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equilibrium price for futures contracts. Also called the
theoretical futures price.
portfolio that an investor can construct given the assets
held in reserve for depository institutions at their district
Federal Reserve Bank.
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.
interest rate charged to borrow funds in the federal funds market.
price at which an order is executed.
or kill order
trading order that is canceled unless executed within a designated
time period. Related: Open order
percentage by which the price of a security must change in order
to trigger its purchase or sale.
organized institutional structure or mechanism for creating and
exchanging financial assets.
risk that the cash flow of an issuer will not be adequate to meet
its financial obligations.
method of valuing the costs of goods sold that uses the cost of
the oldest item in inventory first.
first day, varying by contracts and exchanges, on which notices of
intent to deliver actual financial instruments or physical
commodities against futures are authorized.
called a busted convertible, a convertible security that is
trading like a straight security because the optioned common stock
is trading low.
that pay a fixed-dollar amount, such as bonds and preferred stock.
market for trading bonds and preferred stock.
an interest rate swap the counterparty who pays a fixed rate,
usually in exchange for a floating-rate payment.
of the yield curve
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.
guaranteed investment contract where the crediting rate is tied to
some variable ("floating") interest rate benchmark, such
as a specific-maturity Treasury yield.
an interest rate swap, the counterparty who pays a rate based on a
reference rate, usually in exchange for a fixed-rate payment.
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.
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".
of a nationís internal market, representing the mechanisms for
issuing and trading securities of entities domiciled outside that
nation. Compare external market and domestic market.
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.
projection of future interest rates calculated from either the
spot rates or the yield curve.
security pledges for larger municipal bond issuers, such as states
and large cities which have diverse funding sources.
called dirty price, the price of a bond including accrued
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.
product of a statistical model to predict the fundamental risk of
a security using not only price data but other market-related and
the model for calculating fundamental beta, ratios in risk indexes
other than market variability, which rely on financial data other
than price data.
ratio of a pension planís assets to its liabilities.
Interest rate risk.
term used to designate all contracts covering the sale of
financial instruments or physical commodities for future delivery
on a commodity exchange.
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,
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.
constant, set by an exchange, which when multiplied by the futures
price gives the dollar value of a stock index futures contract.
option on a futures contract. Related: Options on physicals
price at which the parties to a futures contract agree to transact
on the settlement date.
ratio of the change in a call optionís delta to the change in
price of underlying stock.
debt instrument of a municipality which is secured by the issuerís
unlimited taxing power.
that arises when an insurer has policies concentrated within
certain geographic areas, such as the risk of damage from a
hurricane or an earthquake.
order executed by one brokerage house, but cleared by another
house at the request of the customer.
(Good till canceled)
order to buy or sell at a fixed price. It holds until executed or
ratio of gross profit to net sales.
top-down manager who infers the phases of the business cycle and
allocates assets accordingly.
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.
phase of development in which a company experiences rapid earnings
growth as it produces new products and expands market share. Related:
investment contract (GIC)
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.
who purchases or sells a futures contract as a temporary
substitute for a transaction to be made at a later date. Related:
purchaser of an option. Also known as the option buyer.
called the ex post return, the return on a portfolio over a period
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
bond portfolio strategy whose goal is to immunize a portfolio
against a general change in the rate of interest.
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
expected volatility in a stockís return derived from its option
price, using an option-pricing model.
statement showing the revenues, expenses, and income (the
difference between revenues and expenses) of a corporation over
some period of time.
passive instrument strategy consisting of the construction of a
portfolio of stocks designed to track the total return performance
of an index of stocks.
graphical expression of a utility function, where the horizontal
axis measures risk and the vertical axis measures expected return.
called purchasing-power risk, the risk that changes in the real
return the investor will realize after adjusting for inflation
will be negative.
in which an investor believes he or she possesses pertinent
information not currently reflected in the stockís price.
that are the result of either a reallocation of wealth or an
implementation of an investment strategy that only utilizes
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.
that indicate how much each industry requires of the production of
each other industry in order to produce each dollar of its own
that invest, including insurance companies, depository
institutions, pension funds, investment companies, and endowment
gradual domination of financial markets by institutional
investors, as opposed to individual investors. This process has
occurred throughout the industrialized world.
municipal bond backed both by the credit of the municipal issuer
and by commercial insurance policies.
legal claim to some future benefit, typically a claim to future
cash. Financial assets, also called financial instruments or
securities, are intangible assets.
ratio of the earnings available for paying the interest for a
given year to the annual interest expense.
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).
called an interest rate ceiling, an interest rate agreement in
which payments are made when the reference rate exceeds the strike
Interest rate cap
interest rate agreement in which payments are made when the
reference rate falls below the strike rate.
a bond, the risk that a rise in interest rates will decrease the
bondís price. For a depository institution, also called funding
risk, the risk that spread income will suffer because of a change
in interest rates.
binding agreement between counterparties to exchange periodic
interest payments on some predetermined dollar principal, which is
called the notional principal amount.
spread between the interest rate offered in two sectors of the
bond market for issues of the same maturity.
exchange of one bond for another based on the managerís
projection of a realignment of spreads between sectors of the bond
mechanisms for issuing and trading securities within a nation,
including its domestic market and foreign market. Compare external
rate of return
rate of return.
Depository Receipt (IDR)
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
See external market
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
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
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
futures market in which the nearer months are selling at price
premiums to the more distant months. Related: Premium
bond that is assigned a rating in the top four categories by
commercial credit rating companies. Related: High-yield
particular financial asset.
entity that issues a financial asset.
index that uses the capital asset pricing model to determine
whether a money manager outperformed a market index.
that clear on more than one exchange.
called a high-yield bond, one with a quality rating below triple
ratio of the dollar price change in the price of an option to a 1%
change in the expected price volatility.
bond portfolio strategy in which the portfolio is constructed to
have approximately equal amounts invested in every maturity within
a given range.
final day under an exchangeís 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.
of one price
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.
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
portfolio that includes risky assets purchased with funds
financial obligation, or the cash outlay that must be made at a
specific time to satisfy the contractual terms of such an
strategies that select assets so that cash flows will equal or
exceed the clientís obligations.
interest rate swap used to alter the cash flow characteristics of
an institutionís liabilities so as to provide a better match
with its assets.
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.
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.
transaction that offsets or closes out a long or short position. Related:
Buy in, Evening up, Offset
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
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.
theory of the term structure
biased expectations theory that asserts that the implied forward
rates will not be a pure estimate of the marketís expectations
of future interest rates because they embody a liquidity premium.
that are traded on an exchange.
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
amount a policyholder may borrow against a whole life insurance
policy at the interest rate specified in the policy.
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.
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
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
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
straddle in which a long position is taken in both a put and call
debt to equity ratio
capitalization ratio comparing long-term debt to shareholdersí
price-earnings ratio effect
tendency of portfolios of stocks with a low price earnings ratio
to outperform portfolios consisting of stocks with a high
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