Naked: A naked option position is one not protected by an offsetting position in the underlying. See covered call/put.

NAO: National Audit Office.

Negative divergence: When at least two indicators, indices or averages show conflicting or contradictory trends.

Negotiable: A security which can be bought and sold in a secondary market is negotiable.

Net present value: The net present value of a series of cash flows is the sum of the present values of each cash flow (some or all of which may be negative).

NLF: National Loans Fund, the account which brings together all UK Government lending and borrowing.

Noise: Fluctuations in the market which can confuse or impede interpretation of market direction.

Nominal amount: Another term for the face value of a security.

Nominal rate: A rate of interest as quoted, rather than the effective rate to which it is equivalent.

Normal: A normal probability distribution is a particular distribution assumed to prevail in a wide variety of circumstances, including the financial markets. Mathematically, it corresponds to the probability density function.

Notional: In a bond futures contract, the bond bought or sold is a standardised non-existent notional bond, as opposed to the actual bonds which are deliverable at maturity. Contracts for differences also require a notional principal amount on which settlement can be calculated.

Novation: Replacement of a contract or, more usually, a series of contracts with one new contract.

NPV: See net present value.

O/N: See overnight.

Odd date: See broken date.

Offer: The price at which a market maker will sell bonds. Also called "ask".

Off-market: A rate which is not the current market rate.

Off-market coupon swap: Tax-driven swap strategy, in which the fixed-rate payments differ significantly from current market rates. There are high and low coupon swaps.

One touch all-or-nothing: Digital option. The option's put pays out a predetermined amount (the "all") if the index goes below (above) the strike price at any time during the option's life. How far below (above) the strike price the index moves is irrelevant; the payout will be the "all" or nothing.

Open interest: The quantity of futures contracts (of a particular specification) which have not yet been closed out by reversing. Either all long positions or all short positions are counted, but not both.

Opening leg: The first half of a repo transaction (see closing leg).

Operational Market Notice: Sets out the DMO's (previously the Bank's) operations and procedures in the gilt market.

Operational risk: Risk of loss occurring due to inadequate systems and control, human error, or management failure.

Opportunity cost: Value of an action that could have been taken if the current action had not been chosen.

Option: The right (but not the obligation) to buy or sell securities at a fixed price within a specified period.

Option forward: See time option.

Option-adjusted spread (OAS): For a bond with an embedded option or a mortgage-backed security, the additional spread earned over the term structure of returns that is implied from benchmark government yields in order for the value of the bond to be equal to its observed market price. The higher yield spread reflects the interest-rate option embedded in the callable bond or MBS security.

Ornstein-Uhlenbeck equation: A standard equation that describes mean reversion. It can be used to characterise and measure commodity price behaviour.

OTC: Over the counter. Strictly speaking, any transaction not conducted on a registered stock exchange. Trades conducted via the telephone between banks, and contracts such as FRAs and (non-exchange traded) options, are said to be "over-the-counter" instruments. OTC also refers to non-standard instruments or contracts traded between two parties; for example, a client with a requirement for a specific risk to be hedged with a tailor-made instrument may enter into an OTC structured option trade with a bank that makes markets in such products.

Out-of-the-money: A call (put) option is out-of-the-money if the underlying is currently less (more) valuable than the strike price. See at-the-money, in-the-money.

Outright: An outright (or forward outright) is the sale or purchase of one foreign currency against another value on any date other than spot. See forward, short date, spot, swap.

Overborrowed: A position in which a dealer's liabilities (borrowings taken in) are of longer maturity than the assets (loans out).

Overlent: A position in which a dealer's assets (loans out) are of longer maturity than the liabilities (borrowings taken in).

Overnight: A deal from today until the next working day ("tomorrow").

P(t, T): The price at time t of a risk-free zero-coupon bond that matures at time T (with T > t).

Paper: Another term for a bond or debt issue.

Par: When the price of a security is equal to the face value, usually expressed as 100, it is said to be trading at par. A par swap rate is the current market rate for a fixed interest rate swap against Libor. In foreign exchange, when the outright and spot exchange rates are equal, the forward swap is zero or par.

Par yield curve: A curve plotting maturity against yield for bonds priced at par.

Parity: The official rate of exchange for one currency in terms of another which a government is obliged to maintain by means of intervention.

Participation forward: A product equivalent to a straightforward option plus a forward deal, but structured as a forward deal at an off-market rate plus the opportunity to benefit partially if the market rate improves.

Path-dependent: A path-dependent option is one which depends on what happens to the underlying throughout the option's life (such as the American or barrier option) rather than only at expiry (a European option).

Peak exposure: If the worst case or the expected credit risk exposures of an instrument is calculated over time, the resulting graph reveals a credit risk exposure profile. The highest exposure marked out by the profile is the peak exposure generated by the instrument.

Perfect market: A theoretical market in which transactions may be undertaken without the need to pay a bid-offer spread or other transaction costs such as commission, taxes and so on. It also assumes that buy and sell trades can be undertaken in any size without affecting the market.

Periodic resetting swap: Swap where the floating-rate payment is an average of floating rates that have prevailed since the last payment, rather than the interest rate prevailing at the end of the period. For example, the average of six one-month Libor rates rather than one six-month Libor rate.

Pips: See points.

Plain vanilla: See vanilla.

Points: In bond markets, one whole unit of price. In FX markets, the last two decimal places in an exchange rate. For example, when EUR/USD is 1.0520/1.0530, the points are 20/30. See bid figure.

Portfolio variance: The square of the standard deviation of a portfolio's return from the mean.

Positive cash flow collar: Collar other than a zero-cost collar.

Potential exposure: Estimate of the future replacement cost, or positive market value, of a derivative transaction. Potential exposure should be calculated using probability analysis based on broad confidence intervals (e.g., two standard deviations) over the remaining term of the transaction.

Preference shares: These are a form of corporate financing. They are normally fixed interest shares whose holders have the right to receive dividends ahead of ordinary shareholders. If a company were to go into liquidation, preference shareholders would rank above ordinary shareholders for the repayment of their investment in the company. Preference shares ("prefs") are normally traded within the fixed interest division of a bank or securities house.

Premium: The amount above par at which a bond is trading. In the FX market, the amount by which a currency is more expensive, relative to another currency, for future delivery compared to spot delivery. This is the forward premium, and reflects the interest-rate differential between the two currencies.

Present value: The amount of money which needs to be invested now to achieve a given amount in the future when interest is added. See future value, time value of money.

Pre-settlement risk: As distinct from credit risk arising from intra-day settlement risk, this term describes the risk of loss that might be suffered during the life of the contract if a counterparty to a trade defaulted and if, at the time default, the instrument had a positive economic value.

Price factor: See conversion factor.

Price-earnings ratio: A ratio giving the price of a stock relative to the earnings per share.

Primary market: The market for new debt, into which new bonds are issued. The primary market is made up of borrowers, investors and the investment banks which place new debt into the market, usually with their clients. Bonds that trade after they have been issued are said to be part of the secondary market.

Probability distribution: The mathematical description of how probable it is that the value of something is less than or equal to a particular level.

Probability of default: The statistical measure of how likely it is that an institution will default on its debt obligations over the next 12 months. As calculated by the ratings agencies, this is based on historical measures of institutions in the same credit rating category.

Put: A put option is an option to sell the commodity or instrument underlying the option. See call option.

Quanto: An option that has its final payoff linked to two or more underlying assets or reference rates.

Quanto swap: A swap where the payments of one or both legs are based on a measurement (such as the interest rate) in one currency but payable in another currency.

Quasi-coupon date: The regular date for which a coupon payment would be scheduled if there were one. Used for price/yield calculations for zero-coupon instruments.