AIFMD

AIFMD stands for alternative investment fund managers (AIFM) directive, which is the main European regulatory framework for alternative investment funds designed for professional investors. This directive requires more transparency and security to the way alternative funds are managed. Alternative fund managers falling under this directive profit from a passport allowing them to market their fund to professional investors throughout the European Union.

Accrued interest

Accrued interest is the amount of interest earned but not yet collected. When buying or selling bonds, accrued interest refers to the interest accrued since the last coupon date. When settling the bond the accrued interest is added to the quoted price because the buyer will collect this accrued interest from the seller.

Active investing

Active investing seeks to profit from market inefficiencies by purchasing securities that are undervalued or by selling securities that are overvalued. To do so an active investor must be good at forecasting future price developments or identifying mispriced securities. Active investing is thus a skill-based investing approach. Pure active strategies do not follow a benchmark and are therefore also referred to as absolute return strategies. Typical active investors are hedge funds.

American option

An option is called American if it can be exercised up to and including expiration date. Most exchange-listed options are American.

Arbitrage

An arbitrageur seeks to profit from small price differences of identical or related assets. We talk about "deterministic" arbitrage if the same asset is simultaneously bought in one market and sold in another market at a higher price. "Statistical" arbitrage includes all activities that attempt to buy one product and simultaneously sell a related product that appears to be overvalued relative to the first product. The goal is to close the positions and thus make a profit once the prices of the two products have realigned. Thus, an arbitrageur exploits obvious (deterministic arbitrage) or statistical (statistical arbitrage) market inefficiencies to make a profit.

Ask price

See offer

Asset manager

The job of an asset manager is to manage investments on behalf of their clients. They are also called investment managers, portfolio managers, financial advisors or wealth managers. There are many different asset management companies with a wide range of different services. Investors can either hire an asset manager to help them manage their existing portfolio or, alternatively, buy into an existing asset management solution such as an exchange-traded fund, a mutual fund, a hedge fund or a pension fund.

Assignment

In an option transaction assignment refers to the notice to short option seller that the option holder is exercising the option.

At-the-money-forward (ATMF)

ATMF describes an option when the strike price is the same as the forward price.

At-the-money-spot (ATMS)

ATMS describes an option when the strike price is the same as the spot price.

Auction market (e.g. exchange)

In an auction market, all parties wishing to trade securities gather in one place, either physically or virtually, and announce the prices at which they are willing to buy or sell. These are referred to as bid and ask prices. Thus, mutually agreeable market prices emerge when the buyers' bid prices and the sellers' ask prices converge and transactions take place.

Back office

The function within an financial firm like an investment bank. The back office ensures smooth settlement, payment and reporting of transactions.

Balance sheet

A summary of a company's assets and liabilities.

Barrier option

An option (call or put) which ceases to exist or only comes into existence if the underlying asset trades at or through a predetermined price. Barrier options are common in FX markets.

Base currency

In the currency quotation USDCHF the USD is the base currency. We are measuring the value of 1 unit of the base currency (USD) in quote currency units (CHF).

Basis

Basis is the difference between the forward price and the spot price. Forward price (F) = Spot price (S) + basis.

Benchmark

The price or performance of a financial instrument used as reference to compare the performances of similar instruments.

Bid

As a verb bid means to put in a purchase price: “I'm 4 bid for the puts.” As a noun bid means the purchase price: “the bid is 2 ¼ “. Hit the bid means to sell at the counterparty's (market market's) purchase price. Get given on the bid means someone sold to you at your purchase price. As an adjective bid describes a buying interest in a commodity: “the market is bid for the 1-month forward.”

Bid-offer spread

Bid-offer spread is the difference between the bid and the offer prices.

Bond

A certificate of debt issued by a company, government or supranational body, which is traded at a price according to its yield and the issuer's credit rating.

Bonds

Bonds are securities issued by a government or company. If an investor buys a bond, the investor is effectively lending out money. The issuer agrees to pay the “par value” back at maturity of the bond, plus a certain periodic interest, either once every year or every 6 months. The investor will receive those payments in full as long as the company does not go bankrupt before maturity of the bond. After being issued by the issuer, bonds trade in the secondary market. A buyer of bonds in the secondary market effectively becomes a lender of capital, he acquires the rights to all future cash flows paid by the issuer. Bonds are one of the most important types of investments and one of the most important sources of financing for governments and corporations.

Book entry method

The ownership of securities are recorded electronically rather than in form of a physical paper certificate. That is, the security issuer, its agent or a central securities depository keeps records of who holds outstanding securities. This allows investors to trade or transfer securities without having to present a paper certificate as proof of ownership.

Borrow cost

See “Securities lending”.

Break-even point

The break-even point is the price at which a transaction produces neither a gain nor a loss.

Broker

A firm or institution which introduces the two parties in a transaction to each other and/or arranges the transaction for a commission fee. Brokers executes trades on behalf of their clients, brokers don't buy or sell securities on their own account. Brokers are the "middlemen" between sellers and buyers.

Bushel

A bushel is a unit of volume to measure bulk commodities that are not fluids and that were typically shipped and sold in standardized containers such as barrels. A US Bushel is equivalent to 35.24 liters. At one time, farm products were measured by how much would fit in a “bushel basket”. Today, a bushel has a weight equivalent, different for every commodity. For wheat, one bushel equals 60 pounds of wheat. This is approximately equivalent to one million wheat kernels.

Buy-side

The part of the financial market that buys securities in order to invest them. Buy-side professionals manage their clients' money and make investment decisions. Typical tasks include portfolio management, asset management and investment research. The buy-side includes pension funds, mutual funds, private equity funds and hedge funds. Compare with "sell-side."

Buyout

A transaction to purchase a business, a business unit or a whole company.

Call

A call option is the right to buy an underlying asset at a predetermined price (strike price). The buyer of the call option acquires this right, the seller of the call option grants this right and is obliged to sell the underlying asset should the buyer exercise the option.

Callable bond

Callable bonds give the issuer the right to redeem the bond at a previously agreed coupon date before maturity. If the issuer exercises this right, the investor receives the coupon due plus the face value of the bond. The bond therefore matures early and no further payments are made. Since the issuer has the right to redeem early, a callable bond usually pays a higher coupon than an equivalent straight bond.

Capital call

A fund issues a capital call to investors, for them to transfer all or part of the committed capital.

Carried interest

Share of profits a fund manager will receive after returning the capital called and preferred return. It is expressed as a percentage of the fund’s total profits.

Cash market

A cash market (or spot market) is a market in which trades are settled immediately, or at least as soon as practicable. In many spot markets delivery and payment happens 2 business days after the trade date. The opposite of a spot market would be a derivative market where trades can settle months after the trade date.

Catch-up clause

A hurdle rate clause is often combined with a catch-up clause. Once the hurdle rate is reached, the fund manager will be entitled to any profits made above this rate until the agreed carried interest threshold is hit.

Central bank

The main task of a central bank is to manage a country's monetary system. The goal is to maintain price stability, i.e., to limit how quickly prices rise over time due to inflation. The central bank does this by increasing or decreasing the money supply in the financial system. The central bank increase the money supply by buying securities, thus pumping money into the financial market. Conversely, the central bank can decrease the money supply by selling securities and thus withdrawing cash from the financial market.

Central clearing

Establishing a central counterparty which assumes legal responsibility for all transactions is referred to as central clearing.

Central counterparty (CPP)

The “Central Counterparty” is the legal counterparty for centrally cleared trades. The central counterparty is the "Buyer for every seller and seller for every buyer." By assuming legal responsibility for the trade, the central counterparty removes any credit risk on each other that the two original counterparties might have had. The clearing house of the exchange is typically the CCP for exchange traded contracts. The terms CCP and clearinghouse are therefore often used interchangeably.

Certificate

A certificates is a “bond” whose final payout at maturity depends on the market price of an asset, a basket of assets, or an index at that time. Certificates are very flexible in that sense that the final payout can be linked to any tradable underlying and structured to fit a predefined payout. They can be issued very quickly under an existing issuance program making them especially suitable to capture time sensitive investment opportunities. On the negative side, certificates must be fully funded or in other words, paid for in full in advance and they are exposed to the credit risk of the issuer. Like a bond, a certificate is a payment promise by the issuer and therefore exposed to credit risk. If the issuer defaults, the certificate holder will incur a loss. Depending on the underlying asset class a certificate is also referred to as equity linked note or credit linked note. Certificates are the wrapper of choice for most structured products.

Choice market

Choice describes one price at which you are willing to buy or sell: “My market in the 50 call is 2 choice.”

Clean price

The clean price of a bond is the price that is quoted for trading purposes and excludes any accrued coupon payments. The clean price represents the price volatility of the bond while the accrued coupon is just an add-on. When combined they form the dirty or invoice price.

Clearing broker

A clearing broker is a clearing member who takes over the clearing and settlement for another participant.

Clearing house

The affiliate or subsidiary of an exchange which clears the trades. It manages the margin accounts and becomes the central counterparty on each trade.

Clearing member

The clearing house of the exchange is organized as a “club” with members. Only those who are approved as clearing members can become a counterparty to the clearing house. A clearing member must meet the clearing house's requirements and obligations. Only clearing members can directly clear trades with the clearing house. All other market participants will first have to find a clearing member to clear their trade before they can start trading on the exchange.

Closed-end fund

Closed-end funds have a pre-defined lifespan and only issue fund shares once. The opposite is an open-end fund.

Closing

The point in time at which the investors sign a limited partnership agreement and enter into a legally binding commitment to provide capital to the fund. If there are several closings, the first will be called the “initial closing” and the last the “final closing".

Co-Investment

Investing directly in a company together with a private equity investment manager.

Collateral

Assets (property or securities) pledged by a borrower to secure payment of a loan or bond issue in the event of default

Collateralized trading

To be Added

Commercial bank

A commercial bank focuses on the financial needs of small and medium-sized companies. It provides all basic banking services, but most importantly, it accepts deposits and grants loans. Commercial banks are typical intermediaries. They make most of their profits by providing loans and charging interest.

Commercial paper (CP)

Commercial papers (often called CPs) are short-term debt instruments issued by large corporations to raise funds for a period of up to one year. CPs are issued in large denominations (face value, par value) of $100,000 or more and do not pay a coupon. Instead, they are sold at a discount to their face value. This discount is effectively the interest income the investor receives. The typical investors are money market funds, insurance companies, and banks. Issuers use commercial paper to finance short-term liabilities such as salaries or the purchase of raw materials.

Committed capital

Capital that investors have "pledged" to provide to a private market funds. In private markets investments are done on a commitment basis. Capital is committed today but only provided to the funds once it is called.

Compounding method

Compounding refers to the frequency at which one earns interest. We distinguish between simple interest, compounding more than once per year, and continuous. Compounding can occur more than once per year. Typical conventions include annual (once per year), semi-annual (twice per year) or quarterly (4 times per year). The relationship between the present value (PV) and the future value (FV) is FV=PV*(1+r/n)^(t*n), where r is interest rate in per annum terms, t is the interest period measured in years and n is number of compounding periods per year.

Continuous compounding

Continuous compounding means that interest is credited to the account every instant. Continuous interest makes the math behind interest rates very simple, especially when we work with interest rate periods of different lengths. That is why most models work internally with continuous interest. Continuous compounding might sounds complicated, but the relationship between the present value (PV) and the future value (FV) is straightforward: FV=PV*e^(r*t), where r is interest rate in per annum terms, t is the interest period measured in years and "e" is the Euler number 2.7182…

Continuous interest

See “continuous compounding”

Continuous return

See “continuous compounding”

Contract for difference (CFD)

A contract for difference (CFD) is a contract between a "buyer" and a "seller" stipulating that the seller will pay to the buyer the difference between the current value of a reference asset and its value at expiry of the CFD. If this difference is negative then the buyer will have to make a payment to the seller. A contract for difference (CFD) is similar to a total return swap with only one payment on the contract expiration date (bullet swap). A CFDs are designed for short term trading and speculation. A rolling daily CFD is a 1-day contract for difference that automatically extended to the next trading day rather than expiring at the end of a trading day.

Conversion

Doing a conversion means doing the following trade: buy the underlying, sell the call, buy the put (the options at the same strike). We can also describe this trade as buying the real underlying and selling the synthetic underlying; we can also say selling the real call and buying the synthetic call; we can say buying the real put and selling the synthetic put. The flip-side of doing a conversion (sell the underlying, buy the call, sell the put) is called a reversal. The main impetus for doing a conversion or reversal is that we have no underlying price exposure, so any edge or loss is locked in at maturity. (Note: regardless of the underlying price at expiration, we are obliged to sell the underlying at the strike price. If the underlying price at expiration is equal to strike (X), then we receive X when we sell out our long position in the underlying. If the underlying price is less than strike, we can exercise our put and sell at strike. If the underlying price is greater than strike, as we are short the call, the call holder will exercise against us and we have to sell him the underlying at strike.)

Convertible bond

Corporate bond where the bondholder has the right to convert, that is exchange, the bond for a fixed number of shares in the issuing company. The investor has the lower downside risk of the bond but at the same time all the upside potential of a share. Companies issue convertible bonds to either lower the coupon rate on debt or to delay the dilution effect of an equity issuance.

Corporate action

A corporate action is a event initiated by a public company which (may) impact the securities issued by the company. With some corporate actions, the security holder may make an election or take some other action in order to secure their entitlement. Typical examples of corporate actions are dividends, stock splits, rights issues, and spin-offs, mergers and acquisitions.

Corporate finance department

The corporate finance department of a (investment) bank is the part of the bank that specializes in advising companies and governments on all financial matters. In particular, it has a great deal of expertise in how to structure a company's finances, how to raise capital and how to carry out strategic transactions such as merging with another company (merger) or taking over another company (acquisition). Note that in some banks, the corporate finance department is called the "investment banking department." This can lead to confusion because an investment bank does not only consist of an "investment banking department" but also has trading and sales departments.

Corporation

A legal entity formed by a group of individuals to operate a business

Correlation

Correlation indicates the degree to which two assets move in relation to each other. Correlation is statistically measured by the correlation coefficient. Its values range from -1 to 1. A correlation coefficient of 1 means that the two assets move in lockstep and in the same direction. A correlation coefficient of -1 means that the two assets move in lockstep but in opposite directions. A correlation coefficient of zero means that the two assets move linearly independently of each other.

Counter currency

See "quote currency"

Counterparty risk

Counterparty risk, also called “counterparty credit risk” or just “credit risk”, is the risk that your counterparty will not be able or willing to meet its contractual obligations. Counterparty risk exists whenever a market participant has entered into a transaction with a counterparty and the latter has a contractual obligation to make payments or deliveries at some point in the future.

Custody account

You usually need a custody account for investing. The custody account allows you to hold securities, such as shares or bonds. It is the place where your investment portfolio lives. Once you have one, you can buy and manage investments like shares, bonds, or funds.

Day basis conventions

The types of day basis deem the lengths of the term and the lengths of the year. There are 4 common day basis: A/360, A/365, A/A and 30/360. The numerator deems the length of the term ("A" means as per actual calendar days; "30" means 30 days in any complete month'). The denominator deems the length of the year measured in days. Example: Settlement date is February 1, 2024; maturity is June 1, 2024. The interest rate is 3%. If we deposit $100 February 1, what is our $ return on June 1? - if the rate is on an A/360, we receive $100*(1+0.03*121/360) - if the rate is on an A/365, we receive $100*(1+0.03*121/365) - if the rate is on A/A, we receive $100*(1+0.03*121/366) - if the rate is on 30/360, we receive $100*(1+0.03*120/360)

De-hedge order

A spot order placed beyond a barrier in the event that an exotic option is terminated.

De-hedging

De-hedging: To have to reverse a delta hedge. Especially when referring to taking a hedge off when an option ceases to exist, either because it has hit a barrier or because it has expired (see "slippage").

Deal flow

Number of potential investments that an investment manager examines within a certain time frame.

Dealer

A person or institution acting as a principal in buying and selling securities. Acting as a principal simply means that a dealer buys and sells securities for their own account. If a dealers buys an assets from one client, he intends to sell that asset at a later stage to another client. Unlike a broker, a dealer is not paid a commission. See also "market-maker".

Decay (decay bill)

The decay-bill refers to the change, or "cost" of holding an options position one additional day, it is the overnight change in an option portfolio's value; however, usually refers to the theoretical value of the portfolio losing value as one day passes - this is the downside of being long gamma and is referred to as "paying decay" (the opposite is "earning decay").

Default

The failure by a borrower to comply with certain provisions of their loan agreement (e.g. making interest payments by an agreed deadline).

Delta

Change in option theoretical value (TV) for a small change in the underlying spot price.

Delta One

“Delta one” implies a one-for-one relation between the price of the underlying and the value of the derivative.

Delta one

A delta of one, or 100%, implies a one-for-one relation between the price of the underlying and the value of the derivative. A delta-one product produces the same capital gains and losses as the underlying. That is, if the underlying spot price increases by one dollar, then the value of the delta-one product also increases by one dollar. If the underlying spot price decreases by one dollar, then the value of the delta-one product also decreases by 1 dollar. A good delta one-product should mirror the value changes of the underlying, have a structure that is easy and liquid to trade, and be low cost.

Delta-One Product

In finance products which provide a one-to-one exposure to an underlying are called delta one products. A good delta one-product should mirror the value changes of the underlying, have a structure that is easy and liquid to trade and is low cost.

Depositary Receipt

A Depositary Receipt is a financial instrument representing shares in a foreign company but traded on the local stock exchange. For example, a German listed company wanting to attract U.S. investors can package a portion of its shares into a financial instrument, the Depositary Receipt, which is then listed on a U.S. stock exchange. This allows U.S. investors to invest in the German company as comfortably as if its shares were listed on a U.S. exchange. Note that listing the Depositary Receipt on the local exchange is a much simpler process than listing the foreign company's shares on the local exchange.

Derivative, Financial Derivative

A financial instrument which derives its value from the current or future performance of an underlying asset, commodity, index or currency.

Dirty price

The dirty price (sometimes called the invoice price) of a bond incorporates any accrued coupon that is associated to the time of the last coupon payment. Compare this with the clean price.

Distribution

Cash paid out to investors.

Diversification

Diversification is the strategy of mixing a variety of assets into a portfolio. A diversified portfolio contains a mix of assets to limit exposure to any one asset.

Dividend

The proportion of a company's earnings distributed in cash to shareholders.

Dry powder

Dry powder is uncalled but committed capital in a private market fund.

Due diligence

The detailed review of a company and its financial records, which is done before becoming involved in a business arrangement with that company.

Edge

In option trading, edge is a term often used to describe one-half of the difference in the premium between the bid price and the offer price (also known as the "bid/ask spread") that is another way of saying the full difference between an option's true mid-market value and where it was traded. "Captured edge” refers to the realized profit that is assigned to a trade; markets move and we often need to cross bid/ask or trade at mid-market to cover risk or close a trade, so it is difficult to realize full profit on the edge of a trade.

Endowment

An endowment is donated capital that is invested in financial assets to create a reliable annual income stream for a charitable purpose. Most endowments have a clear policy that specifies how the capital can be invested and how the income may be spent. For many universities, endowments are an important source of revenue.

Equity

Equity is the owners’ total interest in a company. The value of equity is the value of the business after all other claims have been paid in full. Example: If you own a house worth 500,000 and there is a mortgage on the house for 200,000, then your equity in the house is worth 300,000.

Equity analyst

An equity analyst (stock analyst) is a financial expert who analyzes a company and assesses whether its share price reflects the company’s fair value, whether it is overvalued or undervalued.

Equity capital

“Equity Capital” refers to the capital (money) collected by a corporation in exchange for shares. If a company issues 100,000 shares for 50 dollars per share, its equity capital is 5 million dollars.

Equity-Linked Note (ELN)

An Equity-Linked Note (ELN) is a bond whose final payout at maturity depends on the market price of a share, a basket of stocks, or a stock index at that time. Some ELNs are principal-protected, meaning that the investor is guaranteed to receive at maturity at least 100% of the original amount invested.

European Option

An option is called European if it can only be exercised on expiration date.

Ex-dividend day

On or after ex-dividend date, the stock trades in the market without the dividend. Existing holders of the share will receive the dividend even if they now sell the share. Anyone who buys the share now will not receive the dividend.

Excess return

Return in excess of the risk-free interest rate.

Exchange

An exchange is an organized "marketplace" where potential buyers and sellers come together. An exchange bundles trading in one place. The historical form of an exchange is the trading room, where brokers of buyers and sellers meet physically and conclude transactions through mutual communication. Today, however, almost all exchanges are electronic, where communication and trading take place virtually through an electronic platform. On an exchange, the last traded price of an asset is considered its current market price. Thus, market prices are constantly and publicly redetermined.

Exchange

Organized exchanges for listed securities exist in a great many countries and trade a wide variety of products. In general exchanges trade a standardized, fungible product, where they act as the ultimate counterparts for all trades. Exchange clearing corporations ensure the creditworthiness of its members and impose many capital requirements upon them. In effect the exchange acts as “the seller to every buyer and the buyer to every seller”.

Exchange traded commodity (ETC)

Exchange Traded Commodities (ETCs) are investment vehicles that track the performance of an underlying commodity index or a single commodity. ETC’s are traded and settled exactly like normal shares on an exchange. They are open-ended securities (asset backed bonds), created and redeemed on demand by the issuer. As such they are similar to ETF’s. But ETF’s are funds and must meet a minimum diversification requirement. As such ETF’s are not suited to hold concentrated exposure to single commodities.

Exchange trading

When trading on an exchange, buyers and sellers of securities do not meet in person, but the transactions are carried out via brokers and traders on an exchange.

Exchange-traded

Options and futures (derivatives) that are traded on an organized exchange in standard denominations.

Exchange-traded fund (ETF)

An exchange-traded fund (ETF) is a special type of investment fund. ETFs usually track a specific stock basket or stock index, but unlike mutual funds, ETFs can be bought or sold on an exchange.

Exercise

To exercise an option means to choose to use the right to buy (if a call) or to sell (if a put).

Exotic option

A non-standard option or one with a twist. See also Vanilla.

Expiration date

Expiration date. In a derivative transaction expiration date is the pre-determined date at which we agree (or have the right) to buy / sell. The terminology is used for forwards, futures, swaps, options etc.

FCP

An FCP is a common fund structure in some European jurisdiction. FCP stands for “Fonds Commun de Placement” which translates to “collective investment scheme”.

FX excess return

The FX excess return is the excess return a investor gets from investing into a foreign money market fund. The investor is then exposed to the movements of the currency pair and earns the foreign interest rate. Using AUDUSD as example, a US investor investing in an AUD money market product, earns the AUDUSD spot return plus the AUD interest rate. To get to excess return we subtract the USD interest rate.

FX swap

An FX swap is the simultaneous purchase and sale of identical amounts of one currency for another with two different delivery dates (normally a spot trade paired with the a forward trade).

Financial intermediary

A financial intermediary channels capital between parties with a surplus (the savers), and parties in demand of capital (the spenders). The savers give money to the intermediary and the intermediary passes that money on to the savers. In this transaction, the financial intermediary is not just an agent between the two parties. It is the legal counterparty to both the spender and the saver. Thus the financial intermediary takes risk by acquiring funds from the savers and thereby incurring a liability on its own account. A typical example is a retail or commercial bank pooling short term deposits from many clients and then granting mortgages or loans to other clients.

Floating rate note (FRN)

Floating rate notes (called FRNs or “floaters”) are bonds that have a variable coupon. This means that the interest (coupon) paid to the holder is adjusted at regular intervals to reflect current market conditions. These variable coupon payments are usually linked to a reference interest rate such as Euribor or the Fed Funds Rate. Floating rate notes offer investors some protection from rising market interest rates.

Foreign currency

In the currency quotation USDCHF the USD is the foreign currency. We are measuring the value of 1 unit of the foreign currency (USD) in domestic currency units (CHF).

Foreign exchange (FX)

Global decentralized or over-the-counter (OTC) market for the trading of currencies.

Forward

A contract to buy/sell an asset at a future point in time at a price agreed today. Distinct from futures in that they are not traded on an exchange.

Forward points

Express the difference measured in pips between the spot price and the forward price of a currency pair. Forward points are also called "swap points",

Forward rate agreement (FRA)

A derivative contract in which the buyer locks in a specified rate of interest on a future borrowing and the seller agrees to compensate the buyer if market rates turn out higher. An FRA is equivalent to a short-dated interest rate swap with just one interest period.

Free float

The free float refers to the number of shares that can be traded on the open market, usually through a stock exchange. The free float can be considered as that part of a company's stock that is available to the public for trading on the secondary market.

Front office

The client-facing functions within a financial firm like an investment bank. Includes trading and sales teams.

Fundamental research

Fundamental analysis is a method of assessing the fair value of a security by analyzing various macroeconomic and business-related factors. Important fundamental factors are for example profitability, growth and risk related to a business. The fair value of the security can then be compared with the current market price to facilitate investment decisions.

Fundamnental stock analysis

Fundamental analysis seeks to uncover a company's future earnings potential and thus determine the value of its shares by examining the company’s business, as well as conditions within its industry and the broader economy.

Fungible

A fungible good or asset is one that can be readily interchanged (substituted) for another of the same kind. Fungibility implies equal value between the assets. Fungible assets simplify trading, since all fungible assets have the same value. Money is a good example of something fungible. A $1 bill is fungible with any other $1 bill.

Fungible

Fungible assets are assets that are equivalent, substitutable and exchangeable.

Future / Future contract

Forwards and Futures are contracts between two parties to trade an asset at a specified price on a future date. One party (the buyer) agrees to buy the asset at the specific price, the other party (the seller) agrees to sell the asset at the specific price. Forwards and futures differ in how they are traded: A forward contract is a customized bilateral agreement between two parties and is entered into outside the supervision of any exchange. A futures contract, on the other hand, has standardized terms and is traded on an exchange.

Future roll

Rolling a futures contract refers to extending the maturity of a future position forward by closing the initial contract and simultaneously opening a new longer-term contract for the same underlying.

Gamma

Change in delta for a small change in the underlying spot price (everything else equal). Mathematically gamma = dDetla/dSpot.

General Partner (GP)

A limited partnership is a partnership structure consisting of both, general partners (GP), and limited partners (LP). General partners have unlimited liability and have full management control of the business. Limited partners have little to no involvement in management, but also have liability that's limited to their investment amount in the LP.

Going private

The process of a public company becoming private company again, is referred to as "going private". See also Leveraged buyout.

Greeks

A general term referring to the different option risk measures such as delta, gamma, vega, theta, phi and rho. The option Greeks are model dependent and represent the first derivative of the option value to the different value drivers.

Growth capital

Growth requires capital, and it must be financed. Growth or mezzanine capital is a later stage private equity investment, aimed at helping successful young companies expand their business and implement their growth plans. Growth capital bridges the financing needs until a company is established enough to be listed on an exchange.

Hedge fund

A hedge fund is a special type of investment fund that aims to profit from short-term market opportunities. Its investment strategy is highly flexible and focuses on absolute performance. The goal of a hedge fund is to achieve good risk-adjusted returns with a low correlation to traditional equity and fixed income markets. Typical hedge fund strategies include "equity long/short" (buying undervalued stocks and selling overvalued stocks) and "merger arbitrage" (making profits from situations where one company is trying to acquire another company). Hedge fund managers receive a performance fee based on the amount of positive returns generated by the fund.

Hedging

Hedging is the practice of taking a position in a financial instrument to offset against the risk of another instrument or exposure. A typical hedger might be a farmer. The market values of crops fluctuate constantly with supply and demand. Once the farmer planted his wheat, he is committed to it for an entire season. By selling (some of) their production forward the farmer reduces this risk.

Home currency

In the currency quotation USDCHF the CHF is the home currency. We are measuring the value of 1 unit of the foreign currency (USD) in domestic currency units (CHF).

Hurdle rate

The hurdle rate sets a return hurdle, which must be reach before a performance fee is paid to the fund manager. A typical hurdle rate in private equity is 8%.

Hybrid securities

Combine the characteristics of debt instruments and equities. Hybrid securities typically pay regular income up to a specified date. However, there is no legal guarantee as to the amount and timing of these "interest" payments. The issuer may defer interest payments for years and not repay the principal for decades. But compared to equities, hybrid securities offer better protection against issuer bankruptcy. That is, hybrid investors are eligible to be paid before common stockholders in the event that the issuer bankruptcy. The original hybrid security is a preferred stock with fixed payments (like bonds). Hybrid securities issued by banks are often automatically converted into common shares if the bank runs into financial difficulties.

ICAV

ICAV is a common fund stucture in Ireland. It stand for "Irish Collective Asset-management Vehicle" (ICAV).

IPO (Initial public offering)

When a private company sells shares to the public for the first time, the process is called an Initial Public Offering (IPO). In an IPO, ownership of a company changes from private to public. After the IPO, the company's shares are freely traded on the open market, usually through a stock exchange.

IRR (internal rate of return)

The discount rate at which the present value of future cash flows of an investment equals to the cost of the investment. If the net value of the capital outflows (investment costs) and capital inflows (investment income) is zero, the discount factor will equate to the internal rate of return.

ITMF

see in-the-money-forward

ITMS

see in-the-money-spot

Idiosyncratic risk

Idiosyncratic risk is risk that is specific to a single asset (e.g., the stock of a particular company) or a specific group of assets (e.g., stocks in a particular industry). Idiosyncratic risk is also referred to as asset-specific risk or unsystematic risk. Idiosyncratic risk can be diversified away, whereas systemic risk cannot.

Implied volatility

Implied volatility indicates how much volatility the market priced into an option. Implied volatility is thus the answer to the question: "What volatility justifies the observed market price?". Implied volatilities are usually determined using the Black-Scholes model. In this process, the model's input value "volatility" is changed until the model price matches the market value. The implied volatilities thus reflects the market price of the option and can be understood as a measure of how rich or cheap an option is trading in the market at a given point in time. Implied volatility is therefore a characteristic of an option and not a characteristic of the underlying asset.

In-the-money-forward (ITMF)

Describes an option when it has parity to the forward. Which just means that the strike price of the option is more favorable than the forward price.

In-the-money-spot (ITMS)

Describes an option when it has parity to the spot. Which just means that the strike price of the option is more favorable than the spot price.

Inflation-linked bonds

Inflation-linked bonds offer investors protection against inflation. This is done by linking the the face value of the bond to a consumer-price-index. The face value is thus adjusted according to the inflation and coupon payments are made based on the adjusted face value (keeping the coupon-rate constant). The majority of inflation-linked bonds are issued by governments. Example: An investor purchases an Inflation-linked bond with a face value of EUR 1000 and a coupon rate of 3%. Over the next year the consumer price index increases by 5%. Thus the inflation-adjusted principal increases to EUR 1050. The coupon is thus 3% of EUR 1050, that is EUR 31.5.

Initial margin

Amount of margin you need to deposit to initiate a position. Initial margin can be in cash or securities.

Institutional investor

An institution whose purpose is to invest its assets or those held in trust for others (e.g. pension funds, insurance companies).

Insurance Company

Insurance companies collect premiums from their customers to protect them against various types of risks. The insurance company invests the collected premiums to cover future claims and make a profit.

Interest rate swap

In an interest rate swap one party agrees to pay a fixed interest rate in return for receiving a variable rate from the counter party.

Investment bank

An investment bank focuses on the financial needs of large companies and large institutional investors. You can think of an investment bank as being divided into a “sell-side” servicing companies and a “buy-side” servicing institutional investors. The "sell-side", or corporate finance division, is best known for helping companies issue new debt and equity. The “buy-side”, or securities division, assists institutional investors investing their money by providing investment advice (research), executing trades (brokerage, market making), and offering risk management products. Investment banks make most of their profits by charging fees for advice and earning commissions on trade execution.

Investment banking

see "corporate finance department" and "investment bank"

Investment fund

An investment fund pools money contributed by a group of investors and invests that capital collectively in a portfolio of stocks, bonds and other financial assets. The fund manager determines the composition of the portfolio according to predefined investment guidelines and constraints. He receives a management fee based on the total assets under management.

Investment period

Period during which a fund makes investments.

J-curve

The J-curve represents the evolution over time of the net cumulated cash in- and outflow into a private market fund.

J-curve

The J-curve refers to the negative returns that the fund generates during the investment phase, when the fund manager starts calling capital from investors. The administration fees and costs for launching the fund are covered from the first few capital calls. The return starts turning positive when the assets appreciate in value over time and finally get sold.represents the evolution over time of the net cumulated cash in- and outflow into a private market fund.

Kurtosis

Kurtosis refers to a market phenomenon that gives out-of-the-money strike options a different implied vol price than the at-the-money strike options of the same expiration. A graph of implied vol against spot would reveal a line that looks like a smile, hence the term, "Vol Smile". When low delta options have a great deal of positive kurtosis, they are often referred to as “fat wings" or "fat tails".

Large Cap

"Large cap" stands for large capitalization. It usually refers to large companies as measured by their market value. The opposite of large cap stocks are small cap stocks.

Leverage

Leverage refers to the use of debt (borrowed funds) or derivative instruments to amplify returns from an investment. Leverage increases the expected return and the risk of an investment.

Leveraged Buyout (LBO)

A leveraged buyout or LBO is a company’s purchase by another company using a lot of borrowed money to finance the transaction. This borrowed money is provided by private equity or more precisely by leveraged buyout investors. An LBO consolidates all outstanding shares of the acquired company under one ownerships. The acquired company becomes a privately owned company again. The process of a public company becoming private again, is referred to as "going private".

Limited Partner (LP)

A limited partnership (LP) is a partnership structure consisting of both, general partners, and limited partners. General partners have unlimited liability and have full management control of the business. Limited partners have little to no involvement in management, but also have liability that's limited to their investment amount in the LP.

Limited liability company (LLC)

A limited liability company (LLC) is a business structure in the U.S. that protects its owners from personal responsibility for its liabilities. Limited liability companies are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship. While the limited liability feature is similar to that of a corporation, the availability of flow-through taxation to the members of an LLC is a feature of a partnership rather than an LLC.

Limited partnership

A limited partnership is a partnership structure consisting of both, general partners and limited partners. General partners have unlimited liability and have full management control of the business. Limited partners have little to no involvement in management, but also have liability that's limited to their investment amount in the LP.

Liquidity

Describes the ease with which one can buy or sell a security or asset without causing a pronounced change in the price. The amount that can be traded without a price change indicates how liquid a market is. In accounting, used to describe how quickly an asset can be converted to cash. A liquid market is usually reflected by a narrow bid-ask spread.

Listed

A security or contract (stock, bond, or derivative) that trades on a regulated exchange such as the New York Stock Exchange.

Listing (of securities)

Listing of a securitiy means the inclusion of the security in the list of securities admitted to trading on an exchange.

Long position

Refers to the the position of the buyer (holder) of a security or other instrument. “I'm long 500 shares of IBM” means that you own 500 shares of IBM. Investors maintain “long” security positions in the expectation that the stock will rise in value in the future. A long IBM position will thus generate a profit, if the price of the IBM share increases and generate a loss if it decreases. The opposite of a “long” position is a “short” position.

Long the underlying

A position that appreciates in value when the price of the underlying increases. Such as buying the underlying, buying futures, buying call options or selling put options. "If you are short a put then you are long the underlying".

Maintenance margin

Minimum amount that must be maintained at any given time in your margin account.

Make a market

To make a market means to give both a purchase and an offer price and sizes and be ready to trade on those prices.

Margin call

If your margin account falls below the maintenance level, you receive a margin call to bring your margin account back up to the initial margin level. If you cannot meet the margin call, your position will be liquidated (closed out).

Mark-to-market

In general, mark-to-market means recognizing the profit/loss on a position against the current market price. In particular, if one is trading on an exchange, then marking-to-market results in real dollar adjustments to the margin account through the daily settlement of profits and losses.

Mark-to-market margin

See variation margin

Market

A market is a physical place or virtual structure where potential buyers and sellers meet to exchange goods and services. When a potential buyer and a potential seller agree on a price, a transaction takes place in which the seller sells goods or services to the buyer in exchange for money.

Market capitalization

Market capitalization (Market cap) refers to the total market value of all shares issued by a company. It is calculated by multiplying the share price of a company by the number of outstanding shares of that that company. For example, a company with 100 million shares selling at 50 Euros a share would have a market cap of 5 billion Euros.

Market equilibrium

Market equilibrium is a state in which market supply and demand balance each other. That is, at prevailing market prices, investor demand for an asset is exactly equal to the supply of that asset. Hence, asset prices are neither artificially driven up by unmet demand nor driven down by oversupply. As a consequence, prices are determined by macroeconomic variables and are NOT distorted by imbalances between supply and demand. In other words, asset prices reflect how the average market participant perceives their value.

Market exposure

Market exposure is the tendency of a portfolio or position to gain or lose value due to changes in the general economic conditions. Market exposure and market risk are often used synonymously.

Market maker

A market maker is trader that stands ready to buy and sell specific financial instruments on a regular and continuous basis. This involves giving a price at which the market maker will buy the financial instrument as well as a price at which they will sell it (2-way price quote). As such they provide liquidity to the market. The size (how many) and the width (price difference between where the market maker will buy and sell the same security) will depend on many factors such as liquidity and market volatility. Market makers trade for their own account. They make a living from capturing the bid-ask spread (the difference between the bid and offer price they quote). A trader at an investment bank for example acts primarily as a market maker and his job is to provide liquidity to his clients. Market makers are like dealers in that they make money from quoting a 2-way price (bid and ask). Dealers usually operate in the OTC markets while market maker typically operate on an exchange where they are obligated to sell and buy at the price and size they have quoted.

Market portfolio

A portfolio consisting of all assets available in the investment universe, with each asset held in proportion to its market value. That is, the relative market value of an asset in the market portfolio is simply equal to the aggregate market value of the asset divided by the sum of the aggregate market values of all assets. The market portfolio is considered the most diversified portfolio.

Market risk

See "systematic risk"

Maturity

The date on which the life of a financial instruments ends through cash or physical settlement or expiration with no value. Typically used in the bond market and the derivatives market. In the derivatives market the two terms expiration and maturity are often used synonymously.

Medium Term Note

The terms bonds and notes are mostly used interchangeably. The only distinction is that a note has an original maturity of no more than 10 years. Most MTNs have a maturity between 4 and 7 years. Medium-term notes are typically targeted at large institutional investors and high net worth individuals, whereas bonds are issued to the general public on the open market. An important difference between bonds and medium term notes is the way they are issued. Bonds are issued with a coupon interest and maturity date that is set when the bond is issued. Later, additional funds may be raised by selling bonds retained by the issuer, but the maturity date and coupon rate of the bond would be the same as in the originally issue. With a Medium Term Note (MTN programme) issuers can issue multiple series of the notes with different coupons (potentially fixed and floating rate) and maturities. The main advantage of medium-term notes is their flexibility: Issuer can continuously issue notes with characteristics that a specific investor group would want. Structured MTNs go even a step further by combining MTNs with derivatives to meet specific investor need.  

Mezzanine credit

A subordinated loan, which is accorded a lower priority than a senior loan in the capital structure.

Micro-gamma

Micro-gamma sometimes refers to options with very little time left to expiration (less than a week but mostly overnight, 2 day, or 3 day options). These options have a huge amount of gamma), and hence give market makers a good leveraged way to patch-up "bad" gamma positions. The downside of such positions are massive decay bills.

Money market

The wholesale securities market in short-term, highly-liquid, high-quality assets.

Multiples

Multiples express the return on an investment as a multiple of the paid-in capital. The most commonly used ones are D/PI and TV/PI: ▪ D/PI (distributions to paid-in capital ratio): the sum total of distributions received relative to the capital paid into the fund up to that point. ▪ TV/PI (total value to paid-in capital ratio): the sum of distributions received plus the unrealised value of the investment relative to the capital paid into the fund up to that point.

Net Asset Value (NAV)

The NAV is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction. The investments are usually valued at cost in the first twelve months after their purchase, after which their value is set based on a fundamental assessment, comparable transactions and public market multiples.

Noise

Fluctuations in price and volume that confuse any judgement on which way the market is going.

Non-deliverable forward (NDF)

Non-deliverable Forward. Some currencies cannot be freely converted into other currencies due to legal restrictions. A hedger can still trade these currencies forward, but the forwards are then cash settled. Such cash settled FX forwards are called Non-Deliverable-Forwards or simply NDFs. NDF trading developed in offshore financial centers, outside the jurisdiction of the country with foreign exchange convertibility restrictions. Examples of NDFs are Korean Won (KRW against USD), Indian Rupee (INR against USD), and Taiwan Dollar (TWD against USD).

Note

A fixed-rate debt instrument with a maturity of less than 10 years. Any floating-rate debt instrument (other than a floating-rate certificate of deposit) are referred to as (floating rate) notes.

Notes

The terms ‘bonds’ and ‘notes’ are mostly used interchangeably. The only distinction is that a note has an original maturity of no more than 10 years.

Notional amount

The notional amount (or notional principal amount or notional value or principal) of a financial instrument is the nominal amount that is used to calculate payments made on that instrument. In a bond, the buyer receives coupons payments calculated off the bond's notional and then receives the notional back at maturity. In a total return swaps the notional is the nominal amount upon which the total return payments and the interest rate payments will be determined. Note that in a total return swap transaction neither party pays nor receives the notional amount at any time; only the total return payments and interest rate payments change hands.

OTMF

see out-of-the-money-forward

OTMS

see out-of-the-money-spot

Offer

As a verb offer means to put in a sale price: ”On that call, I'm 5 offered.” As a noun offer describes the sale price: “the broker's offer is 3 ½”. lift/take the offer means to buy at the counterparty's (market's) offer price. Get taken/lifted means someone bought from you at your sale price. As an adjective offer describes selling pressure in a security or instrument: “shares in the banking industries were offered, the index fell today.”

Open-end fund

Open-end funds are perpetual in nature and can issue or redeem fund shares throughout their existence. The opposite is a closed-end fund.

Option holder

The person who is long the option.

Option writer

The person who is short the option.

Options

An option is the right to buy (call) or sell (put) the underlying at the strike price at a pre-determined date (expiration).

Ordinary share

A regular share in a company, giving the holder the right to vote on company decisions and receive a dividend. Also called common stock.

Organizational capital

Organizational capital is a term used for the internal efficiency with which the company uses its resources to implement its business strategy.

Out-of-the-money-forward (OTMF)

Describes an option when it has no parity to the forward. Which just means that the strike price of the option is less favorable than the forward price.

Out-of-the-money-spot (OTMS)

OTMS describes an option when it has no parity to spot. Which just means that the strike price of the option is less favorable than the spot price.

Over the counter (OTC)

A market that established itself away from commoditized and centralized exchange trading. Price discovery and trading involves dealers, brokers, and customers. An OTC trade is often executed between two participants without others being aware of the price at which the transaction was completed. A major difference between exchange trading and OTC is that the parties to an OTC trade have credit risk, which must be managed.

Par value of a share

The ”Par value” ("face value" or "nominal value”) of a share is a somewhat outdated legal and accounting concept that you should not pay much attention to. It has nothing to do with the actual value of the share or its market price. Rather, it is the lowest price at which the company may sell its shares. The par value is set by the company's charter. If a company issues different types of common shares, then shareholder rights such as dividends or voting rights are often proportional to the par value of the share.

Parity value

The parity value is the discounted party to the forward e.g. parity-to-forward / (1+rt). The value of a European option is always greater than or equal to its parity value.