Glossary

Question 1

Arbitrage

Answer 1

Trading strategies designed to profit from price differences for the same or similar goods in different markets.

Question 2

Clearing

Answer 2

The settlement of a transaction, often involving exchange of payments and/or documentation.

Question 3

Clearing house

Answer 3

An institution that acts as the buyer to every seller and the seller to every buyer of exchange traded contracts and thus guarantees the performance of the contract. It is able to incur the enormous credit risks that this involves as a result of a system of deposits known as margins.

Question 4

Derivative

Answer 4

Forwards, futures, swaps and options (and other such as weather derivatives) whose value depends, at least in part, upon the value of an underlying asset or liability.

Question 5

Equity derivative

Answer 5

A generic term for derivatives involving stocks/shares - whether in terms of those in individual companies, or baskets or indices of these.

Question 6

Equity option

Answer 6

An option involving a stock/share, or a basket or index of these.

Question 7

Exchange traded

Answer 7

The generic term used to describe shares, bonds, futures, options and other derivative instruments traded on an organized exchange.

Question 8

Exercise

Answer 8

The act by which the buyer/holder of an option takes up his rights to buy or sell the underlying at the strike price.

Question 9

Expiry, expiration date, maturity date

Answer 9

The date and time when a transaction matures. Most commonly used to describe when the buyer / holder of an option ceases to have any rights under the contract, or when a futures contract month ceases trading.

Question 10

Forward

Answer 10

Any transaction in which the price is fixed today, but settlement is not due to take place until a future date.

Question 11

Future

Answer 11

An agreement to buy/sell, a standard quantity of a specific commodity or financial instrument, at a standard future date at a price agreed between parties to the contract. Futures contracts are traded on organized exchanges.

Question 12

Delta

Answer 12

change in option price per USD (ZAR etc.) increase in underlying
asset

Question 13

Gamma

Answer 13

change in delta per USD (ZAR etc.) increase in underlying asset

Question 14

Vega

Answer 14

change in option price per 1% increase in volatility (e.g. from 19%
to 20%)

Question 15

Rho

Answer 15

change in option price per 1% increase in interest rate (e.g. from
4% to 5%)

Question 16

Theta

Answer 16

change in option price per calendar day passing.

Question 17

Hedging

Answer 17

Dealing in such a manner as to reduce risk by taking a position that offsets an existing or anticipated exposure to a change in market prices. You are therefore attempting to lock in the profit/loss on the position at the current level.

Question 18

Initial margin

Answer 18

A relatively small deposit (in comparison to the nominal value of the contract) which both the buyer and the seller must lodge with the clearing house as security. In very volatile markets, the initial margin required can vary several times during the course of a single day.

Question 19

Long position

Answer 19

The result of a trader having bought more than he has sold in any particular market/commodity/instrument/contract.

Question 20

Margin

Answer 20

Those involved in exchange traded derivatives have to pay margins to the clearing house, either directly, if they are members, or via their broker. These are posted as a “good-faith” performance guarantee designed to ensure that all
parties are able to fulfil their obligations to one another. Margin accounts are adjusted daily to reflect current market price on the positions held. If a profit has been made it is paid to the account holder on a daily basis, likewise, if a loss has been made the account holder is asked to reimburse the amount lost daily.

Question 21

Margin call

Answer 21

A demand from the clearing house to one of its members, or a broker (normally a member) to one of its customers, for a margin payment.

Question 22

Mark-to-market

Answer 22

The revaluation of a futures or options position at its current market price/rate. All positions are marked to market by the clearing house, at least once a day. The profit/loss that is revealed by the re-valuation is received/paid to the clearing house (known as variation margin).

Question 23

Maturity

Answer 23

The date when a transaction is due to end, or the period of time until that date is reached.

Question 24

Open Interest

Answer 24

The total number of purchased or sold lots in a particular type of exchange traded contract that have not yet been offset, i.e. sold off or bought back.

Question 25

Option

Answer 25

Contracts which give the buyer/seller the contractual right, but not the obligation, to buy/sell a specified quantity of a given underlying asset at a fixed price on the designated future date.
The holder of a long call position will profit
from a rise in the price of the underlying asset, while the holder of a long put position will profit from a fall in the price of the underlying asset.

Question 26

Call Option

Answer 26

A call option confers the buyer/holder the right to buy the underlying commodity/instrument at the strike price.

Question 27

Put Option

Answer 27

A put option, on the other hand, confers to the buyer/holder the right to sell the underlying commodity/instrument.

Question 28

Over the counter (OTC)

Answer 28

The term “over the counter” is used to describe trading in financial instruments off organized exchanges with the effect that performance risk by the counterparties is not guaranteed by the exchange

Question 29

Position

Answer 29

The difference between the quantities bought and sold in any particular market / commodity / instrument / contract.

Question 30

Premium

Answer 30

The consideration paid by the buyer/holder to the seller/writer for an option.

Question 31

Risk management

Answer 31

The science of identifying, assessing, monitoring and controlling risks in order to keep them within acceptable bounds.

Question 32

Seat

Answer 32

The right which confers membership of the exchange on the registered holder or lessee thereof.

Question 33

Short position

Answer 33

The result of a trader having sold more than he has bought in any particular market/ commodity / instrument / contract.

Question 34

Spot (or cash market)

Answer 34

A transaction involving immediate settlement, or the soonest standard settlement in that market. For example, the spot date in the foreign exchange market, is normally two business days after the date of the deal.

Question 35

Strike price

Answer 35

The price at which the buyer/holder of an option has the right to buy/sell the underlying.

Question 36

Underlying

Answer 36

The commodity / asset / financial instrument on which a derivative is based. For example, in the case of an option, the product which the buyer/holder has the right to buy / sell.

Question 37

Volatility

Answer 37

A measure of the degree of movements in the price of the underlying around their statistical mean.

Question 38

Writer

Answer 38

The original seller of an option. The writer is required to fulfil the terms of the option at the choice of the holder.