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Face value

Related: Par value

Fair price

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

Feasible portfolio

A portfolio that an investor can construct given the assets available.

Federal funds

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

Federal funds market

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

Federal funds rate

The interest rate charged to borrow funds in the federal funds market.


The price at which an order is executed.

Fill or kill order

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


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

Financial market

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

Financial risk

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

First-in-first-out (FIFO)

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

First notice day

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

Fixed-income equivalent

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

Fixed-income instruments

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

Fixed-income market

The market for trading bonds and preferred stock.

Fixed-rate payer

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

Flattening of the yield curve

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

Floatingprate contract

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

Floating-rate payer

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

Floor broker

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

Floor trader

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

Foreign market

Part 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.

Forward contract

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

Forward rate

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

Full faith-and-credit obligations

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

Full price

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

Fund family

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

Fundamental beta

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

Fundamental descriptors

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

Funding ratio

The ratio of a pension planís assets to its liabilities.

Funding risk

Related: Interest rate risk.


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

Futures commission merchant

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

Futures contract

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

Futures contract multiple

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

Futures option

An option on a futures contract. Related: Options on physicals

Futures price

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


The ratio of the change in a call optionís delta to the change in price of underlying stock.

General obligation bond

A debt instrument of a municipality which is secured by the issuerís unlimited taxing power.

Geographic risk

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

Give up

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

GTC (Good till canceled)

An order to buy or sell at a fixed price. It holds until executed or canceled.

Gross profit margin

The ratio of gross profit to net sales.

Group rotation manager

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

Growth manager

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

Growth phase

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

Guaranteed investment contract (GIC)

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


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


The purchaser of an option. Also known as the option buyer.

Holding period return

Also called the ex post return, the return on a portfolio over a period of time.

Hybrid security

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

Immunization strategy

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

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. Related: Cheapest to deliver issue

Implied volatility

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

Income statement

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


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

Indifference curve

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

Inflation risk

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

Information-motivated trades

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

Informationless trades

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

Initial margin requirement

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

Input-output tables

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

Institutional investors

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


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

Insured bond

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

Intangible asset

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

Interest coverage ratio

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

Interest rate agreement

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

Interest rate cap

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

Interest rate ceiling

Related: Interest rate cap

Interest rate floor

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

Interest rate risk

For 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.

Interest rate swap

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

Intermarket sector spread

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

Intermarket spread swaps

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

Internal market

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

Internally efficient market

Operationally efficient market.

Internal rate of return

Dollar-weighted rate of return.

International Depository Receipt (IDR)

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

International market

Related: See external market


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

Intramarket sector spread

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

Intrinsic value

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

Inverted market

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

Investment grade

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


A particular financial asset.


An entity that issues a financial asset.

Jensen Index

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

Joint Clearing Members

Firms that clear on more than one exchange.

Junk bond

Also called a high-yield bond, one with a quality rating below triple B.


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

Ladder strategy

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

Last trading day

The 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.

Law of one price

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

Leveraged buy-out (LBO)

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

Leveraged portfolio

A portfolio that includes risky assets purchased with funds borrowed.


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

Liability funding strategies

Investment strategies that select assets so that cash flows will equal or exceed the clientís obligations.

Liability swap

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

Limit order

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

Limit price

Maximum price inflation.

Limit order book

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


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


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

Liquidity risk

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

Liquidity theory of the term structure

A 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.

Listed stocks

Stocks that are traded on an exchange.

Load fund

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

Loan value

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

Local expectations theory

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


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

Long hedge

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

Long position

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

Long straddle

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

Long-term debt to equity ratio

A capitalization ratio comparing long-term debt to shareholdersí equity.

Low price-earnings ratio effect

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

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