Derivatives: Markets and Instruments Flashcards
American-Style
Type of option contract that can be exercised at any tile up to the options expiration date
Arbitrage
The simulataneous purchase of an undervalued asset or portfolio and sale of an overvalued but equivalent asset or portfolio, in order to obtain a risk less profit on the price differential.
At the money
An option in which the underlying as price equals the exercise price
Call
An option that gives the holder the right to buy an underlying asset from another party at a fixed price over a specific period of time
Call Option
An option that gives the holder the right to buy an underlying asset from another party at a fixed price over a specific period of time
Cash markets
Markets in which assets are traded for immediate delivery.
Cash prices
The price of an asset for immediately delivery.
Cash-settled forwards
Cash-settled forward contracts, used predominately with respect to foreign exchange forwards
Clearing
The process by which the exchange verifies the execution of a transaction and records the participants’ identities
Collateralized bond obligations
A structured asset-backed security that is collateralized by a pool of bonds.
Collateralized debt obligation
Generic term used to describe a security backed by a diversified pool of one or more debt obligations.
Collateralized loan obligations
A structured asset-backed security that is collateralized by a pool of loans.
Collateralized mortgage obligation
A security created through the securitization of a pool of mortgage-related products (mortgage pass-through securities or pools of loans).
Contingent claims
Derivatives in which the payoffs occur if a specific event occurs; generally referred to as options.
Contracts for differences
Cash-settled forward contracts, used predominately with respect to foreign exchange forwards.
Credit default swap (CDS)
A type of credit derivative in which one party, the credit protection buyer who is seeking credit protection against a third party, makes a series of regularly scheduled payments to the other party, the credit protection seller. The seller makes no payments until a credit event occurs.
Credit derivatives
A contract in which one party has the right to claim a payment from another party in the event that a specific credit event occurs over the life of the contract.
Credit-linked note (CLN)
Fixed-income security in which the holder of the security has the right to withhold payment of the full amount due at maturity if a credit event occurs.
Credit spread option
An option on the yield spread on a bond.
Daily settlement
The revaluation of a financial asset or liability to its current market value or fair value.
Derivatives
A financial instrument whose value depends on the value of some underlying asset or factor (e.g., a stock price, an interest rate, or exchange rate).
European-style
Said of an option contract that can only be exercised on the option’s expiration date.
Exercise price
The fixed price at which an option holder can buy or sell the underlying.
Fixed-for-floating interest rate swap
An interest rate swap in which one party pays a fixed rate and the other pays a floating rate, with both sets of payments in the same currency.
Forward commitments
Class of derivatives that provides the ability to lock in a price to transact in the future at a previously agreed-upon price.
Forward price
The fixed price or rate at which the transaction scheduled to occur at the expiration of a forward contract will take place. This price is agreed on at the initiation date of the contract.
Futures price
The agreed-upon price of a futures contract.
Hedge portfolio
A hypothetical combination of the derivative and its underlying that eliminates risk.
Implied volatility
The volatility that option traders use to price an option, implied by the price of the option and a particular option-pricing model.
In the money
Options that, if exercised, would result in the value received being worth more than the payment required to exercise.
Initial margin
The amount that must be deposited in a clearinghouse account when entering into a futures contract.
Law of one price
The condition in a financial market in which two equivalent financial instruments or combinations of financial instruments can sell for only one price. Equivalent to the principle that no arbitrage opportunities are possible.
Limit down
A limit move in the futures market in which the price at which a transaction would be made is at or below the lower limit.
Limit up
A limit move in the futures market in which the price at which a transaction would be made is at or above the upper limit.
Locked limit
A condition in the futures markets in which a transaction cannot take place because the price would be beyond the limits.
Long
The buyer of a derivative contract. Also refers to the position of owning a derivative
Maintenance margin
The minimum amount that is required by a futures clearinghouse to maintain a margin account and to protect against default. Participants whose margin balances drop below the required maintenance margin must replenish their accounts.
Margin
The amount of money that a trader deposits in a margin account. The term is derived from the stock market practice in which an investor borrows a portion of the money required to purchase a certain amount of stock. In futures markets, there is no borrowing so the margin is more of a down payment or performance bond.
Margin bond
A cash deposit required by the clearinghouse from the participants to a contract to provide a credit guarantee.
Margin call
A request for the short to deposit additional funds to bring their balance up to the initial margin.
Mark to market
The revaluation of a financial asset or liability to its current market value or fair value.
Non-deliverable forwards
Cash-settled forward contracts, used predominately with respect to foreign exchange forwards.
Notional principal
An imputed principal amount.
Open interest
The number of outstanding contracts in a clearinghouse at any given time. The open interest figure changes daily as some parties open up new positions, while other parties offset their old positions.
Option
A financial instrument that gives one party the right, but not the obligation, to buy or sell an underlying asset from or to another party at a fixed price over a specific period of time.
Option premium
The amount of money a buyer pays and seller receives to engage in an option transaction.
Out of the money
Options that, if exercised, would require the payment of more money than the value received and therefore would not be currently exercised.
Performance bond
A cash deposit required by the clearinghouse from the participants to a contract to provide a credit guarantee.
Price limits
Limits imposed by a futures exchange on the price change that can occur from one day to the next.
Put
An option that gives the holder the right to sell an underlying asset to another party at a fixed price over a specific period of time.
Put Option
An option that gives the holder the right to sell an underlying asset to another party at a fixed price over a specific period of time.
Risk management
The process of identifying the level of risk an organization wants, measuring the level of risk the organization currently has, taking actions that bring the actual level of risk to the desired level of risk, and monitoring the new actual level of risk so that it continues to be aligned with the desired level of risk.
Settlement
The process that occurs after a trade is completed, the securities are passed to the buyer, and payment is received by the seller.
Settlement price
The official price, designated by the clearinghouse, from which daily gains and losses will be determined and marked to market.
Short
The seller of an asset or derivative contract. Also refers to the position of being short an asset or derivative contract.
Spot markets
Markets in which assets are traded for immediate delivery.
Spot prices
The price of an asset for immediately delivery.
Total return swap
A swap in which one party agrees to pay the total return on a security. Often used as a credit derivative, in which the underlying is a bond.
Transparency
Said of something (e.g., a market) in which information is fully disclosed to the public and/or regulators.
Underlying
An asset that trades in a market in which buyers and sellers meet, decide on a price, and the seller then delivers the asset to the buyer and receives payment. The underlying is the asset or other derivative on which a particular derivative is based.
