Option that can be exercised any time before the final exercise date.
The gradual reduction of a loan or other obligation by making periodic payments of principal and interest.
An interest rate swap or currency swap where the principal or notional amount decreases in steps over the life of the swap.
The increase in value of an investment, expressed as a percentage per year. If the annual return is expressed as annual percentage yield, then the number takes into account the effects of compounding interest. If it is expressed as annual percentage rate, then the annual rate will usually not take into account the effect of compounding interest.
Option based on the average price of the asset during the life of the option.
Anything owned that has commercial or exchange value.
A detailed listing of assets, liabilities and capital accounts (net worth), showing the financial condition of a bank or company as of a given date. A balance sheet illustrates the basic accounting equation:
Assets= liabilities + net worth.
One hundredth of a percentage point. Spreads in interest rate markets are commonly quoted in basis points. 1bps=1/10,000
A Binder is a set of users who receive a number of specified reports every time they are produced. The Binder stores the e-mail addresses of the specified users and the report(s) that these users must receive. A user performing the Reporter’s tasks will e-mail selected reports to these defined binders.
Binomial Option Tree
Option Pricing method which assumes that the price of the underlying can go up or down by fixed multiples. Each price jump is assigned a probability and a tree of possible underlying prices is built. Working from the tree points or nodes at the option maturity date, the worth of the option can be back calculated until the option can be valued at the desired date.
An analytical option pricing formula which is used to price European options on non-dividend paying equity. The Black-Scholes (BS) method can be extended to price American options.
A debt instrument which pays back cash to the holder at regular frequencies. The payment is normally a fixed percentage, known as a coupon. At maturity, the face value of the bond is paid.
A contract between a buyer and seller whereby the buyer acquires the right, but not the obligation, to buy a specified stock, commodity or index at a predetermined price on or before a predetermined date. The seller of the option assumes the obligation of delivering the underlying, should the buyer exercise the option.
An upper and lower limit on the interest rate on a floating-rate note.
The number of compounding periods in a year. For example, quarterly compounding has a compounding frequency of 4.
Property that a curve is above a straight line connecting two end points. If the curve falls below the straight line, it is called concave.
Cost of capital
The required return for a capital budgeting project.
Cost of funds
Interest rate associated with borrowing money.
One of a series of promissory notes of consecutive maturities, attached to a bond or other debt certificate and intended to be detached and presented on the due dates for payment of interest.
In bonds, notes, or other fixed income securities, the stated percentage rate of interest, usually paid twice a year.
The risk that an issuer of debt securities or a borrower may default on its obligations, or that the payment may not be made on a negotiable instrument.
Applies to derivative products. Difference in the value of two options, when the value of the one sold exceeds the value of the one bought. One sells a “credit spread.”
Current rate method
The translation of all foreign currency balance sheet and income statement items at the current exchange rate.
Date of issue
Used in the context of bonds to refer to the date on which a bond is issued and when interest accrues to the bondholder. Used in the context of stocks to refer to the date trading begins on a new stock issued to the public.
A convention for quoting interest rates.
Day Count Conventions
This determines the convention to be used in pricing of Fixed Income Bonds.
Actual / Actual – The number of accrued days is equal to the actual number of days between the start and the end date of the period, while the number of days in the year is taken to be the actual number of days in the year concerned.
Actual/365 – The number of accrued days is equal to the actual number of days between the start and the end date of the period, while the number of days in a year is taken to be 365.
Actual/360 – The number of accrued days is equal to the actual number of days between the start and the end date of the period, while the number of days in a year is taken to be 360.
European 30/360 – The number of accrued days are calculated on the basis of a year of 360 days and a month of 30 days. If the first date falls on the 31st, it is changed to the 30th. If the second date falls on the 31st, it is changed to the 30th.
US (NASD) 30/360 – The number of accrued days are calculated on the basis of a year of 360 days and a month of 30 days. If the first date falls on the 31st, it is changed to the 30th. If the second date falls on the 31st, it is changed to the 30th but only if the first date falls on the 30th or the 31st.
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). Individual or firm acting as a principal in a securities transaction. Principals are market makers in securities, and thus trade for their own account and risk.
The rate of change of fair value of an option with respect to the change in price of the underlying.
Asset whose value derives from that of some other asset (e.g. future or an option).
A portion of a company’s profit paid to common and preferred shareholders.
A common gauge of the price sensitivity of a fixed income asset or portfolio to a change in interest rates.
The stockholder’s investment interest in a corporation, equalling the excess of assets over liabilities and including common and preferred stock, retained earnings, and surplus reserves.
Option that can only be exercised only on the final exercise date.
A non standard option.
Also called the maturity value or face value; the amount that an issuer agrees to pay at the maturity date.
Term used to denote one side of an interest rate swap – the payments made on this side will remain a constant percentage of the principal amount.
A traditional approach to determining the finance charge payable on an extension of credit. A predetermined and certain rate of interest is applied to the principal.
Fixed Income Bond
A bond which provides income over its life and at maturity the original investment is returned
Note whose interest payment varies with the short-term interest rate.
Preferred stock paying dividends that varies with short-term interest rate.
Term used to denote one side of an interest rate swap – the payments made on this side will vary over the life of the swap depending on some pre-defined market index such as Libor.
The price specified in a forward contract for a specific commodity. The forward price makes the forward contract have no value when the contract is written. However, if the value of the underlying commodity changes, the value of the forward contract becomes positive or negative, depending on the position held. Forwards are priced in a manner similar to futures. As with a futures contract, the first step in pricing a forward is to add the spot price to the cost of carry (interest forgone, convenience yield, storage costs and interest/dividend received on the underlying). However, unlike a futures contract, the price may also include a premium for counterparty credit risk, and there is not daily marking-to-market to minimize default risk. If there is no allowance for these credit risks, then the forward price will equal the futures price.
Fixed Income Bonds
It is a loan an investor makes to the bonds’ issuer. The investor generally receives regular interest payments on the loan until the bond matures, at which point the issuer repays the principal.
Fixed Income Issues
Each Fixed Income Bond in the market has an Issue. An Issue of a bond is characterised by the following information:
Issue Date – date on which the Fixed Income Bond is issued
Maturity Date – date on which the issue of a Fixed Income Bond
Coupon Rate – annual rate of interest payable on the bond
Yield to Maturity – rate of return measuring the total performance of a bond (coupon payments as well as Capital gain or loss- from the time of purchase until maturity.
The rate of change of an option’s delta with respect to underlying price. The second derivative of option value with respect to underlying price. Also referred to as an options curvature.
Commonly used to indicate an options value and how this value will change as market conditions change.
Buying one security and selling another in order to reduce risk.
Interest Rate Swap (IRS)
An exchange of a fixed rate of interest on a certain notional principal for a floating rate of interest on the same notional principal.
The date on which a bond, insurance policy or stock offering is issued. Also called date of issue.
Karachi Interbank Offer Rate. The rate offered by banks to banks.
London interbank offer rate. The rate offered by banks on Euro-currency deposits.
The date on which a note, draft, bond or acceptance becomes due and payable.
The date on which a debt becomes due for payment. Also called maturity.
Recording the price or value of a security, portfolio, or account on a daily basis, to calculate profits and losses or to confirm that margin requirements are being met.
Expected return on a security.
Risks that result from the overall movements of the market.
The expected value of a random variable.
Market for short term safe investments.
Monte Carlo Simulation
Method for calculating the probability distribution of possible outcomes.
National Association of Securities Dealers.
The value of the position subtracting the initial cost of setting up the position.
Notional principal amount
In an interest rate swap, the predetermined dollar principal on which the exchanged interest payments are based.
The right, but not the obligation, to buy (for a call option) or sell (for a put option) a specific amount of a given stock, commodity, currency, index, or debt, at a specified price (the strike price) during a specified period of time.
Total assets minus total liabilities of an individual or company. For a company, also called net worth or shareholders’ equity or net assets.
Value of a security shown on a certificate.
Term for describing all the investments that an entity owns. A diversified portfolio contains a variety of investments.
The maximum number of listed option contracts on a single security which can be held by an investor or group of investors acting jointly.
The amount by which a bond or stock sells above its par value.
A value describing one quantity in terms of another quantity. A common type of rate is a quantity expressed in terms of time, such as percent change per year.
The degree of possibility that a loss will be sustained in a loan, investment, or other transaction.
Risk Free Rate
The rate of interest that can be earned without assuming any risks.
Price of asset for immediate delivery (in contrast to forward or futures price).
Difference between the price at which an underwriter buys an issue from a firm and the price at which the underwriter sells it to the public.
An arrangement whereby two companies lend to each other on different terms e.g. in different currencies, or one at a fixed rate and the other at a floating rate.
The gap between bid and ask prices of a stock or other security. (2) The simultaneous purchase and sale of separate futures or options contracts for the same commodity for delivery in different months. Also known as a straddle. (3) Difference between the price at which an underwriter buys an issue from a firm and the price at which the underwriter sells it to the public. (4) The price an issuer pays above a benchmark fixed-income yield to borrow money.
The current market price of the actual physical commodity. Also called cash price.
The stated price per share for which underlying stock may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract.
An exchange on which shares of stock and common stock equivalents are bought and sold. Examples include the NYSE and the AMEX.
A stop order for which the specified price is below the current market price and the order is to sell.
The date by which an executed securities transaction must be settled, by paying for a purchase or by delivering a sold asset; usually three business days after the trade was executed (T+3); or one day for listed options and government securities.
A statistical measure of the historical volatility of a mutual fund or portfolio, usually computed using 36 monthly returns. More generally, a measure of the extent to which numbers are spread around their average.
Relationship between interest rates on loans of different maturities.
The rate at which option loses value as time to maturity decreases. Also referred to as the time decay of an option.
Buying and selling securities or commodities on a short-term basis, hoping to make quick profits.
The name for the centre of financial operations within a company. The Treasury is responsible for such things as issuing new securities.
The “something” that the parties agree to exchange in a derivative contract.
Value at Risk
Procedure for estimating the probability of a portfolio’s losses exceeding some specified proportion.
Option without unusual features.
Value at Risk model.
The relative rate at which the price of a security moves up and down. Volatility is found by calculating the annualized standard deviation of daily change in price. If the price of a stock moves up and down rapidly over short time periods, it has high volatility. If the price almost never changes, it has low volatility.
The external id used by an institution to integrate their front office date with the Alchemy Risk Manager.
The rate of return on any financial instrument, normally expressed as a percentage.
A curve which plots current yields of fixed interest securities against their times to redemption (maturity). This enables investors to compare the yields of short, medium and long term securities at a given time.
Yield to Maturity
Internal rate of return on a bond.
The percentage rate of return paid on a bond, note or other fixed income security if you buy and hold it to its maturity date. The calculation for YTM is based on the coupon rate, length of time to maturity and market price. It assumes that coupon interest paid over the life of the bond will be reinvested at the same rate.
Zero Coupon Bond
A bond which pays no interest through its life and which pays a capital gain by being issued at a substantial discount to the maturity value.
Zero Coupon Rate
The interest rate that would be earned on a bond that provides no coupons.