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Glossary of financial terms
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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 is the amount of interest earned but not yet collected. Accrued interest is interest that has accrued but not yet been paid out. When buying or selling bonds, accrued interest refers to the interest accrued since the last coupon date. When settling the bond is added to the quoted price because the buyer will collect this accrued interest from the issuer.
Stückzinsen, March-Zinsen, aufgelaufene Zinsen
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.
An option is called American if it can be exercised up to and including expiration date. Most exchange-listed options are American.
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.
Briefkurs, Ask Preis, Angebotskurs
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.
In an option transaction assignment refers to the notice to short option seller that the option holder is exercising the option.
ATMF describes an option when the strike price is the same as the forward price.
am Geld relativ zum Forward, at-the-money-forward
ATMS describes an option when the strike price is the same as the spot price.
am Geld relativ zum Spotpreis, at-the-money-spot
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.
The function within an financial firm like an investment bank. The back office ensures smooth settlement, payment and reporting of transactions.
A summary of a company's assets and liabilities.
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.
Barrier-Option, Barriere Option
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 is the difference between the forward price and the spot price. Forward price (F) = Spot price (S) + basis.
The price or performance of a financial instrument used as reference to compare the performances of similar instruments.
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.”
Geldkurs, Bid-Kurs, Nachfragekurs
Bid-offer spread is the difference between the bid and the offer prices.
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.
Anleihe, Schweiz: Obligation
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.
Anleihe, Schweiz: Obligation, Rentenpapiere
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
See “Securities lending”.
The break-even point is the price at which a transaction produces neither a gain nor a loss.
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 account. Brokers are the "middlemen" between sellers and buyers.
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.
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."
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.
Call, Call-Option, Kaufoption
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.
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.
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.
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 describes one price at which you are willing to buy or sell: “My market in the 50 call is 2 choice.”
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.
A clearing broker is a clearing member who takes over the clearing and settlement for another participant.
Clearing corporation The affiliate or subsidiary of an exchange which clears the trades. It manages the margin accounts and becomes the central counterparty on each trade.
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.
Assets (property or securities) pledged by a borrower to secure payment of a loan or bond issue in the event of default
Pfand, Sicherheiten, Besicherung, Collateral
To be Added
besicherte Handelsgeschäfte, gedeckte Forderungen, besicherte Forderungen
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.
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 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…
kontinuierliche Verzinsung, kontinuierliche Aufzinsung
See “continuous compounding”
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.
Differenzkontrakt, Contract for Difference, CFD
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.)
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.
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 Action, Kapitalmassnahmen
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.
See "quote currency"
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. For example, if you buy a forward and the price of the underlying increases between trade and maturity, the contract then has a positive value for the buyer and a negative value for the seller. The buyer can only realize this value at maturity. If the counterparty defaults before the trade settles, the buyer might never realize the value of the contract. There are various ways to mitigate the counterparty credit risk, the most typical of which are collateralization and netting.
Gegenparteirisiko, Kreditrisiko, Ausfallrisiko
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)
A spot order placed beyond a barrier in the event that an exotic option is terminated.
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").
Dehedging, Rückkauf von Sicherungsgeschäften
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").
Wertverlust über die Zeit, Decay, zeitlicher Wertverlust
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