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Derivatives Glossary
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Accrual Accounting
When swaps are used to hedge specific on-balance-sheet exposures, they are often accounted for on an accrual basis. Under the accrual method, the net payment or receipt in each period is accrued and recorded as an adjustment to income or expense.
Accrual Swap
An interest rate swap where interest on one side accrues only when a certain condition is met.
Accrued Interest
The interest earned on a bond since the last coupon payment date.
Actual Hedging
Is the risk management of a position when a hedger has a bona fide long or short actual position and is involved in an offsetting transaction. This offset is usually in the derivatives market
After Hours Dealing
Trading outside the trading hours of the futures markets ? eg, trading a futures month in Brent crude outside the IPE and Singapore International Monetary Exchange trading periods.
Alternative Investments
Are usually investments other than mutual funds, certificates of deposit, or direct investments in equities and bonds. Some of these alternatives are: art, collectibles, commodities, commodity funds, commodity pools, derivatives,
American Depository Receipt
receipt indicating a claim on some number (less than one, one, or more than one) of shares in a foreign corporation that a Depository Bank holds for U.S. investors.
American option
An option that may be exercised on any day ahead of expiry. These trade on the futures exchanges.
Amortizing Swap
A swap where the notional principal decreases in a predetermined way as time passes.
Arbitrage
The simultaneous purchase and sale of an instrument in two separate markets, when the price is out of line.
Asian option
An option that is exercised against an average over a period.
Ask Price
Is the price requested, at the minimum, for an order to be acceptable and executed for the seller.
Asset and Liability Management
Asset and Liability Management - Is the process for financial institutions and corporations to adjust their funding and usage of funds. Some approaches are the Bucket, GAP, Hedging, Matched Book, Matched Funding, Financial Swaps, and Structured Products.
Asset swap
A Swap that converts a fixed- (floating-) coupon asset into a floating- (fixed-) coupon asset. This is in contrast to the more familiar (Liability) Swap that converts a fixed- (floating-) coupon liability into a floating- (fixed-) coupon liability.
At-the-Money Option (ATM)
An option with an exercise price at the current market level of the underlying.
Back Month
Back month contracts are any exchange-traded derivatives contracts apart from the nearest, or front, contract month.
Back Testing
Testing a value-at-risk or other model using historical data.
Barrier Option
An option whose payoff depends on whether the path of the underlying asset has reached a barrier (i.e., a certain predetermined level).
Basic
The gap between the active futures price and the implied forward price of the underlying commodity.
Basis
The difference between the spot price and the futures price of a commodity.
Basis Risk
The risk to a hedger arising from uncertainty about the basis at a future time.
Basket Credit Default Swap
Credit default swap where there are several reference entities.
Basket Option
An option that provides a payoff dependent on the value of a portfolio of assets.
Bear Spread
A short position in a put option with strike price K(1) combined with a long position in a put option with strike price K(2), where K(2)> K(1). (can also be created with call options.)
Beta
A measure of the systematic risk of an asset.
Bid
The price at which a dealer (market maker) stands ready to buy. Ordinarily the bid is less than the ask, and the bid-ask spread is what the dealer stands to make by quickly turning around one unit of product.
Bid Price
The price that a dealer is prepared to pay for an asset.
Bid-Ask Spread
The amount by which the ask price exceeds the bid price.
Binary Call (Put) Option
Typically, a Binary Call (Put) Option that pays off nothing if the underlying risk factor is below (above) the strike, and a constant amount if the risk factor exceeds (is below) the strike.
Binary Option
An option with a payoff function that has two levels, such as zero dollars or one million dollars.
Binomial Model
A model where the price of an asset is monitored over successive short periods of time.
Binomial Tree
A tree that represents how an asset price can evolve under the binomial model.
Board Broker
The individual who handles limit orders in some exchanges. The board broker makes information on outstanding limit orders available to other traders.
BOBL
German Federal Debt Obligations.
BOBL Futures
The DTB Futures contract on a notional medium term (3.5 - 5 years) debt security of the German Federal Government or the Treuhandanstalt, with a notional interest rate of 6%. The BOBL and other instruments qualify.
BOBL Futures Option
An American option that settles into a BOBL Futures contract. Payment of the option premium is "futures-style", which means none of it occurs immediately, and a piece of it occurs with each daily mark-to-market.
Bond Option
An option where a bond is the underlying asset.
Bond Yield
Discount rate which, when applied to all the cash flows of a bond, causes the present value of the cash flows to equal the bond's market price.
Bootstrap Method
A procedure for calculating the zero-coupon yield curve from market data.
Bull Spread
A long position in a call with strike price K(1) combined with a short position in a call with strike price K(2), where K(2)> K(1). (can also be created with put options).
Bulldog Bond
Bond that Amortizes fully on a single date. Its cash flows consist of regular coupon payments of interest and a final repayment of principal.
Bullet Bond
Bond that Amortizes fully on a single date. Its cash flows consist of regular coupon payments of interest and a final repayment of principal.
Bund
German Federal Government Bonds.
Bund Futures
The DTB Futures contract on a notional long term (8.5 - 10 years) debt security of the German Federal Government or the Treuhandanstalt, with a notional interest rate of 6%. The Bund and other instruments qualify.
Bund Futures Option
An American option that settles into a BUND Futures contract. Payment of the option premium is "futures-style", which means none of it occurs immediately, and a piece of it occurs with each daily mark-to-market.
Bund Futures Option
An American option that settles into a Bund Futures contract. Payment of the option premium is "futures-style", which means none of it occurs immediately, and a piece of it occurs with each daily mark-to-market.
Bundle
A Strip of consecutive, quarterly Eurodollar or Euroyen futures contracts. Markets, such as Simex offer a Bundle as a convenient package of futures contracts, without the execution risk inherent in building up the Strip, contract by contract.
Butterfly Spread
A position that is created by taking a long position in a call with strike price K(1), a long position in a call with strike price K(3), and a short position in two calls with strike price K(2), where K(3)> K(2)> K(1) and K(2) = 0.5[K(1)+K(3)].
Buy-Write
An investment strategy that consists of buying an asset and selling a call on it. Thus, the investor sells upside potential to elevate the rest of his payoff function.
Calendar pread
A position that is created by taking a long position in a call and a short position in a call that matures at a different time. (can also be created with put options).
Call option
The right, but not the obligation to buy the underlying asset at the previously agreed-upon price on (European) or anytime through (American) the expiration date.
Callable bond
A (noncallable) Bullet Bond, minus (i.e., short) a Call Option on the bond. The Call Price as a function of calendar time is the Call Schedule.
Cancelable Swap
Swap that can be canceled by one side on prespecified dates.
Cap
A strip of Caplets - that is, a portfolio of Caplets with sequential accrual periods. Also known as a Ceiling.
Capital Asset Pricing Model
A model relating the expected return on an asset to its beta.
Caplet
An Interest Rate Option to pay fixed in an FRA. Its payoff is proportional to that of a Call Option on a floating rate of interest.
Caption
An option on a Cap.
Car
The size of one futures contract, based on the idea that some commodity futures contracts historically called for the delivery of one railroad car of the underlying commodity.
Carry trade
trade that consists of borrowing and paying interest in order to finance the purchase of an investment that pays a greater interest or a dividend stream.
Clearing Margin
A margin posted by a member of a clearinghouse.
Clearinghouse
A firm that guarantees the performance of the parties in an exchangetraded derivatives transaction.
CMCDS
It is an abbreviation of Constant Maturity Credit Default Swap. CMCDS are also an extension of Constant Maturity Swaps to the realm of credit. CMCDS also offers investors access to floating credit spreads.
Collar
A portfolio of two options with the same underlying risk factor and expiration date: a long call with a higher strike and a short put with a lower strike.
Collateralized Bond Obligation
An ABS structure similar to a CMO, but with a portfolio of bonds as collateral, instead of a portfolio of Mortgage Backed Securities and/or mortgage loans.
Collateralized Debt Obligation
A way of packaging credit risk. Several classes of securities are created from a portfolio of bonds and there are rules for determining how defaults are allocated to classes.
Collateralized Loan Obligation
An ABS structure similar to a CMO, but with a portfolio of commercial or personal loans as collateral, instead of a portfolio of Mortgage Backed Securities and/or mortgage loans.
Collateralized Mortgage Obl.
A portfolio of claims against a portfolio of mortgages and/or Mortgage-Backed Securities. The claims separate naturally into "tranches" that differ by the rules defining their interest and principal payments.
Combination
A position involving both calls and puts on the same underlying asset.
Commodity Futures Trading Comm.
A body that regulates trading in futures contracts in the United States.
Commodity Swap
A swap where cash flows depend on the price of a commodity.
Compound option
An option on an option. Also known as a Split Fee Option. A special case of an Installment Option.
Continuous Compunding
A way of quoting interest rates. It is the limit as the assumed compounding interval is made smaller and smaller.
Convenience Yield
A measure of the benefits from ownership of an asset that are not obtained by the holder of a long futures contract on the asset.
Convertible bond
A Bond that the owner can convert into Common Shares under specific terms. A Convertible Bond is an ordinary Bond, plus the option to exchange the Bond for the Shares.
Convexity
A measure of the curvature in the relationship between bond prices and bond yields.
Costless collar
A Collar in which the proceeds of the sale of the short Call option exactly finance the purchase of the long Put option.
Covered Call
A short position in an call option on an asset combined with a long position in the asset.
CPPI
It is an abbreviation of Constant Proportion Portofolio Insurance. It is one of the many methods of insurance portofolio.
Credit default swap
A Swap in which A pays B the periodic fee, and B pays A the floating payment that depends on whether a predefined credit even has occurred, or not. The fee might be quarterly, semiannual, or annual.
Credit Derivatives
Derivative Product with payoffs that depends on risk factors related to credit quality, such as yield spread over Treasuries, price discount from par, or a credit event.
Credit Linked NOte
A note that pays interest and repays principal that depends on a credit event, such as bankruptcy and default.
Credit Option
An Option with a payoff that depends on credit quality, without bearing ordinary interest-rate risk.
Credit Risk
The risk of loss from not receiving one's reward for being on the right side of a bet about a market move, due to the losing counterparty's failure to meet his obligations.
Credit Spread Option
An Option with a payoff that depends on a Credit Spread.
Credit Spread Swap
A Swap with a payoff that depends on a Credit Spread .
Credit Swap
A Swap whose value depends on underlying credit quality, preferably without bearing ordinary interest-rate risk.
Credit Value-at-Risk
The credit loss that will not be exceeded at some specified confidence level.
Cross Currency Option
An option to exchange units of one currency for units of another, as seen from the point of view of a third currency. A Margrabe Option with underlying currency risk.
Currency swap
The exchange of specified amounts of currencies on one (nearby) date, exchange of specified amounts of currencies in opposite directions on a future date, and (possibly) exchange of specified coupons in between.
DAX
A stock performance index (dividends added in) composed of the 30 most actively traded German blue chip stocks on the Frankfurt Stock Exchange.
Day Count
A convention for quoting interest rates.
Day Trade
A trade that is entered into and closed out on the same day.
Default Correlation
Measures the tendency of two companies to default at about the same time.
Default Probability Density
Measures the unconditional probability of default in a future short period of time.
Deferred Payment Option
An option were the price paid is deferred until the end of the option's life.
Deferred Swap
An agreement to enter into a swap at some time in the future.
Delivery Price
Price agreed to in a forward contract.
Delta
The rate of change of the price of a derivative with the price of the underlying asset.
Delta Hedging
A hedging scheme that is designed to make the price of a portfolio of derivatives insentive to small changes in the price of the underlying asset.
Delta Neutral Portfolio
A portfolio with a delta of zero so that there is no sensitivity to small changes in the price of the underlying asset.
Derivative
An instrument whose price depends on, or is derived from, the price of another asset.
Differential Swap
A swap where a floating rate in one currency is exchanged for a floating rate in another currency and both rates are applied to the same principal.
Discount Rate
The annualized dollar return on a Treasury bill or similar instrument expressed as a percentage of the final face value.
Duration
A measure of the average life a bond. It is also an approximation to the ratio of the proportional change in the bond price to the absolute change in its yield.
Dynamic Hedging
A procedure for hedging an option position by periodically changing the position held in the underlying assets.
Early Exercise
Exercise prior to the maturity date.
Embedded Option
An option that is an inseparable part of another instrument.
Equity Swap
A swap where the return on an equity portfolio is exchanged for either a fixed or a floating rate of interest.
Equity Swap
A Swap in which one of the payment streams derives from an equity instrument.
Euro LIBOR
The British Bankers Associationæ¯ Euro-denominated analog to dollar LIBOR.
Eurocurrency
A currency that is outside the formal control of the issuing country's monetary authorities.
Eurodollar
A dollar held in a bank outside the United States.
European Option
An option that can be exercised only at the end of its life.
EWMA
Exponentially weighted moving average.
Exchange Option
An option to exchange one asset for another.
Executive Stock Option
A stock option issued by company on its own stock and given to its executives as part of their remuneration.
Exercise Price
The price at which the underlying asset may be bought or sold in an option contract.
Exotic Option
Any Option that is well out of the ordinary, hence not a "Plain Vanilla" Option. The list of Exotic Options changes over time.
Expiration Date
The end of the life of a contract.
Exposure
The maximum loss from default by a counterparty.
Extendable Bond
A bond whose life can be extended at the option of the holder.
Extendable Swap
A swap whose life can be extended at the option of one side to the contract.
Fannie Mae
Federal National Mortgage Association. The largest player in the secondary mortgage market.
FASB
Financial Accounting Standards Board.
Flex Option
An option traded on an exchange with terms that are different from the standard options traded by the exchange.
Floor
A strip of Floorlets. Cf. Cap.
Floor Rate
The rate in an interest rate floor agreement.
Floorlet
An Interest Rate Option to receive fixed in an FRA (q.v.). Its payoff is proportional that to that of a Put Option on a floating rate of interest.
Foreign Currency Option
An option on a foreign exchange rate.
Forward Contract
A contract to exchange (buy or sell) an underlying instrument for a fixed forward price at a specific, future delivery date.
Forward Interest Rate
The interest rate for a future period of time implied by the rates prevailing in the market today.
Forward Price
The delivery price in a forward contract that causes the contract to be worth zero.
Forward Rate
Rate of interest for a period of time in the future implied by today's zero rates.
Forward Rate Agreement
A contract calling for one counterparty to receive the fixed FRA rate and pay the floating rate (e.g., LIBOR) for a particular accrual period in the future, and for the other counterparty to do the reverse.
Forward Start Option
An option designed so that it will be at-the-money at some time in the future.
Forward Swap
An agreement to enter into a swap at some time in the future.
Futures Contract
An exchange-traded contract that on its last trading day settles into a Forward Contract.
Futures Option
A listed option that settles into a Futures Contract.
Futures Price
The delivery price currently applicable to a future contract.
Gamma
The rate of change of delta with respect to the asset price.
Gamma-Neutral Portfolio
A portfolio with a gamma zero.
Greeks
Hedge parameters such as delta, gamma, vega, theta, and rho.
Hazard Rate
Measures probability of default in a short period of time conditional on no earlier default.
Heath-Jarrow-Morton Model
Model that applies forward rates to an existing term structure of interest rates to determine appropriate prices for securities that are sensitive to changes in interest rates.
Hedge
A trade designed to reduce risk.
Hedge Ratio
The ratio of the size of a position in a hedging instrument to the size of the position being hedged.
In-the-Money Option
Either (a) a call option where the asset price is greater than the strike price or (b) a put option where the asset price is less than the strike price.
Index Amortizing Swap
A swap where the principal declines over time. The reduction in the principal on a payment date depends on the level of interest rates. (also called Indexed Principal Swap).
Index Arbitrage
An arbitrage involving a position in the stocks comprising a stock index and a position in a futures contract on the stock index.
Index Futures
A futures contract on a stock index or other index.
Index Option
An option contract on a stock index or other index.
Initial Margin
The cash required from a futures trader at the time of the trade.
Instantaneous Forward Rate
Forward rate for a very short period of time in the future.
Interest Rate Cap
An option that provides a payoff when a specified interest rate is above a certain level. The interest rate is an floating rate that is reset periodically.
Interest Rate Collar
A combination of an interest rate cap and an interest rate floor.
Interest Rate Derivative
A derivative whose payoffs are dependent on future interest rates.
Interest Rate Floor
An option that provides a payoff when an interest rate is below a certain level. The interest rate is a floating rate that is reset periodically.
Interest Rate Option
An option where the payoff is dependent on the level of interest rates.
Interest Rate Swap
An exchange of a fixed rate of interest on a certain notional principal for a floating rate of interest on the same notional principal.
IO
Interest Only. A mortgage-backed security where the holder receives only interest cash flows on the underlying mortgage pool.
Jamming
Executing a large sell (buy) order in stages by asking for a market on a small size, hitting the bid (offer), then repeating the process with a different market maker, ultimately driving the price considerably lower (higher).
Kappa
The rate of change in the price of an option or other derivative with volatility.
Kurtosis
A measure of the fatness of the tails of a distribution.
Lambda
The rate of change in the price of an option or other derivative with volatility.
LEAPS
Long-term equity anticipation securities. These are relatively long-term options on individual stocks or stock indices.
LIBID
Lond interbank bid rate. The rate bid by banks on Eurocurrency deposits (i.e., the rate at which a bank is willing to borrow from other banks).
LIBOR
London interbank offer rate. The rate offered by banks on Eurocurrency deposits (i.e., the rate at which a bank is willing to lend to other banks).
LIBOR Curve
LIBOR zero-coupon interest rates as a function of maturity.
LIBOR-in-Arrears Swap
Swap where the interest paid on a date is determined by the interest rate observed on that date (not by the interest rate observed on the previous payment date).
Long Hedge
A hedge involving a long futures position.
Lookback Option
An option whose payoff is dependent on the maximum or minimum of the asset price achieved during a certian period.
Maintenance Margin
When the balance in a trader's margin account falls below the maintenance margin level, the trader receives a margin call requiring the account to be topped up to the initial margin level.
Margin
The cash balance (or security deposit) required from a futures or options trader.
Margin Call
A request for extra margin when the balance in the margin account falls below the maintenance margin level.
Margrabe Option
The option to exchange one asset for another. Margrabe (1978) showed several applications for this sort of option (margin account, corporate exchange offer, and standby commitment) and derived a model for pricing this option.
Market Maker
A trader who will at that moment is willing and able to either buy or sell at stated bid and ask prices. Also known as scalper or scalp-beggar.
Market Risk
The risk of loss from being on the wrong side of a bet about a market move.
Marking to Market
The practice of revaluing an instrument to reflect the current values of the relevant market variables.
Maturity Date
The end of the life of a contract.
Mean Reversion
The tendency of a market variable (interest rate) to revert back to some long-run average level.
Monte Carlo Simulation
A technique for approximating a probability distribution by generating uniformly distributed pseudo random numbers and transforming them into the required sort of random numbers.
Mortgage Backed Securities
A security, such as a bond, pass-through, CMO, or REMIC that derives its cash flows and market value from underlying Mortgage Backed Securities and/or Mortgage Bonds, Loans, and/or Notes.
MSCI
Morgan Stanley Capital International.
Naked Option
A short position in a call option that is not combined with a long position in the underlying asset.
Nonsystematic Risk
Risk that can be diversified away.
Notional Principal
The principal used to calculate payments in an interest rate swap. The principal is "notional" because it is neither paid nor received.
Offer Price
The price that a deaer is offering to sell an asset.
Open Interest
The total number of long positions outstanding in a futures contract (equals the total number of short positions).
Open Outcry
System of trading where traders meet on the floor of the exchange.
Option
The right to buy or sell an asset.
Option Class
All options of the same type (call or put) on a particulear stock..
Option Series
All options of a certain class with the same strike price and expiration date.
Option-Adjusted Spread
The spread over the Treasury curve that makes that theoretical price of an interest derivative equal to the market price.
OTM
Out-of-the-Money. Having an Intrinsic Value of zero.
Out-of-the-Money Option
Either (a) a call option where the asset price is less than the strike price or (b) a put option where the asset price is greater than the strike price.
Over-the-Counter Market
A market where traders deal by phone.
Absolute priority rule
The idea that creditors...
Package
A derivative that is a portfolio of standard calls and puts, possibly combined with a position in forward contracts and the asset itself.
Par Value
The principal amount of a bond.
Par Yield
The coupon on a bond that makes its price equal the principal.
Path-Dependent Option
An option whose payff depends on the whole path folowed by the underlying variable - not just its final value.
Plain Vanilla
A term used to describe a standard deal.
PO
Principal Only. A mortgage-backed security where the holder receives only principal cash flows on the underlying mortgage pool.
Portfolio Immunization
Making a portfolio relatively insensitive to interest rates.
Portfolio Insurance
Entering into trades to ensure that the value of a portfolio will not fall below a certain level.
Portofolio insurance
Portofolio insurance is something designed to give the investor the ability to limit downside risk while allowing some participation in upside markets.
Premium
The price of an option.
Protective Put
A put option combined with a long position in the underlying asset.
Pull-to-Par
The reversion of a bond's price to its par value at maturity.
Put Opion
The right, but not not the obligation, to sell the underlying asset at the strike price. Cf. Call Option.
Put Option
An option to sell an asset for a certain price by a certain date.
Put-Call Parity
The relationship between the price of a European call option and the price of a European put option when they have the same strike price and maturity date.
Putable Bond
A Bullet Bond that the bondholder can force the issuer to buy back at a scheduled price. The Put Price as a function of calendar time is the Put Schedule. A Bullet Bond plus a Put Option on the Bond. AKA Retractable Bond.
Puttable Bond
A bond where the holder has the right to sell it back to the issuer at certain predetermined times for a predetermined price.
Puttable Swap
A swap where one side has the right to terminate early.
Quanto
A derivative where the payoff is defined by variables associated with one currency but is paid in another currency.
Rainbow Option
An option that has several risk factors of the same type, e.g., two stock prices or three exchange rates.
Range-Forward Contract
The combination of a long call and short put or the combination of a short call and long put.
Real Option
An option that involves tangible objects such as bricks and mortar, pipelines and equipment.
Rebalancing
The process of adjusting a trading position periodically.
Recovery Rate
Amount recovered in the event of a default as a percent of the claim.
Reset Date
The date in a swap or cap or floor when the floating rate for the next period is set.
Reversion Level
The level to which the value of a market variable (e.g., an interest rate) tends to revert.
Rho
Rate of change of the price of a derivative with the interest rate.
Risk-Free Rate
The rate of interest that can be earned without assuming any risks.
Scenario Analysis
An analysis of the effects op possible alternative future movements in market variables on the value of a portfolio.
SEC
Securities and Exchange Commission.
Settlement Price
The average of the prices that a futures contract trades for immediately before the bell signaling the close of trading for a day. It is used in market-to-market calculations.
Sharpe Ratio
A measure of investment performance, namely, the investment's average excess rate of return (investment's rate of return minus riskless rate of return), divided by its standard deviation of rate of return.
Short Hedge
A hedge where a short futures position is taken.
Short Position
A position assumed when traders sell shares they do not own.
Short Rate
The interest rate applying for a very short period of time.
Short Selling
Selling in the market shares that have been borrowed from another investor.
Shout Option
An option where the holder has the right to lock in a minimum value for the payoff at one time during its life.
Sigma
The rate of change in the price of an option or other derivative with volatility.
Special Purpose Vehicle (SPV)
A merger of a bond and a derivatives trade into a single contract.
Spot Price
The price for immediately delivery.
Spot rate
The date from which interest starts accruing in a fixed income transaction. In the USD swap market (1999), typically, two business days after the transaction date.
Spread Option
An option where the payoff is dependent on the difference between two market variables.
Spread Rate
A trade that profits from a positive move in one risk factor and a negative move in another.
Static Hedge
A hedge that does not have to be changed once it is initiated.
Straddle
An option portfolio consisting of one Call Option and one Put Option, both with the same underlying, direction (long or short), strike, and expiration date.
Strap
Straddle lus another one of the Call Options.
Stress Testing
Testing of the impact of extreme market moves on the value of a portfolio.
Strike Price
The price at which the asset may be bought or sold in an option contract.
Strip
A Straddle plus another one of the Put Options.
Structured Product
Essentially a portfolio of securities and other (often, Vanilla) Derivative Products, although the dealer that creates it hopes the customer doesn't realize this.
Swap
The exchange of a sequence of cash flows that derive from two difference financial instruments.
Swaplet
A Swap that has a single payment.
Swaption
An option to enter into an interest rate swap where a specified fixed rate is exchanged for floating.
Swing Option
Energy option in which the rate of consumption must be between a minimum and maximum level.
Synthetic Option
An option created by trading the underlying asset.
Systematic Risk
Risk that cannot be diversified away.
Terminal Value
The value at maturity.
Theta
The rate of change of the price of an option or other derivative with the passage of time.
Time Value
The value of an option arising from the time left to maturity.
Timing Adjustment
Adjustment made to the forward value of a variable to allow for the timing of a payoff from a derivative.
Total Return Swap
A swap where the return on an asset such as a bond is exchanged for LIBOR plus a spread.
Transaction Costs
The cost of carrying out a trade.
Treasury Bill
A short-term non-coupon-bearing instrument issued by the government to finance its debt.
Treasury Bond
A long-term coupon-bearing instrument issued by the government to finance its debt.
Treasury Note
A long-term coupon-bearing instrument issued by the government to finance its debt. Treasury notes have maturities less than 10 years.
Tree
A representation of the evolution of the value of a market variable for the purposes of valuing an option or other derivative.
Underlying
An investment from which a derivative security is derived. It is invariably more common and more widely heard of than the securities derived from it.
Underlying Variable
A variable that price of an option or other derivative depends on.
Unsystematic Risk
Risk that can be diversified away.
Up-and-In Option
An option that comes into existence when the price of the underlying asset increases to a prespecified level.
Up-and-Out option
An option that ceases to exist when the price of the underlying asset increases to a prespecified level.
Uptick
An increase in price.
Value at Risk
A loss that will not be exceeded at some specified confidence level.
Variance Rate
The square of volatility.
Variance Swap
A contract that pays off an amount proportional to the difference between the realized variance over a specific period of time and the contractual variance.
Variation Margin
An extra margin required to bring the balance in a margin account up to the initial margin when there is a margin call.
Vega
The rate of change in the price of an option or other derivative with volatility.
Vega-neutral portfolio
A portfolio with a vega of zero.
Volatility
A measure of the uncertainty of the return realized on an asset.
Volatility Skew
A term used to describe the volatility smile when it is nonsymmetrical.
Volatility Smile
The variation of implied volatility with the strike price.
Volatility Swap
Swap where the realized volatility during an accrual period is exchagned for a fixed volatility.
Volatility Term Structure
The variation of implied volatilities with strike price and time to maturity.
Warrant
An option that a corporation issues, with its own shares as the underlying asset. The crucial implication is that exercise of the option changes the number of claims against the corporation's assets.
Weather Derivative
Derivative where te payoff depends on the weather.
Writing a Option
Selling an option.
Xerxes
The Convexity of Modified Duration.
Yard
One billion units of a currency.
Yield
A return provided by an instrument.
Zero Coupon Bond
A bond that pays no coupon, just par at maturity.
Zero Exercise Price Option
A European Call Option with strike price of zero. The owner will certainly exercise it, so it is equivalent to owning the underlying asset without receiving the cash flow (dividends or interest) through expiration.
Zero Gain Collar
A Costless Collar consisting of a short Call and long Put, where the short Call's strike is ATM.
Zero Rate
See also zero-coupon interest rate.
Zero-Coupon Interest Rate
The interest rate that would be earned on a bond that provides no coupons.
Zero-Coupon Yield Curve
A plot of the zero-coupon interest rate against time to maturity.
Zeta
The market value of an option, less its model value, using the ATM implied vol for the same expiration.
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