term objectives.
Day
order
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.
Day
trading
Refers
to establishing and liquidating the same position or positions
within one day’s trading.
Dealer
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).
Dealer
options
Over-the-counter
options, such as those offered by government and mortgage backed
securities dealers.
Debt
instrument
An
asset requiring fixed dollar payments, such as a government or
corporate bond.
Debt
market
The
market for trading debt instruments.
Default
risk
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.
Deferred
futures
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.
Delivery
The
tender and receipt of an actual commodity or financial
instrument in settlement of a futures contract.
Delivery
notice
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
Delivery
options
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.
Delivery
points
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.
Delivery
price
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.
Delta
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.
Derivative
instruments
Contracts
such as options and futures whose price is derived from the
price of the underlying financial asset.
Derivative
markets
Markets
for derivative instruments.
Diffusion
process
A
conception of the way a stock’s price changes that assumes
that the price takes on all intermediate values.
Dirty
price
Related:
Full price
Discount
Referring
to the selling price of a bond, a price below its par value. Related:
Premium
Discount
rate
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.
Discretionary
account
Accounts
over which an individual or organization, other than the person
in whose name the account is carried, exercises trading
authority or control.
Diversifiable
risk
Related:
Unsystematic risk
Dividend
rate
The
fixed or floating rate paid on preferred stock base on par
value.
Dividend
yield
The
cash yield of a stock or stock index, used in determining the
net financing cost for a stock index future contract.
Dual-currency
issues
Eurobonds
that pay coupon interest in one currency but pay the principal
in a different currency.
Duration
A
common gauge of the price sensitivity of an asset or portfolio
to a change in interest rates.
Dynamic
asset allocation
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.
Dynamic
hedging
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
per share
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.
Earnings
surprises
Positive
or negative differences from the consensus forecast.
Economic
surplus
For
an entity, the difference between the market value of all its
assets and the market value of its liabilities.
Effective
convexity
The
convexity of a bond calculated with cash flows that change with
yields.
Effective
date
In
an interest rate swap, the date the swap begins accruing
interest.
Effective
duration
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.
Efficient
portfolio
A
portfolio that provides the greatest expected return for a given
level of risk, or equivalently, the lowest risk for a given
expected return.
Embedded
option
An
option that is part of the structure of a bond, as opposed to a
bare option, which trades separately from any underlying
security.
Emerging
markets
The
financial markets of developing economics.
Enhanced
indexing
Also
called indexing plus, an indexing strategy whose objective is to
exceed the total return performance of the index.
Equilibrium
market price of risk
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.
Equity
The
residual dollar value of a futures trading account, assuming its
liquidation at the going market price.
Equity
collar
The
simultaneous purchase of an equity floor and sale of an equity
cap.
Equity
floor
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.
Equity
market
Related:
Stock market
Equity
options
Options
in which the underlying is either a stock or a stock index.
Equity
swap
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
Euro
straight
A
fixed-rate coupon Eurobond.
Eurobond
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.
Eurodollar
bonds
Eurobonds
denominated in U.S. dollars.
Euroequity
issues
Securities
sold in the Euromarket. That is, securities initially sold to
investors simultaneously in several national markets by an
international syndicate.
Euromarket
Related:
External market
Euroyen
bonds
Eurobonds
denominated in Japanese yen.
Evening
up
Buying
or selling to offset an existing market position. Related:
Buy in, Liquidation, Offset
Event
risk
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.
Exchange
rate risk
Also
called currency risk, the risk of an investment’s value
changing because of currency exchange rates.
Exchangeable
security
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.
Execution
costs
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.
Exercise
The
conversion of the option by the holder into the appropriate long
or short underlying futures contract.
Exercise
price
The
price at which the underlying future or options contract may be
bought or sold.
Expectations
theories
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.
Expected
return
The
return expected on a risky asset based on a probability
distribution for the possible rates of return.
Expected
value
The
weighted average of a probability distribution.
Expiration
date
