An Interest rate swap where interest on one side accrues only when a certain condition is met.
The interest earned on a bond since the last coupon payment date.
A swap where the notional principal decreases in a predetermined way as time passes.
An individual engaging in arbitrage.
An option with a payoff dependent on the average price of the underlying asset during a specified period.
The price that a dealer is offering to sell an asset.
Asset-or-Nothing Call Option
An option that provides a payoff equal to the asset price if the asset price is above the strike price and zero otherwise.
Asset-or-Nothing Put Option
An option that provides a payoff equal to the asset price if the asset price is below the strike price and zero otherwise.
An option in which the strike price equals the price of the underlying asset.
Average Price Call Option
An option giving a payoff equal to the greater of zero and the amount by which the average price of the asset exceeds the strike price.
Average Price Put Option
An option giving a payoff equal to the greater of zero and the amount by which the strike price exceeds the average price of the asset.
Average Strike Option
An option that provides a payoff dependent on the difference between the final asset price and the average asset price.
Testing a value-at-risk or other model using historical data.
A procedure for working from the end of a tree to its beginning in order to value an option.
The risk to a hedger arising from uncertainty about the basis at a future time.
An option that provides a payoff dependent on the value of a portfolio of assets.
An option that can be exercised on specified dates during its life.
A measure of the systematic risk of an asset.
The amount by which the ask price exceeds the bid price.
An option with a discontinuous payoff: for example, a cash-or-nothing option or an asset-or-nothing option.
A model where the price of an asset is monitored over successive short periods of time. In each short period it is assumed that only two price movements are possible.
A tree that represents how an asset price can evolve under the binomial model.
An extension of the Black-Scholes model for valuing European options on futures contracts.
A model for pricing European options on stocks, developed by Fischer Black, Myron Shcoles and Robert Merton.
An option where a bond is the underlying asset.
A position that is created by taking a long position in a call option that matures at one time and a short position in a similar call option that matures at a different time (A calendar spread can also be created using put options).
A method for implying volatility parameters from the prices of actively traded options.
An option to buy an asset at a certain price by a certain date.
A procedure for settling a futures contract in cash rather than by delivering the underlying asset.
Call-or-Nothing Put Option
An option that provides a fixed predetermined payoff if the final asset price is below the strike price and zero otherwise.
A bond containing provisions that allow the issuer to buy it back at a predetermined price at certain times during its life.
Capital Asset Pricing Model
A model relating the expected return on an asset to its beta.
One component of an interest rate cap.
Cash Flow Mapping
A procedure for representing an instrument as a portfolio of zero-coupon bonds for the purpose of calculating value at risk.
Cash-or-Nothing Call Option
An option that provides a fixed predetermined payoff if the final asset price is above the strike price and zero otherwise.
A firm that guarantees the performance of the parties in an exchange-traded derivatives transaction. (Also referred to as a clearing corporation).
A swap where cash flows depend on the price of a commodity.
An option on an option.
Constant Maturity Treasury Swap
A swap where the yield on a Treasury bond is exchanged for either a fixed rate or a floating rate on each payment date.
A way of quoting interest rates. It is the limit as the assumed compounding interval is made smaller and smaller.
A corporate bond that can be converted into a predetermined amount of the company’s equity at certain times during its life.
A measure of the curvature in the relationship between bond prices and bond yields.
Interest payment made on a bond.
A short position in a call option on an asset combined with a long position in the asset.
Credit Default Swap
An instrument that gives the holder the right to sell a bond for its face value in the event of a default by the issuer.
A measure of the creditworthiness of a bond issue.
Credit Transition Matrix
A table showing the probability that a company will move from one credit rating to another during a certain period of time.
Credit Value At Risk
The credit loss that will not be exceeded at some specified confidence level.
A swap where interest and principal in one currency are exchanged for interest and principal in another currency.
A convention for quoting interest rates.
A trade that is entered into and closed out on the same day.
Deferred Payment Option
An option where the price paid is deferred until the end of the option’s life.
An agreement to enter into a swap at some time in the future.
A hedging scheme that is designed to make the price of a portfolio of derivatives insensitive to small changes in the price of the underlying asset.
A portfolio with a delta of zero so that there is no sensitivity to small changes in the price of the underlying asset.
A position in two calls where both the strike prices and times to maturity are different (A diagonal spread can also be created with put options).
A swap where a floating rate in one currency is exchanged for a floating rate in another currency and both rates are applied to the same principal.
See zero-coupon bond.
An instrument, such as a Treasury bill, that provides no coupons.
The annualized dollar return on a Treasury bill or similar instrument expressed as a percentage of the final face value.
The dividend as a percentage of the stock price.
An option that comes into existence when the price of the underlying asset declines to a prespecified level.
A clause in a contract that states that the contract will be terminated with a cash settlement if the credit rating of one side falls below a certain level.
The average increase per unit of time in a stochastic variable.
A measure of the average life of a bond. It is also an approximation to the ratio of the proportional change in the bond price to the absolute change in its yield.
A procedure for matching the durations of assets and liabilities in a financial institution.
A procedure for hedging an option position by periodically changing the position held in the underlying assets. The objective is usually to maintain a delta-neutral position.
An exercise prior to the maturity date.
Efficient Market Hypothesis
A hypothesis that asset prices reflect relevant information.
An option that is inseparable part of another instrument.
A model for the behaviour of interest rates derived from a model of the company.
A swap where the return on an equity portfolio is exchanged for either a fixed or a floating rate of interest.
A dollar held in a bank outside the United States.
An option that can be exercised only at the end of its life.
When a dividend is declared, an ex-dividend date is specified. Investors who own shares of the stock up to the ex-dividend date receive the dividend.
An option to exchange one asset for another.
The price at which the underlying asset may be bought or sold in an option contract. (Also called the strike price).
A nonstandard option.
The theory that forward interest rates equal expected future spot interest rates.
Expected Value of a Variable
The average value of the variable obtained by weighting the alternative values by their probabilities.
The end of life of a contract.
Exponentially Weighted Moving Average Model
A model where exponential weighting is used to provide forecasts for a variable from historical data. It is sometimes applied to the variance rate in value at risk calculations.
The maximum loss from default by a counterparty.
A bond whose life can be extended at the option of the holder.
A swap whose life can be extended at the option of one side to the contract.
A bank or other financial institution that facilitates the flow of funds between different entities in the economy.
The name given to volatility used to price a cap when the same volatility is used for each caplet.
An option traded on an exchange with terms that are different from the standard options traded by the exchange.
Foreign Currency Option
An option on a foreign exchange rate.
A contract that obligates the holder to buy or sell an asset for predetermined delivery price at a predetermined future time.
Forward Exchange Rate
The forward price of one unit of a foreign currency.
The delivery price in a forward contract that causes the contract to be worth zero.
Forward Rate Agreement (FRA)
An agreement that a certain interest rate will apply to a certain principal amount for a certain time period in the future.
Forward Risk-Neutral World
A world is forward risk-neutral with respect to a certain asset when the market price of risk equals the volatility of that asset.
Forward Start Option
An option designed so that it will be at-the money at some time in the future.
The interest rate for a future period of time implied by the rates prevailing in the market today.
An option on a futures contract.
The delivery price currently applicable to a futures contract.
The rate of change of delta with respect to the asset price.
A portfolio with a gamma of zero.
A ratio of the size of a position in a hedging instrument to the size of the position being hedged.
An individual who enters into hedging trades.
A volatility estimated from historical data.
A simulation based on historical data.
A distribution for a future asset price implied from option prices.
Implied Repo Rate
The repo rate implied from the price of a Treasury bill and a Treasury bill futures price.
A tree describing the movements of an asset price that is constructed to be consisted with observed option prices.
Volatility implied from an option price using the Black-Scholes or a similar model.
Either (a) a call option where the asset price is greater than the strike price or (b) a put option where the asset price is less than the strike price.
An arbitrage involving a position in the stocks comprising a stock index and a position in a futures contract on the stock index.
A futures contract on a stock index or other index.
An option contract of a stock index or other index.
Indexed Principal Swap
A swap where the principal declines over time. The reduction in the principal on a payment date depends on the level of interest rates.
An option that provides a payoff when a specified interest rate is above a certain level. The interest rate is a floating rate that is reset periodically.
A combination of an interest-rate cap and an interest-rate floor.
A derivative whose payoffs are dependent on future interest rates.
An option that provides a payoff when an interest rate is below a certain level. The interest rate is a floating rate that is reset periodically.
An option where the payoff is dependent on the level of interest rates.
An exchange of a fixed rate of interest on a certain notional principal for a floating rate of interest on the same notional principal.
For a call option, this is the greater of the excess of the asset price over the strike price and zero. For a put option, it is the greater of the excess of the strike price over the asset price and zero.
A market where futures prices decrease with maturity.
Libor zero-coupon interest rates as a function of maturity.
The maximum price move permitted by the exchange in a single trading session.
An order that can be executed only at a specified price or one more favourable to the investor.
The amount that forward interest rates exceed expected future spot interest rates.
A hedge involving a long futures position.
When the balance in a trader’s margin account falls below the maintenance margin level, the trader receives a margin call requiring the account to be topped up to the initial margin level.
Marking To Market
The practice of revaluing an instrument to reflect the current values of the relevant market variables.
The end of the life of a contract.
A security that entitles the owner to a share in the cash flows realized from a pool of mortgages.
A short position in a call option that is not combined with a long position in the underlying asset.
The ability to offset contracts with positive and negative values in the event of a default counterparty.
Risk that can be diversified away.
The standard bell shaped distribution of statistics.
The principal used to calculate payments in an interest rate swap. The principal is ¨notional¨ because it is neither paid nor received.
The total number of long positions outstanding in a futures contract (equals the total number of short positions).
All options of the same type (call or put) on a particular stock.
All options of a certain class with the same strike price and expiration date.
The spread over the Treasury curve that makes the theoretical price of an interest rate derivative equal to the market price.
Either (a) a call option where the asset price is less than the strike price or (b) a put option where the asset price is greater than the strike price.
Market where traders deal by phone. The traders are usually financial institutions , corporations and fund managers.
The principal amount of a bond.
The coupon on a bond that makes its price equal the principal.
An option whose payoff depends on the whole path followed by the underlying variable – not just its final value.
The cash realized by the holder of an option or other derivative at the end of its life.
PO (principal only)
A mortgage-backed security where the holder receives only principal cash flows on the underlying mortgage pool.
Making a portfolio relatively insensitive to interest rates.
Entering into trades to ensure that the value of a portfolio will not fall below a certain level.
The maximum position a trader (or group of traders acting together) is allowed to hold.
The par or face value of a debt instrument.
A procedure where trades are automatically generated by a computer and transmitted to the trading floor of an exchange.
A put option combined with a long position in the underlying asset.
The reversion of a bond’s price to its par value at maturity.
The relationship between the price of a European call option and the price of a European put option when they have the same strike price and maturity date.
A bond where the holder has the right to sell it back to the issuer at certain predetermined times for a predetermined price.
A swap where one side has the right to terminate early.
An option whose payoff is dependent on two or more underlying variables.
The combination of a long call and short put or the combination of a short call and long put.
The process of adjusting a trading position periodically. Usually the purpose is to maintain delta neutrality.
Repo (Repurchase Agreement)
A procedure for borrowing money by selling securities to a counterparty and agreeing to buy them back later at a slightly higher price.
The rate of interest in a repo transaction.
The rate of interest that can be earned without assuming any risks.
The valuation of an option or other derivative assuming the world is risk neutral. Risk-neutral valuation gives the correct price for a derivative in all worlds, not just in a risk-neutral world.
A trader who holds positions for a very short period of time.
The average of the prices that a contract trades for immediately before the bell signalling the close of trading for a day. It is used in mark-to-market calculations.
A hedge where a short futures position is taken.
Selling in the market shares that have been borrowed from another investor.
An option where the holder has the right to lock in a minimum value for the payoff at one time during its life.
An option where the payoff is dependent on the difference between two market variables.
A position in two or more options of the same type.
A swap where the principal increases over time in a predetermined way.
An equation describing the probabilistic behaviour of a stochastic variable.
A dividend paid in the form of additional shares.
Stock Index Futures
Futures on a stock index.
Stock Index Option
An option on a stock index.
An option on a stock.
A long position in a call and a put with the same strike price.
A long position in a call and a put with different strike prices.
A long position in two call options and one put option with the same strike price.
Testing of the impact of extreme market moves on the value of a portfolio.
A long position in one call option and two put options with the same strike price.
The fixed rate in an interest rate swap that causes the swap to have a value of zero.
An option to enter into an interest rate swap where a specified fixed rate is exchanged for floating.
Risk that cannot be diversified away.
Tera Structure of Interest Rates
The relationship between interest rates and their maturities.
The value at maturity.
The rate of change of the price of an option or other derivative with the passage of time.
The value of an option arising from the time left to maturity (equals an option’s price minus its intrinsic value).
Total Return Swap
A swap of the return on one portfolio of assets for the return on another portfolio of assets.
The cost of carrying out a trade (commissions plus the difference between the price obtained and the midpoint of the bid-offer spread).
A short-term non-coupon-bearing instrument issued by the government to finance its debt.
Treasury Bill Futures
A futures contract on a Treasury bill.
A long-term coupon-bearing instrument issued by the government to finance its debt.
Treasury Bond Futures
A futures contract on Treasury bonds.
Treasury Note Futures
A futures contract on Treasury notes.
A variable that the price of an option or other derivative depends on.
An option that comes into existence when the price of the underlying asset increases to a prespecified level.
An option that ceases to exist when the price of the underlying asset increases to a prespecified level.
Value At Risk
A loss that will not be exceeded at some specified confidence level.
The square of volatility.
A table showing the variation of implied volatilities with strike price and time to maturity.
A term used to describe the volatility smile when it is nonsymmetrical.
The variation of implied volatility with strike price.
Volatility Term Structure
The variation of implied volatility with time to maturity.
Writing An Option
Selling an option.
Zero-Coupon Interest Rate
The interest rate that would be earned on a bond that provides no coupons.