12b-1 fee
A fee charged mutual fund investors, and deducted directly from the fund's portfolio, to cover marketing expenses and sales commissions.
ABC paper
Asset-backed commercial paper.
above par
Selling for a price in excess of par value.
absolute pricing model
An asset valuation model that bases prices on economic arguments as opposed to other related prices quoted in the market.
acceptance
A time draft on which the drawee has accepted an obligation to make payment.
accrual bond
A type of CMO bond, also called a Z bond.
accrual instrument
A money market instrument that accrues interest to maturity.
accrued-coupon bond
A bond that, rather than paying coupons, accrues them to maturity.
accrued interest
Interest that is earned but not yet paid on a bond or other obligation.
adjustable-rate preferred stock
Preferred stock that pays a dividend linked to floating interest rates.
agency
Agency security.
agency security
A security issued by a US federal agency or government sponsored enterprise.
ALM
Asset-liability management.
alpha
If active investment management were a religion, alpha would be its god.
alpha transport
Use of a self-financing market neutral strategy to generate alpha in one market while investing in another.
alternative option
A better-of option.
Amaranth Advisors
A hedge fund that suffering staggering losses speculating on natural gas prices.
American exercise
A provision that permits exercise of an option any time prior to expiration.
AMT bond
A municipal bond whose interest is subject to the Alternative Minimum Tax.
annual compounding
Compounding based on annual crediting of interest.
annual rate of return
Rate of return.
annualized return
A return calculated over one period, but adjusted to be comparable to a return calculated over a year.
annualized volatility
A quoting convention for volatility.
antithetic variates
A technique of variance reduction for the Monte Carlo method.
AR process
Autoregressive process.
arbitrage
1) A transaction that generates a risk-free profit; 2) a leveraged speculative transaction; and 3) the activity of engaging in either of the above two forms of arbitrage transactions.
arbitrage CDO
A CDO sponsored for the purpose of adding value by repackaging collateral.
arbitrage condition
Any relationship that must prevail between certain prices if they are to be arbitrage-free.
arbitrage free
A condition in which prices offer no arbitrage opportunities.
arbitrage-free model
A type of financial engineering model that generates prices that entail no arbitrage opportunities.
arbitrage-free pricing
The approach to pricing instruments that underlies essentially all of financial engineering in complete markets.
arbitrageur
One who engages in arbitrage.
ARCH
Autoregressive conditional heteroskedasticity
arithmetic random walk
A random walk with increments that are a Gaussian white noise.
arithmetic random walk with drift
An arithmetic random walk with a constant drift.
arithmetic return
Simple return.
ARMA
process autoregressive moving-average process.
arranger
A party that arranges a syndicated loan.
ARS
Auction rate security.
Arthur Andersen conviction
In 2002, accounting firm Arthur Andersen was convicted on a single charge related to its auditing of Enron.
Asian option
An option whose expiration value depends on the average value of an underlier over a specified period.
Askins, David
Manager of the Granite Fund, a hedge fund that failed in 1994.
asset-backed commercial paper
Commercial paper secured by receivables or other assets.
asset-backed security
A securitized interest in non-mortgage assets.
asset-based lending
Collateralized lending.
asset-liability management
The process of coordinating the management of an entity's assets with the management of its liabilities, to protect its solvency.
asset-liability risk
Risk to a firm from having assets and liabilities whose risk exposures do not offset one another.
asset management
Investment management.
asset management firm
Investment management firm.
asset manager
Investment manager
asset-or-nothing binary
A type of binary option.
asset sensitive
Having assets that reprice earlier than liabilities.
asset swap
A non-vanilla swap customized to change the character of a specific asset.
asset value model
A type of default model.
at par
Selling for a price equal to par value.
at-the-money
A condition where the value of an option's underlier equals the option's strike price.
auction rate security
A floating-rate municipal security.
autocorrelation
A correlation between a component of a stochastic process and itself lagged a certain period of time.
autoregressive conditional heteroskedasticity
A category of conditionally heteroskedastic stochastic processes.
autoregressive process
A type of stochastic process.
autoregressive moving-average process A type of stochastic process.
average option
An Asian option.
average price option
An average rate option
average rate option
A form of Asian option whose payoff is linked to the average underlier value over a specified period.
average strike option
A form of Asian option whose strike equals the average underlier value over a specified period.
AW Jones & Co.
An early hedge fund formed in 1949.
BA
Bankers acceptance.
BA rate
Bankers acceptance rate.
Bachelier, Louis
French researcher famous for his 1900 doctoral thesis, which discovered Brownian motion and anticipated the random walk hypothesis.
back-end load
Deferred sales charge deducted from the proceeds when an investor sells shares in an open-end mutual fund.
backfill
A questionable practice of adjusting historical values of an index to reflect past performance of an asset just added to that index.
backwardation
A condition where spot prices exceed forward prices.
balance sheet CDO
A CDO issued for the purpose of moving assets off the sponsor's balance sheet.
BAN
Bond anticipation note.
bank discount yield
A convention for calculating yield on a discount instrument.
Bank for International Settlements
An international organization which fosters international monetary and financial cooperation and serves as a bank for central banks.
Bank Holding Company Act of 1956
A revoked US law that had limited the services commercial banks could offer clients.
bank run
A situation where fear of a bank failing motivates massive deposit withdrawals.
bankers acceptance
An acceptance that has a bank as its drawee.
bankers acceptance rate
The interest rate at which a bankers acceptance is quoted
Banking Act of 1933
The United States Glass-Steagal Act that separated commercial and investment banking and formed the FDIC.
Barings debacle
In February 1995, Britain's oldest merchant bank failed due to unauthorized trading by a single individual at its Singapore office.
barrier option
A path dependent option that terminates or is activated by the underlier reaching some "barrier" level.
Barry, John D.
One of the managers of Beacon Hill Asset Management, accused of defrauding hedge fund investors in 2002.
base currency
The currency in which a VaR measure quantifies market risk.
Basel II
An international accord on bank capital requirements to replace the earlier 1988 Basel Accord.
Basel Accord (1988)
An international accord on bank capital requirements.
Basel Accord (1996 Amendment)
An amendment to the 1988 Basel Accord that added capital requirements for market risk.
Basel Committee
An international committee that has has played a leading role in standardizing bank regulations across jurisdictions.
Basel-IOSCO initiative
A 1991 initiative to globally harmonize capital requirements for banks and securities firms.
basis
A spread. Often the spread between a futures price and the spot price of its underlier.
basis point
A hundredth of a percent.
basis risk
Risk from exposure to uncertain spreads.
basis swap
A floating-for-floating interest rate or currency swap.
basket option
An option on a portfolio or "basket" of underliers.
BBA Libor
Any of several indicative Libor rates compiled by the British Bankers Association.
Beacon Hill Asset Management
A firm accused of defrauding hedge fund investors in 2002.
bear spread
A put spread.
bearer bond
A bond for which ownership is evidenced by possession of a certificate.
below par
Selling for a price below par value.
below investment grade bond
Junk bond.
Berger, Michael
Manager of the Manhattan Fund, a hedge fund that defrauded investors during the 1990s.
Bermudan exercise
A provision that permits exercise of an option on any of several days prior to expiration.
beta
A metric of systematic risk.
better-of option
A form of rainbow option.
bid-ask spread
The difference between prices at which dealers are willing to buy or sell.
bid-offer spread
Bid-ask spread.
bilateral loan
A loan made by a single lender to a single borrower.
bilateral netting
Netting of obligations between two parties.
bill of exchange
A draft used in international trade.
binary option
A type of option which features a discontinuous expiration value.
BIS
Bank for International Settlements.
Black (1976) option pricing formula
A pricing formula for European options on commodities, forwards or futures.
Black '76
Black (1976) option pricing formula
Black-Scholes (1973) option pricing formula
The original option pricing formula published by Black and Scholes in their landmark (1973) paper. Used to price European options on non-dividend-paying stocks.
Black-Scholes Theory
Another name for option pricing theory.
Black's model
Black (1976) option pricing formula
Boesky day
November 14, 1986, the day it was announced that Ivan Boesky had pled guilty to insider trading and was cooperating with government investigators.
Boesky, Ivan
An insider trader of the 1980s.
bond
Securitized debt.
bond anticipation note
A type of municipal security.
bond-equivalent yield
A convention for converting discount yields to a form more comparable to bond yields.
bond value
Investment value of a convertible bond.
book entry bond
A bond for which ownership records are maintained electronically in lieu of certificates.
book value
Acquisition cost less depreciation.
Borodovsky, Lev
Co-founder of the scandal-rocked Global Association of Risk Professionals.
Brady bond
A bank loan repackaged as a bond under a 1980s debt restructuring for less-developed countries.
broker-dealer
Securities firm.
Brownian motion
A simple continuous stochastic process that is widely used in physics and finance for modeling random behavior that evolves over time.
Bubble Act
An 18th century English law that severely restricted the formation of new corporations.
bull spread
A call spread.
bulldog
A foreign bond issued in the United Kingdom.
bundle
Eurodollar bundle.
business risk
Exposure to uncertainty in economic value that cannot be marked-to-market.
busted
A convertible bond is busted if its conversion option is far out of the money.
butterfly spread
An options spread that combines a long strangle with a short straddle.
CAD
Europe's 1993 Capital Adequacy Directive.
CAD II
A 1998 update to CAD.
CAD III
European regulation implementing the Basel II Accord.
calendar spread
1) the difference between the values of a single variable at two points in time—see spreads; 2) a long-short futures spread with both contracts on the same underlier but with different maturity months—see futures spread; and 3) An options spread with options expiring on different dates—see options spread.
call
An option to purchase an asset.
call premium
The difference between a callable security's call price and par value (or book value).
call price
The price at which a callable security is redeemed.
call protection
A provision that limits or disallows the calling of a security during its first few years.
call provision
A feature of some securities providing for their early retirement ("call" or "redemption").
call schedule
A schedule indicating call prices at which a callable security can be redeemed over time.
call spread
An options spread comprising a long-short position in call options.
callable bond
A bond that can be retired ("called" or redeemed") early.
callable preferred stock
Preferred stock that can be called by the issuer.
callable security
A security that can be retired ("called" or redeemed") early.
cap
A type of derivative instrument that offers protection against rising interest rates.
capacity to contract
Legal authority to enter into a given contract.
capital
A firm's value—assets minus liabilities.
capital adequacy
A condition where a financial institution or trading organization has sufficient capital for the risks it is taking.
capital allocation
Formal allocation of capital charges to a firm's business lines or transactions.
capital asset pricing model
A model for valuing financial assets based upon their systematic risk.
capital charge
Capital required to support a given business line or transaction.
capital market line
A line which describes the optimal relationship between risk and reward for an investment portfolio.
capital ratio
The ratio of a firm's capital to its assets.
capital requirements
A financial institution's or trading organization's requirements to hold capital for the specific risks it takes.
Capital structure arbitrage
Any trading strategy that seeks to profit from inconsistencies in the relative pricing of a firm's debt and equity.
caplet
One of a series of options that comprise an interest rate cap.
CAPM
Capital Asset Pricing Model.
cartwheel
An options spread that is long (short) a ratio call spread and short (long) a ratio put spread.
cash CDO
A CDO whose collateral comprises cash positions in bonds, loans or other forms of debt.
cash-flow-at-risk
A category of cash-flow risk measures.
cash flow CDO
A CDO whose payments to investors are contingent on the adequacy of collateral cash flow.
cash flow matching
Structuring a fixed income portfolio so each day's net cash flow is zero.
cash flow risk
Risk due to uncertainty in future reported cash flows.
cash instrument
An instrument whose value, unlike that of a derivative instrument, is determined directly by the markets.
cash loan
A loan that commences immediately.
cash management
T-bill A Treasury bill issued with a non-standard maturity.
cash matching
Cash flow matching.
cash-or-nothing binary
A type of binary option.
cash price
The price at which trades for cash settlement transact.
cash settlement
1) in trading, settlement on the trade date—see settlement; 2) a derivative instrument has cash settlement if it settles for a cash payment in lieu of physical delivery of an underlier—see physical settlement, cash settlement.
cash trade
A trade that settles on the trade date.
Cauchy distribution
A bell-shaped distribution that is more peaked and has fatter tails than the normal distribution.
CBO
Collateralized bond obligation.
CD
Certificate of deposit.
CDO
Collateralized debt obligation.
CDSC
contingent deferred sales charge
central limit theorem
A theorem that explains why the normal distribution plays such an important role in probability theory.
certificate of deposit
A money market instrument issued by a depository institution as evidence of a time deposit.
CFaR
Cash-flow-at-risk
CFTC
Commodity Futures Trading Commission.
charter abuse
An archaic practice of devoting a corporation to some purpose other than that specified in its charter.
chi-squared distribution
A continuous probability distribution related to the normal distribution.
chief risk officer
Head of risk management.
Cholesky algorithm
A standard algorithm for calculating a positive definite matrix's Cholesky matrix.
Cholesky factorization
A factorization of a positive definite matrix into the product of its Cholesky matrix and the transpose of the Cholesky matrix.
Cholesky matrix
A lower-triangular matrix that acts as a matrix "square root" for a positive definite matrix.
chooser option
A derivative that converts to a vanilla put or a vanilla call at the holder's choice.
Citron, Robert
Treasurer of Orange County, California whose speculative activities lead to the county's 1994 bankruptcy.
clean price
A bond price quoted without accrued interest.
cliquet option
A ratchet option.
CLO
Collateralized loan obligation.
closed-end fund
Mutual fund with a fixed number of outstanding shares, which trade on a stock exchange.
closed-end mortgage bond
A mortgage bond that protects the seniority of existing bondholders in the event that new bonds are issued.
closed form expression
Closed form solution.
closed-form solution
A formula that can be evaluated in a finite number of standard operations.
closed form VaR
Linear VaR.
closeout netting
The netting of obligations on derivative instruments that are terminated early.
CLS
Continuous Linked Settlement.
CLS Bank International
The special purpose bank that settles foreign exchange trades under Continuous Linked Settlement.
CMO
collateralized mortgage obligation
COFI
Cost of Funds Index.
collar
An options spread comprising a long call and short put.
collateral
Assets held to secure an obligation.
collateral arrangement
An agreement between two parties for the ongoing collateralization of a repo, securities lending, derivative or other transaction.
collateralized bond obligation
A securitized interest in a portfolio of bonds.
collateralized debt obligation
A securitized interest in a portfolio of bonds, loans or other debt.
collateralized loan obligation
A securitized interest in a portfolio of loans.
collateralized mortgage obligation
A type of mortgage-backed security.
commercial bank
A type of bank defined by US law that engages in lending and deposit taking businesses.
commercial paper Short-term promissory notes issued primarily by corporations.
Commodity Exchange Act
US legislation passed in 1974 forming the Commodity Futures Trading Commission.
Commodity Futures Modernization Act
US legislation passed in 2000 clarifying that OTC derivatives markets were to remain largely unregulated.
Commodity Futures Trading Commission
The regulator of futures and options exchanges in the United States.
common stock
Non-preferred stock.
companion bond
A bond that takes most of the prepayment in a PAC CMO structure.
complex number
A number of the form a + bi, where a and b are real, and i is the imaginary number .
complement
The set of elements contained in one set but not another.
compound interest
Any of several methods of crediting interest in which interest is earned on interest.
compound option
An option on an option.
conditional heteroskedasticity
A condition where a stochastic process has non-constant conditional second moments.
conditional homoskedasticity
A condition where a stochastic process has constant conditional second moments.
conditional prepayment rate A metric of annual prepayment for mortgage-backed securities.
contango
A condition where forward prices exceed spot prices.
contingent deferred sales charge
Back-end sales load charged on a mutual fund, typically declining with the number of years the fund was held.
contingent premium option
An option for which the premium is deferred to expiration and is paid only if the option expires in-the-money.
contingent voting
Voting by preferred stockholders during a suspension of dividend payments.
continuous call
A provision allowing a callable security to be called on any business day following its issuance or first call date.
continuous compound interest
A limiting form of compound interest where the frequency with which interest is credited approaches infinity.
Continuous Linked Settlement
A settlement system for foreign exchange trades.
continuous process
A stochastic process that has a term associated with every real number.
continuous-time
Refers to continuous stochastic processes.
contract formation
Steps through which a legally enforceable contract is entered into.
contract frustration
Invalidation of a contract by unforeseen circumstances.
contractarian theory of the firm
The contracts theory of the firm.
contracts theory of the firm
A theory that defines a firm as an aggregation of contracts.
control variates
A technique of variance reduction for the Monte Carlo method.
conversion price
The par value of a convertible security that is convertible into one share of common stock.
conversion ratio
The number of shares of common stock into which a convertible security can be converted.
conversion value
What the market value of a convertible security would be if it were immediately converted to common stock.
convertible
Convertible security.
convertible arbitrage
A market neutral trading strategy that exploits relative mispricings of a firm's convertible bonds.
convertible bond
A bond that can be exchanged for (converted into) shares of common stock.
convertible preferred stock
Preferred stock that can be exchanged for (converted into) shares of common stock.
convertible security
A hybrid security that can or must be exchanged for some other security, usually the issuer's common stock.
convexity
A factor sensitivities indicating a fixed income portfolio's second order (quadratic) sensitivity to the parallel shifts in the spot cure.
convexity bias
A bias in Eurodollar futures rates that makes them slightly higher than corresponding forward rates.
Cornish-Fisher expansion
A formula for approximating quintiles of a random variable based only on its first few cumulants.
corporate bond
A bond issued by a corporation.
corporate governance movement
Collectively, a number of initiatives to reform the governance of corporations, starting during the latter part of the 20th century.
corporate risk management
Practices that serve to optimize risk taking in a context of book value accounting.
corporation
1) A group of people, such as a guild or city, with a legal collective identity. 2) A joint-stock, limited liability corporation.
correlation
A parameter, related to covariance, that indicates the tendency for two random variables to "move together" of "co-vary."
correlation matrix
A symmetric matrix indicating all the correlations of a random vector.
cost, insurance, freight
A method for settling physical commodity trades.
Cost of Funds Index
A yield index.
costless collar
A collar whose strike prices are set so that the net cost of the collar is zero.
coupon
An interest payment made by a bond.
coupon bond
A bond that pays coupons.
coupon clipping date
The date on which a coupon is to be clipped from a bearer bond.
coupon date
The date on which a coupon is paid.
coupon leverage
The amount by which the reference rate is multiplied to determine the floating rate payable by an inverse floater.
coupon strip
A Treasury strip formed from a coupon of a Treasury security.
covariance
A parameter, related to correlation, that indicates the tendency for two random variables to "move together" of "co-vary."
covariance matrix
A symmetric matrix indicating all the covariances and variances of a random vector.
covariance stationarity
A property of some stochastic processes.
Cowles, Alfred
Early researcher of the random walk hypothesis.
CP rate
An average commercial paper rate reported by the Federal Reserve.
CPR
Conditional prepayment rate.
crack spread
A spread between crude and refined oil prices.
crash of 1929
A famous stock market crash.
credit
A counterparty that poses credit risk.
credit analysis
Any process for assessing the credit quality of a counterparty.
credit analyst
A professional who performs credit analysis.
credit default swap
A type of credit derivative.
credit derivative
A credit derivative is a financial transaction whose payoff depends on whether or not a credit event, such as a bankruptcy, default, upgrade or downgrade, occurs. Another variation is a credit basket, where, for example, if any one of five companies defaults, it's considered a credit event. A derivative instrument designed to transfer credit risk from one party to another
credit enhancement
Any methodology that reduces the credit risk of a transaction with a counterparty.
credit exposure
The potential for loss in the event of a default.
credit insurance
A form of insurance designed to protect against default by a debtor.
credit linked note
A type of credit derivative.
credit quality
Encompasses both the likelihood of a counterparty defaulting as well as possible recovery rates in the event of a default.
credit rating
A metric of the credit quality of either a counterparty or a specific obligating of a counterparty.
credit risk
Risk due to uncertainty in a counterparty's ability to meet its obligations.
credit scoring
A formulaic procedure for assessing credit quality.
credit spread
A yield or interest rate spread due to credit risk.
cross correlation
A correlation between one component of a stochastic process and another lagged by a certain period of time.
cross-currency derivative
Quanto
crude Monte Carlo estimator
A Monte Carlo estimator implemented without variance reduction.
cubic spline
A real function constructed by piecing together cubic polynomials on consecutive intervals.
cubic spline interpolation
Any of several methods of interpolating with cubic splines.
cumulant
A parameter of a random variable similar to a moment.
cumulative preferred stock
Preferred stock whose dividends may be postponed but not cancelled.
currency code
Any three letter code used to designate a particular currency.
currency swap
A swap in which two loans in different currencies are exchanged.
current yield
1) A bond's yield calculated as annual coupon divided by clean price. 2) A stock's yield calculated as annual dividend divided by the stock's market price.
curse of dimensionality
A tendency of certain computational techniques for their computational expense to increase exponentially with the dimensionality of the problem to be solved.
custodian
An institution that holds securities for investors.
custody
The safekeeping of securities and related services.
cylinder
A type of derivatives hedge.
D&O insurance
Directors and officers liability insurance.
Daiwa Bank debacle
A 1995 rogue trader scandal.
deal risk
Risk of a planned merger or acquisition failing.
dealer paper
Commercial paper issued through a dealer.
debenture
An unsecured corporate bond.
dedicated long
An investment or trading strategy of always holding just long positions.
dedicated long bias
An investment or trading strategy of always being net long the overall market.
dedicated short
An investment or trading strategy of always holding just short positions.
dedicated short bias
An investment or trading strategy of always being net short the overall market.
deed of trust
Bond indenture.
default intensity
An "instantaneous" rate of default.
default mode
A mode of analysis for a portfolio credit risk model.
default model
A type of model that assess the likelihood of default by an obligor.
default probability
The likelihood that a counterparty will default on an obligation.
deferred-coupon bond
A bond that pays no coupons for its first few years.
deferred-interest bond
Any of several types of bonds that defer the payment of interest.
delivery month
For physically settled futures contracts, the month during which delivery occurs.
delivery price
The price to be paid under a forward contract.
delta
The Greek factor sensitivities measuring a portfolio's first order (linear) sensitivity to the value of an underlier.
delta approximation
A linear approximation for how a portfolio's value will change in response to a small change in an underlier's value.
delta-gamma approximation
A quadratic approximation for how a portfolio's value will change in response to a small change in an underlier's value.
delta-gamma hedge
A type of hedge that can be used to reduce or eliminate a portfolio's exposure to some underlier.
delta-gamma remapping
A quadratic remapping constructed from a portfolio's deltas and gammas.
delta-gamma
VaR measure Quadratic VaR measure.
delta hedge
A type of hedge that is widely used by derivative dealers to reduce or eliminate a portfolio's exposure to some underlier.
delta neutral
Having zero delta.
delta-normal
VaR Linear VaR.
demand deposit
A bank deposit that can be withdrawn any time without penalty.
democracy of capitalism
A condition in which stock ownership of corporations is fragmented and widely dispersed among numerous investors.
deposit
A sum of money placed with a bank for safe keeping and possibly to earn interest.
deposit insurance Insurance of deposits against default by the deposit taking institution.
Depository Institutions Deregulation and Monetary Control Act of 1980
US legislation that contributed to the deregulation of depository institutions.
depreciation
An amount deducted from an asset's book value to account for loss in value over time.
depth, market
The volume of transactions necessary to move prices.
derivative
Derivative instrument.
derivative approximation
In calculus, an approximation for a function constructed from its derivative.
derivative instrument
An instrument that derives value from the value of some commodity, energy, or other financial instrument.
derivatives pricing theory
The body of financial theory used by financial engineers to value derivative instruments.
deterministic volatility function model
Alternative name for a local volatility model.
diff swap
quanto swap
differential equations approach
An informal name for derivatives pricing models based upon the original Black-Scholes methodology.
differential swap
quanto swap
digital option
Binary option.
direct paper
Commercial paper sold directly to investors by the issuer.
directional strategy
A trading or investment strategy that entails taking net long or short positions in a market.
directors and officers liability insurance
Protects against legal claims for wrongful acts performed by corporate directors or officers in performing their corporate duties.
dirty price
A bond price quoted with accrued interest.
discount curve
A graph of discount factors as a function of maturity.
discount factor
The factor by which a future cash flow must be multiplied in order to obtain its present value.
discount instrument
A money market instrument that pays no coupons, matures for its face value, and is issued at a discount to its face value.
discount yield
A convention for calculating yield on a discount instrument.
discounting
1) Calculating the present value of a future cash flow. 2) Purchasing a time draft for its discounted value.
discrete process
A stochastic process that has terms associated with each integer.
discrete-time
Refers to discrete stochastic processes.
disjoint
Two sets are disjoint if they have no elements in common.
distance to default
A metric of how close debt is to a defaulting.
diversification
The taking of multiple disparate risks.
diversity (market)
Diversity among market participants in their market views and desired trades.
dividend
A distribution of corporate profits to shareholders.
dividend yield
A stock's annual dividend divided by the stock's market price.
domestic bond
A bond issued in a country by a domestic issuer for domestic investors. They are denominated in that country's currency and are subject to that country's regulations.
domestic CD
A certificate of deposit issued within a country by a domestic bank or other depository institution.
draft
An order to make payment to a third party.
drawee
The party instructed to make payment by a draft.
drawer
The party who issues a draft.
Drexel Burnham Lambert
The investment bank that dominated the junk bond market of the 1980s.
dual remapping A type of remapping used in value-at-risk measures.
duration
A factor sensitivities indicating a fixed income portfolio's first order (linear) sensitivity to the parallel shifts in the spot cure.
duration-convexity matching
A technique of asset-liability matching.
duration matching
A technique of asset-liability matching.
dynamic hedging
A technique that is widely used by derivatives dealers to hedge gamma or vega exposures.
earnings-at-risk
A category of earnings risk measures.
earnings risk
Risk due to uncertainty in future reported earnings.
East India Companies
Several companies formed by European businessmen to exploit the spice trade of the 1600s.
ECO
equity collateralized obligation.
economic capital
Capital held for economic (as opposed to regulatory) purposes.
economic profit
Profit in excess of the opportunity cost of capital.
economic value
A generalization of market value.
economic value added
Economic profit.
EDS
Equity default swap.
effective Fed funds rate
A dollar-weighted average of interest rates paid on overnight Fed funds.
efficient frontier
A theoretical set of portfolios, each offering an optimal risk-reward tradeoff.
efficient market
A market in which prices reflect all available information.
efficient market hypothesis
A financial theory that markets are efficient in the sense that prices reflect all available information.
Eifuku Master Fund
A Japanese hedge fund that failed in 2002.
eigenvalue
A concept from linear algebra.
eigenvector
A concept from linear algebra.
eligible (bankers acceptance)
A bankers acceptance that satisfies requirements to be free of bank reserve requirements in the event it is sold.
Emerging market debt
Debt issued by governments or corporations in countries whose economies are striving to emerge from under development.
employment practices liability insurance
Protects against claims for wrongful dismissal, failure to promote, sexual harassment and other violations of employment or anti-discrimination laws.
empty set
The set that contains no elements.
Engraftment
An archaic practice for retiring government debt through a debt-for-equity swap.
Enron debacle
In December 2001, energy trading powerhouse Enron filed for bankruptcy in the midst of an accounting scandal.
enterprise risk management
The extension of financial risk management to non-financial risks.
EPL insurance
Employment practices liability insurance.
equilibrium pricing model
An asset pricing model based on economic arguments about how prices should behave to maintain market equilibrium.
equipment trust certificate
Secured corporate debt issued through a trust to finance transportation equipment.
equity
An ownership interest in something.
equity collateralized obligation
A synthetic CDO structured exclusively with equity default swaps.
equity default swap
A far out-of-the-money equity option structured much like a credit default swap.
equity financing
Ownership that is securitized as stock that may be held by multiple investors and traded in secondary markets.
equity market neutral
Market neutral equity trading strategy based primarily on fundamental analysis.
equivalent martingale measure
A martingale measure that is equivalent to the "real world" probability measure.
equivalent measures
Equivalent probability measures.
equivalent probability measures
Probability measures that have the same null space.
ETL
Expected tail loss.
Euler's formula
An important formula of mathematics that relates the exponential, sine and cosine functions.
Euribor
Euro interbank offered rate.
Euro CD
A certificate of deposit issued outside a country but denominated in that country's currency.
Euro interbank offered rate
Refers to indicative short-term interest rates available for the euro.
Euro medium-term note
A debt instrument structured like a medium-term note and issued in the unregulated Euro markets.
Eurobond
A bearer bond issued and traded within the largely unregulated Euromarket.
Eurocurrency
Currency deposited in bank branches outside countries where it is the national currency.
Eurocurrency future
Any of several available cash-settled futures on a 3-month Eurocurrency deposit.
Eurodollar
A US dollar deposited with a bank branch outside the United States.
Eurodollar bundle
A Eurodollar futures strip that can be traded as a single unit on the CME.
Eurodollar deposit
A deposit of US dollars held at a bank branch outside the United States.
Eurodollar future
A cash-settled future on a 3-month Eurodollar deposit.
Eurodollar futures strip
A position consisting of an equal number of each of several consecutive quarterly Eurodollar futures.
Eurodollar pack
A Eurodollar futures strip that can be traded as a single unit on the CME.
Eurodollar strip
Eurodollar futures strip.
Euroeuro
A deposit of European euros held at a bank branch outside any country where the euro is the national currency.
Euroeuro future
A cash-settled future on a 3-month Euroeuro deposit.
European exercise
A provision that permits exercise of an option only at expiration.
Eurosterling
A deposit of British pounds held at a bank branch outside the United Kingdom.
Eurosterling future
A cash-settled future on a 3-month Eurosterling deposit.
Euroswiss
A deposit of Swiss francs held at a bank branch outside Switzerland.
Euroswiss future
A cash-settled future on a 3-month Euroswiss deposit.
Euroyen
A deposit of Japanese yen held at a bank branch outside Japan.
Euroyen future
A cash-settled future on a 3-month Euroyen deposit.
EVA
Economic value added.
event driven strategy
Speculative trading strategy that seeks to exploit relative mispricings between securities whose issuers are involved in mergers, divestures, restructurings or other corporate events.
ex-coupon
Refers to a bond trading too late for the buyer to receive an upcoming coupon.
ex-coupon date
The date on which a bond starts to trade ex-coupon.
ex-dividend
Refers to a stock trading too late for the buyer to receive an upcoming dividend.
ex-dividend date
The date on which a stock starts to trade ex-dividend.
ex-dock
A method for settling physical commodity trades.
ex-warehouse
A method for settling physical commodity trades.
exchange for physicals
An alternative to physical settlement offered by many futures exchanges.
exchange traded
Traded on a formal exchange such as the New York Stock Exchange or Chicago Board of Trade.
exempt security
A security exempted from certain provisions of US securities laws.
exotic derivative
A complicated or specialized derivative instrument.
expected default frequency
Default probability calculated for a one-year horizon.
expected exposure
The expected value of credit exposure at some future point in time.
expected loss
Expected value of losses due to default over a specified horizon.
expected shortfall
Expected tail loss.
expected tail loss
A VaR metric indicating the expected portfolio loss conditional on that loss exceeding a specified quantile of loss.
expectation
Expected value.
expected value
A parameter indicating the "center of gravity" of a probability distribution.
expiration date
The date on which an option expires.
expiration value
The value of an option at expiration.
exposure at default
Credit exposure to an obligor at the time of a default by that obligor.
exposure limit
A risk limit based upon some exposure metric of risk.
extendible option
An option whose expiration may be extended.
extraordinary mandatory redemption
A provision requiring that a security be called if a specified event occurs.
extraordinary optional redemption
A provision permitting a security be called if a specified event occurs.
extraordinary redemption
A provision providing for a security to be called if a specified event occurs.
F-3 fund
A fund of funds of funds.
face value
Par value.
fallen angel
A bond that was investment grade when issued, but has since degraded to junk quality.
Fama, Eugene
Scholar who extended the random walk hypothesis as the efficient market hypothesis.
family of funds
A group of mutual funds all managed and administered by a single fund management company.
Fannie Mae
Official name for what was formerly the Federal National Mortgage Association.
fast Fourier transform
An algorithm for rapidly valuing Fourier transforms.
Fastow, Andrew
Enron's CFO whose aggressive use of special purpose entities lined his own pockets and lead to accounting scandals in 2001.
FDIC
Federal Deposit Insurance Corporation
Fed funds
Deposits held by US banks in accounts at their regional Federal Reserve banks.
Fed funds market
A market for unsecured short-term loans of Fed funds.
Fed funds rate
A rate of interest payable on overnight loans of Fed funds.
Fed Wire
An electronic funds transfer system maintained by the Federal Reserve.
Federal Deposit Insurance Corporation
An independent agency of the United States Federal Government responsible for insuring bank deposits.
Federal Financing Bank
A bank established by the US Congress to consolidate debt issuances by federal agencies.
Federal Reserve
The central bank of the United States.
fence
A collar.
FFT
Fast Fourier transform.
FHC
Financial holding company.
financial engineer
A practitioner of financial engineering.
financial engineering
The field of applied finance devoted to the design and pricing of derivative instruments.
financial holding company
A type of holding company authorized under US law following the repeal of Glass-Steagall to hold commercial banks, investment banks and insurance companies as affiliated subsidiaries.
financial risk management
Practices by which a firm optimizes the manner in which it takes financial risk.
Financial Services Modernization Act of 1999
US legislation that revoked the Glass-Steagal separation of investment and commercial banking.
first call date
The earliest date on which a security can be called.
first mortgage bond
A senior mortgage bond.
first notice date
The first date on which notice of delivery on a futures contract can be given to the exchange.
fixed-for-floating swap
An interest rate or currency swap in which fixed rate interest payments are swapped for floating rate payments.
fixed income arbitrage
Any fixed income market neutral trading strategy.
fixed income term structure
Refers collectively to a spot curve, forward curve, discount curve, yield curve or any other curve that describes the time value of money.
fixed strike lookback option
One of two basic forms of lookback options.
flat (trading)
Refers to a bond whose price is quoted as an invoice price instead of a clean price.
floater
A fixed income instrument whose coupon fluctuates with some designated reference rate.
floating rate CMO
A CMO tranch structured as a floater.
floating rate note
A floater issued by a corporate or agency borrower.
floating strike lookback option
One of two basic forms of lookback options.
floor
A type of derivative instrument that offers protection against declining interest rates.
floorlet
One of a series of options that comprise an interest rate floor.
flower bond
A type of tax-advantaged bond issued by the US Treasury between 1953 and 1963.
forced conversion
Conversion of a callable convertible security forced by a call of the security.
foreign bond
A bond issued in one country and denominated in that country's currency by a foreign issuer.
foreign CD
A certificate of deposit issued within a country by a domestic branch of a foreign depository institution.
forward
Forward contract.
forward contract
A trade that is agreed to at one point in time but will take place at some later time.
forward curve
1) A graph of forward prices for different maturities; 2) a graph of forward interest rates for different forward periods.
forward loan
A loan that commences on some future (post spot) date.
forward price
Market price quoted for a forward contract.
forward rate
The interest rate payable on a forward loan that accumulates interest to maturity.
forward rate agreement
A cash-settled forward contract on a short-term loan.
forward settlement
Trade settlement on some date subsequent to spot settlement.
forward start option
A forward on an option.
forward trade
A trade for settlement on some future (post spot) date.
Fourier transform
An integral transform used in signal processing, physics and financial engineering.
FRA Forward rate agreement.
Freddie Mac
Name for what was previously the Federal Home Loan Mortgage Corporation.
free alongside
A method for settling physical commodity trades.
free onboard
A method for settling physical commodity trades.
Freeman, Robert
Goldman Sachs arbitrager who became embroiled in the 1980's insider trading scandals.
FRM
Financial risk management.
FRM certification
Professional certification offered by GARP.
FRN
Floating rate note.
front-end load
Sales charge applied at the time an investor buys shares in an open-end mutual fund.
function remapping
A type of remapping used in value-at-risk measures.
fund family
A group of mutual funds all managed and administered by a single fund management company.
fund of funds
An investment fund that invests in other investment funds.
fundamental theorem of algebra
An important theorem about the existence of roots of polynomials.
fundamental theorem of asset pricing
A theorem that relates the existence of an equivalent martingale measure to the no-arbitrage condition and completeness of markets.
fund management
Investment management.
fund management firm
Investment management firm.
fund manager
Investment manager.
future
An exchange-traded derivative that is similar to a forward.
futures spread
A long-short futures position.
G-30 Report
Group of 30 Report.
gains trading
Selective realization of gains to manipulate book value earnings.
gamma
The Greek factor sensitivities measuring a portfolio's second order (quadratic) sensitivity to the value of an underlier.
GAN
Grant anticipation note.
gap analysis
A technique of asset-liability management used to assess interest rate risk or liquidity risk.
GARCH
Generalized ARCH.
Garman and Kohlhager (1983) option pricing formula
A formula for pricing European options on currencies.
GARP
Global Association of Risk Professionals.
GARP scandal
Scandal that rocked the risk management profession in 2001-2002.
Gaussian white noise
An independent white noise with joint normal terms.
general obligation bond
A municipal bond backed by the general taxing authority of the issuer.
Generalized ARCH
A generalization of the autoregressive conditional heteroskedasticity model.
geometric random walk
A discrete stochastic process whose log returns are independent and identically normally distributed.
geometric return
Log return.
Gilded Age
The period in American history following the Civil War during which industry grew rapidly.
Ginnie Mae
Official name for what was previously the Government National Mortgage Association.
Glass-Steagal Act
The United States 1933 Banking Act that separated commercial and investment banking and formed the FDIC.
Global Association of Risk Professionals
Controversial organization that claims to represent the risk management community.
global bond
A bond that is simultaneously issued as a foreign bond and a Eurobond.
global macro strategy
An investment or trading strategy of taking net long or short positions simultaneously in multiple markets around the world.
global remapping
A type of function remapping.
Golden Age (Dutch)
A period during the 1600s when Dutch art, social tolerance and commerce flourished.
government sponsored enterprise
Any private corporation chartered by the US Federal Government and granted privileges to advance specific purposes.
gradient
In calculus, a vector of partial derivatives.
gradient approximation
In multivariate calculus, an approximation for a function constructed from its gradient.
gradient-Hessian approximation
In multivariate calculus, an approximation for a function constructed from its gradient and Hessian.
Gramm-Leach-Bliley Act of1999
The Financial Services Modernization Act.
Granite Fund
A hedge fund that failed in 1994.
grant anticipation note A type of municipal security.
Greeks
A set of factor sensitivities used for measuring risk exposures related to options or other derivatives.
gross return
Simple return plus 1.
Group of 30 Report
An influential 1993 industry report on OTC derivatives.
Guldimann, Till
Pioneered RiskMetrics.
Hamanaka, Yasuo
A rogue trader whose speculative activities during the 1980s and 1990s cost Sumitomo Corp. USD 1.8 billion.
Hammersmith and Fulham decision
A 1992 legal decision that invalidated existing derivatives contracts with numerous UK local councils.
harmonization
Making regulations consistent across industries.
hazard rate
Default intensity.
head of risk management
A senior manager with responsibility for financial risk management within a firm.
hedge fund
A largely unregulated investment fund that specializes in taking leveraged speculative positions.
hedging
The taking of offsetting risks.
Herstatt Bank
A German bank whose 1974 failure highlighted the dangers of settlement risk.
Herstatt risk
Settlement risk.
Hessian
In calculus, a matrix of second partial derivatives.
heteroskedasticity
A condition where a stochastic process has non-constant second moments.
high-water mark
In investment management, a provision that an incentive fee will not be payable until any prior losses have first been made up.
high yield bond
Junk bond.
historical transformation
For a VaR measure, a transformation procedure that employs the Monte Carlo method with realizations constructed from historical market data..
historical VaR
A category of VaR measures that employ an historical transformation.
historical volatility
A volatility estimated from historical data.
holder extendible option
An option that grants the holder the right to extend the expiration date.
holdings
A row vector listing the number of units of specific assets held by a portfolio.
holdings remapping
A type of portfolio remapping.
homoskedasticity
A condition where a stochastic process has constant second moments.
hub-and-spoke arrangement
A means of packaging a mutual fund for multiple distribution channels.
hurdle rate
In investment management, a provision that incentive fees will be paid only for returns exceeding some specified level.
hybrid instrument
A financial instrument that blend characteristics of debt and equity markets.
hypothecation
The posting of collateral.
Iguchi, Toshihide
A rogue trader whose speculative activities during the 1980s and 1990s cost Daiwa Bank Corp. USD 1.1 billion.
imaginary number
A complex number of the form bi, where b is real, and i is the imaginary number .
impact costs
Transaction costs that arise for trades that are sufficiently large that they cannot be transacted at the best bid or ask price.
implementation shortfall
A metric of total transaction costs—usually Perold's implementation shortfall.
implied volatility
A volatility inferred from an option price.
implied tree model
Alternative name for a local volatility model.
importance sampling
A technique of variance reduction for the Monte Carlo method.
in-the-money
A condition where an option has a positive intrinsic value.
in-warehouse
A method for settling physical commodity trades.
income bond
A corporate bond that only has to pay coupons if the issuer has sufficient income to do so.
incorporation by registration
A 19th century legal innovation that streamlined the formation of corporations.
indefinite matrix
A square matrix that is neither positive semidefinite nor negative semidefinite.
indenture
A bond's loan agreement.
independence
In the context of financial risk management, the segregation of risk management and risk taking functions.
independent white noise
A white noise with independent terms.
individual investor
A person or family possessing invested assets.
inference procedure
The procedure within a VaR measure that characterizes a joint probability distribution for key factors.
infimum
The infimum of a real set A is the largest real number such that all elements of A are greater than or equal to that number.
initial margin
An amount of money that must be on deposit with a broker before you can put on a futures position.
institutional investor
An organization, such as a pension fund, insurance company or mutual fund, possessing invested assets.
integers
The set of numbers {…, –2, –1, 0, 1, 2, …}.
intensity model
A type of default model.
intercommodity spread
A futures spread where the contracts are for different underliers.
interest rate cap
A derivative instrument which is linked to interest rates.
interest rate floor
A derivative instrument which is linked to interest rates.
interest rate gap
An imbalance in the assets and liabilities being repriced during a given period.
interest rate parity
An arbitrage condition that must hold between the spot interest rates of different currencies.
Interest rate risk
Risk due to uncertain future interest rates.
interest rate spreads
Spreads between interest rates.
interest rate swap
A swap under which both cash flow streams are in the same currency and are of a nature that might be associated with some fixed income obligation.
International Organization of Securities Commissions
An international organization representing securities regulators.
interpolation
Any procedure for fitting a function to a set of points in such a manner that the function intercepts each of the points.
interpolation remapping
A global remapping implemented using interpolation.
intersection
The intersection of two sets C and D is the set C D that contains all elements that are both elements of C and elements of D.
intracommodity spread
A futures spread where both futures are on the same underlier but have different maturities.
intrinsic value
The component of an option's market value that could be realized by exercising the option immediately.
inverse floater
A floater whose coupon varies inversely to its reference rate.
inverse floater CMO
A CMO tranch structured as an inverse floater.
investment adviser Investment manager.
Investment Advisers Act of 1940
US legislation governing the relationship between a mutual fund and its investment manager.
investment bank
A type of bank defined by US law that underwrites and trades securities.
investment company
A mutual fund.
Investment Company Act of 1940
US legislation authorizing the SEC to regulate mutual funds.
investment grade bond
A bond whose credit rating is BBB or better.
investment management
The process of investing a portfolio on an ongoing basis.
investment management industry
Industry comprising investment management firms and pooled investment vehicles, such as mutual funds.
investment management firm
A firm that manages investment portfolios for others.
investment manager
A professional who invests portfolios on an ongoing basis.
Investment Services Directive 1993
European financial legislation.
investment value
What the market value of a convertible security would be if it were stripped of its conversation feature.
invoice price
Dirty price.
IO
A type of mortgage-backed security.
IOSCO
An international organization representing securities regulators.
ISD
Investment Services Directive.
ISO codes
Currency codes.
Jacobian
In calculus, a matrix of partial derivatives.
Johnson curves
A family of curves used to model probability density functions.
joint normal distribution
A multivariate distribution, all of whose marginal distributions are normal, and such that any linear polynomial of the distribution is normal.
Jones, Alfred W.
Pioneer hedge fund manager.
jump-diffusion model
A stochastic process that combines random jumps with a geometric Brownian motion.
junior debt
Subordinated debt.
junk bond
A bond whose credit rating is below BBB-.
kappa
Alternative name for the Greek factor sensitivity vega.
Kendall, Maurice
Famous statistician who contributed to early research of the random walk hypothesis.
key factor
A risk factor whose conditional probability distribution is directly modeled by a VaR measure.
key vector
The vector of key factors.
KMV model
A commercial implementation of the asset value model of credit risk.
knock-in option
A type of path-dependent option.
knockout option
A type of path-dependent option.
Koonmen, John
Manager of the Eifuku Master Fund, a Japanese hedge fund that failed in 2002.
kurtosis
A parameter describing the peakedness and tails of a probability distribution.
Lancer Offshore Fund
A hedge fund that defrauded investors during the early 2000s.
Lauer, Michael
Manager of the Lancer Offshore Fund, a hedge fund that defrauded investors during the early 2000s.
law of one price
The notion that, if two assets have identical cash flows, they should have the same market
value.
Lay, Kenneth
Chairman of energy trading firm Enron, which failed spectacularly in 2001.
lead bank
A bank that takes the lead in originating and arranging a loan syndication.
lead lender
A bank or other institution that takes the lead in originating and arranging a loan syndication.
least squares
Method of least squares.
least squares remapping A global remapping implemented using the method of least squares.
Leeson, Nick
The rogue trader who brought down Barings Bank in February 1995.
legal personality
A legal concept under which corporations are treated as artificial people, with a similar capacity for legal rights and obligations.
legal risk
Risk from uncertainty due to legal actions or uncertainty in the applicability or interpretation of contracts, laws or regulations.
leptokurtosis
Kurtosis in excess of 3.
leverage
Debt financing or anything that can similarly magnify the risk and reward of an investment.
leveraged inverse floater
An inverse floater with coupon leverage greater than one.
Levine, Dennis
Investment banker who formed an insider trading ring during the 1980s.
liability sensitive
Having liabilities that reprice earlier than assets.
liability swap
A non-vanilla swap customized to change the character of a specific liability.
Libid
London interbank bid rate.
Libor
London Interbank Offered Rate.
Libor-swap curve
A spot curve constructed from Libor rates and swap rates.
Limean
The average of Libor and Libid
limit
Risk limit.
limit utilization
Given a risk limit, the amount of risk being taken as a fraction of the limit.
limit violation
Risk taken in excess of that permitted by a risk limit.
limited liability
A legal provision applicable to corporations and certain other business forms under which liabilities of the firm are not liabilities of the owners.
linear derivative
A derivative instrument whose payoff diagram is liner or almost linear.
linear interpolation
Interpolation using a linear polynomial as an interpolation function.
linear polynomial
A polynomial of the form p(x) = bx + a.
linear polynomial of a random vector
A random variable or random vector that is defined as a linear polynomial of a random vector.
linear position
An instrument or position whose payoff or market value as a function of some underlier is either linear or almost linear.
linear remapping
A global remapping that replaces a portfolio mapping function with a linear polynomial.
linear transformation
In the context of value-at-risk, a transformation procedure applicable to linear polrtfolios.
linear VaR
A category of VaR measures applicable to linear portfolios.
Lipper Convertible Fund
A hedge fund whose manager misrepresented performance to investors.
liquidity
Term used in various senses, all relating to availability of, access to, or convertibility into cash.
liquidity black hole
A condition where liquidity dries up, and selling pressure causes more selling pressure, or buying pressure causes more buying pressure.
liquidity gap
A net cash outflow projected for a given period.
liquidity risk
Risk due to uncertain liquidity.
liquidity spread
A yield or interest rate spread due to lack of liquidity.
load
A charge applied at the time an investor buys or sells shares in an open-end mutual fund to cover marketing expenses or commissions.
loan guarantee
Commitment by a third party to meet a debtor's obligations in the event that the debtor is unable to do so.
local volatility model
Any of a category of option pricing models that can be calibrated to volatility skew.
log return
A standard metric of return.
lognormal distribution
A probability distribution.
London interbank bid rate
A rate at which banks bid for deposits from other banks.
London interbank offered rate
A rate at which banks offer to lend to other banks.
long holding
Owning an asset or otherwise having positive exposure to some financial quantity.
long position
A position that is long an asset or otherwise has positive exposure to some financial quantity.
Long-short position
A position that is long one asset and short another.
long/short strategy
Market timing, usually in an equity market.
Long Term Capital Management
A hedge fund that failed spectacularly in 1998.
long volatility
Holding a positive vega position.
lookback option
A path dependent option whose payout depends upon the maximum or minimum underlier value achieved during the entire life of the option.
Lore, Marc
Co-founder of the scandal-rocked Global Association of Risk Professionals.
loss given default
The fraction of credit exposure that will not be recovered in the event of default on a specified obligation.
LTCM
Long Term Capital Management.
Lynch, Peter
Former manager of the famous Magellan mutual fund.
MA process
Moving-average process.
Maastricht Treaty
The treaty that formed the European Union in 1993.
Macaulay duration
Weighted average maturity of a set of cash flows.
Magellan Fund
A famous—arguably the most famous—open-end mutual fund.
maintenance margin
A minimum balance for a margin account that, if breached, results in a margin call.
Maloney Act of 1938
US legislation authorizing oversight of securities firms by self regulating organizations.
managed CDO
A CDO whose collateral is actively managed by a portfolio manager.
managed futures
Portfolios of forwards or futures managed as an "alternative asset category."
management team
In investment management, a team of officers, general partners or employees of a fund who are responsible for investing its portfolio.
managerial capitalism
A condition in which stock holdings in corporations become so fragmented and dispersed that owners lose effective control over those corporations.
mandatory redemption
A provision requiring that a security be called.
Manhattan Fund
A hedge fund that defrauded investors during the 1990s.
Maounis, Nicholas
Founder of the hedge fund Amaranth Advisors
mapping procedure
The procedure within a VaR measure that characterizes a portfolio's exposures.
margin
1) Collateral. 2) Daily settlement payment on a futures position.
margin account
An account holding funds available for making margin payments.
margin call
A demand for additional margin.
marginal tax rate
The fraction of an incremental dollar of income that would be paid as taxes.
Margrabe option
An outperformance option.
Maricopa funds
Fraudulent hedge funds run by David M. Mobley during the 1990s.
Mark, Rebecca
Enron executive whose ill-advised international acquisitions lost billions of dollars.
mark-to-market
The act of assigning a market value to an asset.
mark-to-market exposure
credit exposure calculated from instruments' current market values.
mark-to-market mode
A mode of analysis for a portfolio credit risk model.
mark-to-model
Use of financial models to ascribe a market value to an asset.
market neutral
Having balanced long and short positions resulting in no net exposure to broad market moves.
market neutral strategy
Speculative trading strategy that seeks to exploit relative mispricings between instruments while avoiding systematic risk.
market portfolio
A theoretical portfolio which comprises all risky assets available to investors.
market price
Market value.
market risk
Exposure to the uncertain market value of a portfolio.
market timing
Opportunistically going long or short a market in anticipation of possible market moves.
market value
A valuation assigned to an asset based on the price it might fetch in the market.
market value CDO
A CDO whose payments to investors are contingent on the adequacy of the market value of its collateral.
Markets in Financial Instruments Directive
A 2006 European directive that replaced the 1993 Investment Services Directive.
Markowitz, Harry
1990 Nobel Prize winner who launched the field of portfolio theory.
martingale
A type of stochastic process with zero drift.
martingale measure
A probability measure under which all asset prices relative to a given numeraire are martingales.
master-feeder arrangement
A means of packaging a mutual fund for multiple distribution channels.
matador
A foreign bond issued in Spain.
maximum
The largest element of a real set.
maximum likely exposure
A metric for potential credit exposure.
maximum option
A form of rainbow option.
mean
Expected value.
mean reversion
A tendency for a stochastic process to remain near, or return over time to a long-run average.
mean vector
The vector of the expected values of the components of a random vector.
measure
An operation for assigning a number to something.
measurement
A number obtained from applying a measure.
medium-term note
A debt security issued through shelf-registration under US law.
merger arbitrage
Speculative trading strategy designed to exploit relative mispricings between the stocks of a firm and another it intends to merge with or acquire.
Merton (1973) option pricing formula
A pricing formula for European options on stocks or stock indexes that have a known dividend yield.
Merton model
Alternative name for the asset value model of credit risk.
Metallgesellschaft Debacle
In 1993, a US subsidiary of Germany’s Metallgesellschaft lost USD 1.3 billion unwinding failed hedges of long-dated oil and fuel contracts.
method of least squares
Any of several techniques for fitting a curve to data so as to minimize the sum of squared differences between the curve and data points.
metric
An interpretation of the measurements obtained from a measure.
mezzanine finance
Catch-all term for various subordinated financing arrangements that include some element of equity.
mid-offer price
Average of the bid and ask prices.
MiFID
Markets in Financial Instruments Directive
Milken, Michael
The "junk bond king" of the 1980s.
min-max option
Either a minimum option or a maximum option.
minimum
The smallest element of a real set.
minimum option
A form of rainbow option.
Mississippi Scheme
A French stock bubble that burst spectacularly in 1720.
mixed distribution model
Any of a category of option pricing models that can be calibrated to volatility skew.
MM
Shorthand notation for millions.
Mobley, David M.
Manager of the fraudulent Maricopa hedge funds.
model risk
The risk that models are applied to tasks for which they are inappropriate or are otherwise implemented incorrectly.
modern portfolio theory
A body of theory relating to how investors optimize portfolio selections.
modified duration
A modification of Macaulay duration.
money market deposit
A large-denomination time deposit.
Monte Carlo method
Any numerical method that employs statistical sampling to solve problems.
Monte Carlo simulation
A simulation process whereby the value of a variable (e.g. equity price) is simulated over a future period of time. The simulation assumes that the variable follows a defined randomly generated process with a given drift and volatility.
Monte Carlo transformation
For a VaR measure, a transformation procedure that employs the Monte Carlo method with pseudorandomly generated realizations.
Monte Carlo VaR
A category of VaR measures that employ a Monte Carlo transformation.
monthly compounding
Compounding based on monthly crediting of interest.
mortality model
A type of default model.
mortgage backed security
A security interest in mortgage collateral.
mortgage bond
A corporate bond collateralized with assets such as a power plant or factory.
mortgage pass-through
A securitized pool of mortgages.
moving-average process
A type of stochastic process.
MPT
modern portfolio theory.
MTN
Medium-term note.
multiasset option
A multifactor option.
multicollinear
A covariance matrix is muticollinear if it is "almost" singular.
multifactor option
Any option linked to multiple underliers.
multilateral netting
Netting of obligations between three or more parties.
multinormal distribution
Joint normal distribution.
multivariate normal distribution
Joint normal distribution.
muni
Municipal security.
municipal bond
A type of municipal security.
municipal note
A type of municipal security.
municipal security
A debt security issued by a local government or its agencies or authorities in the United States or its territories.
mutual fund
A pooled investment vehicle that allows many parties to collectively invest in a professionally managed portfolio of assets.
NASD
National Association of Securities Dealers
National Association of Securities Dealers
A self regulating organization of the US securities industry.
National Securities Markets Improvement Act
1996 law that liberalized regulatory limitations on the activities of hedge funds.
natural numbers
The set of "counting" numbers: {1, 2, 3, …}.
NAV
Net asset value.
negative definite matrix
A square matrix, all of whose eigenvalues are real and negative.
negative semidefinite matrix
A square matrix, all of whose eigenvalues are real and nonpositive.
net asset value
The value of a mutual fund's holdings (assets minus liabilities) divided by the number of shares outstanding.
net return
Has two possible meanings. Most common is as a metric of return taking into account items such as management fees, custody fees and trading costs. Less common is as an alternative word for simple return.
netting
The offsetting of cash flows or other obligations against each other.
nexus of contracts theory of the firm
The contracts theory of the firm.
no arbitrage condition
A condition where prices in market offer no opportunities for arbitrage.
no-load fund
A mutual fund that charges no load and whose 12b-1 fee does not exceed 25 basis points.
nominal par value
A par value significantly below the intended issuance price of a security.
nominal yield
A bond's yield calculated as annual coupon divided by par value.
non-cumulative preferred stock
Preferred stock for which missed dividends are forfeited.
non-linear derivative
A derivative instrument whose payoff diagram in highly non-linear.
non-linear position
An instrument or position whose payoff or market value as a function of some underlier is highly non-linear.
nonsingular random vector
A random vector with nonsingular covariance matrix.
normal distribution
A continuous probability distribution whose probability density function has a "bell" shape.
note
A medium term coupon-bearing debt instrument.
notice date
The date on which a party that is short a future gives notice of delivery.
notice of delivery
Notice to a futures exchange of intent to close a short futures position by delivery.
notional amount
The quantity of an underlier to which a derivative instrument applies.
notional limit
A risk limit based upon notional amount as a crude exposure metric.
numeraire
Any unit of account used in financial engineering.
numerical method
A methodology for constructing numerical solutions.
numerical solution
An approximation that can be evaluated in a finite number of standard operations.
OAS
Option-adjusted spread.
obligor
A counterparty that poses credit risk.
OCC
Office of the Comptroller of the Currency
off-balance sheet financing
Financing that does not appear on a firm's balance sheet.
off-the-run
Refers to US Treasury securities that were not recently auctioned.
Office of the Comptroller of the Currency
The primary regulator of US national banks.
Offset
The closing of a futures position by taking an opposite position in the same contract.
OID
Original issue discount.
on-balance sheet financing
Financing that appears on a firm's balance sheet.
on-the-run
Refers to US Treasury securities that were recently auctioned.
open-end fund
A mutual fund that continually issues or redeems its own shares at their NAV to meet investor demand.
open-ended mortgage bond
A mortgage bond whose claim on collateral can be diluted by subsequent bond issuances.
operational risk
Risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.
operations risk
Risk associated with the day-to-day operation of a non-financial firm.
opportunity costs
Transaction costs arising from orders that are not fulfilled on the day they are placed.
option
A type of derivative instrument.
option-adjusted duration
Duration calculated in a manner that accurately reflects the interest rates sensitivity of options.
option-adjusted spread
Yield spread not attributable to embedded options.
option-adjusted yield
A metric of yield calculated for fixed income instruments that have embedded options.
option holder
The party to whom an option grants rights, usually the purchaser.
option issuer
Option writer
option premium
The purchase price of an option.
option pricing theory
The body of financial theory used by financial engineers to value options and other derivative instruments.
option spread
A position combining two or more options on a single underlier.
option valuation
Any procedure for assigning a market value to an option.
option writer
The party who grants an option, usually the seller of an option.
optional redemption
A provision allowing an issuer to call a security.
Orange County debacle
In 1994, the Orange County investment pool lost USD 1.7 billion from speculative activities.
ordinary interpolation
A flexible technique for interpolating functions.
ordinary least squares
A flexible technique for fitting a curve to data so as to minimize the sum of squared differences between the curve and data points.
original issue discount bond
Zero-coupon bond.
Ostrander, Patsy
Manager of a Fidelity Investments junk bond fund who was convicted of accepting illegal compensation from Michael Milken during the 1980s.
OTC
Over the counter.
out-of-the-money
A condition where an option is neither at-the-money nor has any intrinsic value.
outperformance option
An option to exchange one asset for another.
over the counter
Traded in some context other than a formal exchange.
overfit
An interpolated function is said to be overfit if it inappropriately weaves up and down in order to fit too many data points.
overlay strategy
Addition of managed futures to an existing investment portfolio.
overnight
Commencing immediately and lasting for one trading day.
Own Funds Directive 1989
European legislation defining capital for banks.
PAC bond
A type of CMO bond that has minimal prepayment risk.
PAC II bond
A support bond for a PAC bond that is itself structured as a PAC bond.
PAC III bond
A support bond for a PAC II bond that is itself structured as a PAC bond.
pack Eurodollar pack.
pairs trading
Statistical arbitrage based on trading long-short pairs of stocks.
paper market
A market in which transactions are cash settled.
paperwork crisis
A crisis in the US brokerage industry during the late 1960s.
par value
A stated value for a security.
parametric VaR
Linear VaR.
parity value
Conversion value of a convertible security.
participating preferred stock
Preferred stock that pays additional dividends when earnings distributions to common shareholders are high.
pass-through
A security issued by a special purpose vehicle that pays investors whatever net cash flows the special purpose vehicle's assets generate.
path dependence
A property of certain exotic options whose terminal value depends upon the path taken by the underlier during the life of the option.
payee
The part to receive payment under a draft.
payer swaption
An option to pay fixed on an interest rate swap.
payment-in-kind bond
A bond that give the issuer the option of paying coupons in cash or in more bonds.
payment netting
Netting of cash flows.
payoff
The net P&L from an options spread.
payoff diagram
A graph of an options spread's payoff as a function of underlier value at expiration.
PCA
principal component analysis
Peek-a-Boo
Public Company Accounting Oversight Board
percentile
A type of quantile.
perfected interest
A claim that is senior to any existing or future third-party claims in the event of bankruptcy.
Perold's implementation shortfall
A metric of total transaction costs.
physical delivery
A derivative instrument has physical delivery if it settles with actual delivery of some underlier.
physical market
A market in which transactions are physically settled.
physical settlement
Settlement of a derivative instrument with physical delivery of an underlier.
planned amortization bond
A type of CMO bond that has minimal prepayment risk.
platykurtosis
Kurtosis that is less than 3.
PO
A type of mortgage-backed security.
portfolio credit risk
The sum credit risk of a portfolio of obligations.
portfolio credit risk model
A model of portfolio credit risk.
portfolio management
Investment management.
portfolio manager
Investment manager.
portfolio mapping
A functional relationship specified by a VaR measure between a portfolio's value and the key vector.
portfolio mapping function
The function that defines a portfolio mapping.
portfolio remapping
A remapping that simplifies a portfolio mapping by replacing the mapping function and/or key vector.
portfolio theory
A body of theory relating to how investors optimize portfolio selections.
positive definite matrix
A real symmetric matrix, all of whose eigenvalues are real and positive.
positive semidefinite matrix
A real symmetric matrix, all of whose eigenvalues are real and nonnegative.
potential exposure
Credit exposure that may develop on an obligation due to possible changes in its market value.
pre-settlement risk
Credit risk of default on a derivative instrument prior to final settlement.
preference option
Chooser option.
preferred stock
Stock that is senior to common stock and pays a fixed dividend.
prepayment
The payment of a debt prior to its being due.
prepayment protection band
A range of prepayment rates between which a PAC bond will redeem principal according to schedule.
prepayment risk
Risk to holders of mortgage-backed securities arising from uncertainty in the rates at which mortgagors will prepay.
prerefunded bond
Refunded bond.
primary capital
A bank's permanent capital.
primary dealer
Primary government securities dealer.
primary government securities dealer
A Treasury securities dealer with whom the New York Fed transacts in its open market activities.
primary instrument
A financial instrument whose value is not derived from that of another instrument, but instead is determined directly by a market.
primary mapping
A portfolio mapping constructed directly from the portfolio's holdings.
prime broker
A brokerage firm that provides bundled services to a hedge fund.
principal
An amount of invested capital.
principal component
An output of principal component analysis.
principal component analysis
A technique for orthogonalizing a random vector.
principal component remapping
A portfolio remapping implemented using principal component analysis.
principal strip
A Treasury strip formed from the principal cash flow of a Treasury security.
prior lien bond
A senior mortgage bond issued as part of a reorganization.
priority
The order in which financial claims are to be paid in a corporate liquidation.
private activity bond
A taxable municipal bond issued to finance some private-sector purpose.
private-label mortgage-backed security
An MBS issued by an entity that is not a quasi-agency of the US Government.
private placement
A non-public offering of securities.
PRM certification
Professional certification offered by PRMIA.
PRMIA
Professional Risk Managers' International Association
process
Short for stochastic process.
professional indemnity D&O insurance
A special form of D&O insurance covering professional directors or officers for professional errors or omissions.
Professional Risk Managers' International Association
Controversial organization that claims to represent the risk management community.
project finance
Off-balance sheet financing of a power plant, infrastructure or other project.
PSA
A metric for projecting prepayments over the life of a mortgage-backed security.
Public Company Accounting Oversight Board
A US federal agency tasked with overseeing external auditors.
publicani
1) Ancient Roman precursors of the modern business corporation. 2) Owners of those Roman firms.
put
An option to sell an asset.
put-call parity
A relationship between the prices of European put and call options on the same underlier.
put spread
An options spread comprising a long-short position in put options.
putting on a spread
The act of purchasing and/or selling instruments to comprise an options or futures spread.
quadratic formula
A general formula for solving quadratic polynomial equations.
quadratic interpolation
Interpolation using a quadratic polynomial as an interpolation function.
quadratic polynomial
A polynomial of the form p(x) = cx2 + bx + a.
quadratic portfolio
In the context of value-at-risk, a portfolio whose portfolio mapping function is a quadratic polynomial.
quadratic remapping
A global remapping that replaces a portfolio mapping function with a quadratic polynomial.
quadratic transformation
For a VaR measure, a transformation procedure that is applicable to quadratic portfolios.
quadratic VaR measure
A category of VaR measures that are applicable to quadratic portfolios.
quant
A financial engineer.
quantile
A notion from probability.
quanto
A cash settled derivative that has an underlier denominated in one currency, but settles in another currency based on a fixed exchange rate.
quanto swap
An interest rate swap linked to different currency's interest rates.
quarterly compounding
Compounding based on quarterly crediting of interest.
quartile
A type of quantile.
rainbow option
A category of option linked to two or more underliers.
RAN
Revenue anticipation note.
random walk
A discrete stochastic process whose increments form a white noise.
random walk hypothesis
Financial model based on the empirical observation that stock and commodity prices behave like a random walk.
range forward
A type of derivatives hedge.
RAPM
risk-adjusted performance metric.
RAROC
Risk-adjusted return on capital.
RARORAC
risk-adjusted return on risk-adjusted capital.
ratchet cap
A cap whose strike is reset to the current rate for each caplet.
ratchet floor
A floor whose strike is reset to the current rate for each floorlet.
ratchet option
An option that periodically "locks in" profits.
rate of return
Annualized return.
ratings migration model
A default model based upon historical patterns of changes in bonds' credit ratings.
ratings transition matrix
A matrix indicating probabilities of upgrades or downgrades in bonds' credit ratings.
ratio call spread
A call spread in which there is not a one-to-one ratio between the numbers of long and short calls
ratio put spread
A put spread in which there is not a one-to-one ratio between the numbers of long and short puts.
real numbers
The set of all numbers that form the number line.
real set
Any set, all of whose elements are real numbers.
receiver swaption
An option to receive fixed on an interest rate swap.
record date
The date on which the owners of a security are identified for the purpose of making an upcoming interest or dividend payment.
recovery rate
In the event of a default, the fraction of the outstanding obligation expected to be recovered through bankruptcy proceedings or some other form of settlement.
redeemable bond
Callable bond.
redeemable security
Callable security.
reduced form model
Intensity model.
reduced stable distribution
Standardized stable distribution.
refunded bond
Municipal bond for which assets have been set aside in an escrow account or trust to fully retire the debt.
refunding
A transaction in which bonds are called so they can be replaced with new debt, usually at a lower interest rate.
regime switching model
A category of stochastic processes.
registered bond
A bond for which ownership is evidenced by both a certificate and the issuer's records.
regular-way settlement
Settlement on the third trading day after the trade date.
Regulation Q
A Depression era regulation that limited the interest commercial banks could credit on savings account balances.
regulatory capital
Capital held in accordance with statutory or regulatory requirements.
rehypothecation
The reuse of collateral for one's own purposes.
reinvestment risk
Risk from uncertainty in the interest rate at which future cash flows may be invested.
relative pricing model
An asset pricing model that assigns prices based on prices of other instruments quoted in the market.
relative value strategy
Market neutral strategy.
remapping
In value-at-risk, the approximation of one risk vector with another.
Rembrandt
A foreign bond issued in the Netherlands.
reopening
A Treasury securities auction in which previously issued securities are again offered.
replacement cost
The cost of replacing an obligation of a counterparty.
repo
Repurchase agreement.
repo rate
The rate of interest on a general collateral repo transaction.
repricing
Resetting of an interest rate.
repricing date
Any date on which an interest rate is reset.
repricing risk
Term structure risk.
repricing gap
Interest rate gap.
repurchase agreement
An agreement to sell and subsequently repurchase a security.
required capital
Capital a financial institution or trading organization must hold against the specific risks it takes.
reset date
Any date on which the floating rate payable on a floater is reset.
reset option
Ratchet option.
residual claim
The claim of stockholders on corporate assets after claims to all other parties have been met.
resiliency, market
The speed with which prices return to equilibrium following a large trade.
retail investor
Individual investor.
return
Any of a number of metrics of the change in an asset's or portfolio's accumulated value over some period of time.
return on assets
A standard accounting performance metric.
return on capital
A risk-adjusted performance metric.
return on equity
A standard accounting performance metric.
return on investment
Return.
return on risk-adjusted capital
A risk-adjusted performance metric.
revenue anticipation note
A type of municipal security.
revenue bond
Municipal bond issued to finance a specific revenue-producing projects, such as a toll
road, airport or public housing.
reverse floater
Inverse floater.
reverse inquiry
A request by an investor that a medium-term note be issued based on terms other than those offered.
reverse repo
The opposite side of a repo transaction.
rho
The Greek factor sensitivity measuring a portfolio's first order (linear) sensitivity to the risk-free rate.
risk
Comprises two components: uncertainty and exposure.
risk-adjusted capital ratio
A firm's capital ratio with an adjustment made to the denominator to reflect the riskiness of its assets.
risk-adjusted performance metric
Any metric of performance that balances reward against risk.
risk-adjusted return on capital
A RAPM based on ROC.
risk-adjusted return on risk-adjusted capital
A RAPM based on ROC.
risk arbitrage
Merger arbitrage.
risk averse
Preferring less risk to more.
risk-based capital
Capital requirements for US insurers developed by the National Association of Insurance Comissioners.
risk committee
A board level committee with responsibility for issues related to financial risk management.
risk factor
A random variable whose value will affect the value of a portfolio.
risk limit
A limit placed upon risk taking activity for the purpose of avoiding excessive risk.
risk loving
Alternative word for "risk seeking."
risk management
Generally means financial risk management, but other meanings are possible.
risk management department
A department within a firm that is responsible for financial risk management.
risk manager
A professional who performs duties related to risk management.
risk measure
An operation for quantifying a risk.
risk measurement
A number obtained from applying a risk measure.
risk metric
An interpretation of the measurements obtained from a risk measure.
risk neutral
Indifferent to risk.
risk neutral valuation
A concept that underlies many techniques for pricing options and other derivatives.
risk oversight committee
A committee of senior managers with responsibilities related to financial risk management.
risk seeking
Preferring more risk to less.
risk vector
A random vector whose components are risk factors.
RiskMetrics
A free service launched by JP Morgan in 1994 to promote the use of value-at-risk.
ROA
Return on assets.
robber barons
A term used disparagingly to refer to industrialists of America's Gilded Age.
ROC
Return on capital.
rocket scientist
A financial engineer.
ROE
Return on equity.
rollover risk
Risk that an issuer will be unable to roll over its maturing commercial paper into new commercial paper.
RORAC
Return on risk-adjusted capital.
Rule 12b-1
SEC rule allowing mutual funds to pay marketing and sales expenses directly out of fund assets.
Rule 18f-3
SEC rule allowing mutual funds to issue multiple classes of shares.
Rule 415
SEC rule allowing shelf registration of medium-term notes.
sales load
A charge applied at the time an investor buys or sells shares in an open-end mutual fund to cover marketing expenses or commissions.
samurai
A foreign bond issued in Japan.
Sarbanes-Oxley Act of 2002
US legislation enacted in response to the accounting scandals of 2001-2002.
scenario analysis
Formalized "what if" analysis typically performed as a part of asset-liability management or corporate risk management.
SEC
Securities and Exchange Commission
second mortgage bond
A subordinate mortgage bond.
secondary capital
A bank's transient capital.
secured debt
Collateralized debt.
secured lending
Collateralized lending.
Securities Act of 1933
US legislation to regulate the primary (underwriting) market for securities.
Securities and Exchange Commission
The primary regulator of US securities markets.
Securities Exchange Act of 1934
US legislation to regulate the secondary market for securities.
securities firm
A firm that brokers or sells securities.
Securities Investor Protection Corporation
A corporation established by the US Federal Government to insure investors accounts at brokerage firms.
securities lending
The lending of securities, usually for a fee.
securitization
A financial transaction in which assets are pooled and securities representing interests in the pool are issued.
securitize
To legally structure or package a financial interest as a security.
security
A financial instrument such as a stock or bond.
self regulating organization
In the United States, a private organization that performs a regulatory function under the supervision of the SEC.
semi-strong efficiency
A market has semi-strong efficiency if prices fully reflect all readily-available public information—past prices, economic news, earnings reports, etc.
semi-variance
An alternative to variance that focuses on negative values of a distribution.
semiannual compounding
Compounding based on semiannual crediting of interest.
senior claim
A claim on a corporation's assets that has higher priority than all or most other claims.
separation theorem
The result that portfolio composition and portfolio leveraging are two unrelated decisions.
sequential pay CMO bond
A type of CMO bond.
servicing agent
The party who performs servicing on collateral of a securitization.
servicing fee
A fee subtracted from the cash flows of a securitization to cover the cost of servicing.
servicing rights
Rights to process payments and perform related tasks associated with the collateral of a securitization.
set
An unordered collection of elements.
settlement
In finance, performance on a contractual obligation.
settlement date
The date on which a trade settles—delivery of what is being traded in exchange for payment.
settlement price
A price set for a futures contract at the close of trading for the purpose of calculating margin payments.
settlement risk
A form of credit risk that arises at the settlement of a transaction.
share
1) An ownership interest in something. 2) A unit of stock.
shareholder An owner of stock.
Sharpe ratio
A risk-adjusted performance metric used in investment management.
Sharpe, William 1990
Nobel Prize winner who published the original capital asset pricing model.
shelf registration
A flexible form of SEC registration applicable to medium-term notes.
short
Having a net negative position in an asset or otherwise having negative exposure to some financial quantity.
short position
A position that is short an asset or otherwise has negative exposure to some financial quantity.
short sale
Sale of a borrowed security.
short seller
Someone who sells an asset short.
short squeeze
A speculative trading strategy that takes advantage of short sellers' need to eventually buy back assets they are short.
short volatility
Holding a position that has negative vega.
Siegel, Martin Kidder
Peabody investment banker who became embroiled in the 1980's insider trading scandals.
sight draft
A draft on which payment is to be made immediately.
simulation analysis
Scenario analysis performed as a Monte Carlo analysis.
simple interest
A method of crediting interest in which interest is not earned on interest.
simple random walk
A random walk whose increments form a strong white noise whose terms only take on the values 1 or –1, each with probability 0.5.
simple return
A standard metric of return.
singular positive semidefinite matrix
A matrix that is positive semidefinite but not positive definite.
singular random vector
A random vector whose covariance matrix is singular.
sinking fund
A provision that requires an issuer of bonds or preferred stock to retire some of the issue each year.
sinking fund redemption
A provision requiring the periodic call of securities to satisfy a sinking fund provision.
SIPC
Securities Investor Protection Corporation.
skew
1) the probabilistic notion of skewness; 2) volatility skew.
skewness A parameter that describes a lack of symmetry of a probability distribution.
Skilling, Jeffrey
Former President and CEO of energy trading firm Enron, which failed spectacularly in 2001.
soft dollars
A sometimes controversial inducement brokers offer investment managers to place trades through them.
Solvency II
European directive specifying capital requirements for insurers.
Solvency Ratio Directive
1989 European legislation specifying capital requirements for the non-trading portion of a bank's balance sheet.
South Sea Bubble
An English stock bubble that burst in 1720.
SOX
Sarbanes-Oxley Act of 2002
SPE
Special purpose entity.
special purpose entity
Special purpose vehicle.
special purpose vehicle
A firm or other legal entity established to facilitate off-balance sheet financing.
special security
A security for which there is particular demand in the repo market.
specific risk
That component of an instrument or portfolio's market risk that is uncorrelated with the overall market.
speculative grade bond
Junk bond.
spline interpolation
A category of interpolation techniques.
split-coupon bond
Deferred-coupon bond.
spot curve
A graph of spot interest rates for different maturities.
spot loan
A loan that commences spot.
spot-next
A loan commencing spot and lasting one trading day.
spot price
The price at which trades for spot settlement transact.
spot rate
The rate of interest on a spot loan that accumulates interest to maturity.
spot settlement
Settlement of a trade almost immediately—within a number of trading days that is standardized for each market.
spot trade
A trade for spot settlement.
spread
1) a difference between two variables—see Spreads; 2) a long-short futures position—see Futures Spread; and 3) a position comprising two or more options—see Options Spread; 4) see also interest rate spreads.
spread option
An option on a spread.
spread risk
Risk due to exposure to some spread.
spread trading
Trading of futures spreads.
SPV
Special purpose vehicle.
square root of time rule
A formula for computing a volatility for one unit of time from a volatility for a different unit of time.
SRO
self regulating organization
SSM
Single monthly mortality.
stable distribution
A probability distribution that remains the same under addition.
stable Paretian distribution
A non-normal stable distribution.
standard Cauchy distribution
A Cauchy distribution with position parameter 0 and dispersion parameter 1.
standard deviation
A parameter describing the dispersion of a probability distribution.
standard normal distribution
The normal distribution with mean 0 and variance 1.
standardized stable distribution
A stable distribution whose scale and location parameters are 1 and 0.
stat arb
Statistical arbitrage.
stated value
Par value.
static CDO
A CDO whose collateral is not actively managed by a portfolio manager.
stationarity
Covariance stationarity.
statistical arbitrage
Market neutral trading strategy used in equity markets and employing time series analysis.
statutory underwriter
An investor who unintentionally acts as a securities underwriter under the 1933 Securities Act.
step-up bond
A bond that pays a reduced coupon during its first few years.
sticky delta
A model whereby volatility skew is stable relative to option deltas.
sticky strike
A model whereby volatility skew is stable relative to option strikes.
stochastic
Random.
stochastic calculus approach
An informal name for derivatives pricing models that employ stochastic calculus with risk neutral valuation or other techniques based upon modeling future asset values.
stochastic process
A model for a time series.
stochastic volatility model
A category of conditionally heteroskedastic stochastic processes.
stock
A security representing an ownership interest in a corporation.
stock picking
The act of picking individual stocks to include in an investment portfolio.
stockholder
An owner of stock.
stop-loss limit
A market risk limit based upon incurred mark-to-market loss.
stop-out yield
The yield to maturity at which auctioned Treasury securities are issued.
straddle
An options spread comprising a long put and a long call both with the same strike price.
Strafaci, Edward
Manager of the Lipper Convertible Fund, who misrepresented fund losses as gains.
strangle
An options spread comprising a long put and a long call, both with out-of-the-money strike prices.
stratified sampling
A technique of variance reduction for the Monte Carlo method.
stress testing
A simple form of scenario analysis typically used to assess market risk.
strict stationarity
A property of some stochastic processes.
strike price
The price specified by an option at which an asset is to be purchased or sold.
strip
A zero-coupon bond "stripped" from the cash flows of a Treasury security.
STRIPS Program
A US Department of Treasury program for "stripping" coupon-bearing Treasury securities to form zero-coupon securities.
strong efficiency
A market has strong efficiency if prices fully reflect all public and privileged information.
strong white noise
Independent white noise.
structural credit risk model
Asset value model.
subcustodian
A custodian who holds securities locally on behalf of foreign investors.
submartingale
A type of stochastic process that may have positive drift.
subordinate PAC bond
A pack bond that is paired with a super PAC bond to take most of the prepayment risk.
subordinated claim
A claim on a corporation's assets that has lower priority than all or most other claims.
Sumitomo Corp. debacle
A 1996 rogue trader scandal.
super-efficient portfolio
A notion from portfolio theory.
super PAC bond
A form of PAC bond that is structured to have less prepayment risk than an accompanying subordinate PAC bond.
supermartingale
A type of stochastic process that may have negative drift.
support bond
A bond that takes most of the prepayment risk in a PAC CMO structure.
supremum
The supremum of a real set A is the smallest real number such that all elements of A are less than or equal to that number.
survival function
Probability of avoiding default expressed as a function of time.
swap
A derivative whereby two parties exchange cash flow streams.
swap curve
A yield curve of swap rates.
swap rate
The fixed rate quoted on a vanilla interest rate swap.
swaption
An option on a swap.
syndicate
The group of lenders in a syndicated loan.
syndicated lending
A form of lending in which a group of lenders collectively extend a loan to a single borrower.
syndicated loan
A loan made collectively by a group of lenders to a single borrower.
synthetic CDO
A CDO that creates credit exposures for investors primarily through CDSs.
systematic risk
That component of an instrument or portfolio's market risk that is correlated with the overall market.
T-bill
Treasury bill.
TAC bond
Targeted amortization class bond.
TAN
Tax anticipation note.
targeted amortization class
A type of CMO bond structured to minimize risk due to high prepayment rates.
tax and revenue anticipation note
A type of municipal security.
tax anticipation note
A type of municipal security.
tax-backed bond
A municipal bond backed by anticipated tax, penalty or fee revenue.
tax-equivalent yield
Indicates for an investor the yield a taxable bond would have to earn in order to match, after taxes, the yield available on an untaxed municipal security.
tax-exempt bond
Municipal or other bond whose interest is not subject to one or more taxes.
tax spread A (usually negative) yield or interest rate spread due to some tax advantage.
Taylor polynomial
In calculus, a polynomial approximation for a function constructed from its derivatives.
Taylor series expansion
In calculus, a power series obtained as a limit of Taylor polynomials that may approximate or equal the function from which it is constructed.
TED spread
Treasury-Eurodollar spread.
term
The length of time between a bond's issuance date and maturity date.
term CD
Certificates of deposit with a term of a year or more.
term repo
A long-term repo transaction.
term structure
Any curve describing some financial quantity as a function of time to maturity or expiration.
Term structure risk
That component of interest rate risk due to changes in the fixed income term structure.
theta
The Greek factor sensitivity measuring a portfolio's first order (linear) sensitivity to the passage of time.
tier 1 capital
Core capital under the Basel Accords
tier 2 capital
Supplementary capital under the Basel Accords
tier 3 capital
Capital applicable only to market risk under the Basel Accords
tightness, market
Bid-ask spread as a component of liquidity.
time deposit
A bank deposit that has a fixed maturity.
time draft
A draft on which payment is to be made at some future date.
time series
A series of observations made over a period of time.
time value
A component of the market value of an option.
time value of money
Used informally to refer to the fact that the present value of future cash flows decreases with the amount of time until they are to be received.
timing risk costs
Transaction costs arising from market movements during the period between an order being placed and that order being filled.
TIPS
Treasury Inflation-Protected Securities.
tom-next
A loan commencing in one trading day and lasting one trading day.
total return
A return on investment calculated from accumulate values reflecting only price appreciation and income from dividends or interest.
total return swap
A type of credit derivative.
trading book
Under bank regulations, a portion of a bank's balance sheet set side for trading activities.
TRAN
Tax and revenue anticipation note.
tranch
One class of bonds issued in a securitization that has multiple classes of bonds.
transaction costs
Direct costs associated with transacting trades.
transformation procedure
One of the three essential components of a VaR measure.
Treasury
Treasury security.
Treasury bill
US Treasury security with with a maturity of a year or less at the time of issue.
Treasury bond
A coupon-bearing Treasury security with original maturity greater than ten years.
Treasury Inflation-Protected Securities
Inflation-indexed bonds issued by the US Treasury.
Treasury note
A coupon-bearing Treasury security with original maturity greater than one year and up to ten years.
Treasury security
US Federal Government debt obligations issued by the Department of Treasury.
Treasury strip
A zero-coupon bond "stripped" from the cash flows of a Treasury security.
Treynor ratio
A risk-adjusted performance metric used in investment management.
TruPS
Trust preferred security
TruPS CDO
A CDO that has trust preferred securities as collateral.
trust preferred security
Cumulative preferred stock issued by a bank holding company through a special purpose vehicle.
tunnel
A type of derivatives hedge.
two-asset correlation option
A type of rainbow option.
UCITS
Undertakings for Collective Investment in Transferable Securities Directive.
unconditional heteroskedasticity
A condition where a stochastic process has non-constant unconditional second moments.
unconditional homoskedasticity
A condition where a stochastic process has constant unconditional second moments.
underlier
A primary instrument or variable upon which the value of a derivative instrument depends.
Undertakings for Collective Investment in Transferable Securities Directive
Directive specifying EU-wide rules for pooled investment vehicles such as mutual funds.
unexpected loss
A risk metric related to the second moment of a portfolio's losses due to default over a specified horizon.
uniform distribution
A continuous probability distribution that has constant probability on a finite interval.
Uniform Net Capital Rule
The SEC's rule setting minimum capital requirements for broker-dealers trading non-exempt securities.
union
The intersection of two sets C and D is the set C D that contains all elements that are either elements of C and/or elements of D.
universal bank
A bank that engages in both commercial banking and investment banking activities.
universal volatility model
Any of a class of option pricing models that model volatility skew by combining elements of local volatility, jump-diffusion and stochastic volatility models.
unsecured debt
Uncollateralized debt.
utilization
Given a risk limit, the amount of risk being taken as a fraction of the limit.
value-at-risk
A measure of the loss in market value of a position/portfolio, which is expected over a given holding period for a given confidence interval. The underlying premise of VaR is that the historical volatility and correlation between different types of risk factors can be used to estimate the overall variation in the value of different and numerous cashflows.
value date
The date on which a trade is intended to settle.
vanilla currency swap
A standardized fixed-for-floating or floating-for-floating currency swap.
vanilla derivative
A derivative instrument that is simple or of a common form.
vanilla interest rate swap
A standardized fixed-for-floating fixed income swap.
vanilla option
A simple put or call option.
vanilla swap
One of a few standardized forms of swaps that are widely quoted in the markets.
VaR
Value-at-risk.
VaR horizon
The period of time over which a VaR measure assesses a portfolio's market risk.
VaR implementation
An implementation of a VaR measure, generally as software on a computer.
VaR limit
A market risk limit that uses some VaR metric to quantify and limit risk.
VaR measure
A set of operations by which a portfolio's VaR is calculated.
VaR measurement
The numerical value a VaR measure assigns to a portfolio's market risk.
VaR metric
An interpretation of a VaR measure.
VaR model
The financial theory, mathematics, and logic that motivate a VaR measure.
variable rate demand note
Variable rate demand obligation.
variable rate demand obligation
A type of floating-rate municipal security.
variables remapping
A type of remapping used in value-at-risk measures.
variance
A parameter describing the dispersion of a probability distribution.
variance-covariance VaR
Linear VaR.
variation margin
A margin payment to restore a margin account to the initial margin level.
vcv
VaR Shorthand for "variance-covariance VaR".
vega
The Greek factor sensitivity measuring a portfolio's first order (linear) sensitivity to the implied volatility of an underlier.
volatility
A metric of variability in a stochastic process.
volatility clustering
A property of some stochastic processes that they experience periods of high and low variance.
volatility skew
A condition where implied volatilities vary by strike.
volatility smile
A condition where implied volatilities for in-the-money and out-of-the-money strikes exceed those for at-the-money strikes.
volatility surface
A function describing implied volatilities' dependence on both strike and expiration.
volatility term structure
A curve that describes volatility as a function of expiration for a given strike.
volume-weighted average price
The average price paid for an instrument in all trading of that instrument during a given day.
VRDN
Variable rate demand obligation.
VRDO
Variable rate demand obligation.
VWAP
Volume-weighted average price
watered stock
Stock sold for a price below its par value.
weak efficiency
A market has weak efficiency if prices fully reflect any information contained in past price data.
when-issued security
A government security that trades forward in advance of being issued.
white noise
A simple form of stochastic process.
Wiener, Norbert
Mathematician who proved the existence of Brownian motion.
Wiener process
Brownian motion.
Working, Holbrook
Early researcher of the random walk hypothesis.
WorldCom bankruptcy
The largest bankruptcy in US history.
worst-of option
A form of rainbow option.
wrangle
An options spread that is long (short) both a ratio call spread and a ratio put spread.
writer extendible option
An option whose expiration is extended if some pre-defined condition is met.
Yankee
A foreign bond issued in the United States.
Yankee CD
A foreign certificate of deposit issued in the United States.
yield
Any of several metrics of the income or return to be earned from an investment.
yield curve
A graph of yields as a function of maturity.
yield curve risk
Term structure risk.
yield to call
A bond investment's internal rate of return based on the bond's current dirty price and an assumption that the bond will be called.
yield to first call
A bond investment's internal rate of return based on the bond's current dirty price and an assumption that the bond will be called on its first call date.
yield to first par call
A bond investment's internal rate of return based on the bond's current dirty price and an assumption that the bond will be called on the first date it is callable at par.
yield to maturity
A bond investment's internal rate of return based on the bond's current dirty price and an assumption that all coupon and principal payments are received as scheduled.
yield to worst
The minimum of several metrics of yield.
YTM
Yield to maturity.
Z bond
A type of CMO bond, also called an accrual bond.
zero
Zero-coupon bond.
zero-coupon bond
A bond that pays no coupons, pays its par value at maturity and is issued at a discount.
zero-coupon curve
Spot curve.
zero-coupon rate
Spot rate.
zero-coupon Treasury security
Treasury strip.
Source: http://www.riskglossary.com/
Sunday, March 9, 2008
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