Value at Risk,

Value at Risk – Historical Simulation,

Value at Risk – Variance Covariance,

Volatility Trend Analysis,

Portfolio Volatility,

Correlation,

A

American Option

Option that can be exercised any time before the final exercise date.

Amortization

The gradual reduction of a loan or other obligation by making periodic payments of principal and interest.

Amortizing Swap

An interest rate swap or currency swap where the principal or notional amount decreases in steps over the life of the swap.

Annual return

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.

Asian Option

Option based on the average price of the asset during the life of the option.

Asset

Anything owned that has commercial or exchange value.

B

Balance Sheet

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.

Basis Point

One hundredth of a percentage point. Spreads in interest rate markets are commonly quoted in basis points. 1bps=1/10,000

Binders

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.

Black-Scholes

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.

Bond

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.

C

Call Option

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.

Collar

An upper and lower limit on the interest rate on a floating-rate note.

Compounding frequency

The number of compounding periods in a year. For example, quarterly compounding has a compounding frequency of 4.

Convexity

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.

Coupon

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.

Coupon rate

In bonds, notes, or other fixed income securities, the stated percentage rate of interest, usually paid twice a year.

Credit risk

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.

Credit spread

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.

D

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.

Day Count

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.

Dealers

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.

Delta

The rate of change of fair value of an option with respect to the change in price of the underlying.

Derivative

Asset whose value derives from that of some other asset (e.g. future or an option).

Dividend %

A portion of a company’s profit paid to common and preferred shareholders.

Duration

A common gauge of the price sensitivity of a fixed income asset or portfolio to a change in interest rates.

E

Equity

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.

European Option

Option that can only be exercised only on the final exercise date.

Exotic Option

A non standard option.

F

Face value

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

Fixed

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.

Fixed rate

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

Forex

Foreign Exchange.

Floating-rate Note

Note whose interest payment varies with the short-term interest rate.

Floating-rate preferred

Preferred stock paying dividends that varies with short-term interest rate.

Floating

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.

Forward price

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.

G

Gamma

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.

Greeks

Commonly used to indicate an options value and how this value will change as market conditions change.

H

Hedging

Buying one security and selling another in order to reduce risk.

I

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.

Issue date

The date on which a bond, insurance policy or stock offering is issued. Also called date of issue.

K

KIBOR

Karachi Interbank Offer Rate. The rate offered by banks to banks.

L

LIBOR

London interbank offer rate. The rate offered by banks on Euro-currency deposits.

M

Maturity

The date on which a note, draft, bond or acceptance becomes due and payable.

Maturity date

The date on which a debt becomes due for payment. Also called maturity.

Mark-to-market

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.

Market Capitalisation

Expected return on a security.

Market Risk

Risks that result from the overall movements of the market.

Mean

The expected value of a random variable.

Money Market

Market for short term safe investments.

Monte Carlo Simulation

Method for calculating the probability distribution of possible outcomes.

N

NASD

National Association of Securities Dealers.

Net position

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.

O

Option

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.

Owner’s equity

Total assets minus total liabilities of an individual or company. For a company, also called net worth or shareholders’ equity or net assets.

P

Par Value

Value of a security shown on a certificate.

Portfolio

Term for describing all the investments that an entity owns. A diversified portfolio contains a variety of investments.

Position limit

The maximum number of listed option contracts on a single security which can be held by an investor or group of investors acting jointly.

Premium

The amount by which a bond or stock sells above its par value.

R

Rate

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.

Risk

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.

S

Spot Price

Price of asset for immediate delivery (in contrast to forward or futures price).

Spread

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.

Swap

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.

Spread

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.

Spot

The current market price of the actual physical commodity. Also called cash price.

Strike

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.

Stock Exchange

An exchange on which shares of stock and common stock equivalents are bought and sold. Examples include the NYSE and the AMEX.

Stop loss

A stop order for which the specified price is below the current market price and the order is to sell.

Settlement date

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.

Standard deviation

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.

T

Term Structure

Relationship between interest rates on loans of different maturities.

Theta

The rate at which option loses value as time to maturity decreases. Also referred to as the time decay of an option.

Trading

Buying and selling securities or commodities on a short-term basis, hoping to make quick profits.

Treasury

The name for the centre of financial operations within a company. The Treasury is responsible for such things as issuing new securities.

U

Underlying

The “something” that the parties agree to exchange in a derivative contract.

V

Value at Risk

Procedure for estimating the probability of a portfolio’s losses exceeding some specified proportion.

Vanilla Option

Option without unusual features.

VAR Model

Value at Risk model.

Volatility

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.

X

XML Id

The external id used by an institution to integrate their front office date with the Alchemy Risk Manager.

Y

Yield

The rate of return on any financial instrument, normally expressed as a percentage.

Yield curve

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.

YTM

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.

Z

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.