410 Midterm 1 Flashcards
American option
An options that can be exercise at any time during it’s life.
arbitrage
a trading strategy that takes advantage of two or more securities being mis-priced relative to each other
asian option
an option with a payoff dependent on the average price of the underlying asset during a specified period.
asset-backed security
security created from a portfolio of loans, bonds, credit card receivables, or other assets.
asset swap
exchange the coupon on a bond for LIBOR plus a spread
bermudan option
an option that can be exercised on specified dates during it’s life
call option
an option to buy an asset at a certain price by a certain date.
cash settlement
procedure for setting a futures contract in cash rather than by delivering the underlying asset.
CDD
cooling degree days
coupon
interest payment made on a bond
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.
credit risk
the risk that a loss will be experienced because of a default by counter party in a derivatives transaction.
currency swap
a swap where interest and principal in one currency are exchanged for interest and principal in another currency.
european option
an option that can be exercised only at the end of its life.
exercise price
the price at which the underlying asset may be bought or sold in an option contract (also called the strike price).
forward contract
a contract that obligates the holder to buy or sell and asset for a predetermined delivery price at a predetermined future time.
forward interest rate
the interest rate for a future period of time implied by the rates prevailing in the market today.
future contract
a contract that obligate the holder to buy or sell an asset at a predetermined delivery price during a specified future time period. the contract is settled daily.
haircut
discount applied to the value of an asset for collateral purpose.
HDD
heating degree days.
hedge fund
decrease risk and decrease volatility. 1. funds that are subject to less regulation and fewer restrictions than mutual funds. 2. they can take short position and use derivatives. 3. but they cannot publicly offer their securities.
interest rate swap
an exchange of a fixed rate of interest on a certain notional principal for a floating rate of interest on the same notional principal.
LIBOR
LODON INTERBANK OFFERED RATE
Liquidity risk
- risk that it will not be possible to sell a holding of a particular instrument at it;s theoretical price. 2. the risk that a company will not be able to borrow money to fund its assets.
maturity date
the end of the life of a contract
put-call parity
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.
REPO
repurchase agreement. a procedure for borrowing money by selling securities to a counter party and agreeing to buy them back later at a slightly higher price.
repo rate
the rate of interest in a repo transaction
spot price
the price for immediate delivery
static hedge
a hedge that does not have to be changed once it is initiated.
tranche
one of several securities that have different risk attributes.
treasury bill
a short term non-coupon bearing instrument issued by the government to finance its debt.
treasury bond
a long term coupon bearing instrument issued by the government to finance its debt
volatility
a measure of the uncertainty of the return realized on an asset
yield
a return provided by an instrument
deversification
decrease risk by dividing a port folio between many different asset
