Accordian Swap (or Concertina or NPV Swap)
Represents the fraction of a year in a given period. There are two components that make up an accrual factor. The first component uses a day count convention to determine how many days fall in the accrual period, which will be the numerator in the calculation of the accrual factor. The second component is a day count convention to determine the number of days that make up a full period, which will be the denominator in the calculation of the accrual factor.
AFB Agreement (Federation Bancaire Francais) (AFBA, FBF)
The process by which two counterparties verify that they agree the primary economics of a trade. The affirmation process is where one party sends information to another party and the second party confirms whether or not the information is correct. This may be done by telephone, voice recording, email or an electronic affirmation platform.
Agency for the Cooperation of Energy Regulators (ACER)
All-to-Default Basket Default Swap
A basket default swap on which a credit event occurs on a credit event of any of the entities in the basket. At that point the buyer receives from the seller the difference of the principal amount of the defaulted entity and the recovered value. The buyer continues paying the premium as long as there are undefaulted entities in the basket and the counterparty does not default.
Alternative Instrument Identifier (Aii)
Used where the ISIN is not the industry method of identification of a security such as options, shares, equities or derivatives. Consists of six separate mandatory elements which are collectively known as the Aii. The Aii is one method being used in Europe to categorise trades being reported under EMIR.
American Style Options
Approved Reporting Mechanism (ARM)
Assignment Date (or Step-in Date)
Average Price (Asian) Option
Average Rate Cap/Floor
Average Strike Option
Options that can assure that the average price paid (or received) for an asset over a certain time period is not greater than the final price. These are path dependent because the payoff is based on the difference between the spot price at expiration and an average strike price determined over the life of the option.
Bank for International Settlements (BIS)
Bank Identifier Code (BIC)
A unique address that identifies the financial institutions involved in international financial transactions. It consists of eight or eleven characters, comprising the first three or all four of the following components: Bank Code, Country Code, Location Code and Branch Code. Example of where BICs are used is during the settlement instruction process to move funds from one institution to another.
Bank of England
A modified interest rate cap that only pays a return to the buyer when the underlying index, usually LIBOR, is above the defined barrier level. When above this level the barrier cap payout is the same as the payout on a traditional interest rate cap. The barrier feature is usually applied to each LIBOR period separately. A traditional interest rate cap can be considered as a barrier cap where the cap strike and cap barrier are set at the same level. A barrier cap with a maximum dollar payout is known as a bounded Barrier floor.
A modified interest rate floor that only pays a return to the buyer when the underlying index, usually LIBOR, is below the defined barrier level. When below this level the barrier floor payout is the same as the payout on a traditional interest rate floor. The barrier feature is usually applied to each LIBOR period separately. A traditional Interest rate floor can be considered as a barrier floor where the floor strike and floor barrier are set at the same level. A barrier Floor with a maximum dollar payout is known as a interest rate floor.
Basel Committee Banking Supervision (BCBS)
Basis Point Value
Basket Credit Default Swap
A basket default swap is similar to a single entity default swap except that the underlying is a basket of entities rather than one single entity. There are several types of basket default swaps. The popular ones are first-to-default, n-th-to-default, n-out-of-m-to-default and all-to-default swaps. With a single entity, a credit event is usually a default of the entity. With a first-to-default swap, a credit event occurs the first time any of the entities defaults. A similar definition holds for an n-th-to-default swap. An n-out-of-m-to-default swap protects the buyer against losses related to the first defaults of the m-entity basket. Similarly, an all-to-default swap protects against losses resulting from credit events of any of the entities in the basket.
An arrangement between two parties that transactions be summed, rather than settled individually. Bilateral netting not only streamlines the settlement process, it also reduces risk by specifying that, in the event of a default or some other termination event, all outstanding contracts are likewise terminated.
Binomial Option Pricing Model
A method to calculate possible paths that might be followed by the underlying asset’s price over the life of the option. The model works by dividing the time to expiration into a number of time intervals and over each time interval, the model assumes that the price of the underlying moves up or down to certain values. Then from the up or down prices at the next time step, the up and down price is calculated for each scenario until the expiry date. The magnitude of these moves is determined by the volatility of the underlying and the length of the time interval.
Black-Scholes Option Pricing Model
A method to calculate the price of a European style option (exercise on expiry date only) assuming that the underlying instrument pays a constant dividend, extraneous costs such as taxes are ignored, a constant risk-free interest rate, constant volatility and the price follows a probability distribution that is lognormal (a mathematical statistic: the logarithm of the price is normally distributed) until expiration. Although this model produces a theoretical value, it is considered the industry standard.
Bond Forwards or Futures
An agreement whereby the short position (seller) agrees to deliver pre-specified bonds to the long (buyer) at a set price and within a certain time frame. The forward contract is an agreement between two counterparties to exchange bonds at an agreed price and time in the future. The futures contract is typically traded on an exchange and the underlying bond is “standardized”. “Standardized” means that it is a fictional bond.
Bounded Barrier Cap
Bounded Barrier Floor
An interest rate swap where the floating rate is calculated using the average one-day Brazilian interbank deposit rate (CDI rate) which is an annual rate calculated daily by the C?mara de Cust?dia e Liquida??o (CETIP). It represents the average rate of all inter-bank overnight transactions in Brazil. The swap has only one payment, which occurs at maturity.
Break Forward Contract
Break-even Forward Rate
Bundesanstalt f?r Finanzdienstleistungsaufsicht (BAFiN)
Business Day Convention
An option strategy involving three call or put options with strike prices that are equally apart. Buy or sell the option with the lowest strike price, sell or buy twice the quantity at the central strike price and buy or sell the option at the highest strike price. The payoff diagram for this option strategy resembles a picture of a butterfly.
Call Spread vs. Put
An interest rate cap where the fixed rate payer has the right, but not the obligation to terminate the swap at one or more pre-determined times during the life of the swap. A Swap where the fixed rate receiver has the right to terminate is known as a putable swap. Both callable and putable swaps are also known as cancellable swaps. The foreign exchange version of the cancellable swap is known as a break forward or cancellable forward.
A cancelable interest rate swap provides the right to cancel the swap at a given point in the future. An example would be a swap with a tenor of 5 years that can cancelled after year three. This can be broken into two components. The first is a vanilla five year swap paying floating and receiving fixed. The econd component is a payer swaption exercisable into a two year swap three years from today. The result is that when the original bond is called, the swaption is exercised and the cash flows for the original swap and that from the swaption offset one another. If the bond isn?t called, the swaption is left to expire.
Cash Flow Hedge
Central counterparty (CCP)
Central Securities Depository (CSD)
CFTC Interim Compliant Identifier (CICI)
Cheapest to Deliver Bond
Chooser Flexible Cap
Chooser Flexible Floor
A modification of the flexible floor. While the number of floor “uses” is still limited, the buyer can choose when to use the floor rather than have it automatically exercised. A chooser flexible floor where the notional amount increases each time the floor is not exercised is known as super flexible floor.
An option where the investor has the opportunity to choose whether the option is a put or call at a certain point in time during the life of the option. The underlying options are assumed to be European options on the same asset. At the expiry date of the chooser option, it is assumed that a rational holder of the chooser option will choose the more valuable of the put or call option. In doing so, the less valuable option, not chosen, will die.
Classification of Financial Instruments (CFI)
Classification of Financial Instruments Code (CFIC)
Clearing Brokers (CB)
Clearing House (CCP)
Clearing member (CM)
Clearing Member ID
Client Reference Data
Close-out netting clause
A type of spread option strategy where an investor purchases (or sells) a call option while at the same time sells (or purchases) a put option both of which are out of the money with the same expiry date. If the strikes are chosen so that the purchase price of the call option and the sale price of the put option exactly match, then this is called a costless collar.
Property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup its losses. In trading, collateral is posted from one counterparty to another to offset the risk of losses associated with its position.
Collateral in transit
Collateral Portfolio Management
Collateral Support Document (CSD)
Collateralized Debt Obligation (CDO)
A financial instrument that is linked to a diversified pool of credits or credit derivatives which are mostly backed by corporate bonds or other corporate debt. The credits can be assets, such as bonds or loans, or simply defaultable names, such as companies or countries. There are two categories of CDOs: Cash CDOs and Synthetic CDOs
Committee of European Securities Regulators (CESR)
Committee on Payment and Settlement System (CPSS)
A forward contract which is very similar to a futures contract, except that the terms and conditions can be specified to meet the particular needs of the counterparty. These contracts are primarily on agricultural or precious metal commodities and can be used for hedging, arbitraging and speculating against the future price of the underlying asset.
Commodity Forward Strip
A futures contract is an agreement between two counterparties that commits one party to sell a standardized quantity of a commodity at a given price on a specified future date. These contracts are primarily on agricultural or precious metal commodities and can be used for hedging, arbitraging and speculating against the future price of the underlying asset. These contracts are standardized and traded on an exchange, in contrast to a forward.
Commodity Futures Trading Commission (CFTC)
The Commodity Futures Trading Commission (CFTC) is an independent US federal agency established by Congress in 1974, whose mandate is to regulate the commodity futures, options and derivatives markets in the US. The mandate of the agency has been most recently renewed by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
A commodity call option gives the holder the right to buy a commodity at a specified price (the exercise or strike price) for a certain time. The seller of a call option assumes a corresponding obligation to sell the commodity if and when the call option holder decides to exercise his right to buy. A put option gives the holder the right to sell a commodity at a specified price for a certain time. The seller of a put option assumes a corresponding obligation to buy the commodity if the put option holder decides to exercise his right to sell.
Commodity Option Strip
A set of 59 fields which is common to both parties to a trade including contract type and transaction details e.g. trade ID (UTI), notional amount, currency, maturity date, etc. To avoid inconsistencies, common data needs to be agreed between counterparties before submission to a trade repository for EMIR regulatory reporting purposes.
An option on an underlying which is itself an option; therefore, there are two strike prices and two expiry dates (where the underlying option?s expiry date is equal to or greater than the compound option?s expiry date). The underlying option is assumed to be a European Style option on an asset which follows a lognormal random walk (such as a basic Black-Scholes call or put option).
Conduit Affiliate (CA)
Client can be classified under US legislation as Conduit Affiliates. This classification will determine the applicability of certain rules. Factors relevant to determine classification include: (i) the non-US person is a majority-affiliate of a US person; (ii) the non-US person is controlling, controlled by or under common control with the US person; (iii)the financial results of the non-US person are included in the consolidated financial statements of the US person (iv) the non-US person, in the regular course of business, engages in swaps with non-US third party(ies) for the purpose of hedging or mitigating risks faced by, or to take positions on behalf of its US affiliate(s), and enters into offsetting swaps or other arrangements with its US affiliate(s) in order to transfer the risks and benefits of such swaps with third-party(ies) to its US affiliates; (v) Conduit Affiliate does not include affiliates of Swap dealers.
Constant Maturity Credit Default Swap
Constant Maturity Derivatives
A derivative where the payoffs are based on interest rate swap rates or bond yields (multiple payments) but the payoffs are calculated as if the rates or yields were zero coupon rates. The term constant maturity swap (CMS) is used when the derivative is based on swap rates and the term constant maturity treasury (CMT) is used when the derivative is based on bond yields.
Constant Maturity Swap
An interest rate swap where the interest rate on one leg is reset periodically but with reference to a market swap rate rather than LIBOR. The other leg of the swap is generally LIBOR but may be a fixed rate or potentially another constant maturity rate. Constant maturity swaps can either be single currency or cross currency swaps.
Contingent Credit Swap
Contingent Premium Cap
Generic term for an interest rate swap that is activated when rates reach a certain level or a specific event occurs. Swaptions are often considered to be contingent swaps ? the specific event in this case being the exercise of the option. Other types of swaps, e.g., droplock or spreadlock swaps, are activated only if rates drop to a certain level or if a specified level over a benchmark is achieved.
Continuous Linked Settlement (CLS)
Cost of Carry
An option that settles periodically and resets the strike at the worst of (a) the then spot level, and (b) the original strike set in period one. It is a series of options, but where the total premium is determined in advance. The payout on each option can be paid at final maturity, or paid at the end of each reset period.
Covered Call Option
An option strategy where the investor owns a stock and writes a call option on the same amount of the stock. If the holder exercises the option, the stock owner must deliver the stock. This strategy is used if the stock owner believes that the stock price may decline in which case the holder will not exercise and he or she keeps the premium. If the price of the stock goes up and the option is exercised, the risk is minimal as the writer already owns the stock.
Credit Default Index Swap Option
Credit Default Index Swap(CDIS)
A portfolio of single-entity credit default swaps where the premium notional is variable. The most popular CDISs are the so-called standardized CDISs. In these standardized contracts the reference entity pool is homogeneous, that is, all the reference entities have the same notional and the same recovery rate. Typical examples of standardized CDISs are the CDX index and the ITRAXX index
Credit Default Swap Options
Also known as a credit default swaption, it is an option on a credit default swap (CDS). A CDS option gives its holder the right, but not the obligation, to buy (call) or sell (put) protection on a specified reference entity for a specified future time period for a certain spread. The option is knocked out if the reference entity defaults during the life of the option. This knock-out feature marks the fundamental difference between a CDS option and a vanilla option. Most commonly traded CDS options are European style options.
Credit Default Swaps (CDS)
A financial contract under which an agent buys or sells risk protection against the credit risk associated with a specific reference entity (or specified range of entities). For a periodic fee, the protection seller agrees to make a contingent payment to the buyer on the occurrence of a credit event (usually default in the case of a credit default swap).
An event linked to the deteriorating credit worthiness of a credit derivative underlying reference entity. The occurrence of a credit event usually triggers full or partial termination of the transaction and a payment from protector seller to protector buyer. Credit events include bankruptcy, failure to pay, restructuring, obligation acceleration, obligation default and repudiation/moratorium.
Credit Event Notice
A credit derivative notice where the counterparty triggering the credit event (normally the protection buyer) informs the other counterparty that a credit event has occurred. The notice must contain a description in reasonable detail of the facts relevant to the determination that a credit event occurred.
A credit exposure of a financial instrument to a counterparty is the amount lost when the counterparty defaults. There are two types of potential credit exposures, worst credit exposures and expected credit exposures. A worst credit exposure at a given time is the largest possible loss of the instrument at certain confidence level when the counterparty defaults. An expected exposure is the expected loss of the instrument at a given time.
Credit Spread Option
Credit Support Annex
The Credit Support Annex (CSA) is a standard form collateral agreement which enables parties to an ISDA Master Agreement to receive and provide collateral in order to reduce counterparty risk. In practical terms, the bilateral agreement establishes the day-to-day management of the risk, which involves computing the mark-to-market of the parties? exposure across all the ISDA Master Agreements OTC derivatives and allowing the in-the-money party to make calls for collateral from the out-of-the-money parties.
Credit Support Annex (CSA)
Credit value adjustment (CVA)
The risk of loss caused by changes in the credit spread of a counterparty due to changes in its credit quality (also referred to as the market value of counterparty credit risk). Under Basel II, the risk of counterparty default and credit migration risk were addressed but mark-to-market losses due to credit valuation adjustments were not. Basel III introduced a CVA capital charge in addition to the default risk capital requirements for counterparty credit risk.
Credit-linked Note (CLN)
Also called a credit default note, it is a fixed or floating rate note where the coupon and principal payments are referenced to a reference credit, which can be a single name or multiple names. It pays interest and repays principal that depend on a credit event. At maturity, the investors receive par unless the referenced credit defaults or declares bankruptcy, in which case they receive an amount equal to the recovery rate
Cross Currency Basis Spread
Cross Currency Bermudan Swaption
An embedded Bermudan option in a cross currency swap. It is a contract in which the holder of a cross currency swap is long or short an option to put the swap at certain cash flow payment dates. For example, suppose a fixed leg cross-currency swap payer is long a Bermudan swaption. Then he makes periodic payments based on a fixed rate in a certain currency and receives floating rate payments based on the interest rate of another currency. At certain payment dates he can cancel the swap, or equivalently, he can switch to pay the floating rate and receive the fixed rate. Most cross currency swaptions are fixed-for-floating swaptions. Typical swaptions have fixed notionals for both receive and pay legs, and a single fixed coupon rate for the fixed leg and a single spread for the floating leg
Cross Currency Swap
An interest rate swap that consists of each leg dominated in a different currency and two notional principal amounts also in different currencies. The two parties agree to exchange principal and interest payments in one currency for the principal and interest payments in the other currency. The principal amounts must be paid out at maturity
Currency Translated Options
The simultaneous purchase of a currency put option and sale of a currency call option at different strike prices. Both options are out of the money. This strategy enables purchasers to hedge their downside risk at a reduced cost. This is at the expense of forgoing upside beyond a certain level since the purchase of the put is financed by the selling of the call (or vice versa). See also Range Forward
Day Count Convention
Delegated Reporting (DR)
Delivery Adjusted Fair Quoted Futures Price
Delta of Correlation
Depository Trust & Clearing Corporation (DTCC)
A holding company consisting of 5 clearing corporations and 1 depository, making it the world?s largest financial services infrastructure corporation dealing with post trade transactions. DTCC is a utility that provides clearance, settlement and information services and it is owned by major investment banks.
Derivative receivables and payables
Derivatives Clearing Organisations (DCOs)
A clearing house, clearing association, clearing corporation, or similar entity that enables each party to an agreement, contract, or transaction to substitute, through novation or otherwise, the credit of the DCO for the credit of the parties. A DCO provides clearing services by multilateral settlement or netting of obligations and by mutualising and transferring the credit risk from the transactions to the members of the clearing organisation.
Designated Contract Markets (DCM)
Boards of trade (or exchanges) that operate under the regulatory oversight of the CFTC, pursuant to Section 5 of the Commodity Exchange Act (CEA), 7 USC 7. DCMs are like traditional futures exchanges in that they may allow access to their facilities by all types of traders, including retail customers.
Differential Interest Rate Fix (DIRF)
An interest rate swap in which a counterparty swaps floating payments referenced to an interest rate of one currency into floating payments referenced to an interest rate of another currency. The principal for both payments, however, is in one currency. The differential swap is therefore a strip of forward rate agreements and the pricing characteristics are similar to a fixed-fixed cross-currency swap, and a premium will be payable either up front or as a spread on the floating rate. Also known as cross index basis swap.
Digital Credit Default Swap
A modification of the standard credit default swap (CDS) used for recovery rate trading. If there is a credit event the protection seller pays the protection buyer par minus a fixed recovery rate. In a vanilla CDS the recovery rate is effectively determined after the credit event. See also recovery lock.
The interest rate used in discounted cash flow analysis to determine the net present value of future cash flows. The discount rate takes into account the time value of money (the idea that money available now is worth more than the same amount of money available in the future because it could be earning interest). See also Net Present Value.
An off-market interest rate swap in which the fixed payments are below the market rate. At the end of the swap the shortfall is made up by one large payment. Companies may use this type of structure to reduce interest rate payments during completion of a project. The more these payments are discounted, the more credit risk is taken by the counterparty. At the extreme, fixed payments can be set to zero resulting in a larger balloon payment on the maturity date. This is known as a zero coupon swap.
Dodd Frank Act (DFA)
Dodd-Frank Protocol 1 (DFP1)
An ISDA Protocol aimed at assisting the over-the-counter derivatives industry in implementing regulatory requirements under Title VII of the US Dodd-Frank Act. It allows market participants to: (i) supplement the terms of existing ISDA Master Agreements under which the parties to the agreements may execute individual swaps and derivatives transactions; and (ii) enter into an agreement to apply selected Dodd-Frank compliance provisions to their swaps and derivatives trading relationship.
Dodd-Frank Protocol 2 (DFP2)
Part of ISDA?s Dodd-Frank documentation initiative. The protocol is intended to aid compliance with the CFTC?s internal business conduct rules for swap dealers and major swap participants. It addresses: (i) swap transaction confirmation (ii) swap portfolio reconciliation (iii) swap portfolio compression (iv) swap trading relationship documentations (v) the commercial end-user exception from mandatory swap clearing requirements (vi) swap clearing determinations under s.2(h) of the US Commodities Exchange Act.
Double Average Options
Options that combine the features of an average strike option and an average price option. Used predominately in the currency markets by multinationals, these options are designed to match currency risks more closely as the option creates an average strike and average price based on pre-defined sampling periods.
Double Average Rate Option (Daro)
A double average option where the strike price is not set at inception; it becomes the average price of the predefined sampling points. Combine this with an average rate feature, the value of a Daro can be described as the difference between the expected average strike price and the expected average rate.
Double Barrier Binary Option
A type of Double Barrier Option whereby in the knock-out case, if during the life of the option neither barrier is touched, the payout at expiry is as for a binary option. For the knock-in option, on the other hand, the payout at expiry is as for a binary option only if one of the barriers has been breached.
Double Barrier Call or Put Option
A type of Double Barrier Option whereby in the knock-out case, if during the life of the option neither barrier is touched, the payout at the expiry is as for a call or put option. For the knock-in option, on the other hand, the payout at expiry is as for a call or put option only if one of the barriers has been breached.
Double Barrier Option
Options that depend not only on the final asset value but also on whether either one of two barrier levels, a lower barrier which is below the value of the underlying, and a upper barrier which is above the value of the underlying, were touched at some time during the life of the option (making the payoff path dependent). There are two types of double barrier options, a knock in or a knock out.
Down-and-in Barrier Option
A type of single barrier option that when the option is set, the underlying asset is above the barrier level. If the barrier is touched, the holder now owns a standard option. If over the life of the option the barrier is never touched, the option dies worthless though the holder may be entitled to a rebate.
Down-and-out Barrier Option
DTCC Trade Information Warehouse (TIW)
The Trade Information Warehouse (TIW) is a centralised global trade repository for trade reporting and post-trade processing of OTC credit derivative transactions and virtually for all credit default swaps (CDS) contracts outstanding in the global marketplace. It is a service offered by the Depository Trust & Clearing Corporation and DerivSERV (a subsidiary of DTCC established in 2003). It offers services of repository, regulatory reporting and lifecycle event processing, particularly, the central settlement operated in collaboration with CLS (Continuous Linked Settlement) Bank.
Dual Currency Swap
A swap used to hedge dual currency bonds in which the issuer has the option to repay principal and coupon in either the base currency or an alternative currency, at a preset exchange rate. Dual currency swaps are currency swaps that incorporate the foreign exchange options necessary to hedge the interest payments back into the principal currency.
Dual Strike Option
Dynamic Credit Swap
A credit default swap with the notional linked to the mark-to-market of a reference swap or portfolio of swaps. For example, the notional amount applied to computing the contingent payment could be equal to the mark-to-market value, if positive, of the reference swap at the time of the credit event. The protection buyer pays a fixed fee, either up front or periodically, which once set does not vary with the size of the protection provided. The protection buyer will only incur default losses if the swap counterparty and the protection seller fail. This dual credit effect means that the credit quality of the Protection Buyer?s position is compounded to a level better than the quality of either of its individual counterparties. It is also called a credit intermediation swap.
Electronic Trading Platforms (ETPs)
End of month – no adjustment (Business Day Convention)
European Insurance and Occupational Pension Authority (EIOPA)
European Market Infrastructure Regulation (EMIR)
The European Union regulation on derivatives, central counterparties and trade repositories. EMIR introduces new requirements to improve transparency and reduce the risks associated with the derivatives market. EMIR also establishes common organisational, conduct of business and prudential standards for CCPs and trade repositories. EMIR is Europe‚Äôs response to the commitments agreed at the G20 2009 Pittsburgh Summit.
European Securities and Markets Authority (ESMA)
The European Securities and Markets Authority (ESMA) is an independent EU Authority that contributes to safeguarding the stability of the European Union’s financial system by ensuring the integrity, transparency, efficiency and orderly functioning of securities markets, as well as enhancing investor protection. The main general purpose of ESMA is to ensure the correct functioning across the financial markets in Europe by providing a consistent investor protection and international supervisory co-operation.
European Style Options
European Supervisory Authorities (ESAs)
An option on a forward start interest rate swap that gives the purchaser the right to either pay or receive a fixed rate. A buyer of a swaption who has the right to pay fixed and receive floating is said to have purchased a payer swaption. Alternatively, the right to exercise into a swap through which the buyer receives fixed and pays floating is known as receiver swaption. The options holder is only permitted to exercise on the expiry date.
Event Determination Date
A marketplace in which securities, commodities, derivatives and other financial instruments are traded. The core function of an exchange is to ensure fair and orderly trading, as well as efficient dissemination of price information for any securities trading on that exchange. Products traded on an exchange are standardised compared to over-the-counter products, which are customised.
Exchange traded products
Exercise (Strike) Price
Expected Future Cash Flows
Extendible Accrual Interest Rate Swap
Failure to Pay
Fair Benchmark Price
Fair Quoted Futures Price
Fair Total Futures Price
The price of a financial instrument that a buyer would be willing to pay and a seller would be willing to accept on the open market. The estimate of fair value should take into account prices for similar assets and valuation results such as the present value of all expected future cash flows of a security.
Federal Deposit Insurance Corporation (FDIC)
Financial Conduct Authority (FCA)
Financial Counterparty (FC)
Under EMIR definitions, FC includes investment firms, credit institutions, insurance undertakings, assurance undertakings, reinsurance undertakings, undertakings for collective investment in transformable securities UCITS and their management companies, institutions for occupational retirement provision, and alternative investment funds managed by alternative investment fund managers. In each case these firms are authorised or registered in accordance with applicable EU legislation.
Financial Market Infrastructure (FMI)
Financial Services Act 2012
The Act came into force from the 1st April 2012 and implemented the UK Government?s commitment to strengthen the financial regulatory structure in the UK. The regulation delivered a reform of the regulatory system by dividing responsibilities for financial stability between the Treasury, the Bank of England and FSA. The FSA ceased to exist from the 1st April 2013. The Act transferred responsibility to a new regulator, the PRA, which was established as a subsidiary of the Bank of England. In addition, the act created a new conduct of business regulator – the FCA. The FCA supervises all firms to ensure that business across financial services and markets is conducted in a way that advances the interest of all users and participants.
Financial Services Authority (FSA)
The regulatory body for all providers of financial services in the United Kingdom. The FSA is an independent, non-governmental entity that receives its statutory powers through the Financial Services and Markets Act of 2000. On 1st April 2013 the FSA was split into two new agencies: the Prudential Regulation Authority and the Financial Conduct Authority.
Financial Stability Board (FSB)
An international board set up to coordinate the work of national financial authorities and international standard setting bodies. Its role is to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies in the interest of global financial stability.
First-to-Default Basket Swap
A basket credit default swap on which a credit event occurs the first time any of the reference entities in the basket defaults. At that point the buyer stops paying the swap’s premium and receives from the seller the difference of the principal amount of the defaulted entity and the recovered value. If the swap’s counterparty defaults, premium payments will stop and both the buyer and the seller walk away from the contract.
Fixed for Fixed Swap
Fixed for Floating Swap
Fixed Rate Day Count
Flexi Range Floater
An interest rate cap where the buyer is only entitled to utilise the cap for a limited and pre-defined number of reset periods. The cap is automatically used if the underlying index, say LIBOR, is above the strike level. Once the number of “uses” equals the limit, the cap can no longer be used by the buyer.
An interest rate floor where the buyer is only entitled to utilise the floor for a limited and pre-defined number of reset periods. The floor is automatically used if the underlying index, say LIBOR, is below the strike level. Once the number of “uses” equals the limit, the floor can no longer be used by the buyer.
Floating Rate Par Forward
An agreement between two parties providing the purchaser (who pays a premium) a guarantee that if interest rates fall below an agreed level, the seller (floor writer) makes compensatory payments to the floor buyer. Floors are used in times of decreasing short term interest rates by money managers trying to preserve certain returns on floating rate investments. Floors are similar to caps, but from the opposite perspective. Floors consist of the sum of individual floorlets.
Following (Business Day Convention)
Foreign Account Tax Compliance Act (FATCA)
A US act that requires persons from the United States, including individuals who live outside the US, to report their financial accounts held outside of the US, and requires foreign financial institutions to report to the Internal Revenue Service (IRS) about their American clients. FATCA was implemented in order to combat offshore tax evasion and to recoup federal tax revenues.
Foreign Exchange (FX) and Currency Options
Foreign Exchange (FX) Forward Contract
Foreign Exchange (FX) Forward Swap
Foreign Exchange (FX) Knock-In (or Knock-Out) Option
An option that comes alive, i.e. Knocks In, when a certain barrier is reached. If the barrier is never reached, the option will automatically expire worthless, as without reaching the barrier, it never exists. If the barrier is reached, the option knocks in and its final value will depend on where the spot rate settles in relation to the strike.
Foreign Exchange (FX) Market
Foreign exchange (FX) swaps
A swap that involves the exchange of two currencies (principal amount only) on a specific date at a rate agreed at the time of the conclusion of the contract, and a reverse exchange of the same two currencies at a date further in the future at a rate (generally different from the rate applied to the short leg) agreed at the time of the contract.
Forward Exchange (FX) Agreement
Forward foreign exchange (FX) forward contract
A contract by which counterparties agree to exchange two currencies at a rate agreed on the date of the contract for value or delivery (cash settlement) at some time in the future (more than two business days later). This category also includes forward FX agreements, non-deliverable forwards and other forward contracts for differences.
Forward Intrinsic Value
Forward Rate Agreement (FRA)
An interest rate forward contract in which the rate to be paid or received on a specific obligation for a set period, beginning in the future, is set at contract initiation. FRAs are settled by net cash payments; that is, the difference between the rate agreed upon and the prevailing market rate at the time of settlement. The FRA buyer receives payment from the seller if the prevailing rate exceeds the rate agreed upon, and vice versa.
Forward Rate Curve
Forward Spread Agreement
An option which is paid for now, but will start at some prespecified date in the future. This date is called the issue date. At the issue date, a call or put option is issued with the strike price being determined by the spot price of the underlying on this date. Generally such options are issued at the money.
Futures Accrued Interest
Standardized contracts traded on organized exchanges or trading platforms by which parties agree to buy or sell underlying assets at pre-set prices on pre-set future dates. They are cash settled daily based on mark-to-market valuations. When they are less standardized and/or do not trade on exchanges they are called forward contracts.
The Group of 10 or G10 refers to the 11 countries that work together to drive global financial and economic stability. The original 10 countries were Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the UK and the US. Switzerland was added in 1964 to make 11 countries but the group kept the original G10 title.
Commitments made by the G20 group of countries. For example, at the G20 2009 Pittsburgh Summit, the participating countries committed to improve the over-the-counter derivatives market through: 1. Reporting over-the-counter derivatives to Trade Repositories 2. Increased use of central counterparties 3. Execution of over-the-counter derivatives on electronic trading platforms 4. Increase use of collateral and risk mitigation techniques.
Garman Kohlhagen Model
Generally Accepted Accounting Principles (GAAP)
GAAP refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards or standard accounting practice. These include the standards, conventions, and rules that accountants follow in the preparation of financial statements. GAAP may vary depending on the jurisdiction they are used in.
Global Trade Repository (GTR)
Guaranteed Affiliate (GA)
Clients can be classified under US legislation as Guaranteed Affiliates, where they are: (i) affiliated with a US person, and (ii) their trading activity is supported by a guarantee from any US person. *A Guarantee in this sense: – is not a traditional guarantee of payment or performance of the related swaps – is the substance, rather than the form, of the arrangement that determines whether the arrangement should be considered a guarantee; and – includes other formal arrangements that support the non-US person?s ability to pay or perform its swap obligations with respect to its swaps.
The extent to which a hedge transaction results in the offsetting changes in fair value or cash flow that the transaction was and is intended to provide as identified by the hedging entity. For example, a hedge is considered to be highly effective if the changes in fair value or cash flow of the hedged item and the hedging derivative offset each other to a significant extent. Under FAS 133 only the portion of a transaction that is considered effective may qualify for hedge accounting treatment.
Implied Black Volatility
An estimate of an underlying asset’s market price volatility using the current prices of the derivative, not the historical price changes of the asset. This measure can be determined by using the Black 76 pricing model for the derivative, that is there are no financing costs related to the derivative contract
Implied Forward Rates
An estimate of an underlying asset’s market price volatility using the current prices of the derivative, not the historical price changes of the asset. This measure can be determined by using a pricing model for the derivative such as Black-Scholes. Implied volatility can be thought of as the current market consensus of volatility for the underlying instrument assuming that everyone is using the same theoretical option pricing model.
A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is an imaginary portfolio of securities representing a particular market or a portion of it. Each index has its own calculation methodology and is usually expressed in terms of a change from a base value.
Index Amortizing Swap
Index-Based Credit Default Swaps
Individual Client Segregation
Initial margin (IM)
Inter-Dealer Broker (IDB)
Interest Rate Cap
An agreement between two parties providing the purchaser an interest rate ceiling or ‘cap’. This financial instrument is primarily used by borrowers of floating rate debt in situations where short term interest rates are expected to increase. Rate caps can be viewed as insurance ensuring that the maximum borrowing rate never exceeds the specified cap level.
Interest Rate Collar
Interest Rate Delta
Sensitivity of the value of a trade to a related interest rate. It may be expressed as a profit or loss measured by a single unit uptick in the interest rate from a valuation curve. A popular measure of interest rate risk, commonly known as price value of a basis point (PV01) or dollar value of a basis point (DV01).
Interest Rate Derivative
Interest Rate Floor
A contract that guarantees a minimum level of LIBOR. A floor can be a guarantee for one particular date, known as a floorlet. A series of floorlets, or floor can extend for up to 10 years in most markets. In return for making this guarantee, the buyer pays a premium. Floors generally guarantee a minimum level of either 3 or 6 month LIBOR or whatever the prevailing floating rate index is in the particular market. The clients maximum loss on a floor transaction is the premium. After purchasing the Floor, the buyer can make “claims” under the guarantee should LIBOR be below the level agreed on the floor on the settlement dates. A floor is not a continuous guarantee, it is only date specific. This means claims can only be made on specified dates. These dates are selected by the purchaser. Should the buyer never be required to make a claim under the floor, the option will expire worthless.
Interest Rate Guarantee
Interest Rate Parity
Interest Rate Processes
Interest Rate Risk
Interest Rate Swaps (IRS)
International Organisation of Securities Commissions (IOSCO)
International Securities Identification Number (ISIN)
International Standards Organisation (ISO)
The world?s largest developer of voluntary International Standards which give specifications for products, services and good practice, helping to make industry more efficient and effective. Developed through global consensus, they help to break down barriers to international trade, by driving consistent standards.
Interpolation Methods for Volatility Surface
A mathematical process in the pricing of options used to plot the volatility surface (varying strike prices and expiry dates that assume that the volatility of the underlying fluctuates) from a set of implied volatilities. These methods include: bi-linear: two dimensional (horizontal and vertical), bi-cubic: two dimensional (weighted average of the nearest sixteen pixels in a rectangular grid), and thin plate: produces a smooth continuous surface.
The amount of any favorable difference between the strike price of an option and the current price of the underlying. For call options, this is the underlying stock’s price minus the strike price. For put options, it is the strike price minus the underlying stock’s price. In the case of both puts and calls, if the difference between the underlying stock’s price and the strike price is negative, the value is zero.
ISDA (International Swaps and Derivatives Association)
The global trade association of the over-the-counter derivatives market participants, including corporations, investment managers, government and supranational entities, insurance companies, energy and commodities firms, and international and regional banks, exchanges, clearing houses and repositories, as well as law firms, accounting firms and other service providers.
ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol
A standard agreement which helps participants to carry out the EMIR requirements for portfolio reconciliation and dispute resolution. It also includes a disclosure waiver to help ensure parties can meet the various reporting and record keeping requirements under EMIR without breaching confidentiality restrictions. Signing up to this agreement eliminates the need to create bilateral agreements between counterparties. If a counterparty signs the protocol, then that counterparty has signed up to all the other counterparties who have also signed the protocol.
ISDA DF Protocol Extension
The ISDA DF Protocol Extension permits parties that have adhered to DFP2 to agree bilaterally to use their existing DFP2 arrangements as a substitute for formal adherence to the ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol. The Protocol Extension either modifies or restates provisions in DFP2 to bring that protocol document into compliance with certain requirements under EMIR.
ISDA Master Agreement
An ISDA Master Agreement provides standardised terms to a contract when trading in the over-the-counter market. The first Master Agreement was first designed by ISDA (International Swap and Derivatives Association) in 1992 with the intent of standardising the documentation in the OTC derivatives market in order to increase efficiency and liquidity in the markets. The standard agreement identifies the two parties entering the transaction; describes the terms of the arrangement, such as payment, events of default and termination; and lays out all other legalities of the deal.
Knock-In Cap or Floor
A cap or floor that only comes alive, or knocks in when some defined barrier (the knock in level) is reached on a rollover date. The cap or floor can either come alive for the entire remaining life of the option or only for the period to which that fixing applies. Interest rate caps and floors can be Knocked-In with reference to a wide range of underlyings, including LIBOR, FX, commodity and equity levels.
Knock-in Double Barrier Option
A swaption with a “knock-In” feature. The swaption only comes alive, or knocks in when some defined barrier (the knock in level) is reached during or at the end of the option period. Both Receiver and Payer Swaptions can be Knocked-In with reference to a wide range of underlyings, including LIBOR, FX, commodity and equity levels.
Knock-Out Cap or Floor
A cap or floor with a “knock-out” feature added to it. Should some defined underlying, say LIBOR, ever reach the prescribed knock-out level on a rollover date, the cap/floor is terminated or “knocked-out”. This termination can be either for the entire remaining life of the option or only for the period to which that fixing applies. Interest rate caps and floors can be knocked-out with reference to a wide range of underlyings, including LIBOR, FX, commodity and equity levels.
Knock-out Double Barrier Option
A swaption with a “knock-out” feature added to it. Should some defined underlying, say LIBOR, ever reach the prescribed knock-out level on a rollover date, the swaption is terminated or “knocked-out”. Both receiver and payer swaptions can be knocked-out with reference to a wide range of underlyings, including LIBOR, FX, commodity and equity levels.
An Option in which the strike is periodically reset when the underlying trades through specified trigger levels, at the same time locking in the profit between the old and the new strike. The trigger strikes appear as rungs on a ladder. Ladder options can be structured to reset the strike in either one or both directions. The Ladder option is also known as a Ratchet option and Lock-In option.
Large Notional Swap
A large notional swap is an off-facility swap that has a notional or principal amount at or above the appropriate minimum block size applicable to such publicly reportable swap transaction and is not a block trade as defined in Section 43.2 of the Commission’s regulations. Similar to block trade, however it is not available for trading or execution on a swap execution facility (SEF) or designated contract market (DCM). A large notional swap must be consistent with the appropriate minimum size requirements in the proposed rules. Additionally, a large notional swap must be reported in accordance with the appropriate time delay in the proposed rules.
Legal Entity Identifier (LEI)
LIBOR (London Interbank Offered Rate) or ICE LIBOR
An interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the ICE Benchmark Administration. The LIBOR is derived from a filtered average of the world?s most creditworthy banks? interbank deposit rates for larger loans with maturities between overnight and one year.
LIBOR Market Model
An interest rate model based on evolving LIBOR market forward rates. The objects modeled using LMM are market-observable quantities (LIBOR forward rates). The LIBOR Market Model can be used to price any instrument whose pay-off can be decomposed into a set of forward rates. It assumes that the evolution of each forward rate is lognormal. Each forward rate has a time dependent volatility and time dependent correlations with the other forward rates being evolved. After specifying these volatilities and correlations, an instrument can be priced using Monte Carlo simulation to evolve the forward rates.
LIBOR Market Model Calibration Parameters
A calibrated model is a model whose parameters have values that are consistent with market observations. Calibration involves finding values of the parameters such that the model is able to reproduce (as close as possible) the prices of ?calibration instruments” observed in the market. Values of the LIBOR Market Model parameters (forward rate volatilities and correlations) are found by calibrating the model to market-quoted Black volatilities of caps and European-style swaptions. The resulting values of the parameters (forward rate volatilities and correlations) are used when evolving the state variables (forward rates) for the purpose of pricing interest rate derivatives that may or may not have prices available in the market.
LIBOR Regulating Swap
Linear Foreign Exchange (FX) Linked Swap
Loan Credit Default Swap (LCDS)
Local Operating Unit (LOU)
Given the prices of call or put options across all strikes and maturities, we may deduce the volatility which produces those prices via the full Black-Scholes equation. Unlike the naive volatility produced by applying the Black-Scholes formulae to market prices, the local volatility is the volatility implied by the market prices and the one factor Black-Scholes.
A historical volatility calculation method that assumes that stock prices are lognormally distributed (the rate of change in a price series is continuous). This is one of the assumptions used in the Black-Scholes option pricing model. The historical volatility of the Black-Scholes model is the standard deviation of the natural logarithms of the prices on consecutive trading dates and is called the log volatility.
Lognormal Random Walk
An industry standard model which describes movements of stock prices are independent of one another and the size and direction are random except for the fact that stock prices tend to increase over time. The lognormal distribution becomes a normal distribution when the values of the variable are switched to the natural logarithms of the values of the variable.
London Clearing House (LCH)
London Inter-Bank Offered Rate (LIBOR)
The London Interbank Offered Rate (LIBOR) or bbalibor is the interest rate that London based banks lend to each other intra-day. It is used in the settlement of interest rate contracts on many of the world’s major futures and options exchanges. It is also used in loan and mortgage agreements globally, and in standardised derivative documents such as the ISDA terms.
Options that allow the option holder the right to purchase the underlying asset at the lowest price (call option), or sell the underlying asset at the highest price (put option) over a specified period. At expiration, the investor looks back and chooses the largest in-the-money amount that occurred over the life of the option. Lookback options are never out-of-the-money.
Major Swap Participant (MSP)
Under Dodd Frank Act, MSP is a person that satisfies any of the following: 1. It maintains a ?substantial position? in any of the major swap categories, excluding positions held for hedging or mitigating commercial risk; 2. A person whose outstanding swaps create ?substantial counterparty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets.?. It is ?highly leveraged relative to the amount of capital such entity holds and that is not subject to capital requirements.”
Margin (initial and variation)
The amount that the holder of a financial instrument has to deposit (with their broker or exchange) to cover some or all of the risk associated with that instrument. Variation margin covers day-to-day changes in instrument mark-to-market market values, and initial margin covers potential losses in excess of posted variation margin in the event of counterparty default.
Mark to Model
An interest rate hedge structure that puts an upper limit on the marked-to-market (MTM) loss of a swap portfolio. It gives the option to enter into a portfolio of offsetting swaps at any reset date over a chosen period, at strikes that will ensure that the MTM loss will not exceed a pre-determined amount.
Mark-to-Market Methodology (MTM)
The Mark to Market methodology is used to compute a value closest to the fair value of an asset or security, by marking it at its market value. Mark to market should be reported daily and the increase and the decrease in the MTM should be reported daily in the P&L. When positions are cleared through a Clearing House, the central counterparty is in charge of re-evaluating positions at their current market price at the end of each day. The re-evaluation of the portfolio will then be used to make calls for new margin (margin calls).
Market Abuse Directive (MAD)
The current value of a financial instrument based upon the price at which the financial instrument can be bought or sold in the financial market immediately. For equities, multiply the number of shares times the market price and for bonds, multiply the par or current face value times the market price.
Markets in Financial Instruments Directive (MiFID)
A directive that aims to integrate the European Union?€™s financial markets and to increase the amount of cross border investment orders. The MiFID plans to implement new measures, such as pre- and post-trade transparency requirements and capital requirements that firms must hold. The directive officially took effect on November 1st, 2007.
Markets in Financial Instruments Directive II (MiFID II)
Markets in Financial Instruments Regulation (MiFIR)
A confirmation platform supporting affirmation and matching of over-the-counter derivative transactions across all major asset classes. MarkitSERV was launched in September 2009 as a joint venture between MarkitWire and DTCC DerivSERV. MarkitWire was the affirmation platform for rates and equity derivatives, where as DTCC DerivSERV was the matching platform for credit and equity derivatives. However, in 2013 Markit acquired DTCC ownership of MarkitSERV, which is now a product of the company.
Minimum transfer amount
Modified following business day (Business Day Convention)
An interest rate cap in which the cap level is dependent on the last rate set for LIBOR. If LIBOR rises above a predetermined trigger in the rate set period, the cap strike for the remaining option is increased by a predetermined amount (up to a maximum level). Also known as ratchet cap and adjustable strike cap.
Moving Average Cap (or Floor)
Multi-factor Short Rate Model
Multi-Name Credit Default Swap
An arrangement among multiple parties that transactions be summed rather than settled individually. Multilateral netting not only streamlines the settlement process, it also reduces risk by specifying that, in the event of a default or some other termination event, all outstanding contracts are likewise terminated. CLS, TriOptima, exchanges and clearing houses perform netting. Firms can multilaterally net positions and/or cash flows. EMIR encourages greater multilateral netting through mandatory use of CCPs.
Multilateral Trading Facility (MTF)
A modification of the Knock-Out Cap. In a Knock-Out Cap, once the trigger rate is reached (i.e. the Knock-Out level), the protection of the cap disappears for that period. With an N-Cap, once the trigger is reached the original cap level is replaced with a second cap level for that period. It is therefore more risk averse than the Knock-Out Cap. The N-Cap is also known as a Dual-Strike or Double Strike Cap.
N-out-of-M Default Basket Swap
National Competent Authority
Negative Acknowledgment/Not Acknowledged (NACK)
Net Present Value (NPV)
The Net Present Value rule is a method used to understand whether a project is worth undertaking, by expressing future cash flows in terms of cash today. It can be used to compare to project (the one with the higher cash flow will win) or to make a decision whether to accept or reject a project (accept those ones with a positive NPV). The Net Present Value of a project is the difference between the present value of the benefits and the present value of its costs, or simpler, the present value of all its future cash flows. NPV = PV (Inflows) – PV (Outflows) = PV (All cash flows – with respective sign)
Next good business day (Business Day Convention)
No date adjustment (Business Day Convention)
Non-Financial Counterparty (NFC) +/-
Under EMIR client classification, non-financial counterparties are separated into two categories: 1) NFC+ is an NFC that has outstanding derivative transactions with a gross notional value which exceeds EUR 1 billion for credit and equity derivatives or EUR 3 billion for rates, FX and commodity transactions. An NFC+ will be subject to the same EMIR obligations as a financial counterparty (FC). 2) NFC- is an NFC that has not breached the above thresholds. An NFC- will be exempt from clearing and margining EMIR obligations, but will still be required to comply with transaction reporting, timely confirmations and portfolio compression and reconciliation.
Nth-to-Default Basket Swap
A basket default swap on which a credit event occurs when nth default occurs in the reference basket. At that point the buyer stops paying the premium and receives the difference of the principal amount of the latest (nth) defaulted entity and the recovered value. Note that the premium does not stop until the n-th default as long as the counterparty does not default, even if there are already defaults in the basket.
Also known as stub periods, these are periods which are not of the length as specified in the contract. Usually these are dates which may fall after the start date of a cycling period or before the end of a complete cycling period or both. They can be either longer than a standard period or shorter.
Official Journal (OJ)
Omnibus Client Segregation
One Touch Digital Option
An option that provides the Buyer with a Fixed payout profile. The Buyer receives the same payout irrespective of how far in the money the option closes. Unlike ordinary Digitals, One Touch Digital Options payout if the underlying reaches the strike at any time from start to maturity. They can therefore be considered as an American style Digital Option and the straight Digital as European style (i.e. exercise only at maturity).
One Way Collateralised
Option Pricing Models
A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date). See also http://en.wikipedia.org/wiki/Option_style.
OTC Derivatives Regulators Forum (ODRF)
An agreement to exchange a series of cashflows over time in one currency for a series of cashflows in another currency with all exchanges occurring at the same exchange rate. The Par Forward is therefore a series of foreign exchange forward contracts at one agreed rate. It is not necessary for the cashflows to be of the same notional amount. Also known as a flat rate forward. More complex versions of the par forward include the floating rate par forward and the rolling par forward.
Par Swap Rate
The value of the fixed rate which gives the swap a zero present value or the fixed rate that will make the value of the fixed leg equal to the value of the floating leg. To determine this rate, discount the forward rates of the floating rate to the present date to determine the value of the floating leg then discount the rates for the fixed leg and adjust the fixed rate until the swap has a net present value of zero.
A barrier option for which the barrier feature (knock in or knock out) is only triggered after the underlying asset has spent a certain prescribed time beyond the barrier. The effect of this more rigorous triggering criterion is to smooth the option value (and delta and gamma) near the barrier to make hedging somewhat easier. It also makes manipulation of the triggering, by manipulation of the underlying asset, much harder. In the classical Parisian contract the ‘clock’ measuring the time outside the barrier is reset when the asset returns to within the barrier. In the Parasian contract the clock is not reset but continues ticking as long as the underlying is beyond the barrier.
An option strategy comprised of a combination of the purchase (sale) of a call option and the sale (purchase) of a put option of different amounts, but at the same strike price. This strategy is used for protection against unfavorable changes in foreign currency spot rates by locking in an exchange rate now while leaving a portion of the investment open to participation in favorable exchange rate movements.
A call option on the trading account of an individual trader, giving the holder the amount in his trading account at expiration if it is positive, or zero if it is negative. They are also called perfect trader options. The terms of the contract will specify what the underlying asset is that the trader is allowed to trade, his maximum long and short position, how frequently he can trade and for how long. To price these contracts requires knowledge of stochastic control theory. The governing partial differential equation is easily solved by finite differences.
Plain Vanilla Swap
The most common interest swap involving one party, the fixed rate payer, making fixed payments, and the other party, the floating rate payer making payments which depend on the level of future interest rates. Interest rate payments are made on a notional amount and there is no exchange of principal.
Portfolio compression is a risk reduction technique in which two or more counter- parties terminate some or all of their derivative contracts and replace them with another derivative whose market risk is the same as the combined notional value of all of the terminated derivatives. Under EMIR, firms must use a portfolio compression technique to reduce the number of transactions in a portfolio that need to be managed in the trade life cycle. This reduces the overall operational risk of the portfolios by reducing the gross nationals outstanding.
Positive Acknowledgment (ACK)
A measure of the degree of curvature between bond prices and bond yields when the bond?s price increases at least as much as the duration when interest rate drop and decreases less than duration when interest rates rise. Duration changes in the opposite direction of interest rates if the convexity is positive.
Potential Future Exposure (PFE)
Preceding (Business Day Convention)
Preferred Credit Default Swap (PCDS)
Credit derivatives whose payoffs are triggered by the usual CDS credit events (e.g., bankruptcy, restructuring, failure to pay) and the deferral of preferred stock dividends (or interest, in the case of hybrids). Payments of preferred dividends in stock rather than cash also triggers a credit event.The reference obligation is defined as an obligation of the reference entity itself or a related preferred issuer (e.g Trust Preferreds). A preferred security is any security that represents a class of equity ownership which upon liquidation ranks prior to the claims of common stock holders. Reference obligations can be senior preferred or subordinated preferred.
Present Value Cashflow
Previous good business day (Business Day Convention):
Price Alignment Interest (PAI)
Primary Economic Terms (PET)
Principal Place of Business
Prudential Regulation Authority (PRA)
Public Sector Exempt
Put Spread Vs. Call
A cap that provides insurance against the total interest cost over a period. The borrower pays a premium and in return receives a guaranteed maximum cash interest cost for the period. Over this period the loan remains floating. The borrower pays the interest charge up to the guarantee level. Payments above this are reimbursed by the option seller. Q caps are also known as quantity caps, cumulative caps and payment caps.
A floor that provides insurance against the total interest income over a period and is an ideal alternative for investors with floating rate assets. The investor pays a premium and in return receives a guaranteed maximum cash interest income for the period. Over this period the underlying asset remains floating. The investor is guaranteed to earn a minimum cash income from the asset and any shortfall is reimbursed by the option seller. Q floors are also known as quantity floors, cumulative floors and payment floors
An option on an underlying asset in one (foreign) currency, but which is settled in a second (domestic) currency. These options are used when an investor believes that the value of the foreign security will increase but the currency may not, so the investor buys an option in the foreign asset which is paid out in the domestic currency.
An interest rate swap where payments are based on the movement of two countries? interest rates. Though two different currencies are involved, payments are settled in the same currency. Quanto swaps may be broken down into two general sub-categories. One category called fixed for quanto swaps, involves swaps where one party pays a fixed rate while the other party pays the variable quanto rate. The other category called floating for quanto swaps, is one where one party pays a regular floating rate (e.g. LIBOR) while the other pays the variable quanto rate.
Rahmenvertrag fu_r Finanzterming escha_fte ?DERV?
A deposit or Note that accrues interest daily when the underlying reference point is within a predefined range and accrues zero when outside that range. In general, Range Floaters are principal guaranteed so the investor is assured of at least receiving the principal back. By their nature, Range Floaters are ideal where the market is expected to move sideways, i.e. stay range bound. Range Floaters can be designed with any underlying reference including interest rates and FX rates. Range Floaters are also known as Fairway Bonds or Fairway Floaters and Daily Range Accruals.
An FX collar using forward contracts that replicates the payoff profile of purchasing an in the money call and selling an in the money put. For example if the forward price for sterling is $1.50, a range forward can be produced by buying a forward contract to purchase sterling at $1.50, entering a forward contract where the buyer has the right to break the contract at a price of $1.43, and the seller of the forward contract has the right to break the contract at a price of $1.56.
Rating Sensitive Note
Ratio Put Spread
Real-Time Reporting (RT)
A modification of the standard credit default swap (CDS) used for recovery rate trading. If there is a credit event the Lock seller delivers a Deliverable Obligation to the Lock buyer. The Lock buyer pays the seller a fixed recovery amount specified in the contract, or the Reference Price. This different from the vanilla CDS contract, where par is paid for the bond. See also digital credit default swap.
Regulated Market (RM)
Regulatory Technical Standards (RTS)
Rental Caps and Floors
A rental cap or floor is similar to a normal interest rate cap or interest rate floor, but where the premium is paid over time in instalments. The buyer can terminate the option by ceasing to make further premium instalment payments. This allows the buyer to “change their mind” and not continue the option to maturity. The rental option is also known as an instalment option.
As a result of ongoing global regulatory reform, financial markets regulators increasingly require reporting of transaction data to increase market transparency and enable regulators to monitor systemic risk. In order to report data as required, counterparties have to obtain each other?s consent. Consent can be required from a counterparty which does not fall directly in scope for a certain regulation (i.e. a non-US person entity transacting with a US person entity).
Reporting Entity ID
In case the reporting counterparty has delegated the submission of the report to a third party or to the other counterparty, this entity has to be identified in this field by a unique code. Otherwise this field shall be left blank. In case of an individual, a client code shall be used as assigned by the legal entity used by the individual counterparty to execute the trade.
Reporting Time Stamp
Reset Rate Date
The point in time when the coupon rate for a variable rate or floating rate financial instrument is re-adjusted to reflect changes in a benchmark index. Usually, interest is paid at the end of a specific quarter based on the value of 3-month LIBOR two business days before the start of that quarter. The coupon rate is calculated as the reference rate (3-month LIBOR) plus a fixed spread. Reset dates are usually monthly, quarterly, semi-annual or annual.
Reset Rate Status
Reverse Floating Swap
An interest rate swap in which one side has an option to alter the payment basis (fixed/floating) after a certain period. This is usually achieved by the use of a swaption, allowing the purchaser the opportunity to enter a swap with payment on the opposite basis. The swaption would be for twice the principal amount, one half of which nullifies the original swap.
Rho of Holding Cost Rate
Rho of Rate
Rho of Recovery Rate
Risk Mitigation Techniques
Financial and non-financial counterparties entering into an over-the-counter derivative contract that is not cleared by a CCP must ensure that appropriate procedures and arrangements are in place to measure, monitor and mitigate operational risk and counterparty credit risk. EMIR prescribes a number of techniques: portfolio reconciliation, portfolio compression, dispute resolution, etc.
Risk Reversal (Cylinder)
Roller Coaster Swap
A modification of an interest rate cap. With a standard interest rate cap, the notional amount remains the same at each reset date. If any caplet should expire out-of-the-money, its value is lost forever and the buyer does not have the opportunity to utilise it at some point in the future. The rolling cap seeks to remedy this shortcoming by rolling any un-exercised caplet notional amount onto the next period. Where the cap remains un-utilised, the notional amount will continue to increase, providing increased protection to the buyer. A rolling cap where the buyer has the choice of what amount to roll forward is known as a super flexible cap.
A modification of an Interest rate floor. With a standard interest rate floor, the notional amount remains the same at each reset date. If any floorlet should expire out-of-the-money, its value is lost forever and the buyer does not have the opportunity to utilise it at some point in the future. The rolling floor seeks to remedy this shortcoming by rolling any un-exercised floorlet notional amount onto the next period. Where the floor remains un-utilised, the notional amount will continue to increase, providing increased protection to the buyer. A rolling floor where the buyer has the choice of what amount to roll forward is known as a super flexible floor.
Rolling Par Forward
A modification of the par forward. The standard par forward has a defined maturity. When entering into a rolling par forward, one party has the right to extend the maturity of the transaction. Any extension is transacted at the then market rate and so no optionality exists. At the time of extension, the contracted par forward rate is adjusted to reflect the extended maturity. A rolling par forward where the maturity automatically extends each period in perpetuity is known as a perpetual par forward.
A percentage usually applied (similar to a spread but multiplied) to a parameter such as volatility, forward rates etc. and is particularly useful when cash flow payments are based on a percentage of a parameter (such as Percentage of LIBOR swaptions where a scale factor is applied to the floating leg).
An interest rate swap in which the principal alternates between zero and some notional principal amount. The principal amount of the swap is designed to hedge the seasonal borrowing needs of a company. For example retail companies might use such swaps to fix rates on loans required only on a seasonal basis for building up inventory.
Secure File Transfer (STF)
Securities and Exchange Commission (SEC)
The US Securities and Exchange Commission (SEC) is an agency of the United States federal government, established in the years following the Great Depression of the 1929 to regulate the stock market by the Commission with the Security Act of the 1933 and the Security Exchange Act (1934). The main purpose of the SEC is to ‚Äúto protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.‚Äù
Short Rate Model
An option that allows the buyer to lock in the profit to date while retaining the right to benefit from any further upside. When the option buyer thinks the market has reached a high (call) or low (put), they “shout” and lock in that minimum level. If the market finishes higher (call) or lower (put) than the shout level, the holder benefits further. The option can be structured with any number of “shout” opportunities.
Single Barrier Option
Options that depend not only on the final asset value but also on whether a certain barrier level was touched at some time during the life of the option. There are four types of single barrier options (each may be either a call or a put and have either European or American exercise features): an up-and-in Barrier option, a down-and-in Barrier option, an up-and-out- Barrier option and a down-and-out Barrier option
Special Purpose Vehicle (SPV)
Spot Rate/ Spot Price
The price quoted for immediate settlement on a commodity, a security or a currency. It is based on the value of an asset at the moment of the quote. This value is in turn based on how much buyers are willing to pay and how much sellers are willing to accept, which depends on factors such as current market value and expected future market value. The spot rate is the rate used in the market in two days time. TOM rate is the rate used tomorrow.
An indicator that shows the difference between the bid and ask price of a security, currency or asset. The spread indicator is typically used in a chart to graphically rep resent the spread at a glance, and is a popular tool among forex traders. The indicator, displayed as a curve, shows the direction of the spread as it relates to the bid and ask price. Usually, highly liquid currency pairs have lower spreads.
Standard Rate Cap/Floor
A rate cap is an agreement between two parties providing the purchaser, who pays a premium, an interest rate ceiling or ‘cap’. This financial instrument is primarily used by borrowers of floating rate debt in situations where short term interest rates are expected to increase. Rate caps can be viewed as insurance, ensuring that the maximum borrowing rate never exceeds the specified cap level. An interest rate floor on the other hand, guarantees the purchaser, who pays a premium, a lower bound for the rate of interest received on an investment. This may be used in conjunction with a floating rate note (FRN) to ensure a minimum return on investment. Floors are used in times of decreasing short term interest rates by money managers trying to obtain higher cash returns on floating rate investments.
Straddle vs. Call
Straddle vs. Put
Straight Through Processing (STP)
Strike (exercise) Price
An interest rate swap in which the fixed rate is below the market rate. However, if rates rise above a certain trigger level, the fixed payer will pay floating rate set below the then prevailing rate. The result is a below market fixed Interest Rate Swap that reverts to a below market floating rate when a certain trigger rate is reached. The Subsidised Swap is created by combining a pay fixed Interest Rate Swap with a sold Interest Rate Cap. The cap premium is used to reduce the fixed rate paid under the swap.
Super Flexible Caps and Floors
A modification of the chooser flexible cap and interest rate cap. With a standard interest rate cap, the notional amount is the same at each reset date. The super flexible cap defines the total cap notional amount that may be exercised over the life of the cap, but the buyer has the right to choose what notional amount will be exercised if any, at each LIBOR reset date. Therefore, where the buyer chooses not to utilise the cap at a particular reset date even though LIBOR is above the strike, they have more notional amount available to utilise at a later date. At each reset date, the buyer can determine the size of the cap they wish to exercise as long as the cumulative amounts of the caps exercised to date do not exceed the notional amount. Of course, as time goes by, there is added pressure to use the cap otherwise it may expire with little or none of the notional amount utilised. A super flexible cap where the notional amount is automatically rolled forward when not utilised is known as a rolling cap.
Swap Data Repository (SDR)
Swap Dealer (SD)
Swap Difference Agreement (SDA)
An interest rate derivative contract moves with reference to the difference between the same point on two different yield curves. The SDA allows the investor to profit from the widening or narrowing between two yield curves. The SDA is customised with defined settlement dates, a defined value per basis point move, and one defined point on two yield curves. All payments are in one currency so there is no currency exposure.
Swap Execution Facility (SEF)
A trading system or platform that enables many participants to execute or trade swaps. A swap execution facility generates the Unique Trade Identifier (UTI) for both parties to a swap and reports the executed transaction to the regulated transaction repository. SEF is the US regulated abbreviation for electronic trading platform.
An option created by trading the underlying asset. For example, a synthetic (long) call option is created by buying a stock then buying a put option on it at the same time. This the same as buying a call option on the stock so it is ?synthetic” as the two instruments put together act as a different investment.
Term Structure Model
Third Country Entities (TCEs)
The difference between option value and intrinsic value (see Intrinsic Value), i.e.: Time Value = Option Value – (price of underlying – strike price of option), or: Time Value = Option Value – Intrinsic Value. The time value of an option is meant to describe the possibility that the option will increase in value relatively to the volatility of the underlying asset. Time value is always positive and declines exponentially over time until the expiration date when time value reaches zero.
Total Return Equity Swap
Similar to a total return swap on a bond, it is a 2-sided financial contract in that one counterparty pays out the total return of the equity, including its dividends and capital appreciation or depreciation, and in return, receives a regular fixed or floating cash flow. For convenience the asset’s total return is called a TR-leg and the fixed or floating cash flow a non-TR leg. A total return swap can be settled at the terminating date only or periodically, e.g., quarterly. The equity used in a total return swap contract can be a single publicly traded stock or a private stock, a portfolio of stocks, a stock index, or even any market index. The buyer of a total return equity swap can gain the economic exposure to certain equity or index market without physically owning such assets while the seller of a total return equity swap can reduce or eliminate the market risk of his/her stock portfolio without selling the assets and gain stable returns.
Total return swap (TROS)
A credit derivative that transfers the returns and risks on an underlying reference asset from one party to another. The ?total return buyer? pays a periodic fee to a ?total return seller? and receives the total economic performance of the underlying reference asset in return. Total return includes all interest payments on the reference asset plus an amount based on the change in the asset?s market value.
Trade Affirmation Platform
Trade Date (T)
Trade Life-Cycle Events
The risk range of two adjacent risk levels or classes in a Collateralized Debt Obligation (CDO). The lower bound of the risk level of a tranche is often referred to as an attachment point and the upper bound a detachment point. Tranche is derived from the French word for “slice”. Each tranche is a separate security with its own interest rate, maturity date and cash flows.
Transaction Monitoring Unit (TMU)
Transaction Reference Identifier
Transaction Reporting User Pack (TRUP)
Undertakings for Collective Investments in Transferable Securities (UCITS)
Unique Counterparty Identifier (UCI)
Unique Product Identifier (UPI)
Unique Swap Identifier (USI)
Unique Trade Identifier (UTI)
Up-and-in Barrier Option
A type of single barrier option that when the option is set, the underlying asset is below the barrier level. If the barrier is touched, the holder now owns a standard option. If over the life of the option the barrier is never touched, the option dies worthless though the holder may be entitled to a rebate.
Up-and-out- Barrier Option
The CFTC defines a person to be a US person under the Dodd Frank regulation if: 1) they are a natural, legal resident of the United States of America; 2) they are an enterprise which is either incorporated or has its place of business in the US (with the exception of funds, and collective investment vehicles) as of 1 April 2013; 3) pension funds for US employees of the above entities; 4) they are a collective investment vehicles ? including hedge funds? that are majority-owned by US persons, or a trust of a US citizen or administered under US jurisdiction; 5) there exists an account in which the beneficiary is any of the above entities.
Value at Risk (VaR)
The Value at Risk (VaR) is a risk measure to compute the maximum amount of losses that can be expected with certain confidence level p over a certain horizon (K trading days). This means that we are (1- p)*100% confident that losses will not exceed the VaR, over K days horizon. In statistical terms, that is: Probability (Loss > VaR) = p.
Vanilla (or Plain Vanilla) Derivative
Variation Margin (VM)
Vega of Swaptions
Vega Surface Interpolation
A report that proposes fundamental change in how UK banks are organised. The main proposal is that UK banks should separate retail banking ???utility?€ù from investment banking and corporate finance. It also propose that banks retain higher capital/ loss absorbing reserves than under the Basel Rules. Many of the recommendations of Vickers were given effect by provisions in the Financial Services (Banking Reform) Act 2013.
A measurement of how much the price of a stock various over time or is expected to move in the near future and to what degree are these variances; however, the measurement does not take into account price direction only the quantity of the change. This number is important for analyzing many different types of instruments to determine the probability of a pre-determined price being reached on a certain date in the future.
Volatility Term Structure
The US equivalent of the Vickers Report. The Volcker Rule separates investment banking, private equity and proprietary trading (hedge fund) sections of financial institutions from their consumer lending arms. Banks are not allowed to simultaneously enter into an advisory and creditor role with clients, such as with private equity firms. The Volcker Rule aims to minimise conflicts of interest between banks and their clients through separating the various types of business practices financial institutions engage in.
Warning Acknowledgement (WACK)
Options issued by a company on its own stock. The fundamental difference between a standard option and a warrant is what happens at exercise. In the case of a standard call option, upon exercise, existing stock is delivered to the option holder. In the case of a warrant, upon exercise, the company issues new stock that is then delivered to the warrant holder. This new stock issue leads to a dilution of the existing equity and lowers the value of each individual stock.
Wrong way risk
Yield Curve Swap
An interest rate swap in which the two interest streams reflect different points on the yield curve. For example, one side could pay the five year constant maturity treasury rate versus the two year constant maturity rate. The swap can be on either a fixed or a floating basis. This has been used by many investors who have a point of view on the shape of the yield curve or debt managers that want to hedge a structured note issue.
Yield to Maturity
Zero Cost Option
Zero Coupon Swap
Zero Exercise Price Option
A European call option with a strike price of zero or close to zero, usually traded in countries where there may be obstacles pertaining to the transfer of securities especially stock. The purchaser of the option will definitely exercise it, so it is the same as owning the underlying asset and the seller has full offsetting participation in the stock price.
Zero Premium Cap
History of Central Counterparty Failures and Near-Failures, Derivative Primer 7
The French Caisse de Liquidation clearing house was closed down in 1974 as a result of unmet margin calls by one large trading firm after a sharp drop in sugar prices on the futures exchange. One of the primary causes of the failure was that the clearing house did not increase margin requirements in response to greater market volatility. Also, although it lacked the authority to order exposure reductions, the clearing house should have informed the exchange (which had the authority) of the large size of the exposure of Nataf Trading House. The problem was further aggravated when the clearing used questionable prices and nontransparent methods to allocated losses among clearing members.
Over-the-Counter (OTC) Derivative Primer 1: The Instruments
Financial derivatives are financial instruments that are linked to specific financial instruments, indices, indicators or commodities, and through which specific financial risks can be traded in financial markets in their own right. Financial derivatives contracts are usually settled by net payments of cash, that often occurs before maturity.
Over-the-Counter (OTC) Derivative Primer 5: Trade Reporting
Trade reporting has been one of the success stories of the FSB OTC derivative regulatory reform agenda, with all jurisdictions expected to have adopted reporting requirements or at least related requirements by end-2014. In the United States, reporting requirements under Commodity Futures Trading Commission (CFTC) rules were phased in during 2013, and European Union (EU) trade reporting requirements came into force in February 2014. The majority of FSB member jurisdictions have at least one TR available to receive transactions.