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The physical commodity underlying a futures contract.
Cash commodity, Physical

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.


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.


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.


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.


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.


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

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.


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.


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


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.


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 proposal to buy at a specified price. Related: Ask, Offer


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.


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).


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


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


A rapid and sharp price decline.


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.


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

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.


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.


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.


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.


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


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.


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.

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


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.


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.


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.


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.


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.


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


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.


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.


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.


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.


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.


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

The last day upon which an option can be exercised.

Expiration date

The date when an option contract ends.

External efficiency

Related: Pricing efficiency

External market

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

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