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Magic of diversification

The effective reductions or risk (variance) of a portfolio, achieved without reduction to expected returns through the combination of assets with low or negative correlations (covariances). Related: Markowitz diversification

Maintenance margin requirement

A sum, usually smaller than Ė but part of the original margin, which must be maintained on deposit at all times. If a customerís equity in any futures position drops to, or under, the maintenance margin level, the broker must issue a margin call for the amount at money required to restore the customerís equity in the account to the original margin level. Related: Margin, Margin call

Management fee

An investment advisory fee charged by the financial advisor to a fund based on the fundís average assets, but sometimes determined on a sliding scale that declines as the dollar amount of the fund increases.


Also called security deposit. An amount of funds that must be deposited with the broker for each contract as a good faith deposit on the contract. Related: Security deposit (initial).

Margin call

A demand for additional funds because of adverse price movement. Maintenance margin requirement, Security deposit maintenance.


The daily adjustment of an account to reflect profits and losses.

Market-if-Touched (MIT)

A price order, below market if a buy or above market if a sell, that automatically becomes a market order if the specified price is reached. Related: Market order

Market conversion price

Also called conversion parity price, the price that an investor effectively pays for common stock by purchasing a convertible security and then exercising the conversion option. This price is equal to the market price of the convertible security divided by the conversion ratio.

Market impact costs

Also called price impacts costs, the result of a bid/ask spread and a dealerís price concession.

Market model

This relationship is sometimes called the single-index model. The market model says that the return on a security depends on the return on the market portfolio and the extent of the securityís responsiveness as measured, by beta (i). In addition, the return will also depend on conditions that are unique to the firm. Graphically, the market model can be depicted as a line fitted to a plot of asset returns against returns on the market portfolio.

Market order

An order for immediate execution given to a broker to buy or sell at the best obtainable price.

Market portfolio

A portfolio consisting of all assets available to investors, with each asset held in proportion to its market value relative to the total market value of all assets.

Market risk

Related: Systematic risk

Market sectors

The classification of bonds by issuer characteristics, such as state government, corporate, or utility.

Market segmentation theory

A biased expectations theory that asserts that the shape of the yield curve is determined by the supply of and demand for securities within each maturity sector.

Market timer

A money manager who assumes he or she can forecast when the stock market will go up and down.

Market timing costs

Costs that arise from price movement of the stock during the time of the transaction which is attributed to other activity in the stock.

Marketplace price efficiency

The degree to which the prices of assets reflect the available marketplace information. Marketplace price efficiency is sometimes estimated as the difficulty faced by active management of earning a greater return than passive management would, after adjusting for the risk associated with a strategy and the transactions costs associated with implementing a strategy.

Markowitz diversification

A strategy that seeks to combine assets a portfolio with returns that are less than perfectly positively correlated, in an effort to lower portfolio risk (variance) without sacrificing return. Related: NaÔve diversification

Markowitz efficient frontier

The graphical depiction of the Markowitz efficient set of portfolios representing the boundary of the set of feasible portfolios that have the maximum return for a given level of risk. Any portfolios above the frontier cannot be achieved. Any below the frontier are dominated by Markowitz efficient portfolios.

Markowitz efficient portfolio

Also called a mean-variance efficient portfolio, a portfolio that has the highest expected return at a given level or risk.

Markowitz efficient set of portfolios

The collection of all efficient portfolios, graphically referred to as the Markowitz efficient frontier.

Matching concept

The accounting principle that requires the recognition of all costs that are associated with the generation of the revenue reported in the income statement.

Maturity date

For a bond, the date on which the principal is required to be repaid. In an interest rate swap, the date that the swap stops accruing interest.

Maturity phase

A phase of company development in which earnings continue to grow at the rate of the general economy. Related: Three-phase DDM

Maturity spread

The spread between any two maturity sectors of the bond market.

Maturity value

Related: Par value

Maximum price fluctuation

The maximum amount the contract price can change, up or down, during one trading session, as fixed by exchange rules in the contract specification. Related: Limit price

Mean-variance efficient portfolio

Related: Markowitz efficient portfolio

Medium-term note

A corporate debt instrument that is continuously offered to investors over a period of time by an agent of the issuer. Investors can select from the following maturity bands: 9 months to 1 year, more than 1 year to 18 months, more than 18 months to 2 years, etc., up to 30 years.

Minimum price fluctuation

Smallest increment of price movement possible in trading a given contract. Also called point or tick. Related: Point, Tick minimum variance zero-beta portfolio. The zero-beta portfolio with the least risk.

Modified duration

The ratio of Macaulay duration to (1 + y), where y = the bond yield. Modified duration is inversely related to the approximate percentage change in price for a given change in yield.

Money center banks

Banks that raise most of their funds from the domestic and international money markets, relying less on depositors for funds.

Money market

The market for trading short-term debt instruments (those that mature in less than one year). Related: Capital market

Money market demand account

An account that pays interest based on short-term interest rates.

Mortgage-backed securities

Securities backed by a pool of mortgage loans.

Mortgage bond

A bond in which the issuer has granted the bondholders a lien against the pledged assets. Collateral trust bonds.

Mortgage pass-through security

Also called a passthrough, a security created when one or more mortgage holders form a collection (pool) of mortgages and sell shares or participation certificates in the pool.

Most distant futures contract

When several futures contracts are considered, the contract settling last. Related: Nearby futures contract

Multiperiod immunization

A portfolio strategy in which a portfolio is created that will be capable of satisfying more than one predetermined future liability regardless if interest rates change.

Multirule system

A technical trading strategy that combines mechanical rules, such as the CRISMA (cumulative volume, relative strength, moving average) Trading System of Pruitt and White.

Mutual offset

A system, such as the arrangement between the CME and SIMEX, which allows trading positions established on one exchange to be offset or transferred on another exchange.

NaÔve diversification

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

Naked strategies

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

National Association of Securities Dealers Automatic Quotation (NASDAQ) System

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.

National Futures Association (NFA)

The futures industry self regulatory organization established in 1982.

Nearby futures contract

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

Negative carry

Related: Net financing cost

Negative convexity

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.

Neglected firm effect

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

Net asset value (NAV) per share

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

Net financing cost

Also called the cost of carry or, simply, carry, the difference between the cost of financing the purchase of an asset and the assetís 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.

Net operating margin

The ratio of net operating income to net sales.

Next futures contract

The contract settling immediately after the nearby futures contract.

No-load fund

A mutual fund that does not impose a sales commission. Related: Load fund

Nominal price

Price quotations on futures for a period in which no actual trading took place.

Non-cumulative preferred stock

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

Non-parallel shift in the yield curve

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

Normal portfolio

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


Debt instruments with maturities of less than 10 years.

Notice day

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

Notional principal amount

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

Odd lot

A trading order for less than 100 shares of stock. Compare round lot.


Indicates a willingness to sell at a given price. Related: Bid


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

Omnibus account

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

Open contracts

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.

Open-end fund

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.

Open interest

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

Open order

An order to a broker that is good until it is canceled or executed.


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.

Opening, the

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

Opening price

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

Operating cycle

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

Operationally efficient market

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

Opportunity costs

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.

Optimal portfolio

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

Optimization approach to indexing

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 right, but not the obligation, to buy or sell an underlying futures contract.

Original margin

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

Option-adjusted spread (OAS)

The spread over an issuerís 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.

Option premium

The option price.

Option 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.

Option seller

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

Option writer

Option seller.

Options contract

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).

Options contract multiple

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).

Options on physicals

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

Over-the-counter market (OTC)

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

Overlay strategy

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

Overnight repo

A repurchase agreement with a term of one day.

Overreaction hypothesis

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 customerís net ledger balance after the offset of a previously established position(s).

Par value

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

Parallel shift in the yield curve

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

Parity value

Related: Conversion value

Passive portfolio strategy

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

Perfect hedge

A hedge in which the profit and loss are equal.

Performance attribution analysis

The decomposition of a money managerís 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?

Perpetual warrants

Warrants that have no expiration date.


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

Pit committee

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


Related: Minimum price fluctuation.

Policy asset allocation

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 collection of investments.

Portfolio insurance

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

Portfolio internal rate of return

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

Positive carry

Related: Net financing cost

Positive convexity

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.

Posstrade benchmarks

Prices after the decision to trade.

Preferred stock

A class of stock that shares characteristics of both common stock and debt.


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.

Pre-trade benchmarks

Prices occurring before or at the decision to trade.

Price compression

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.

Price discovery process

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

Price-earnings (P/E) ratio

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

Price momentum

Related: Relative strength

Price persistence

Related: Relative strength

Price risk

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

Price value of a basis point (PVBP)

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.

Price-volume relationship

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

Pricing efficiency

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.

Primary market

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

Profit margin

The ratio of earnings available to stockholders to net sales.

Program trades

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

Protective put buying strategy

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

Provisional call feature

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.

Pure expectations theory

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

Pure index fund

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

Put-call parity relationship

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.

Put swaption

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.

Quality option

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

Quality spread

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.

Quick ratio

Related: Acid-test ratio

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