The principal amount of a security generally repaid ("redeemed") at maturity, but sometimes repaid in stages, on which the coupon amounts are calculated. Also known as nominal amount.
See Libor fixing.
An interest rate set with reference to an external index. Also an instrument paying a floating rate is one where the rate of interest is refixed in line with market conditions at regular intervals such as every three or six months. In the current market, an exchange rate determined by market forces with no government intervention.
Floating rate CD:
CD on which the rate of interest payable is refixed in line with market conditions at regular intervals (usually six months).
Floating rate gilt:
Gilt issued with an interest rate adjusted periodically in line with market interbank rates.
Floating rate note:
Capital market instrument on which the rate of interest payable is refixed in line with market conditions at regular intervals (usually six months).
A series of lender's IRGs, designed to protect an investor against falling interest rates on each of a series of dates.
Option on a floor.
In general, a deal for value later that the normal value date for that particular commodity or instrument. In the foreign exchange market, a forward price is the price quoted for the purchase or sale of one currency against another where the value date is at least one month after the spot date. See short date.
Zero-cost collar, that is one in which the premium payable as a result of buying the cap is offset exactly by that obtained from selling the floor.
See break forward.
Forward exchange agreement:
A contract for differences designed to create exactly the same economic result as a foreign exchange cash forward-forward deal. See ERA, SAFE.
The price agreed today for an asset that will be delivered to the buyer at a date in the future.
Forward rate agreement:
Short-term interest rate hedge. Specifically, a contract between buyer and seller for an agreed interest rate on a notional deposit of a specified maturity on a predetermined future date. No principal is exchanged. At maturity the seller pays the buyer the difference if rates have risen above the agreed level, and vice versa.
Swap arranged at the current rate but entered into at some time in the future.
Another term for an interest rate effective from a forward short date. Also a short-term exchange of currency deposits.
See forward rate agreement.
Option on a forward rate agreement. Also known as an interest rate guarantee.
See floating rate CD.
The Financial Services Authority, the body responsible for the regulation of investment business, and the supervision of banks and money market institutions in the UK. The FSA took over these duties from nine "self-regulatory organisations" that had previously carried out this function, including the Securities and Futures Authority (SFA), which had been responsible for regulation of professional investment business in the City of London. The FSA commenced its duties in 1998.
Index comprising 100 major UK shares listed on The International Stock Exchange in London. Futures and options on the index are traded at the London International Financial Futures and Options Exchange (LIFFE).
The USD/CAD exchange rate for value on the next business day (standard practice for USD/CAD in preference to spot).
A financial instrument that is equivalent in value to another, and easily exchanged or substituted. The best example is cash money, as a £10 note has the same value and is directly exchangeable with another £10 note. A bearer bond also has this quality.
A futures contract is a contract to buy or sell securities or other goods at a future date at a pre-determined price. Futures contracts are standardised and traded on an exchange.
See potential exposure.
The amount of money achieved in the future, including interest, by investing a given amount of money now. See time value of money, present value.
A deal to buy or sell some financial instrument or commodity for value on a future date. Unlike a forward deal, futures contracts are traded only on an exchange (rather than OTC), have standardised contract sizes and value dates, and are often only contract for differences rather than deliverable.
The "Group of Seven" countries, the USA, Canada, UK, Germany, France, Italy and Japan.
The change in an option's delta relative to a change in the underlying's value.
Ratio of interest-rate sensitive assets to interest-rate sensitive liabilities; used to determine changes in the risk profile of an institution with changes in interest rate levels.
Gross domestic product, the value of total output produced within a country's borders.
A gilt-edged market maker, a bank or securities house registered with the Bank of England as a market maker in gilts. A GEMM is required to meet certain obligations as part of its function as a registered market maker, including making two-way price quotes at all times in all gilts and taking part in gilt auctions. The Debt Management Office now make a distinction between conventional gilt GEMMs and index-linked GEMMs, known as IG GEMMs.
General collateral (GC):
Securities, which are not "special", used as collateral against cash borrowing. A repo buyer will accept GC at any time that a specific stock is not quoted as required in the transaction. In the gilts market GC includes DBVs.
Guaranteed investment contract.
A UK Government sterling denominated, listed security issued by HM Treasury with initial maturity of over 365 days when issued. The term "gilt" (or gilt-edged) is a reference to the primary characteristic of gilts as an investment: their security and risk-free status.
Gilt-edged market maker:
Gross national product, the total monetary value of a country's output, as produced by citizens of that country.
Gross redemption yield:
The same as yield to maturity; "gross" because it does not take tax effects into account.
See gross redemption yield.
The ratio of the size of the position it is necessary to take in a particular instrument as a hedge against another, to the size of the position being hedged.
Protecting against the risks arising from potential market movements in exchange rates, interest rates or other variables. See arbitrage, cover, speculation.
See settlement risk.
High coupon swap:
Off-market coupon swap where the coupon is higher than the market rate. The floating-rate payer pays a front-end fee as compensation. Opposite of low coupon swap.
Historic rate rollover:
A forward rate swap in FX where the settlement exchange rate for the near date is based on a historic off-market rate rather than the current market rate. This is prohibited by many central banks.
The actual volatility recorded in market prices over a particular period.
Historical simulation methodology:
Method of calculating value-at-risk (VAR) using historical data to assess the likely effect of market moves on a portfolio.
The holder of an option is the party that has purchased it.
Inter-Dealer Broker, in this context a broker that provides facilities for dealing in bonds between market makers.
Index-linked gilt whose coupons and final redemption payment are related to the movements in the Retail Price Index (RPI).
This is the process by which a bond portfolio is created that has an assured return for a specific time horizon irrespective of changes in interest rates. The mechanism underlying immunisation is a portfolio structure that balances the change in the value of a portfolio at the end of the investment horizon (time period) with the return gained from the reinvestment of cash flows from the portfolio. As such, immunisation requires the portfolio manager to offset interest-rate risk and reinvestment risk.
Implied repo rate:
The break-even interest rate at which it is possible to sell a bond futures contract, buy a deliverable bond, and repo the bond out. See cash and carry.
The volatility used by a dealer to calculate an option price; conversely, the volatility implied by the price actually quoted.
An option whose underlying security is an index. Index options enable a trader to bet on the direction of the index.
Sometimes the same as a basis swap. Otherwise a swap like an interest rate swap where payments on one or both of the legs are based on the value of an index - such as an equity index, for example.
Contract whereby the issuer usually assumes the risk of unfavourable price movements in the instrument, commodity or index to which the contract is linked, in exchange for which the issuer can reduce the cost of borrowing (compared with traditional instruments without the risk exposure).
An exchange rate quotation against the US dollar in which the dollar is the base currency and the other currency is the variable currency.
The excess either of cash over the value of securities, or of the value of securities over cash in a repo transaction at the time it is executed and subsequently, after margin calls.
The market in unsecured lending and trading between banks of roughly similar credit quality.
Interest rate cap:
Interest rate floor:
Interest rate guarantee:
An option on a specified interest rate, usually referenced to Libor.
Interest rate option:
Option to pay or receive a specified rate of interest on or from a predetermined future date.
Interest rate swap:
An agreement to exchange a series of cash flows determined in one currency, based on fixed or floating interest payments on an agreed notional principal, for a series of cash flows based in the same currency but on a different interest rate. May be combined with a currency swap.
A spread involving futures contracts in one market spread against futures contracts in another market.
Internal rate of return:
The yield necessary to discount a series of cash flows to an NPV of zero.
The process of estimating a price or rate for value on a particular date by comparing the prices actually quoted for value dates either side. See extrapolation.
Purchases or sales of currencies in the market by central banks in an attempt to reduce exchange rate fluctuations or to maintain the value of a currency within a particular band, or at a particular level. Similarly, central bank operations in the money markets to maintain interest rates at a certain level.
A call (put) option is in-the-money if the underlying is currently more (less) valuable than the strike price. See at-the-money, out-of-the-money.
The amount by which an option is in-the-money.
A floating-rate note structured so that it's coupon falls as interest rates rise, and vice-versa.
For exchange-traded bond futures contracts, the price received by the short future; calculated as (conversion factor * futures price) + accrued interest.
See interest rate guarantee.
See internal rate of return.
The International Securities Market Association. This association compiled with the PSA (now renamed the Bond Market Association) the PSA/ISMA Global Master repurchase Agreement.
Risk to an institution when it holds debt securities issued by another institution. (See also credit risk).
The repetitive mathematical process of estimating the answer to a problem, by trying how well this estimate fits the data, adjusting the estimate appropriately and trying against it, until the fit is acceptably close. Used, for example, in calculating a bond's yield from its price.