Glossary of Terms 5

Question 1

Non-recourse

Answer 1

A loan, the servicing or repayment of which is dependent solely on the profitability of the underlying project and not on any other funds potentially in the possession of the borrower.

Question 2

Notional Portfolio

Answer 2

A portfolio which is created only notionally to serve as a benchmark for investment performance appraisal. Typically, such a portfolio will have weights set to closely mirror the fund’s objectives.

Question 3

Notional Principal

Answer 3

The principal used to calculate payments in an interest rate swap. The principal is “notional” because it is neither paid nor received (although for currency swaps the full notional is typically exchanged on trade date and at final maturity).

Question 4

OEIC

Answer 4

An Open Ended Investment Company is an investment vehicle very similar to an investment trust but with the open ended characteristics of a unit trust.

Question 5

Out-of-the-money

Answer 5

An option with no intrinsic value is described as out-of-the-money.

Question 6

OTC Option

Answer 6

Privately negotiated derivative contracts offered by dealers directly to end-users.

Question 7

Par Yield Curve

Answer 7

A plot of coupon value on the y-axis against term to redemption on the x-axis. For each term, the coupon that would be required for a fixed interest bond of that term to be issued at par is plotted.

Question 8

Payoff

Answer 8

The cash realised by a holder of a derivative at the end of its life.