Glossary – Investment Terms
Total amount of exposure a bank has with a customer for both spot and forward contracts.
American Style Option
The holder of an American style option has the right to exercise the option any time until the expiry of the option. The writer of an American option has to be ready to meet the obligation any time until the expiry of the option.
A risk-free type of trading where the same instrument is bought and sold simultaneously in two different markets in order to cash in on the difference in these markets.
The price at which the instrument is offered. It is also called the sell price.
Net sales divided by total assets. This is a measure of how well assets are being used to produce revenue, also called total asset turnover.
The asset/equity ratio, also called the Equity Multiplier, shows the relationship of the total assets of the firm to the portion owned by shareholders, also known as owner’s equity. The asset/equity ratio indicates a company’s leverage, which is the amount of debt used to finance the firm.
At The Market
Orders which are intended to be executed immediately at the best obtainable price.
At The Money
An option is at-the-money if the strike price of the option equals the market price of the underlying security.
Te difference between the spot price and the future price.
A market characterized by falling prices.
A measure of an investment’s volatility (risk), relative to an appropriate asset class. An investment with a beta above 1 implies that investment is more volatile than the overall market and vice-versa.
An offer to buy a specific quantity of an instrument that is subject to immediate acceptance. It is also called the buy price.
The difference between the buy (bid) and sell (offer) price of a currency or financial instrument.
Bonds are debt securities that pay a fixed rate of interest (coupon) and mature at a fixed time in the future.
Book Value is the net value of an organization. It is the value at which an asset is carried on a balance sheet.
An individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor.
A market characterized by rising prices.
Describes a market in which prices have a tendency to rise easily with a considerable show of strength.
Buy And Hold
An investor who employs a buy-and-hold strategy actively buys stocks and holds them for a long period of time, regardless of fluctuations in the market.
Buying futures to hedge against the sale of a cash commodity. An investor might use a buying hedge if he/she expects to buy a certain amount of the commodity in the future, but is worried about price fluctuations. He/she will buy a futures contract in order to be able to buy the commodity at a fixed price later. It is also called a long hedge.
Rate at which a bank is prepared to buy foreign exchange. Also known as the Bid Rate.
A Buy-sell agreement is an agreement between two parties in which the two agree to exchange goods or services. The agreement is often recorded to use as proof in case of any legal disputes. It is a record of the terms of a trade.
(1) An option that gives the holder the right to buy the underlying instrument at a specified price during a fixed period.
(2) A period of trading.
(3) The right of a bond issuer to pre-pay debt and demand the surrender of its instruments.
The cost to store and insure a physical instrument.
A graph of the price movements of a given security over a given time period, sometimes along with volume data.
A member of the clearing corporation.
A period of time at the end of the trading session when all orders are filled within the closing range.
A transaction which leaves the trade with a zero net commitment to the market with respect to a particular instrument.
Closing buy transaction
Means a buy transaction which will have the effect of partly or fully offsetting a short position.
A range of closely related prices in which transactions take place at the closing of the market; buying and selling orders at the closing might have been filled at any point within such a range.
Closing sell transaction
Means a sell transaction which will have the effect of partly or fully offsetting a long position.
Common stocks are the typical investment asset in any company Securities that represent an ownership interest in a corporation.
A person on whose instructions and on whose account the Trading Member enters into contract for the purchase or sale of any security or does any act in relation thereto.
(1) A binding agreement between two or more parties for performing, or refraining from performing, some specified act(s) in exchange for lawful consideration.
(2) In futures markets, a standardized traded instrument that specifies the quantity and quality of a commodity (or financial asset) for delivery (or cash settlement) at a specified future date.
The month in which a contract is required to be finally settled.
A convertible bond, or convertible debenture, is a type of bond that can be converted into shares of stock in the issuing company, usually at some pre-announced ratio during a particular period.
Convertible Preferred Stock
Preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, usually anytime after a predetermined date.
Country risk relates to the likelihood that changes in the business environment will occur that reduce the profitability of doing business in a country. They are the financial risks of a transaction which relate to the political, economic, or social instability of the country, and is over and above the credit risk of the borrower.
The periodic interest payment made to a bondholder during the life of the bond.
The interest rate stated on a bond, note or other fixed income security, expressed as a percentage of the principal (face value), also called coupon yield.
To buy futures contracts in order to offset previous selling.
The exchange rate between two currencies, e.g., Yen /Euro.
A form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.
The current ratio is a financial ratio that measures whether or not a firm has enough resources (liquidity) to pay its debts over the next 12 months. It compares a firm’s current assets to its current liabilities.
An order that expires on the close of trading if not filled during that day.
Buying and selling financial instruments on the basis of small short-term price movements.
An individual or a firm acting as a principal, rather than as an agent, in the purchase and/or sale of securities. Dealers trade on their own account and risk.
The settlement of a futures contract by receipt or tender of a financial instrument or currency.
The date of maturity of the contract, when the exchange of the financial asset is made.
A notice of a clearing member’s intentions to deliver a stated quantity of an instrument in settlement of a futures contract.
A term to describe counterpart risk when counterparty is not able to complete his side of the deal.
The rate of change of a financial derivative’s price with respect to changes in the price of the underlying asset.
A collective term for securities whose prices are based on the prices of another (underlying) investment. The main derivatives are Futures, Options, Swaps, and Warrants.
(1) Forward rate is lower than spot rate.
(2) An option that is trading for less than its intrinsic value.
An account in which the customer authorizes another person to make full trading decisions.
Diversification involves making investments in a wide variety of different assets in an effort to minimize risk. Because some investments rise in value while others decline, diversification can help to lower the overall level of risk for a given portfolio.
Dividends represent a distribution of corporate earnings to company shareholders and usually take place in one of two forms — cash or stock.
European Style Option
The buyer of these options can exercise his options only on the expiry day.
Returns in excess of those required by some asset pricing model, or the risk-free return.
Exchange Rate Risk
Also called currency risk, is the potential loss that could be incurred from a movement in exchange rates.
Firms pay dividends to those who are shareholders on a certain date. The next day is called the ex dividend date. If an investor does not own the stock before the ex-dividend date, he or she will be ineligible for the dividend payout. Further, for all pending transactions that have not been completed by the ex-dividend date, the exchanges automatically reduce the price of the stock by the amount of the dividend. This is done because a dividend payout automatically reduces the value of the company (it comes from the company’s cash reserves), and the investor would have to absorb that reduction in value (because neither the buyer nor the seller are eligible for the dividend).
Exercise Price (Strike Price)
The price at which an option may be exercised.
Expected Rate Of Return
Expected rate of return is the return that you expect to earn on an investment.
The last day upon which an option can be exercised or the future can be traded by buying or selling the underlying security.
The condition of being subjected to a source of risk.
First Notice Day (FND)
The first day on which notice of intentions to deliver actual commodities against futures contracts can be made.
A member who executes orders for the accounts of other members on the trading floor.
An exchange member who fills orders for his own account by being personally on the floor. Normally called a “local.”
A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today’s pre-agreed price.
Forward Spread(Forward Points or Forward Pips)
Forward price used to adjust a spot price to calculate a forward price. It is based on the current spot exchange rate, interest rate differential and the number of days to delivery.
A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts and can not be customized.
The price Gap between consecutive trading ranges (i.e. the low of the current range is higher than the high of the previous range) Gap could also be interest rate gaps, maturity gaps etc.
A process where full payment of each transaction is made rather than clearing a group of transactions as currently occurs in the FX market. A method designed to eliminate capital risk.
A strategy used to offset market risk, whereby one position protects another. Transactions undertaken to reduce the volatility in portfolio value. This is accomplished by taking the opposite side of ones’ portfolio exposure similar to insurance. The instruments used are varied and include forwards, futures, options, and combinations of all of them.
The bid and offer rates at which international banks place deposits with each other.
Interest Rate Options
An agreement permitting a party to obtain a particular interest rate, issued both OTC and by exchanges.
Interest Rate Swaps
An agreement to swap interest rate exposures from floating to fixed or vice versa. There is no swap of the principal. It is the interest cash flows be they payments or receipts that are exchanged.
A spread between commodities that are traded on more than one market. For example, a typical intermarket spread might be made between Chicago wheat and Kansas City wheat.
A call option is in-the-money if the price of the underlying instrument is higher than the exercise/strike price. A put option is in-the-money if the price of the underlying instrument is below the exercise/strike price.
Limit set by bank management on the size of each dealer’s intra day position.
Open positions run by a dealer within the day. Usually squared by the close.
Last Trading Day (Ltd)
The final day in which trading may occur for a particular delivery month. After the last trading day, any remaining commitment must be settled for delivery.
Last Traded Price
The most recently traded price of a financial instrument
A portfolio that includes risky assets purchased with borrowed funds.
(1) The maximum price fluctuation permitted by an exchange from the previous session’s settlement price for a given contract. (2) The amount that one bank is prepared to trade with another. (3) The amount that a dealer is permitted to trade in a given currency.
An order in which the trader sets a limit to the price, as contrasted with a market order on which no limit is set.
When residents of a country are prohibited from buying other currencies even though non-residents may be completely free to buy or sell the national currency.
The closing out of a previous position by taking an opposite position in the same contract.
Liquidity refers to how quickly and cheaply an asset can be converted into cash.
A position established by owning the actual instrument or by purchasing futures.
The minimum margin which an investor must keep on deposit in a margin account at all times in respect of each open contract.
Make a Market
A dealer is said to make a market when he or she quotes bid and offer prices at which he or she stands ready to buy and sell.
When the monetary authorities intervene regularly in the market to stabilize the rates or to aim the exchange rate in a required direction.
A good faith deposit a speculator gives to his broker prior to initiating his first trade. It’s the amount a futures market participant must deposit into his margin account at the time he places an order to buy or sell a futures contract.
A demand by a broker for additional to raise the deposit on a futures contract above the minimum acceptable level.
Market If Touched (MIT)
An order that may be executed only if the market reaches a specified point. (NOTE: Not all exchanges accept MIT orders.)
A market maker is a person or a firm authorized to create and maintain a market in an instrument.
(1) An order to buy or sell a financial instrument immediately at the best possible price.
(2) An order that is to be filled as soon as possible at the best possible price
Market risk is the risk that the value of an investment will decrease due to changes in market conditions. They are risk which is common to an entire class of assets or liabilities. The value of investments may decline over a given time period simply because of economic changes or other events that impact large portions of the market. It is also called systematic risk.
The process of ensuring that purchases and sales in each currency and deposits given and taken in each currency are in balance, by amount and maturity.
(1) The last trading day of a futures contract.
(2) Date on which a bond matures, at which time the face value will be returned to the purchaser. Sometimes the maturity date is not one specified date but a range of dates during which the bond may be repaid.
(1) A mismatch between the interest rate maturities of a banks assets and liabilities.
(2) Forward purchases differ in the value date from the forward sales in a given currency.
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures or even in assets like real estate, gold and other securities.
A process which enables institutions to settle only the net positions with one another at the end of the day, in a single transaction, not trade by trade.
The price at which a seller is willing to sell. The best offer is the lowest such price available.
Temporary situation where offers exceed bid.
The closing-out or liquidation of a futures position.
Open interest is the total number of outstanding contracts that are held by market participants at the end of the day.
Any position (long or short) that is subject to market fluctuations and has not been closed out by a corresponding opposite transaction.
Range of closely related prices at which transactions take place at the opening of the market; buying and selling orders at the opening might be filled at any point within such a range.
The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action.
A contract conferring the right but not the obligation to buy (call) or to sell (put) a specified amount of an instrument at a specified price within a predetermined time period.
All options of the same type – calls or puts -listed on the same underlying instrument.
A trading member who is the buyer of the Options Contracts.
All options of the same class having the same exercise/strike price and expiration date.
A trading member who is the seller of the Options Contracts.
A put option is out-of-the-money if the exercise/strike price is below the price of the underlying instrument. A call option is out-of-the money if the exercise/strike price is higher than the price of the underlying instrument.
The obligation which has neither been closed nor been settled
(1) The nominal value of a security or instrument.
(2) The official value of a currency.
Permitted Derivatives Contract
A derivative contract which is permitted to be traded on the Futures and options segment of the exchange.
The area on an exchange floor where trading of financial instruments takes place.
The maximum position, either net long or net short, in one future or in all futures of one currency or instrument combined which may be held or controlled by one person.
A type of stock that pays a fixed dividend regardless of corporate earnings, and which has priority over common stock in the payment of dividends.
(1) The amount by which a forward rate exceeds a spot rate.
(2) The amount by which the market price of a bond exceeds its par value.
(3) In options, it is the price a put or call buyer must pay to a put or call seller to buy the option contract.
(4) The margin paid above the normal price level.
The maximum price advance or decline from the previous day’s settlement price permitted for an instrument in one trading session by the rules of the exchange.
The rate from which lending rates by banks are calculated.
The unwinding of a position to realize profits.
Purchasing Power Parity
Model of exchange rate determination stating that the price of a good in one country should equal the price of the same good in another country, exchanged at the current rate. Also known as the law of one price.
Put Call Parity
The equilibrium relationship between premiums of call and put options of the same strike and expiry.
A put option confers the right but not the obligation to sell currencies, instruments or futures at the option exercise price within a predetermined time period.
(1) A limit on imports or exports.
(2) A country’s subscription to the IMF.
An indicative price. The price quoted for information purposes but not to deal.
Quick advance in prices following a decline.
The difference between the highest and lowest prices recorded during a given trading session, week, month, or year.
The price of one currency in terms of another.
Agreements by a borrower where they sell securities with a commitment to repurchase them at the same rate with a specified interest rate.
Process of changing a call option into a put option.
The degree of uncertainty associated with an investment. The main elements that contribute to the riskiness of an investment are volatility, liquidity and leverage. All things being equal, a high degree of volatility and leverage makes an investment more risky. An illiquid market, where buyers are not always matched by sellers, also increases risk; and many investors can be left holding an asset that is falling in price.
The money that a person allocates to investing in high-risk instruments.
Risk Disclosure Document
Refers to the document to be issued to all potential investors at the time of registration for disclosure of the risks inherent to derivatives.
The identification and acceptance or offsetting of the risks threatening the profitability or existence of an organization such as foreign exchange, market, sovereign, country, transfer, delivery, credit, and counterparty risk.
An asset or liability, which is exposed to fluctuations in value through changes in exchange rates or interest rates.
Additional sum payable or return to compensate a party for adopting a particular risk.
The relationship between the risk and return on an investment. Usually, the more risk you are prepared to take, the higher the return you can expect. Depositing your money in a bank is safe; therefore, a low return is regarded as sufficient. Investing in stock market exposes you to more risk (from capital losses) and so investors will expect a higher return.
Running A Position
Keeping open positions in the hope of a speculative gain.
Same Day Transaction
A transaction that matures on the day the transaction takes place.
A strategy of buying at the bid and selling at the offer as soon as possible.
Also known as the option writer.
The sale of a futures or options contract to protect against the possibility of a decline in the price of securities or commodities that will be sold in the future.
Rate at which a bank is willing to sell foreign currency.
The date by which an executed order must be settled by the transference of instruments or currencies and funds between buyer and seller.
The price at which the clearing house clears all transactions at the close of the day.
Risk associated with the non settlement of the transaction by the counter party. Risk that relates to making a fix payment to a counter party before the counter payment is received. This risk arises from the possibility that your counter party will never pay you.
The selling of a financial instrument that the seller does not own. Short sellers assume that they will be able to buy the instrument at a lower amount than the price at which they short sold. Selling short is the opposite of going long. That is, short sellers make money if the instrument goes down in price.
More potential sellers than buyers, which creates an environment where rapid price falls are likely.
Buying or selling in hopes of making a profit.
One who engages in speculation by buying or selling in hopes of making a profit.
(1) The most common foreign exchange transaction.
(2) Spot or spot date refers to the spot transaction value date that requires settlement within two business days, subject to value date calculation.
Spot Delivery Month
The nearest delivery month among all those traded at any point in time. The actual contract month represented by the spot delivery month is constantly changing throughout the calendar year as each contract month reaches its last trading day.
The contract month closest to delivery or settlement.
The purchase of one futures contract and sale of another, in the expectation that the price relationships between the two will change so that a subsequent offsetting sale and purchase will yield a net profit.
Purchase and sales are in balance and thus the dealer has no open position.
An order placed with a broker to buy/ sell an instrument when it reaches a certain price. It is designed to limit an investor’s loss on a security position.
Also called exercise price. The price at which an options holder can buy or sell the underlying instrument.
Any barrier to a price decline.
The simultaneous purchase and sale of the same amount of a given currency for two different dates, against the sale and purchase of another. A swap can be a swap against a forward. In essence, swapping is somewhat similar to borrowing one currency and lending another for the same period. However, any rate of return or cost of funds is expressed in the price differential between the two sides of the transaction.
The risk inherent to the entire market or entire market segment. Interest rates, recession and wars all represent sources of systematic risk because they affect the entire market and cannot be avoided through diversification.
A market in which trading volume is low and in which consequently bid and ask quotes are wide and the liquidity of the instrument traded is low.
Tick size refers to a minimum change in price up or down. It’s the smallest increment of price movement possible in trading.
A ticker symbols is a sort of identification tag for a stock. It’s a system of letters used to uniquely identify a stock or mutual fund.
Smallest transaction size acceptable.
Transferable options with the right to buy and sell a standardized amount of a currency at a fixed price within a specified period.
The period during which the derivatives contract will be available for trading.
A member of the Derivative Exchange.
The amount that futures prices can fluctuate during one trading session—essentially, the price “distance” between limit up and limit down.
The date on which a trade occurs.
The risk faced by companies involved in international trade that currency exchange rates will change after the companies have already entered into financial obligations. Such exposure to fluctuating exchange rates can lead to major losses for firms.
In an option contract, the security or the commodity that is delivered when the contract is exercised. In securities, the common stock that is the basis of the company’s other types of securities, such as stock options or preferred stock.
The risk of price change due to unique circumstances of a specific security, as opposed to the overall market. This risk can be virtually eliminated from a portfolio through diversification. For example, news that is specific to a small number of stocks, such as a sudden strike by the employees of a company you have shares in is considered to be an unsystematic risk.
The number of shares or contracts traded in a security or market during a specified period.
Yield To Maturity (YTM)
A rate of return measuring the total performance of a bond (coupon payments as well as capital gain or loss) from the time of purchase until maturity.
A debt security that doesn’t pay interest (coupon) but is traded at a deep discount; thus, rendering profit at maturity when the bond is redeemed for its full face value.