Glossary 1

Glossary of Financial Terms

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-AACT Advance Corporation Tax ADR American Depository Receipt. A financial asset issued by a US Depository Bank representing shares in a non-US company held by them. These receipts are traded in the US. AGM The annual meeting of a company which is required by law. AIM Alternative Investment Market AMEX American Stock Exchange. A private, not-for-profit corporation located in New York City, which handles approximately one-fifth of all securities trades within the United States. APT Automated Pit Trading ATM At the Money. When the price of the underlying transaction equals the strike price of the option. ASB Accounting Standards Board ASDA Actual Settlement Date Accounting Abandon The act of not exercising or selling an option before its expiration. Accreting A range of instruments where the notional amount on which the instrument is based increases during its life. This may include swaps, swaptions, floors & collars. Accrual accounting
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A method of reporting income when earned and expenses when incurred, as opposed to reporting income when received and expenses when paid. Accrued Interest Interest earned on a bond since the previous interest payment and not yet paid to the bondholder. Acid-Test Ratio A measure of a corporation's liquidity, calculated by adding cash, cash equivalents, and accounts and notes receivable, and dividing the result by total current liabilities. It is a more stringent test of liquidity than current ratio. Acquisition Fee The total charges and commissions paid by any party in connection with the selection or purchase of property by a direct participation program. Included in the total are any real estate commission, acquisition expense, development fee, and selection fee or construction fee of a similar nature. The fee is added to the basis in the asset for the purpose of depreciation and calculating gain or loss. Adjusted Basis The value attributed to an asset or security that reflects any deductions taken on or capital improvements to, the asset or security. Adjusted basis is used to compute the gain or loss on the sale or other disposition of the asset or security. Adjusted Beta The estimation of a securities future beta calculated from historical data, but modified by the assumption that the securities real beta will move over time to the market average of 1. Adjusted Gross Income (AGI) Earned income plus net passive income, portfolio income and capital gains. Advance/Decline Line A technical analysis tool representing the total of differences between advances and declines of security prices. The advance/decline line is considered the best indicator of market movement as a whole. Agent (1) An individual or firm that effects securities transactions for the accounts of others. (2) A person licensed as a life insurance agent. (3) A securities salesperson who represents a broker-dealer or issuer when selling or trying to sell securities to the investing public; this individual is considered an agent whether he actually receives or simply solicits orders. Alligator Spread A combination of both put & call options, which generates so much commission for the broker that the trade is unprofitable for the investor. Alpha The difference between a securities expected return and its real return. American Style Option An option that may be exercised at any time up until expiry.
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Amortisation (1) The paying off of debt in regular instalments over a period of time. (2) The rateable deduction of certain capitalised expenditures over a specified period of time. Amortising A range of instruments where the notional amount on which the instrument is based decreases during its life used for depreciating intangible assets for tax purposes. These can include swaps, swaptions, floors & collars. Annuity Swap An interest rate swap where irregular cashflows are exchanged for a stream of regular cashflows of the equivalent present value. Annuity A contract that guarantees a fixed or variable annual payment. Apportionment The allocation of stock to a buyer Appreciation The increase in the value of an asset over a period of time. Arbitrage The simultaneous purchase and sale of the same or related securities to take advantage of a market inefficiency. Arbitrage Pricing Theory An equilibrium model of asset pricing stating the expected return on a security is a linear function of the securities function to various common factors. Ask The price at which a market maker is prepared to sell a security also called the offer price. Asset (1) Anything that an individual or a corporation owns. (2) A balance sheet item expressing what a corporation owns. Asset Allocation The optimal apportioning of investment funds amongst categories of assets. Asset Backed Securities Notes or Bonds backed by assets or structured cashflows receivable. Asset-Liability Management The process of matching a level of debt to an amount of assets. Carried out by financial institutions when matching the maturity of their deposits with the length of their loan commitments as protection against changes in interest rates.
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Glossary 4

Asset Swap A swap in which a counterparty exchanges a stream of cash flows from an asset into a different stream. The most common asset swap is the conversion of high yielding fixed rate bonds into synthetic floating rate assets with a Libor + return. Assignment The sale of a swap to a new counterparty or buyout of a swap by a new counterparty. At-the-Opening Order An order that specifies it is to be executed at the opening of the market or of trading in that security or else it is to be cancelled. The order does not have to be executed at the opening price. Auction Issue A method of issuing securities subscribers bid for stock and pay the price they bid. Auction Market A market in which buyers enter competitive bids and sellers enter competitive offers simultaneously. The NYSE is an auction market. Authorised Stock The number of shares of stock that a corporation is permitted to issue. This number of shares is stipulated in the corporation's approved charter, and may be changed by a vote of the corporation's stockholders. Average Price A step in determining a bond's yield to maturity. A bond's average price is calculated by adding its face value to the price paid for it and dividing the result by two.

-BBBAIRS Terms Standard terms for shorter-term interbank interest rate swaps, provided by the British Bankers Association. BD Broker Dealer. A member firm, acting as agent or as principal, who is not a registered market maker in the security in which they are dealing. BET Book entry transfer. The transfer of ownership of a security by means of a computer entry. This electronic recording of the asset may be in immobilised or dematerialised form. BOTCC Board of Trade Clearing Corporation
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Balance of Payments (BOP) An international accounting record of all transactions made by one particular country with others during a certain time period; it compares the amount of foreign currency the country has taken in to the amount of its own currency it has paid out. Balance of Trade The largest component of a country's balance of payments; it concerns the export and import of merchandise (not services). Debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad. Credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economy. Balance Sheet A statement of the assets and liabilities of a company at a particular point in time normally at the end of its financial year. Balance Sheet Equation A formula stating that a corporation's assets equals the sum of its liabilities plus shareholders' equity. Balloon Maturity A repayment schedule for an issue of bonds wherein a large number of the bonds come due at a prescribed time (normally at the final maturity date); a type of serial maturity. Bargain A transaction to buy or sell securities on a stock exchange. Barrier Option Also called a knock-out, knock-in or a trigger option. This is a derivative that is path dependent and is activated or cancelled if the underlying reaches a set level. Basis The difference between the cash price of the underlying security and the nearest dated future. Basis Point One hundredth of 1% - i.e. 50bp = .5% Basis Risk The risk that the value of a futures contract does not move in line with the underlying exposure also the risk of movement between two interest rate profiles [e.g. LIBOR vs. Fed Funds]. Basis Swap A swap from one floating rate to another. Basis Trading Facility A process whereby futures and the underlying can be traded simultaneously to buy/sell the basis.
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Glossary 6

Bear One who expects market prices to fall. Bear Market A market, in which prices of a certain group of securities are falling or are expected to fall. See also bull market. Bear Raid Concerted selling of an instrument so that it can be repurchased at a lower level. Bearer Share A security where possession is taken as proof of ownership as the certificate does not contain the name of the registered owner. Bearer Bond A bond with coupons attached, giving the holder the right to receive interest payments. These coupons [talons] should be submitted after a specified date to receive these payments. Beneficial Owner The owner of a security who is entitled to the benefits of that security. The beneficial and legal owner may be different. Best Execution Dealing at the best possible price in the required size. Beta Coefficient A means of measuring the volatility of a security or portfolio of securities in comparison with the market as a whole. A beta of 1 indicates that the security's price will move with the market. A beta greater than 1 indicates that the security's price will be more volatile than the market. A beta less than 1 means that it will be less volatile than the market. Bid Price The price at which a market maker or dealer will buy a security. Binary Option A discontinuous option that pays out a fixed amount if the underlying reaches the strike price. Black Scholes Model A model used to value options, which calculates a theoretical fair value by constructing an instantaneously riskless hedge [i.e. where performance exactly mirrors the option payout]. The portfolio of option and hedge can then be assumed to earn the risk free rate of return. The model takes 5 major factors into account: the risk free interest rate, the strike price of the option, the price of the underlying, the options maturity and the assumed volatility. Blue Chip Stock The equity issues of financially stable well-established companies that have demonstrated their ability to pay dividends in both good and bad times.

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Bond A negotiable debt security with a maturity at issue of more than one year. Bond Basis Swap rate based on a 365 day year in accordance with the accrual conventions in the US Treasury Bond market. Bond Rating An evaluation of the possibility of default by a bond issuer, based on an analysis of the issuer's financial condition and profit potential. Bond rating services are provided by, among others, Standard & Poor's and Moody's Investors Service. Bond Value The market value a convertible bond would have if it were a straight [fixed rate] bond with no conversion rights. Bonus Issue A free issue of new shares by a company to existing shareholders, in proportion to their existing holdings can also be called a scrip or capitalisation issue. Bootstrapping A method used to derive the zero-coupon yield curve. Brady Bonds Emerging market debt, partly securitised by US Treasuries, issued when bank loans are exchanged for bonds. Breakeven/Payback A ratio [expressed in years] that compares the size of a conversion premium with the difference between the yield on a convertible security and the dividend yield on the shares into which it can be converted. Breakeven Point (1) The point at which gains equal losses. (2) The market price that a stock must reach for an option buyer to avoid a loss if he exercises. For a call, it is the strike price plus the premium paid. For a put, it is the strike price minus the premium paid. Broker One who acts as an agent for a client when buying & selling securities. Bull One who thinks that prices will rise. Bull Market A market in which prices of a certain group of securities are rising or are expected to rise. See also bear market. Business Cycle A predictable long-term pattern of alternating periods of economic growth and decline. The cycle passes through four stages: expansion, peak, contraction, and trough.
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Butterfly Spread The sale of an at-the-money straddle and the simultaneous purchase of an out-of-the-money strangle.

-CCAD Cash against delivery/documents CAD Capital Adequacy Directive the requirement for banks & financial services organisations to have sufficient capital to carry out their activities. CBOE Chicago Board Options Exchange. CBOT [Chicago Board of Trade] The oldest commodities exchange in the United States; established in 1886. The exchange lists agricultural commodity futures such as corn, oats and soybeans, in addition to more recent innovations as GNMA mortgages and the Nasdaq 100 Index. CCSS Crest Courier & Sorting Service CD Certificate of Deposit a certificate issued by a bank against a short-term deposit. CGO Central Gilts Office book entry transfer system for Gilts, operated by the Bank of England CGT Capital Gains Tax CFTC Commodity Futures Trading Commission CJA Criminal Justice Act 1993 CME Chicago Mercantile Exchange CREST Certificateless Register of Electronic Stock & Share Transfer CRR Counterparty Risk Requirement
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CS Cash settlement. CSD Central Securities Depository. Their primary function is to immobilise or dematerialise securities thus assuring most transactions are processed in book entry form. CSDA Contractual Settlement Date Accounting. Global Custodians in certain conditions and in developed markets will give clients cash value for securities traded irrespective of whether they have received the money themselves. CSP Central Stock Payment CUSIP Committee on Uniform Securities Identical Procedures Calendar Spread Buying two futures or options on the same security but with different maturities. Callable Swap A swap that gives the fixed rate payer an option to cancel the swap agreement, usually on one specific future date. Call Option An option that gives the right [but not the obligation] to buy a specific quantity of the underlying instrument at a predetermined price, on or before a fixed date. Cap A contract in which the seller agrees to pay the buyer the difference between a reference rate and an agreed strike rate as in the case when the reference exceeds the strike. This is done in return for annuity payments or a one off premium. Capital Asset Pricing Model [CAPM] Represents the relationship between expected risk and expected return states that the return on an asset or security should be equal to the risk-free return + a premium. Capital Employed Medium & long term finance in a company = debt finance + shareholders funds Capitalisation Issue See bonus issue Capital Markets Financial markets in which instruments with a term to maturity, at issue, are issued and traded.

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Cash Flow The money received by a business minus the money paid out. Cash flow is also equal to net income plus depreciation or depletion. Cash Market The underlying currency or market where the instruments that relate to derivatives are bought and sold. Cash Settlement A security dealt for settlement the business day after dealing. CEDEL An International Central Securities Depository & clearing system based in Luxembourg and owned by a consortium of banks. Certificated Securities represented in the form of paper certificates Chinese Wall A barrier to the flow of information between departments in the same organisation, normally between the corporate finance/M&A departments of financial institutions and the rest of the institutions Circuit Breaker A suspension of trading in a particular market in times of high volatility City Code A rule book for the conduct of take-overs and mergers in the UK. City Panel Panel on Take-overs & Mergers. A non-statutory body, which enforces the take-over, code in the UK. Class 1 Transaction A deal whereby a companys assets/profits/shares could change by 25% or more Class 2 Transaction A deal whereby a companys assets/profits/shares could change by 5% or more. Clean Price The market price of a bond, excluding accrued interest the price at which bonds are traded in the market. Clearing House An organisation responsible for the reconciliation of sales and purchases, organising settlements & margins and providing guarantees to market users in the event of default. Collar The simultaneous purchase of an interest rate cap and an interest rate floor therefore limiting exposure to changing interest rates within a defined range.
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Collateral Certain assets set aside and pledged to a lender for the duration of a loan. If the borrower fails to meet obligations to pay principal or interest, the lender has claim to the assets. Commercial Paper An unsecured, short-term promissory note issued by a corporation for financing accounts receivable and inventories. It is usually issued at a discount reflecting prevailing market interest rates. Commission A fee charged by a broker for a service. Commodity A product traded on a commodity exchange. Compliance Officer Someone appointed by an organisation to ensure that it complies with local & international regulatory requirements. Concert Party Investors buying securities in agreement between themselves. Contract A standard unit of trading in futures & traded options. Contract Note A note containing details of a transaction carried out by a bank/broker on behalf of a client. Convergence Movement of the price of a futures contract towards the price of the underlying. Conversion Premium The amount by which a convertible bonds current market price exceeds the conversion value [current market value] of the shares into which it can be converted. Conversion Price The share price at which a convertible can be exchanged into shares. Convertible Bond A bond that is convertible at a future date, at the option of the bondholder, into a stated quantity of equity shares in the issuer. If not converted, the bond will be redeemed at maturity. Convertible Loan Stock An interest bearing security with an option to convert into a specific amount of equity by a future date. Convexity Mathematical concept measuring the sensitivity of the market price of an interest-bearing bond to a change in interest rates.

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Corporate Actions Once a trade is concluded and the securities held in custody, events occur which can affect change in the underlying asset i.e. share split or a benefit to the shareholder i.e. dividend. Corporation The most common form of business organisation, in which the total worth of the organisation is divided into shares of stock; each share representing a unit of ownership. A Corporation is characterised by a continuous life span and the limited liability of its owners. Correlation A statistical measure which measures the degree of mutual variation between two random variables. Coupon Interest payment. Covered Warrants Warrants issued by intermediaries they can be on single stocks, indices or baskets. Credit Enhancement Improving the credit rating of bonds by obtaining a third party guarantee or credit risk insurance. Credit Rating A formal opinion about the likelihood that a debt will be repaid in full and on time. Credit Risk The probability that a counterparty will default on its financial obligations. Cross Border Trade This occurs when the trading parties are situated in difference countries i.e. a buyer of a security in France with a seller of the same security in Germany who trade with each other. Cum Dividend A security that is purchased with the right to the next dividend. Current Assets Cash and other assets that are expected to be converted into cash within the next twelve months. Examples include such liquid items as cash and equivalents, accounts receivable, inventory and prepaid expenses. Currency Risk Uncertainty in the return from a foreign financial asset due to unpredictability regarding the exchange rate. Currency Swap A transaction in which two parties agree to swap fixed or floating cash flows in different currencies for a specific period. Current Yield Annual interest receivable from a security expressed as a % of its current market value.
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-DDIE Designated Investment Exchange DM Deutschemark DTC Depository Trust Company DTB Deutsche Terminborse DTI Department of Trade and Industry DVP Delivery versus Payment. The simultaneous and irrevocable transfer of ownership of an asset in exchange for the equivalent assured counter value in same day funds. DTI Department of Trade & Industry [UK] Daily Official List Produced each day by the London Stock Exchange to record the previous days trading prices. Day Order An order placed for execution during one trading session only the order is automatically cancelled if not filled that day. Dealer An institution or individual who trades financial assets, either for their own account or on behalf of clients. Debentures Interest bearing security, secured on the borrowers assets. Debt-Equity Swap A one-off transaction of physical instruments, without the exchange of future cashflows. Generally used by countries and companies with large debts that have become unserviceable. Debt Security Normally interest bearing bonds. Debt Service The schedule for repayment of interest and principal (or the scheduled sinking fund contribution) on an outstanding debt.

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Debt Warrant Gives the holder the right to buy a certain bond at a fixed price on or between certain dates. Default (1) The failure to pay interest or principal promptly when due. (2) The failure to perform on a futures contract as required by an exchange. Deferred Swap A type of swap, where due to accounting or tax reasons, payments [rather than the whole swap] are deferred to a later period. Delivery Risk The risk faced when dealing in different time zones, when one side of a transaction has been delivered but not the other. Also known as settlement risk, it is encountered most often in foreign exchange & foreign securities transactions. Delta A measure of the relationship between an option price and the price of the underlying futures contract or a stock price. The rate of change of delta is an options gamma. Dematerialised Securities Securities where the certificates or documents of title have been destroyed and replaced by electronic book entry records. Depreciation (1) A tax deduction that compensates a business for the cost of certain tangible assets. (2) A decrease in the value of a particular currency relative to other currencies. Derivatives Any financial product deriving from another. For example, swaps futures and options. Designated Market Maker A dealer who continuously provides bid & ask prices at which they are obliged to deal, as well as a size. Devaluation A substantial fall in the value of a currency as compared to the value of gold or to the value of another country's currency. Difference Option An option that pays the difference in the price of two assets. The option is originally valued by the strike price. Differential Swap Typically a combination of a simple interest rate swap in the denominating currency, and a quantised swap, denominated in the same currency but referenced to a different currency. Diluted Earnings A reduction in earnings per share of common stock. Dilution occurs because of the issuance of additional common shares through the exercising of options and/or the conversion of convertible securities.
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Dirty Price Price payable for a bond on settlement of a purchase transaction. The clean price plus accrued interest. Discount Rate The interest rate used in calculating the present value of future cashflows. Reflects not only time value but also risk over time. Discount Security A security that is issued at a discount to its face value and [normally] redeemed at par at maturity e.g. bills & zero-coupon bonds. Dividend A distribution of the earnings of a corporation. Dividends may be in the form of cash, stock or property. The board of directors must declare all dividends. Dividend Yield The dividend on a share as a % of the current share price. Dow Jones Index A US stock market index. Due Diligence The careful investigation by the underwriters that is necessary to ensure that all material information pertinent to an issue has been disclosed to prospective investors. Duration The average life of the present values of all future cash flows from a bond. Essentially a measure of bond price volatility by measuring its length i.e. weighted average, term-tomaturity of a bonds cash flow.

-EEASDAQ European Association of Securities Dealers Automated Quotation A pan European market for smaller companies based in Brussels. EB Early bargain EBITDA Earnings before interest, tax, depreciation and amortisation - This method of valuation shows the free cashflow of a company excluding distortions due to differing depreciation policies. ECN Electronic communications network ECU European Currency Unit
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EDR European depository receipt non-Paris listings. EDSP Exchange Delivery Settlement Price EEA European Economic Area [EU + EFTA] EFP Exchange for Physicals EFTA European Free Trade Area (Norway, Liechtenstein & Iceland) EGM Extraordinary General Meeting. EMH Efficient Market Hypothesis EPS Earnings per share. A common valuation yardstick for equities. ERISA Employee Retirement Income Security Act of 1974 allowing US Domestic funds to diversify into non-US securities. EU European Union EuroDR European depository receipt Paris listed. EuroNM Europe-wide stock exchange for smaller companies EVA This is a trademark of Stern Stewart - an American company. It stands for Economic Value Added. It states that ROC (Return on Capital) should be greater than the COC (Cost of Capital). It is a methodology of measuring companies' true profits rather than accounting profits and endeavours to change the behaviour of the employees of a company to take longerterm views on projects that they undertake. Econometrics The use of computer analysis and modelling techniques to describe, on statistical terms, the relationship between key economic forces, then test the effects of changes in economic scenarios.

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Efficient Portfolio A portfolio which offers investors both the maximum return for varying levels of risk & the minimum risk for varying levels of return. Embedded Option An option which is embedded in a debt instrument and affects its redemption or return e.g. callable & puttable bonds. Emerging Markets These are markets where generally the markets are considered to be illiquid, under-regulated, with poor settlement systems and highly volatile markets can occur when a sudden of interest from foreign investors from the developed markets pour money in to an emerging market. Equity Ownership. Normally applied to company shareholders. The shares they hold are called equity. Equity Index Swap A swap in which the total or price return on an equity index, equity basket or single equity is exchanged for a stream of cash flow based on a short-term interest rate index or another index. Equity Kicker The attachment of share options or warrants to an issue of bonds. Escrow Agreement The certificate provided by an approved bank that guarantees that the indicated securities are on deposit at that bank. An investor who writes a call option and can present an escrow agreement is considered covered and does not need to meet margin requirements. European-Style Option An option which can only be exercised at expiry. Eurobond Bond issued and traded in the international bond market. Euroclear An ICSD [International Central Securities Depository] based in Brussels and clearing Eurobonds and international securities. Euroconvertibles Convertible securities issued and traded on the international securities market. Ex Date This is the date specified by the local stock exchange to determine whether the buyer or seller is entitled to the benefit of a dividend. Normally the seller of a security during the ex period will be entitled to the dividend. Exceptional Item A large expense considered to be part of the normal business of a company.

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Exchange Rate Rate at which two currencies can be bought/sold in exchange for the other. Exercise Period The period during which a derivative can be exercised by its holder. Exercise Price Also called the strike price. The agreed fixed price at which the option holder can exercise the option to buy/sell the underlying item. Exotic Option An option with a more complex structure & pay off than a standard put or call. Expected Return The return on a security or portfolio over a holding period that an investor anticipates receiving. Expiry Date The date on which an option holders rights expire. Extendible Swap A swap in which the fixed rate payer has an option to extend the swap. Exposure A term referring to the existence of risk. Extraordinary Item A large expense or item of income deriving from abnormal events or transactions outside the ordinary activities of a company.

-FFAS Financial Accounting Standard FAST Fast Automated Screen Trading FER Foreign Exchange Requirement FIFO First in, first-out FRA Forward rate agreement. An interest rate hedging product where there is an obligation to buy or sell LIBOR at a specified future date. There is no exchange of principal only an exchange of the difference between the rates.
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FRN Floating rate note. Unsecured, floating rate bonds whose interest payments are set using an interest rate benchmark as an index. FRS Financial Reporting Standard FSA Financial Services Act [1986] FSA Financial Services Authority FT Financial Times FT-SE Financial Times-Stock Exchange Firm Underwriting A firm underwriter will buy new securities whereas an ordinary underwriter will take any unwanted shares. Fixed Rate Bond A bond that pays interest at a fixed coupon rate. Flat Yield Curve A chart showing the yields of bonds with short maturities as equal to the yields of bonds with long maturities. Floating Rate An interest rate that is reset against an index during the life of a transaction. Floor A contract where the seller agrees to pay the purchaser the difference between the reference rate and an agreed strike rate if the strike rate exceeds the reference rate. Forward Swap A swap where the dates are fixed prior to the start date. Front Running Firms or employees dealing in shares immediately ahead of publication of information [e.g. an analysts report] which may affect market prices. Fund Manager A person responsible for the management of the investments in a fund and who invests money on behalf of someone else. Future An exchange traded standardised contract to purchase or sell an agreed amount of a commodity or financial instrument for future delivery.
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Futures Market An exchange that trades futures contracts.

-GG30 A private sector group made up of 30 market participants who are concerned with the workings of the international financial system. In 1989 they came up with a set of 9 recommendations for improving settlement, trading etc following the 1987 crash. GAAP Generally accepted accounting policies. GDP [Gross Domestic Product] The total value of goods and services produced in a country during one year. It includes consumption, government purchases, investments, and exports minus imports. GDR Global depository receipt GEMM Gilt Edged Market Makers GTC Good till cancelled Gamma When there is a small change in the underlying, the Gamma is referred to as the rate of change in the Delta of an option. Gearing A measure of the indebtedness of a company that compares the size of the companys debts to its total capitalisation or the size of its equity capital. Gilts UK government securities Global Custodian As defined by ISSA a global custodian acts as a custodian for multi-currency securities and settlement and reporting services which extend beyond the global custodians and the clients base regional currency. They are able to look after all classes of financial instruments. Gross Yield Return on an investment before taking into account any tax payable on this return by the investor. Guaranteed Bond Issued by one corporation but backed by another corporation.
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Guaranteed Exchange Rate Option Also called a quanto option, this is an option on a particular asset in one currency denominated in another currency.

-HHead and Shoulders On a technical analyst's trading chart, a pattern that has three peaks resembling a head and two shoulders. The stock price moves up to its first peak (the left shoulder), drops back, then moves to a higher peak (the top of the head), drops again but recovers to another, lower peak (the right shoulder). A head and shoulders top typically forms after a substantial rise and indicates a market reversal. A head and shoulders bottom (an inverted head and shoulders) indicates a market advance. Hedge Ratio The expected change in the value of an option per $ change in the market price of the underlying asset. Hedging Taking action to remove or reduce an exposure to financial risk. Historical Beta The estimation of a securities Beta, derived purely from historical data. High Coupon Swap Also called a premium swap, the fixed rate payments succeed the market rates. High Low Option The difference between the high and low of the underlying item is paid a combination of two lookback options. Historical Volatility The measure of the past volatility of a financial instrument. Holding Company A company that controls another by owning more than 50% of its shares. Horizontal Spread Also called a calendar spread, this is a strategy where the same number of options contracts with the same exercise price, but with differing maturity dates, are bought & sold. Hull-White Model An option pricing model.

-IIDB Inter Dealer Broker. Acts as an intermediary between market markets.

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IMRO Investment Management Regulatory Organisation INS Institutional Net Settlement IPE International Petroleum Exchange IPO [Initial Public Offering] The first sale of common stock by a corporation to the public. ISD Investment Services Directive ISDA The International Swap & Derivative Association. ISIN International Securities Identification Number. A coding system developed by the ISO to create one unique number on a global basis for identifying individual securities. ISO International Organisation for Standardisation. This is a global federation of national standards bodies to develop standards for communications and standards within industries internationally. ISMA International Securities Market Association ISSA International Society of Securities Administrators. It was set up in 1979 to promote progress in global securities administration. Symposia are held biennially to look at particular areas of concern. Immobilised This is when securities are warehoused safely by a CSD but held on their books in book entry form. Implied Correlation When having two or multi-factor models with two or more underlying assets, this is the correlation which is assumed. Implied Repo Rate The return which is earned by buying a cheapest-to-deliver bond for a bond futures contract and selling it forward via a futures contract. Implied Volatility The value of the volatility in the price of an option.

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In the Money Where the strike price of an option/warrant is more advantageous that the current market price of the underlying. Index Fund A fund that invests in the constituent parts of an index and is designed to replicate the performance of the index. Insider Dealing Use of unpublished, price-sensitive information, or passing on price-sensitive information to enable someone to profit by dealing in securities. INSTINET Electronic brokerage owned by Reuters Interest Rate Swap An agreement to exchange net future cash flows, where one party pays fixed rate and the other floating rate on a notional principal amount [not exchanged]. Intrinsic Value The difference between the exercise price of an option and the underlyings market value. Introduction Method of gaining a listing on an exchange. Generally, no new stock is issued and no new money raised. Inverted Yield Curve Where the short term interest rates are higher than medium to long term ones. Investment Trust / Investment Fund Closed-end fund, investing in the shares of other companies. Issuer (1) The entity, such as a corporation or municipality, that offers or proposes to offer its securities for sale. (2) The creator of an option: the issuer of an over-the-counter option is the option writer, and the issuer of a listed option is the Options Clearing Corporation. There are two exceptions to the definition of issuer. In the case of voting-trust certificates or collateral-trust certificates, the issuer is the person who assumes the duties of depositor or manager. Also, there is considered to be no issuer for certificates of interest or participation in oil, gas, or mining titles or leases where payments are made out of production.

-JJGB Japanese government bond Joint Bond A bond guaranteed by the parent corporation of an issuing subsidiary.
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Joint venture The co-operation of two or more individuals or enterprises in a specific business enterprise, rather than in a continuing relationships in a partnership. Junk Bond A bond whos credit rating is below investment grade.

-KKnock Out Option A derivative where the buyer gets the right but not the obligation to buy an underlying commodity, currency or other instrument at a pre-set price. The option expires worthless if the underlying goes through a particular price level.

-LLCH London Clearing House LER Large Exposure Requirement LIBOR London Interbank Offered Rate Liffe London International Financial Futures & Options Exchange. LIFO Last-in, first-out. LSE London Stock Exchange Lead Manager Term used in the international markets for the bank that will handle a new issue. Leverage Borrowing or trading a multiple of assets. Leveraged Buyout The process of taking over a company using borrowed funds. The security for these funds is normally the assets of the company being acquired. Liability A legal obligation to pay a debt owed. Current liabilities are debts payable within twelve months. Long-term liabilities are debts payable over a period of more than twelve months.
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Listing Part of the process of bringing a company to market i.e. getting a listing on a particular exchange. Listing Rules Rules to be adhered to by listed companies and those seeking a listing. Liquidity The ease with which an asset can be converted to cash in the marketplace. A large number of buyers and sellers and a high volume of trading activity provide high liquidity. Lloyds International insurance market, based in London. Long If someone is long of a product, then they own it. Long Hedge A futures contract bought for protection against a rise in another contract that must be honoured. Lookback Option A type of option enabling the investor to exercise the option at either the highest price [in the case of a call] or the lowest price [in the case of a put] that the underlying has reached during the life of the option.

-MM1 A category of the money supply that includes all coins, currency and demand deposits M2 A category of the money supply that includes M1 in addition to all time deposits, savings deposits and non-institutional money market funds. M3 A category of the money supply that includes M2 in addition to all large time deposits, institutional money market funds, short-term repurchase agreements and certain other large liquid assets. MBO Management buyout MATIF Marche a Terme International de France MLRO Money Laundering Reporting Officer
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MM Market maker. MMC Monopolies & Mergers Commission. MPL Maximum Publication Level MQP Mandatory Quote Period MV Market value Margin A cash deposit payable to a futures & options exchange by the buyer & seller of a future and the seller of a traded option. Margin Call In order to bring a margin account up to the required level, the investor can be called upon to deposit further margin. Market Maker A dealer willing to accept the risk of holding a particular security in its own account to facilitate trading in that security. Market Risk The part of a securities risk that can be diversified also called systemic risk. Matched Bargain Transaction where a buyer & seller have to be found before the deal is done. Maturity Date The date on which a bond's principal is repaid to the investor and interest payments cease. Merger Combining two or more companies by offering the stockholders of one company securities in another company in exchange for the surrender of their stock. Money Back Option An option which at expiry repays at least the original option premium. Money Market A financial market where instruments with a term to maturity are traded. Money Supply The total stock of bills, coins, loans, credit and other liquid instruments in the economy. It is divided into four categories, M1, M2 and M3 according to the type of account in which the instrument is kept.
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Monte Carlo Simulation A simulation of the evolution of a variable many times over. The model outcome of the discounted average outcome is an approximation of the value of the derivative therefore a method to help value complex options. Mortgage Backed Securities Asset-backed securities where the underlying assets are mortgage loans. Mortgage Swaps A swap where the investor receives the flows from a portfolio of mortgages and does not have to take a mortgage asset on to their balance sheet. Multi-Factor Model A model, which allows realistic modelling of options, where there are two or more parameters that are uncertain. Multiple Growth Model A type of dividend discount model where dividends are assumed to grow at different rates over specifically defined time periods. Municipal Bond A bond that is issued by a state or local unit of a government.

-NNAPF National Association of Pension Funds trade body. NASDAQ National Association of Securities Dealers Automated Quotations a US stock market. NC Not for central settlement NMS Normal market size NNT Neural network trading NPV No par value shares or net present value which results from comparing the purchase price of a financial instrument with the present value of the stream of cashflows arising from it. NSCC National Securities Clearing Corporation

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NYSE [New York Stock Exchange] The largest stock exchange in the United States. It is a corporation, operated by a board of directors, and it is responsible for setting policy, supervising Exchange and member activities, listing securities, overseeing the transfer of members' seats on the Exchange and judging whether an applicant is qualified to be a specialist. Nikkei-Dow Main stock market index in Japan Naked Writing an option where you do not own the underlying. Naked Option An option where there is no underlying security position. Net Present Value The present value of the future cash flows expected to be received from a particular investment less the cost of that investment. Net Worth The amount by which assets exceed liabilities. Nominal Value Face value of a security. A security is priced at par when its market value is the same as its nominal value. Nominal Yield The interest rate stated on the face of a bond that represents the percentage of interest to be paid by the issuer on the face value of the bond. Nominee An organisation that acts as the named holder of securities on behalf of a beneficial owner. Non Factor Risk That part of a securities total risk that can be diversified away and is not related to moves in various common factors. Normal Backwardation The relationship between the expected spot price of an asset and its future date on the delivery date of the contract normal backwardation states that the spot price will be less than the futures price. Normal Yield Curve A chart showing long-term debt instruments having higher yields than short-term debt instruments. Novation The replacement of one legal agreement by a new obligation, with the agreement of all parties e.g. Clearing Houses use this process since they stand in the middle of futures contracts and act as guarantor hence the need to novate.
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-OOAT French government bond OMLX London Securities and Derivatives Exchange OTC Over the counter. The term used to describe a security that is traded through the telephoneand computer-connected OTC market rather than through an exchange. OTM Out of the money where the subscription price for an underlying instrument is above the instruments current market price. Obligation Bond A mortgage bond where the value of the underlying property is less than the face value of the bond. Ofex An OTC trading facility for illiquid or infrequently traded company shares. Offer for Sale A method of issuing shares in the primary market. Offer Price Also called the ask price the price at which a dealer/market maker will sell a security. Omega The risk of currency fluctuations that the seller or buyer of an option has to take into account when being exposed to a transaction in a different currency. Open Ended Fund A fund for which there is no maximum limit to the amount of money that can be raised e.g. unit trusts / mutual funds. Open Outcry Face to face trading method on the floor of an exchange Operating Expenses (1) The day-to-day costs incurred in running a business. (2) In an oil and gas program, any production or leasehold expense incurred in the operation of a producing lease, including district expense, direct out-of-pocket expenses for labour, materials and supplies and those shares of taxes and transportation charges not borne by overriding royalty interests. Operating income The profit realised from one year of operation of a business before interest costs.
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Optimark Equity trading system Option Contract giving the holder the right, but not the obligation, to buy or sell a fixed quantity of an underlying item at an agreed price on or before a future date. Order Driven A trading system where transactions are initiated by a buyer or a seller and the price is set by them. Ordinary Shares The most common type of company shares.

-PP/E Ratio Price earnings ratio PHLX Philadelphia Stock Exchange PIA Personal Investment Authority PIBS Permanent Interest Bearing Shares PL Publication level PLC Public Limited Company POSIT Black Box equity trading system PPS Protected Payments System PRR Position Risk Requirement Par Bond A bond which is selling at an amount equal to its face value which is referred to as par. Participating Cap Situation where an out of the money cap is bought and at the same time an in the money floor is sold.
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Participating Forward A simultaneous purchase of a call or put and sale of a put or call at zero cost. Partnership A form of business organisation in which two or more individuals manage the business and are equally and personally liable for its debts. Par Value The nominal value of a security. Passive Bond A bond with no interest yield, often used in non-profit fund raising. Passive Income Earnings derived from a rental property, limited partnership or other enterprise in which the individual is not actively involved. Passive income therefore does not include earnings from wages or active business participation, nor does it include income from dividends, interest and capital gains. Payer The party in a swap transaction who pays a fixed rate and receives a floating rate. Paying Agent A bank appointed to pay interest & principal on a bond issue Pegging Stabilising a country's currency through its purchase or sale by the country's central bank. Placing A method of issuing new shares they are placed with a small number of institutional investors. Position The amount of a security either owned (a long position) or owed (a short position) by an individual or by a dealer. Dealers take long positions in specific securities to maintain inventories and thereby facilitate trading. Positive Yield Curve. Where medium to long term interest rates are higher than short term ones. Preference Shares A type of share which carries the right to a fixed dividend every year. Premium (1) The amount of cash that an option buyer pays to an option seller. (2) The difference between the higher price paid for a security and the security's face amount at issue.

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Present Value A valuation in todays money of a stream of future cash flows, after allowing for interest costs. Primary Market Market for the issue of new securities. Principal Trading Trading by a firm for its own account. Private Placement Market US market for unregistered shares. Programme Trading Simultaneous sell or purchase of 15 stocks or more Prospectus A document issued by organisations planning to issue securities. Proxy A limited power of attorney from a stockholder authorising another person to vote on stockholder issues according to the first stockholder's instructions. In order to vote on corporate matters, a stockholder must either attend the annual meeting or must vote by proxy. Put Call Parity When a put and call have the same market price, expiry date and underlying stock this is the relationship that exists between them. Put Option An option that gives the holder the right to sell a quantity of an item at a fixed price on or before a specified date in the future.

-QQCB Qualifying corporate bond Quanto Product An asset or liability, usually equity index futures, interest rate swaps or bond options denominated in a currency different to the one in which it is being traded. Quote Driven A market where prices are made by market makers advertising on a screen. Quoted Security Security whose price is quoted on a stock exchange.

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-RRADR Rule 144A depository receipt RIE Recognised Investment Exchange RCH Recognised Clearing House RFP Request for Proposal. Used when making a major change to custody arrangements. An RFP is a questionnaire for custodians to fill in and provide details of their services, costs etc RIE Recognised Investment Exchange ROIE Recognised Overseas Investment Exchange RPB Recognised Professional Body RSMM Reduced Size Market Maker Random Walk Theory A theory that states that the future prices of financial instruments cannot be predetermined by past prices prices are reactions from information in the market and influences occur in a random fashion. Rate Anticipation Swap A swap where an investor exchanges bonds expected to perform poorly for ones that are expected to perform well if interest rates change. Rate of Return Over a specified period of time, this is the percentage change in the value of an asset or portfolio. Rating An evaluation of a corporate or municipal bond's relative safety, according to the issuer's ability to repay principal and make interest payments. Bonds are rated by various organisations such as Standard & Poor's and Moody's. Ratings range from AAA or Aaa (the highest) to C or D, which represents a company in default. Rating Service A company, such as Moody's or Standard & Poor's, that rates various debt and preferred stock issues for safety of payment of principal, interest or dividends. The issuing company or municipality pays a fee for the rating.
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Ratio Spread The process of buying similar options having different strike prices selling out of the money options will finance the purchase the purchase of in the money options. Receiver The party in a swap transaction who receives a fixed interest rate and pays a floating rate. Redemption The return of an investor's principal in a security, such as a bond, preferred stock or mutual fund shares. Redemption Yield The average annual return on a redeemable security, up to its redemption date, expressed as a % of the securitys current market price. Registered Security Security for which the record of ownership is maintained in a register. Registrar A specialist organisation that maintains registers of securities on behalf of client companies. Regression Analysis Used in the risk/return analysis of portfolio theory & in the market analysis of securities, this measures the correlation between the independent and dependent variables and tries to value the independent variable. Reinvestment Using dividends, interest and capital gains earned in a mutual fund investment to purchase additional shares, rather than receiving the distributions in cash. Repo A sale & repurchase agreement a collateralised loan. Return on equity A measure of a corporation's profitability. Reversal Eliminating an existing swap by transacting a second swap in the opposite direction. Reverse Cash & Carry Arbitrage Buying a futures contract and selling the underlying. Rho The measure of sensitivity of an option to a change in interest rates. Rights Issue An issue of new shares, offered pro-rata to existing investors.

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Risk Counterparty Risk of non-fulfilment of a trade contract due to either inability or unwillingness of the counterparty. Risk Operational Risk of loss due to clerical errors, delays, fraud, systems failure etc. Risk Settlement Risk that a party will default on one or more delivery or payment obligation to its counterparty or to a settlement agent. Risk Systemic Risk that the inability of one institution to meet its obligations when due will cause other participants or financial firms to be unable to meet their obligations when due. Roller Coaster Swap An interest rate swap, whereby one of the parties involved alternates between paying the floating & fixed rate. Rolling Premium Put Convertible A convertible that gives its holder a series of put options at different dates. Rolling Settlement System for settling transactions whereby settlement must occur a given number of days after the date on which the transaction was made Rump Placing Placing those rights not taken up by investors

-S2BCD Second Banking Co-ordination Directive SBLI Stock borrowing & lending intermediary formerly known as money brokers. SD Sales Docket SDRT Stamp Duty Reserve Tax SEAQ Stock Exchange Automated Quotation system SEATS Stock Exchange Alternative Trading Service
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SEC Securities & Exchange Commission SEDOL Stock Exchange Daily Official List SEMB Stock Exchange Money Broker SEPON Stock Exchange Pool Nominees SFA Securities and Futures Authority SIMEX Singapore International Monetary Exchange SPAN Standard Portfolio of Risk SRO Self Regulatory Organisation SSAP Statement of Standard Accounting Practice SWIFT The Society for Worldwide Interbank Financial Telecommunications. Established in 1977 to service the payments needs of the banking industry through standardised, electronic messages. In 1987 the securities markets were invited to join and stock exchanges, brokers and depositories joined the SWIFT network. Scrip Dividend The payment of a company dividend in the form of new shares rather than cash. Secondary Market A market for trading securities that have already been issued. Securities and Exchange Commission (SEC) Commission created by Congress to regulate the securities markets and protect investors. It is composed of five commissioners appointed by the president of the United States and approved by the Senate. The SEC enforces, among other acts, the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment Company Act of 1940 and the Investment Advisers Act of 1940. Secured Debt Where assets are used as security against a loan

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Securities Borrowing A method by which market makers and other market participants are able to borrow securities to make up a shortage in those securities i.e. to make a delivery in exchange for a fee. Securities Lending Authorised institutions lend their assets and, when permitted, those of their clients to market makers through a network of intermediaries for a fee Semi-Fixed Swap An interest rate swap where there is the possibility of two fixed rates. Senior Debt Secured debt that ranks ahead of other creditors in rights to payment. Settlement The process of completing a transaction whereby cash moves from the buyer to the seller and a product or asset moves the other way. Settlement Fixed The predetermined date in a month when transactions are due to settle. Settlement Rolling Settlement takes place on a certain number of days after the trade date e.g. in the UK it is T + 5. It therefore settles on the 5th calendar day after the trade. Short Position Term used to describe a dealing position where the dealer involved has sold something they dont own in the hope that they can buy it back at a cheaper price. Single Premium Put Convertible A convertible security that gives its holder a put option. S&P [Standard & Poor's Corporation] A company that rates stocks and corporate and municipal bonds according to risk profiles and that produces and tracks the S&P indexes. The company also publishes a variety of financial and investment reports. S&P 500 A leading stock market index in the US. Soft Commission Giving goods and services in return for business. Solvency The ability of a corporation both to meet its long-term fixed expenses and to have adequate money for long-term expansion and growth. Special Purpose Vehicle Company established for the purpose of issuing asset backed securities.

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Spot price The actual price at which a particular commodity can be bought or sold at a specified time and place. Spread (1) In a quotation, the difference between the bid and the ask prices of a security. (2) An options position established by purchasing one option and selling another option of the same class but of a different series. Spread Option When one option is being purchased at one exercise price and another with the same underlying is being sold simultaneously at a different exercise price. Stabilisation A price supporting process used to maintain a certain price level in a new issue of securities. Stag Someone who subscribes for shares in a new issue, expecting the price to rise and therefore to sell & make a quick profit. Stock Lending The lending & borrowing of stock to facilitate trades or to increase the total yield form securities. Sub Custodian A sub agent Swap An arrangement between two parties to exchange a future stream of payments during a contract period. Swaption An option on a swap. Syndicate A group of securities houses that act under the leadership of a lead manager to place a eurobond issue with investors or a group of banks that combine to provide a large loan to a borrower.

-TTAURUS Transfer & Automated Registration of Uncertified Stock. This has been superseded by CREST. TIFFE Tokyo International Financial Futures Exchange

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Takeover The acquisition of one company by another Technical Analysis The use of charts, computer programmes and historical data to identify & predict price movements in financial instruments. Tick Upward or downward price movement in a securities price. Theta Measures the effect on an options price of a one-day decrease of the time to expiration. Time Value The value of an option, other than its intrinsic value. Time Value of Money The price put on the time an investor has to wait to get a return on an investment calculating the present value of the investment at maturity. Touch The best bid and offer in an instrument Tracker Share A share that gives the right to the cashflows from an enterprise but not ownership Tradepoint RIE an alternative exchange for trading shares listed on the LSE. An order driven matching system. Tranche A release of Gilts by the Bank of England which may not be identical to existing stock in circulation. Treasury Bill A marketable government debt security with a maturity of less than one year. Treasury bills are issued through a competitive bidding process at a discount from par; there is no fixed interest rate. Turn If a trader buys an instrument and then sells it quickly at a profit, then they make a turn.

-UUnderlying The variable on which a derivative is based. Underwriter An institution that guarantees to buy any securities not purchased by anyone else in a new issue in return they receive a commission.
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Unit Trust See open-ended funds.

-VVariable Annuity An insurance contract in which at the end of the accumulation stage the insurance company guarantees a minimum total payment to the annuitant. The performance of a separate account, generally invested in equity securities, determines the amount of this total payment. See also fixed annuity. Variable Death Benefit The amount paid to a decedent's beneficiary that is dependent on the investment performance of an insurance company's separate account; the amount is added to any guaranteed minimum death benefit. Variable Life Insurance Policy An insurance contract that provides financial compensation to the insured's named beneficiaries in the event of the insured's death. The insurance company guarantees payment of a minimum amount plus an additional sum according to the performance of a separate account, usually invested in equities or other relatively high-yielding securities. Vertical Line Charting A type of chart used by technical analysts where the high, low and closing prices of an instrument are shown on one vertical line and the closing price indicated by a horizontal mark. Vertical Spread Buying an option at one strike price whilst selling one at the next higher or lower strike price. Vesting (1) An ERISA guideline stipulating that employees must be entitled to their entire retirement benefits within a certain period of time even if they are no longer with the employer. (2) The amount of time that an employee must work before retirement or benefit plan contributions made by the employer become the employee's property without penalty. The IRS and the Employee Retirement Income Security Act of 1974 set minimum requirements for vesting in a qualified plan. Vega The measure of change in an option price due to volatility. Voting Right The right of a stockholder to vote for members of the board of directors and on matters of corporate policy - particularly the issuance of senior securities, stock splits and substantial changes in the corporation's business. A variation of this right is extended to variable annuity contract holders and mutual fund shareholders, who may vote on material policy issues.

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-WWarrant The right but not the obligation to buy or sell a financial instrument at a fixed price on or between fixed dates. With-holding Tax Tax deducted at source from dividends on investments, which are paid to foreign investors. If there is a double taxation agreement in place between the two countries involved the investor can claim back. Writer The seller of an option.

-XXETRA German equity trading system

-YYearling Bond Local authority stocks with a life of one or two years. Yellow Book The listing rules of the London Stock Exchange Yield The return from an investment. Yield Curve A graph showing the term structure of interest rates by plotting the yields of all bonds of the same quality with maturities ranging from the shortest to the longest available. Yield to Put The average annual return on a convertible security with a put option.

-ZZero-Coupon Bond A security that is issued at a discount to its face value, makes no periodic interest payments and is redeemed at par. The return is therefore in the form of a capital gain. Zero-Coupon Convertible As above but with conversion rights attached.
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