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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:
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,
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
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).
demand for additional funds because of adverse price movement.
Maintenance margin requirement, Security deposit maintenance.
daily adjustment of an account to reflect profits and losses.
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
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.
called price impacts costs, the result of a bid/ask spread and a
dealerís price concession.
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.
order for immediate execution given to a broker to buy or sell at
the best obtainable price.
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.
classification of bonds by issuer characteristics, such as state
government, corporate, or utility.
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.
money manager who assumes he or she can forecast when the stock
market will go up and down.
that arise from price movement of the stock during the time of the
transaction which is attributed to other activity in the stock.
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.
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:
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.
called a mean-variance efficient portfolio, a portfolio that has
the highest expected return at a given level or risk.
efficient set of portfolios
collection of all efficient portfolios, graphically referred to as
the Markowitz efficient frontier.
accounting principle that requires the recognition of all costs
that are associated with the generation of the revenue reported in
the income statement.
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
phase of company development in which earnings continue to grow at
the rate of the general economy. Related: Three-phase DDM
spread between any two maturity sectors of the bond market.
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
Markowitz efficient portfolio
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.
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
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.
that raise most of their funds from the domestic and international
money markets, relying less on depositors for funds.
market for trading short-term debt instruments (those that mature
in less than one year). Related: Capital market
market demand account
account that pays interest based on short-term interest rates.
backed by a pool of mortgage loans.
bond in which the issuer has granted the bondholders a lien
against the pledged assets. Collateral trust bonds.
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.
distant futures contract
several futures contracts are considered, the contract settling
last. Related: Nearby futures contract
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.
technical trading strategy that combines mechanical rules, such as
the CRISMA (cumulative volume, relative strength, moving average)
Trading System of Pruitt and White.
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.
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
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
Association of Securities Dealers Automatic Quotation (NASDAQ)
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.
Futures Association (NFA)
futures industry self regulatory organization established in 1982.
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.
nearest active trading month of a financial or commodity futures
market. Related: Deferred futures
Net financing cost
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.
tendency of firms that are neglected by security analysts to
outperform firms that are the subject of considerable attention.
asset value (NAV) per share
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
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.
ratio of net operating income to net sales.
contract settling immediately after the nearby futures contract.
mutual fund that does not impose a sales commission. Related:
quotations on futures for a period in which no actual trading took
stock whose holders must forgo dividend payments when the company
misses a dividend payment. Related: Cumulative preferred
shift in the yield curve
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
customized benchmark that includes all the securities from which a
manager normally chooses, weighted as the manager would weight
them in a portfolio.
instruments with maturities of less than 10 years.
day on which notices of intent to deliver pertaining to a
specified delivery month may be issued. Related: Delivery
an interest rate swap, the predetermined dollar principal on which
the exchanged interest payments are based.
trading order for less than 100 shares of stock. Compare round
a willingness to sell at a given price. Related: Bid
of a current long or short position by making an opposite
transaction. Related: Buy in, Evening up, Liquidation
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
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.
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.
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
order to a broker that is good until it is canceled or executed.
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.
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,
range of prices at which the first bids and offers were made or
first transaction were completed. Related: Range
average time intervening between the acquisition of materials or
services and the final cash realization from those acquisitions.
called an internally efficient market, one in which investors can
obtain transactions services that reflect the true costs
associated with furnishing those services.
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.
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.
approach to indexing
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.
right, but not the obligation, to buy or sell an underlying
margin needed to cover a specific new position. Related:
Margin, Security deposit (initial)
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.
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.
called the option writer, the party who grants a right to trade a
security at a given price in the future.
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
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).
rate options written on fixed-income securities, as opposed to
those written on interest rate futures contracts.
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
decentralized market (as opposed to an exchange market) where
geographically dispersed dealers are linked together by telephones
and computer screens.
strategy of using futures for asset allocation by pension sponsors
to avoid disrupting the activities of money managers.
repurchase agreement with a term of one day.
supposition that investors overreact to unanticipated news,
resulting in exaggerated movement in stock prices followed by
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).
called the maturity value or face value, the amount that the
issuer agrees to pay at the maturity date.
shift in the yield curve
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
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
hedge in which the profit and loss are equal.
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
that have no expiration date.
specific area of the trading floor that is designated for the
trading of an individual futures or options contract.
committee of the exchange that determines the daily settlement
price of futures contracts.
Minimum price fluctuation.
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.
collection of investments.
strategy using a leveraged portfolio in the underlying stock to
create a synthetic put option.
internal rate of return
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.
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
Net financing cost
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.
after the decision to trade.
class of stock that shares characteristics of both common stock
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
occurring before or at the decision to trade.
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.
process of determining the prices of the assets in the marketplace
through the interactions of buyers and sellers.
current market price of the stock divided by some measure of
earnings per share.
risk that the value of a security (or a portfolio) will decline in
value of a basis point (PVBP)
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
relationship espoused by some technical analysts that signals
continuing rises and falls in security prices based on
accompanying changes in volume traded.
called external efficiency, a market characteristic where prices
at all times fully reflect all available information that is
relevant to the valuation of securities.
principal underlying market for a financial instrument or physical
ratio of earnings available to stockholders to net sales.
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
put buying strategy
strategy that involves buying a put option on the underlying
security that is held in a portfolio. Related: Hedge option
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.
theory that asserts that the forward rates exclusively represent
the expected future rates. Related: Biased expectations
portfolio that is managed so as to perfectly replicate the
performance of the market portfolio.
option granting the right to sell the underlying futures contract.
Opposite of a call. Related: Call
relationship between the price of a put and the price of a call on
the same underlying with the same expiration date, which prevents
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.
called the swap option, the sellerís choice of deliverables in
Treasury bond and Treasury note futures contract. Related:
Cheapest to deliver issue
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.
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