The common term for high-yield bonds; higher risk, low rated debt.
An alternative term to refer to volatility; see vega.
A knock out (in) option ceases to exist (starts to exist) if the underlying reaches a certain trigger level. See barrier option.
The same as vega.
Floor on a single-period forward rate agreement.
The non-normal distribution of asset-price returns. Refers to a probability distribution that has a fatter tail and a sharper hump than the normal distribution.
Level payment swap:
Evens out those fixed-rate payments that would otherwise vary, for example, because of the amortisation of the principal.
The ability to control large amounts of an underlying variable for a small initial investment.
Probable future sacrifice of economic benefit due to present obligations to transfer assets or provide services to other entities as a result of past events or transactions. Generally classed as either current or long-term.
An interest rate swap or currency swap used in conjunction with an underlying liability such as a borrowing. See asset swap.
The London Interbank Bid Rate, the rate at which banks will pay for funds in the interbank market.
The London Interbank Offered Rate, the lending rate for all major currencies up to one-year set at 11am each day by the British Bankers Association.
The Libor rate "fixed" by the British Bankers Association (BBA) at 11am each day, for maturities up to one year.
The London International Financial Futures and Options Exchange, the largest futures exchange in Europe.
The arithmetic average of Libor and Libid rates.
Futures prices are generally not allowed to change by more than a specified total amount in a specified time, in order to control risk in very volatile conditions. The maximum movements permitted are referred to as limit up and limit down.
Any transaction that closes out or offsets a futures or options position.
A word describing the ease with which one can undertake transactions in a particular market or instrument. A market where there are always ready buyers and sellers willing to transact at competitive prices is regarded as liquid. In banking, the term is also used to describe the requirement that a portion of a bank's assets be held in short-term risk-free instruments, such as government bonds, T-Bills and high quality Certificates of Deposit. This is the responsibility of the liquidity desk, part of Treasury.
Description of derivative exposure which is used to compare the credit risk of derivatives with that of traditional bonds or bank loans.
A variable's probability distribution is lognormal if the logarithm of the variable has a normal distribution.
The assumption that the natural logarithm of today's interest rate, for example, minus the natural logarithm of yesterday's rate is normally distributed.
A long position is a surplus of purchases over sales of a given currency or asset, or a situation which naturally gives rise to an organisation benefiting from a strengthening of that currency or asset. To a money market dealer, however, a long position is a surplus of borrowings taken in over money lent out (which gives rise to a benefit if that currency weakens rather than strengthens). See short.
Forward foreign exchange contract with a maturity of greater than one year. Some long-dated forwards have maturities as great as 10 years.
Assets which are expected to provide benefits and services over a period longer than one year.
Obligations to be repaid by the firm more than one year later.
Option that allows the purchaser, at the end of a given period of time, to choose as the rate for exercise any rate that has existed during the option's life.
Low coupon swap:
Tax-driven swap in which the fixed-rate payments are significantly lower than current market interest rates. The floating-rate payer is compensated by a front-end fee.
London Stock Exchange.
The process whereby a bank's trading positions are related to a set of risk "buckets", of fixed maturities.
Initial margin is collateral, placed by one party with a counterparty at the time of the deal, against the possibility that the market price will move against the first party, thereby leaving the counterparty with a credit risk. Variation margin is a payment or extra collateral transferred subsequently from one party to the other because the market price has moved. Variation margin payment is either in effect a settlement of profit/loss (for example, in the case of a futures contract) or the reduction of credit exposure (for example, in the case of a repo). In repos, variation margin refers to the fluctuation band or threshold within which the existing collateral's value may vary before further cash or collateral needs to be transferred. In a loan, margin is the extra interest above a benchmark (e.g., a margin of 0.5 per cent over Libor) required by a lender to compensate for the credit risk of that particular borrower.
A request following marking-to-market of a repo transaction for the initial margin to be reinstated or, where no initial margin has been taken, to restore the cash/securities ratio to parity. In the context of a futures exchange, call to make good trading losses and maintain initial margin levels.
Margin default rate:
See probability of default.
The payment of a margin call.
Technique for estimating the fair value of an instrument for which no price is quoted by comparing it with the quoted prices of similar instruments.
Risks related to changes in prices of tradeable macroeconomics variables, such as exchange rate risks.
Market participant who is committed, explicitly or otherwise, to quoting two-way bid and offer prices at all times in a particular market.
The act of revaluing securities to current market values. Such revaluations should include both coupon accrued on the securities outstanding and interest accrued on the cash.
Repo market making, or only trading to cover one's own requirements. It carries no implications that the trader's position is "matched" in terms of exposure, for example to short-term interest rates.
Date on which stock is redeemed. Also known as the expiry date.
A debt capital market instrument originally used to
refer to a bond of maturity five to ten years, hence "medium" term, but
in theory with any maturity ranging from over 270 days to 30 years or
longer. MTNs are frequently issued as part of a continuous rolling debt
One of the strategies for reducing the cost of options by forgoing some of the potential for gain. The buyer of a currency option, for example, simultaneously sells an option on the same amount of currency but at a different strike price.
A measure of the proportional change in the price of a bond or other series of cash flows, relative to a change in yield (mathematically). See duration.
Modified following business day (MFBD):
The convention that if a value date in the future falls on a non-business day, the value date will be moved to the next following business day, unless this moves the value date to the next month, in which case the value date is moved back to the last previous business day.
The strength behind an upward or downward movement in price.
Short-term market (generally up to one year) for financial instruments. See capital market.
An interest rate quoted on an act/360 basis is said to be on a money-market basis. See bond basis.
Monte Carlo simulation:
Technique used to determine the likely value of a derivative or other contract by simulating the evolution of the underlying variables many times. The discounted average outcome of the simulation gives an approximation of the derivative's value. Monte Carlo simulation can be used to estimate the value-at-risk (VAR) of a portfolio. Here, it generates a simulation of many correlated market movements for the markets to which the portfolio is exposed, and the positions in the portfolio are revalued repeatedly in accordance with the simulated scenarios. This gives a probability distribution of portfolio gains and losses from which the VAR can be determined.
A method for calculating the yield of a bond.
Mortgage-backed security (MBS):
Security guaranteed by a pool of mortgages.
Moving average convergence/divergence:
The crossing of two exponentially smoothed moving averages that oscillate above and below an equilibrium line (MACD).
See Medium-Term Note
Option which gives the holder the right to buy the asset that performs best out of a number of assets (usually two). The investor would typically buy a call allowing him or her to buy the equity.