glossary of financial terms

Glossary 1

© Banking & Capital Markets Training Limited

Glossary of Financial Terms

[a] [b] [c] [d] [e] [f] [g] [h] [i] [j] [k] [l] [m] [n] [o] [p] [q] [r] [s] [t] [u] [v] [w] [x] [y] [z]

-A-ACTAdvance Corporation Tax

ADRAmerican Depository Receipt. A financial asset issued by a US Depository Bank representingshares in a non-US company held by them. These receipts are traded in the US.

AGMThe annual meeting of a company which is required by law.

AIMAlternative Investment Market

AMEXAmerican Stock Exchange. A private, not-for-profit corporation located in New York City,which handles approximately one-fifth of all securities trades within the United States.

APTAutomated Pit Trading

ATMAt the Money. When the price of the underlying transaction equals the strike price of theoption.

ASBAccounting Standards Board

ASDAActual Settlement Date Accounting

AbandonThe act of not exercising or selling an option before its expiration.

AccretingA range of instruments where the notional amount on which the instrument is based increasesduring its life. This may include swaps, swaptions, floors & collars.

Accrual accounting

Glossary 2


A method of reporting income when earned and expenses when incurred, as opposed toreporting income when received and expenses when paid.Accrued InterestInterest earned on a bond since the previous interest payment and not yet paid to thebondholder.

Acid-Test RatioA measure of a corporation's liquidity, calculated by adding cash, cash equivalents, andaccounts and notes receivable, and dividing the result by total current liabilities. It is a morestringent test of liquidity than current ratio.

Acquisition FeeThe total charges and commissions paid by any party in connection with the selection orpurchase of property by a direct participation program. Included in the total are any real estatecommission, acquisition expense, development fee, and selection fee or construction fee of asimilar nature. The fee is added to the basis in the asset for the purpose of depreciation andcalculating gain or loss.

Adjusted BasisThe value attributed to an asset or security that reflects any deductions taken on or capitalimprovements to, the asset or security. Adjusted basis is used to compute the gain or loss onthe sale or other disposition of the asset or security.

Adjusted BetaThe estimation of a securities future beta calculated from historical data, but modified by theassumption that the securities real beta will move over time to the market average of 1.

Adjusted Gross Income (AGI)Earned income plus net passive income, portfolio income and capital gains.

Advance/Decline LineA technical analysis tool representing the total of differences between advances and declinesof security prices. The advance/decline line is considered the best indicator of marketmovement as a whole.

Agent(1) An individual or firm that effects securities transactions for the accounts of others.(2) A person licensed as a life insurance agent.(3) A securities salesperson who represents a broker-dealer or issuer when selling or trying to

sell securities to the investing public; this individual is considered an agent whether heactually receives or simply solicits orders.

Alligator SpreadA combination of both put & call options, which generates so much commission for thebroker that the trade is unprofitable for the investor.

AlphaThe difference between a securities expected return and its real return.

American Style OptionAn option that may be exercised at any time up until expiry.

Glossary 3


Amortisation(1) The paying off of debt in regular instalments over a period of time.(2) The rateable deduction of certain capitalised expenditures over a specified period of time.

AmortisingA range of instruments where the notional amount on which the instrument is based decreasesduring its life – used for depreciating intangible assets for tax purposes. These can includeswaps, swaptions, floors & collars.

Annuity SwapAn interest rate swap where irregular cashflows are exchanged for a stream of regularcashflows of the equivalent present value.

AnnuityA contract that guarantees a fixed or variable annual payment.

ApportionmentThe allocation of stock to a buyer

AppreciationThe increase in the value of an asset over a period of time.

ArbitrageThe simultaneous purchase and sale of the same or related securities to take advantage of amarket inefficiency.

Arbitrage Pricing TheoryAn equilibrium model of asset pricing stating the expected return on a security is a linearfunction of the securities function to various common factors.

AskThe price at which a market maker is prepared to sell a security – also called the offer price.

Asset(1) Anything that an individual or a corporation owns.(2) A balance sheet item expressing what a corporation owns.

Asset AllocationThe optimal apportioning of investment funds amongst categories of assets.

Asset Backed SecuritiesNotes or Bonds backed by assets or structured cashflows receivable.

Asset-Liability ManagementThe process of matching a level of debt to an amount of assets. Carried out by financialinstitutions when matching the maturity of their deposits with the length of their loancommitments as protection against changes in interest rates.

Glossary 4


Asset SwapA swap in which a counterparty exchanges a stream of cash flows from an asset into adifferent stream. The most common asset swap is the conversion of high yielding fixed ratebonds into synthetic floating rate assets with a Libor + return.

AssignmentThe sale of a swap to a new counterparty or buyout of a swap by a new counterparty.

At-the-Opening OrderAn order that specifies it is to be executed at the opening of the market or of trading in thatsecurity or else it is to be cancelled. The order does not have to be executed at the openingprice.

Auction IssueA method of issuing securities – subscribers bid for stock and pay the price they bid.

Auction MarketA market in which buyers enter competitive bids and sellers enter competitive offerssimultaneously. The NYSE is an auction market.

Authorised StockThe number of shares of stock that a corporation is permitted to issue. This number of sharesis stipulated in the corporation's approved charter, and may be changed by a vote of thecorporation's stockholders.

Average PriceA step in determining a bond's yield to maturity. A bond's average price is calculated byadding its face value to the price paid for it and dividing the result by two.

-B-BBAIRS TermsStandard terms for shorter-term interbank interest rate swaps, provided by the British BankersAssociation.

BDBroker Dealer. A member firm, acting as agent or as principal, who is not a registered marketmaker in the security in which they are dealing.

BETBook entry transfer. The transfer of ownership of a security by means of a computer entry.This electronic recording of the asset may be in immobilised or dematerialised form.

BOTCCBoard of Trade Clearing Corporation

Glossary 5


Balance of Payments (BOP)An international accounting record of all transactions made by one particular country withothers during a certain time period; it compares the amount of foreign currency the countryhas taken in to the amount of its own currency it has paid out.

Balance of TradeThe largest component of a country's balance of payments; it concerns the export and importof merchandise (not services). Debit items include imports, foreign aid, domestic spendingabroad and domestic investments abroad. Credit items include exports, foreign spending in thedomestic economy and foreign investments in the domestic economy.

Balance SheetA statement of the assets and liabilities of a company at a particular point in time – normallyat the end of its financial year.

Balance Sheet EquationA formula stating that a corporation's assets equals the sum of its liabilities plus shareholders'equity.

Balloon MaturityA repayment schedule for an issue of bonds wherein a large number of the bonds come due ata prescribed time (normally at the final maturity date); a type of serial maturity.

BargainA transaction to buy or sell securities on a stock exchange.

Barrier OptionAlso called a knock-out, knock-in or a trigger option. This is a derivative that is pathdependent and is activated or cancelled if the underlying reaches a set level.

BasisThe difference between the cash price of the underlying security and the nearest dated future.

Basis PointOne hundredth of 1% - i.e. 50bp = .5%

Basis RiskThe risk that the value of a futures contract does not move in line with the underlyingexposure – also the risk of movement between two interest rate profiles [e.g. LIBOR vs. FedFunds].

Basis SwapA swap from one floating rate to another.

Basis Trading FacilityA process whereby futures and the underlying can be traded simultaneously to buy/sell thebasis.

Glossary 6


BearOne who expects market prices to fall.

Bear MarketA market, in which prices of a certain group of securities are falling or are expected to fall.See also bull market.

Bear RaidConcerted selling of an instrument so that it can be repurchased at a lower level.

Bearer ShareA security where possession is taken as proof of ownership as the certificate does not containthe name of the registered owner.

Bearer BondA bond with coupons attached, giving the holder the right to receive interest payments. Thesecoupons [talons] should be submitted after a specified date to receive these payments.

Beneficial OwnerThe owner of a security who is entitled to the benefits of that security. The beneficial andlegal owner may be different.

Best ExecutionDealing at the best possible price in the required size.

Beta CoefficientA means of measuring the volatility of a security or portfolio of securities in comparison withthe market as a whole. A beta of 1 indicates that the security's price will move with themarket. A beta greater than 1 indicates that the security's price will be more volatile than themarket. A beta less than 1 means that it will be less volatile than the market.

Bid PriceThe price at which a market maker or dealer will buy a security.

Binary OptionA discontinuous option that pays out a fixed amount if the underlying reaches the strike price.

Black – Scholes ModelA model used to value options, which calculates a theoretical ‘fair value’ by constructing aninstantaneously riskless hedge [i.e. where performance exactly mirrors the option payout].The portfolio of option and hedge can then be assumed to earn the risk free rate of return. Themodel takes 5 major factors into account: the risk free interest rate, the strike price of theoption, the price of the underlying, the option’s maturity and the assumed volatility.

Blue Chip StockThe equity issues of financially stable well-established companies that have demonstratedtheir ability to pay dividends in both good and bad times.

Glossary 7


BondA negotiable debt security with a maturity at issue of more than one year.

Bond BasisSwap rate based on a 365 day year in accordance with the accrual conventions in the USTreasury Bond market.

Bond RatingAn evaluation of the possibility of default by a bond issuer, based on an analysis of theissuer's financial condition and profit potential. Bond rating services are provided by, amongothers, Standard & Poor's and Moody's Investors Service.

Bond ValueThe market value a convertible bond would have if it were a straight [fixed rate] bond with noconversion rights.

Bonus IssueA free issue of new shares by a company to existing shareholders, in proportion to theirexisting holdings – can also be called a scrip or capitalisation issue.

BootstrappingA method used to derive the zero-coupon yield curve.

Brady BondsEmerging market debt, partly securitised by US Treasuries, issued when bank loans areexchanged for bonds.

Breakeven/PaybackA ratio [expressed in years] that compares the size of a conversion premium with thedifference between the yield on a convertible security and the dividend yield on the sharesinto which it can be converted.

Breakeven Point(1) The point at which gains equal losses.(2) The market price that a stock must reach for an option buyer to avoid a loss if he -

exercises. For a call, it is the strike price plus the premium paid. For a put, it is the strikeprice minus the premium paid.

BrokerOne who acts as an agent for a client when buying & selling securities.

BullOne who thinks that prices will rise.

Bull MarketA market in which prices of a certain group of securities are rising or are expected to rise. Seealso bear market.

Business CycleA predictable long-term pattern of alternating periods of economic growth and decline. Thecycle passes through four stages: expansion, peak, contraction, and trough.

Glossary 8


Butterfly SpreadThe sale of an at-the-money straddle and the simultaneous purchase of an out-of-the-moneystrangle.

-C-CADCash against delivery/documents

CADCapital Adequacy Directive – the requirement for banks & financial services organisations tohave sufficient capital to carry out their activities.

CBOEChicago Board Options Exchange.

CBOT [Chicago Board of Trade]The oldest commodities exchange in the United States; established in 1886. The exchangelists agricultural commodity futures such as corn, oats and soybeans, in addition to morerecent innovations as GNMA mortgages and the Nasdaq 100 Index.

CCSSCrest Courier & Sorting Service

CDCertificate of Deposit – a certificate issued by a bank against a short-term deposit.

CGOCentral Gilts Office – book entry transfer system for Gilts, operated by the Bank of England

CGTCapital Gains Tax

CFTCCommodity Futures Trading Commission

CJACriminal Justice Act 1993

CMEChicago Mercantile Exchange

CRESTCertificateless Register of Electronic Stock & Share Transfer

CRRCounterparty Risk Requirement

Glossary 9


CSCash settlement.

CSDCentral Securities Depository. Their primary function is to immobilise or dematerialisesecurities thus assuring most transactions are processed in book entry form.

CSDAContractual Settlement Date Accounting. Global Custodians in certain conditions and indeveloped markets will give clients cash value for securities traded irrespective of whetherthey have received the money themselves.

CSPCentral Stock Payment

CUSIPCommittee on Uniform Securities Identical Procedures

Calendar SpreadBuying two futures or options on the same security but with different maturities.

Callable SwapA swap that gives the fixed rate payer an option to cancel the swap agreement, usually on onespecific future date.

Call OptionAn option that gives the right [but not the obligation] to buy a specific quantity of theunderlying instrument at a predetermined price, on or before a fixed date.

CapA contract in which the seller agrees to pay the buyer the difference between a reference rateand an agreed strike rate as in the case when the reference exceeds the strike. This is done inreturn for annuity payments or a one off premium.

Capital Asset Pricing Model [CAPM]Represents the relationship between expected risk and expected return – states that the returnon an asset or security should be equal to the risk-free return + a premium.

Capital EmployedMedium & long term finance in a company = debt finance + shareholders funds

Capitalisation IssueSee bonus issue

Capital MarketsFinancial markets in which instruments with a term to maturity, at issue, are issued andtraded.

Glossary 10


Cash FlowThe money received by a business minus the money paid out. Cash flow is also equal to netincome plus depreciation or depletion.

Cash MarketThe underlying currency or market where the instruments that relate to derivatives are boughtand sold.

Cash SettlementA security dealt for settlement the business day after dealing.

CEDELAn International Central Securities Depository & clearing system based in Luxembourg andowned by a consortium of banks.

CertificatedSecurities represented in the form of paper certificates

Chinese WallA barrier to the flow of information between departments in the same organisation, normallybetween the corporate finance/M&A departments of financial institutions and the rest of theinstitutions

Circuit BreakerA suspension of trading in a particular market in times of high volatility

City CodeA rule book for the conduct of take-overs and mergers in the UK.

City PanelPanel on Take-overs & Mergers. A non-statutory body, which enforces the take-over, code inthe UK.

Class 1 TransactionA deal whereby a company’s assets/profits/shares could change by 25% or more

Class 2 TransactionA deal whereby a company’s assets/profits/shares could change by 5% or more.

Clean PriceThe market price of a bond, excluding accrued interest – the price at which bonds are tradedin the market.

Clearing HouseAn organisation responsible for the reconciliation of sales and purchases, organisingsettlements & margins and providing guarantees to market users in the event of default.

CollarThe simultaneous purchase of an interest rate cap and an interest rate floor therefore limitingexposure to changing interest rates within a defined range.

Glossary 11


CollateralCertain assets set aside and pledged to a lender for the duration of a loan. If the borrower failsto meet obligations to pay principal or interest, the lender has claim to the assets.

Commercial PaperAn unsecured, short-term promissory note issued by a corporation for financing accountsreceivable and inventories. It is usually issued at a discount reflecting prevailing marketinterest rates.

CommissionA fee charged by a broker for a service.

CommodityA product traded on a commodity exchange.

Compliance OfficerSomeone appointed by an organisation to ensure that it complies with local & internationalregulatory requirements.

Concert PartyInvestors buying securities in agreement between themselves.

ContractA standard unit of trading in futures & traded options.

Contract NoteA note containing details of a transaction carried out by a bank/broker on behalf of a client.

ConvergenceMovement of the price of a futures contract towards the price of the underlying.

Conversion PremiumThe amount by which a convertible bond’s current market price exceeds the conversion value[current market value] of the shares into which it can be converted.

Conversion PriceThe share price at which a convertible can be exchanged into shares.

Convertible BondA bond that is convertible at a future date, at the option of the bondholder, into a statedquantity of equity shares in the issuer. If not converted, the bond will be redeemed at maturity.

Convertible Loan StockAn interest bearing security with an option to convert into a specific amount of equity by afuture date.

ConvexityMathematical concept measuring the sensitivity of the market price of an interest-bearingbond to a change in interest rates.

Glossary 12


Corporate ActionsOnce a trade is concluded and the securities held in custody, events occur which can affectchange in the underlying asset i.e. share split or a benefit to the shareholder i.e. dividend.

CorporationThe most common form of business organisation, in which the total worth of the organisationis divided into shares of stock; each share representing a unit of ownership. A Corporation ischaracterised by a continuous life span and the limited liability of its owners.

CorrelationA statistical measure which measures the degree of mutual variation between two randomvariables.

CouponInterest payment.

Covered WarrantsWarrants issued by intermediaries – they can be on single stocks, indices or baskets.

Credit EnhancementImproving the credit rating of bonds by obtaining a third party guarantee or credit riskinsurance.

Credit RatingA formal opinion about the likelihood that a debt will be repaid in full and on time.

Credit RiskThe probability that a counterparty will default on its financial obligations.

Cross Border TradeThis occurs when the trading parties are situated in difference countries i.e. a buyer of asecurity in France with a seller of the same security in Germany who trade with each other.

Cum DividendA security that is purchased with the right to the next dividend.

Current AssetsCash and other assets that are expected to be converted into cash within the next twelvemonths. Examples include such liquid items as cash and equivalents, accounts receivable,inventory and prepaid expenses.

Currency RiskUncertainty in the return from a foreign financial asset due to unpredictability regarding theexchange rate.

Currency SwapA transaction in which two parties agree to swap fixed or floating cash flows in differentcurrencies for a specific period.

Current YieldAnnual interest receivable from a security expressed as a % of its current market value.

Glossary 13


-D-DIEDesignated Investment Exchange

DMDeutschemark

DTCDepository Trust Company

DTBDeutsche Terminborse

DTIDepartment of Trade and Industry

DVPDelivery versus Payment. The simultaneous and irrevocable transfer of ownership of an assetin exchange for the equivalent assured counter value in same day funds.

DTIDepartment of Trade & Industry [UK]

Daily Official ListProduced each day by the London Stock Exchange to record the previous day’s trading prices.

Day OrderAn order placed for execution during one trading session only – the order is automaticallycancelled if not filled that day.

DealerAn institution or individual who trades financial assets, either for their own account or onbehalf of clients.

DebenturesInterest bearing security, secured on the borrowers assets.

Debt-Equity SwapA one-off transaction of physical instruments, without the exchange of future cashflows.Generally used by countries and companies with large debts that have become unserviceable.

Debt SecurityNormally interest bearing bonds.

Debt ServiceThe schedule for repayment of interest and principal (or the scheduled sinking fundcontribution) on an outstanding debt.

Glossary 14


Debt WarrantGives the holder the right to buy a certain bond at a fixed price on or between certain dates.

Default(1) The failure to pay interest or principal promptly when due.(2) The failure to perform on a futures contract as required by an exchange.

Deferred SwapA type of swap, where due to accounting or tax reasons, payments [rather than the wholeswap] are deferred to a later period.

Delivery RiskThe risk faced when dealing in different time zones, when one side of a transaction has beendelivered but not the other. Also known as settlement risk, it is encountered most often inforeign exchange & foreign securities transactions.

DeltaA measure of the relationship between an option price and the price of the underlying futurescontract or a stock price. The rate of change of delta is an option’s gamma.

Dematerialised SecuritiesSecurities where the certificates or documents of title have been destroyed and replaced byelectronic book entry records.

Depreciation(1) A tax deduction that compensates a business for the cost of certain tangible assets.(2) A decrease in the value of a particular currency relative to other currencies.

DerivativesAny financial product ‘deriving’ from another. For example, swaps futures and options.

Designated Market MakerA dealer who continuously provides bid & ask prices at which they are obliged to deal, aswell as a size.

DevaluationA substantial fall in the value of a currency as compared to the value of gold or to the value ofanother country's currency.

Difference OptionAn option that pays the difference in the price of two assets. The option is originally valuedby the strike price.

Differential SwapTypically a combination of a simple interest rate swap in the denominating currency, and aquantised swap, denominated in the same currency but referenced to a different currency.

Diluted EarningsA reduction in earnings per share of common stock. Dilution occurs because of the issuanceof additional common shares through the exercising of options and/or the conversion ofconvertible securities.

Glossary 15


Dirty PricePrice payable for a bond on settlement of a purchase transaction. The clean price plus accruedinterest.

Discount RateThe interest rate used in calculating the present value of future cashflows. Reflects not onlytime value but also risk over time.

Discount SecurityA security that is issued at a discount to its face value and [normally] redeemed at par atmaturity e.g. bills & zero-coupon bonds.

DividendA distribution of the earnings of a corporation. Dividends may be in the form of cash, stock orproperty. The board of directors must declare all dividends.

Dividend YieldThe dividend on a share as a % of the current share price.

Dow Jones IndexA US stock market index.

Due DiligenceThe careful investigation by the underwriters that is necessary to ensure that all materialinformation pertinent to an issue has been disclosed to prospective investors.

DurationThe average life of the present values of all future cash flows from a bond. Essentially ameasure of bond price volatility by measuring its ‘length’ i.e. weighted average, term-to-maturity of a bonds cash flow.

-E-EASDAQEuropean Association of Securities Dealers Automated Quotation – A pan European marketfor smaller companies based in Brussels.

EBEarly bargain

EBITDAEarnings before interest, tax, depreciation and amortisation - This method of valuation showsthe free cashflow of a company excluding distortions due to differing depreciation policies.

ECNElectronic communications network

ECUEuropean Currency Unit

Glossary 16


EDREuropean depository receipt – non-Paris listings.

EDSPExchange Delivery Settlement Price

EEAEuropean Economic Area [EU + EFTA]

EFPExchange for Physicals

EFTAEuropean Free Trade Area (Norway, Liechtenstein & Iceland)

EGMExtraordinary General Meeting.

EMHEfficient Market Hypothesis

EPSEarnings per share. A common valuation yardstick for equities.

ERISAEmployee Retirement Income Security Act of 1974 allowing US Domestic funds to diversifyinto non-US securities.

EUEuropean Union

EuroDREuropean depository receipt – Paris listed.

EuroNMEurope-wide stock exchange for smaller companies

EVAThis is a trademark of Stern Stewart - an American company. It stands for Economic ValueAdded. It states that ROC (Return on Capital) should be greater than the COC (Cost ofCapital). It is a methodology of measuring companies' true profits rather than accountingprofits and endeavours to change the behaviour of the employees of a company to take longer-term views on projects that they undertake.

EconometricsThe use of computer analysis and modelling techniques to describe, on statistical terms, therelationship between key economic forces, then test the effects of changes in economicscenarios.

Glossary 17


Efficient PortfolioA portfolio which offers investors both the maximum return for varying levels of risk & theminimum risk for varying levels of return.

Embedded OptionAn option which is embedded in a debt instrument and affects its redemption or return e.g.callable & puttable bonds.

Emerging MarketsThese are markets where generally the markets are considered to be illiquid, under-regulated,with poor settlement systems and highly volatile markets can occur when a sudden of interestfrom foreign investors from the developed markets pour money in to an emerging market.

EquityOwnership. Normally applied to company shareholders. The shares they hold are calledequity.

Equity Index SwapA swap in which the total or price return on an equity index, equity basket or single equity isexchanged for a stream of cash flow based on a short-term interest rate index or another index.

Equity KickerThe attachment of share options or warrants to an issue of bonds.

Escrow AgreementThe certificate provided by an approved bank that guarantees that the indicated securities areon deposit at that bank. An investor who writes a call option and can present an escrowagreement is considered covered and does not need to meet margin requirements.

European-Style OptionAn option which can only be exercised at expiry.

EurobondBond issued and traded in the international bond market.

EuroclearAn ICSD [International Central Securities Depository] based in Brussels and clearingEurobonds and international securities.

EuroconvertiblesConvertible securities issued and traded on the international securities market.

Ex DateThis is the date specified by the local stock exchange to determine whether the buyer or selleris entitled to the benefit of a dividend. Normally the seller of a security during the ex periodwill be entitled to the dividend.

Exceptional ItemA large expense considered to be part of the normal business of a company.

Glossary 18


Exchange RateRate at which two currencies can be bought/sold in exchange for the other.

Exercise PeriodThe period during which a derivative can be exercised by its holder.

Exercise PriceAlso called the strike price. The agreed fixed price at which the option holder can exercise theoption to buy/sell the underlying item.

Exotic OptionAn option with a more complex structure & pay off than a standard put or call.

Expected ReturnThe return on a security or portfolio over a holding period that an investor anticipatesreceiving.

Expiry DateThe date on which an option holders rights expire.

Extendible SwapA swap in which the fixed rate payer has an option to extend the swap.

ExposureA term referring to the existence of risk.

Extraordinary ItemA large expense or item of income deriving from abnormal events or transactions outside theordinary activities of a company.

-F-FASFinancial Accounting Standard

FASTFast Automated Screen Trading

FERForeign Exchange Requirement

FIFOFirst in, first-out

FRAForward rate agreement. An interest rate hedging product where there is an obligation to buyor sell LIBOR at a specified future date. There is no exchange of principal only an exchangeof the difference between the rates.

Glossary 19


FRNFloating rate note. Unsecured, floating rate bonds whose interest payments are set using aninterest rate benchmark as an index.

FRSFinancial Reporting Standard

FSAFinancial Services Act [1986]

FSAFinancial Services Authority

FTFinancial Times

FT-SEFinancial Times-Stock Exchange

Firm UnderwritingA firm underwriter will buy new securities whereas an ordinary underwriter will take anyunwanted shares.

Fixed Rate BondA bond that pays interest at a fixed coupon rate.

Flat Yield CurveA chart showing the yields of bonds with short maturities as equal to the yields of bonds withlong maturities.

Floating RateAn interest rate that is reset against an index during the life of a transaction.

FloorA contract where the seller agrees to pay the purchaser the difference between the referencerate and an agreed strike rate if the strike rate exceeds the reference rate.

Forward SwapA swap where the dates are fixed prior to the start date.

Front RunningFirms or employees dealing in shares immediately ahead of publication of information [e.g.an analyst’s report] which may affect market prices.

Fund ManagerA person responsible for the management of the investments in a fund and who invests moneyon behalf of someone else.

FutureAn exchange traded standardised contract to purchase or sell an agreed amount of acommodity or financial instrument for future delivery.

Glossary 20


Futures MarketAn exchange that trades futures contracts.

-G-G30A private sector group made up of 30 market participants who are concerned with theworkings of the international financial system. In 1989 they came up with a set of 9recommendations for improving settlement, trading etc following the 1987 crash.

GAAPGenerally accepted accounting policies.

GDP [Gross Domestic Product]The total value of goods and services produced in a country during one year. It includesconsumption, government purchases, investments, and exports minus imports.

GDRGlobal depository receipt

GEMMGilt Edged Market Makers

GTCGood till cancelled

GammaWhen there is a small change in the underlying, the Gamma is referred to as the rate of changein the Delta of an option.

GearingA measure of the indebtedness of a company that compares the size of the company’s debts toits total capitalisation or the size of its equity capital.

GiltsUK government securities

Global CustodianAs defined by ISSA – a global custodian acts as a custodian for multi-currency securities andsettlement and reporting services which extend beyond the global custodian’s and the client’sbase regional currency. They are able to look after all classes of financial instruments.

Gross YieldReturn on an investment before taking into account any tax payable on this return by theinvestor.

Guaranteed BondIssued by one corporation but backed by another corporation.

Glossary 21


Guaranteed Exchange Rate OptionAlso called a quanto option, this is an option on a particular asset in one currencydenominated in another currency.

-H-Head and ShouldersOn a technical analyst's trading chart, a pattern that has three peaks resembling a head and twoshoulders. The stock price moves up to its first peak (the left shoulder), drops back, thenmoves to a higher peak (the top of the head), drops again but recovers to another, lower peak(the right shoulder). A head and shoulders top typically forms after a substantial rise andindicates a market reversal. A head and shoulders bottom (an inverted head and shoulders)indicates a market advance.

Hedge RatioThe expected change in the value of an option per $ change in the market price of theunderlying asset.

HedgingTaking action to remove or reduce an exposure to financial risk.

Historical BetaThe estimation of a securities Beta, derived purely from historical data.

High Coupon SwapAlso called a premium swap, the fixed rate payments succeed the market rates.

High Low OptionThe difference between the high and low of the underlying item is paid – a combination oftwo lookback options.

Historical VolatilityThe measure of the past volatility of a financial instrument.

Holding CompanyA company that controls another by owning more than 50% of its shares.

Horizontal SpreadAlso called a calendar spread, this is a strategy where the same number of options contractswith the same exercise price, but with differing maturity dates, are bought & sold.

Hull-White ModelAn option pricing model.

-I-IDBInter Dealer Broker. Acts as an intermediary between market markets.

Glossary 22


IMROInvestment Management Regulatory Organisation

INSInstitutional Net Settlement

IPEInternational Petroleum Exchange

IPO [Initial Public Offering]The first sale of common stock by a corporation to the public.

ISDInvestment Services Directive

ISDAThe International Swap & Derivative Association.

ISINInternational Securities Identification Number. A coding system developed by the ISO tocreate one unique number on a global basis for identifying individual securities.

ISOInternational Organisation for Standardisation. This is a global federation of nationalstandards bodies to develop standards for communications and standards within industriesinternationally.

ISMAInternational Securities Market Association

ISSAInternational Society of Securities Administrators. It was set up in 1979 to promote progressin global securities administration. Symposia are held biennially to look at particular areas ofconcern.

ImmobilisedThis is when securities are warehoused safely by a CSD but held on their books in book entryform.

Implied CorrelationWhen having two or multi-factor models with two or more underlying assets, this is thecorrelation which is assumed.

Implied Repo RateThe return which is earned by buying a cheapest-to-deliver bond for a bond futures contractand selling it forward via a futures contract.

Implied VolatilityThe value of the volatility in the price of an option.

Glossary 23


In the MoneyWhere the strike price of an option/warrant is more advantageous that the current market priceof the underlying.

Index FundA fund that invests in the constituent parts of an index and is designed to replicate theperformance of the index.

Insider DealingUse of unpublished, price-sensitive information, or passing on price-sensitive information toenable someone to profit by dealing in securities.

INSTINETElectronic brokerage owned by Reuters

Interest Rate SwapAn agreement to exchange net future cash flows, where one party pays fixed rate and the otherfloating rate on a notional principal amount [not exchanged].

Intrinsic ValueThe difference between the exercise price of an option and the underlying’s market value.

IntroductionMethod of gaining a listing on an exchange. Generally, no new stock is issued and no newmoney raised.

Inverted Yield CurveWhere the short term interest rates are higher than medium to long term ones.

Investment Trust / Investment FundClosed-end fund, investing in the shares of other companies.

Issuer(1) The entity, such as a corporation or municipality, that offers or proposes to offer its

securities for sale.(2) The creator of an option: the issuer of an over-the-counter option is the option writer, and

the issuer of a listed option is the Options Clearing Corporation. There are two exceptionsto the definition of issuer. In the case of voting-trust certificates or collateral-trustcertificates, the issuer is the person who assumes the duties of depositor or manager. Also,there is considered to be no issuer for certificates of interest or participation in oil, gas, ormining titles or leases where payments are made out of production.

-J-JGBJapanese government bond

Joint BondA bond guaranteed by the parent corporation of an issuing subsidiary.

Glossary 24


Joint ventureThe co-operation of two or more individuals or enterprises in a specific business enterprise,rather than in a continuing relationships in a partnership.

Junk BondA bond who’s credit rating is below investment grade.

-K-Knock Out OptionA derivative where the buyer gets the right but not the obligation to buy an underlyingcommodity, currency or other instrument at a pre-set price. The option expires worthless if theunderlying goes through a particular price level.

-L-LCHLondon Clearing House

LERLarge Exposure Requirement

LIBORLondon Interbank Offered Rate

LiffeLondon International Financial Futures & Options Exchange.

LIFOLast-in, first-out.

LSELondon Stock Exchange

Lead ManagerTerm used in the international markets for the bank that will handle a new issue.

LeverageBorrowing or trading a multiple of assets.

Leveraged BuyoutThe process of taking over a company using borrowed funds. The security for these funds isnormally the assets of the company being acquired.

LiabilityA legal obligation to pay a debt owed. Current liabilities are debts payable within twelvemonths. Long-term liabilities are debts payable over a period of more than twelve months.

Glossary 25


ListingPart of the process of bringing a company to market i.e. getting a listing on a particularexchange.

Listing RulesRules to be adhered to by listed companies and those seeking a listing.

LiquidityThe ease with which an asset can be converted to cash in the marketplace. A large number ofbuyers and sellers and a high volume of trading activity provide high liquidity.

Lloyd’sInternational insurance market, based in London.

LongIf someone is long of a product, then they own it.

Long HedgeA futures contract bought for protection against a rise in another contract that must behonoured.

Lookback OptionA type of option enabling the investor to exercise the option at either the highest price [in thecase of a call] or the lowest price [in the case of a put] that the underlying has reached duringthe life of the option.

-M-M1A category of the money supply that includes all coins, currency and demand deposits

M2A category of the money supply that includes M1 in addition to all time deposits, savingsdeposits and non-institutional money market funds.

M3A category of the money supply that includes M2 in addition to all large time deposits,institutional money market funds, short-term repurchase agreements and certain other largeliquid assets.

MBOManagement buyout

MATIFMarche a Terme International de France

MLROMoney Laundering Reporting Officer

Glossary 26


MMMarket maker.

MMCMonopolies & Mergers Commission.

MPLMaximum Publication Level

MQPMandatory Quote Period

MVMarket value

MarginA cash deposit payable to a futures & options exchange by the buyer & seller of a future andthe seller of a traded option.

Margin CallIn order to bring a margin account up to the required level, the investor can be called upon todeposit further margin.

Market MakerA dealer willing to accept the risk of holding a particular security in its own account tofacilitate trading in that security.

Market RiskThe part of a securities risk that can be diversified – also called systemic risk.

Matched BargainTransaction where a buyer & seller have to be found before the deal is done.

Maturity DateThe date on which a bond's principal is repaid to the investor and interest payments cease.

MergerCombining two or more companies by offering the stockholders of one company securities inanother company in exchange for the surrender of their stock.

Money Back OptionAn option which at expiry repays at least the original option premium.

Money MarketA financial market where instruments with a term to maturity are traded.

Money SupplyThe total stock of bills, coins, loans, credit and other liquid instruments in the economy. It isdivided into four categories, M1, M2 and M3 according to the type of account in which theinstrument is kept.

Glossary 27


Monte Carlo SimulationA simulation of the evolution of a variable many times over. The model outcome of thediscounted average outcome is an approximation of the value of the derivative – therefore amethod to help value complex options.

Mortgage Backed SecuritiesAsset-backed securities where the underlying assets are mortgage loans.

Mortgage SwapsA swap where the investor receives the flows from a portfolio of mortgages and does not haveto take a mortgage asset on to their balance sheet.

Multi-Factor ModelA model, which allows realistic modelling of options, where there are two or more parametersthat are uncertain.

Multiple Growth ModelA type of dividend discount model where dividends are assumed to grow at different ratesover specifically defined time periods.

Municipal BondA bond that is issued by a state or local unit of a government.

-N-NAPFNational Association of Pension Funds – trade body.

NASDAQNational Association of Securities Dealers Automated Quotations – a US stock market.

NCNot for central settlement

NMSNormal market size

NNTNeural network trading

NPVNo par value shares or ‘net present value’ which results from comparing the purchase price ofa financial instrument with the present value of the stream of cashflows arising from it.

NSCCNational Securities Clearing Corporation

Glossary 28


NYSE [New York Stock Exchange]The largest stock exchange in the United States. It is a corporation, operated by a board ofdirectors, and it is responsible for setting policy, supervising Exchange and member activities,listing securities, overseeing the transfer of members' seats on the Exchange and judgingwhether an applicant is qualified to be a specialist.

Nikkei-DowMain stock market index in Japan

NakedWriting an option where you do not own the underlying.

Naked OptionAn option where there is no underlying security position.

Net Present ValueThe present value of the future cash flows expected to be received from a particularinvestment less the cost of that investment.

Net WorthThe amount by which assets exceed liabilities.

Nominal ValueFace value of a security. A security is priced at par when its market value is the same as itsnominal value.

Nominal YieldThe interest rate stated on the face of a bond that represents the percentage of interest to bepaid by the issuer on the face value of the bond.

NomineeAn organisation that acts as the named holder of securities on behalf of a beneficial owner.

Non Factor RiskThat part of a securities total risk that can be diversified away and is not related to moves invarious common factors.

Normal BackwardationThe relationship between the expected spot price of an asset and its future date on the deliverydate of the contract – normal backwardation states that the spot price will be less than thefutures price.

Normal Yield CurveA chart showing long-term debt instruments having higher yields than short-term debtinstruments.

NovationThe replacement of one legal agreement by a new obligation, with the agreement of all partiese.g. Clearing Houses use this process since they stand in the middle of futures contracts andact as guarantor – hence the need to novate.

Glossary 29


-O-OATFrench government bond

OMLXLondon Securities and Derivatives Exchange

OTCOver the counter. The term used to describe a security that is traded through the telephone-and computer-connected OTC market rather than through an exchange.

OTMOut of the money – where the subscription price for an underlying instrument is above theinstruments current market price.

Obligation BondA mortgage bond where the value of the underlying property is less than the face value of thebond.

OfexAn OTC trading facility for illiquid or infrequently traded company shares.

Offer for SaleA method of issuing shares in the primary market.

Offer PriceAlso called the ask price – the price at which a dealer/market maker will sell a security.

OmegaThe risk of currency fluctuations that the seller or buyer of an option has to take into accountwhen being exposed to a transaction in a different currency.

Open Ended FundA fund for which there is no maximum limit to the amount of money that can be raised e.g.unit trusts / mutual funds.

Open OutcryFace to face trading method on the floor of an exchange

Operating Expenses(1) The day-to-day costs incurred in running a business.(2) In an oil and gas program, any production or leasehold expense incurred in the operation

of a producing lease, including district expense, direct out-of-pocket expenses for labour,materials and supplies and those shares of taxes and transportation charges not borne byoverriding royalty interests.

Operating incomeThe profit realised from one year of operation of a business before interest costs.

Glossary 30


OptimarkEquity trading system

OptionContract giving the holder the right, but not the obligation, to buy or sell a fixed quantity of anunderlying item at an agreed price on or before a future date.

Order DrivenA trading system where transactions are initiated by a buyer or a seller and the price is set bythem.

Ordinary SharesThe most common type of company shares.

-P-P/E RatioPrice earnings ratio

PHLXPhiladelphia Stock Exchange

PIAPersonal Investment Authority

PIBSPermanent Interest Bearing Shares

PLPublication level

PLCPublic Limited Company

POSIT“Black Box” equity trading system

PPSProtected Payments System

PRRPosition Risk Requirement

Par BondA bond which is selling at an amount equal to its face value which is referred to as par.

Participating CapSituation where an out of the money cap is bought and at the same time an in the money flooris sold.

Glossary 31


Participating ForwardA simultaneous purchase of a call or put and sale of a put or call at zero cost.

PartnershipA form of business organisation in which two or more individuals manage the business andare equally and personally liable for its debts.

Par ValueThe nominal value of a security.

Passive BondA bond with no interest yield, often used in non-profit fund raising.

Passive IncomeEarnings derived from a rental property, limited partnership or other enterprise in which theindividual is not actively involved. Passive income therefore does not include earnings fromwages or active business participation, nor does it include income from dividends, interest andcapital gains.

PayerThe party in a swap transaction who pays a fixed rate and receives a floating rate.

Paying AgentA bank appointed to pay interest & principal on a bond issue

PeggingStabilising a country's currency through its purchase or sale by the country's central bank.

PlacingA method of issuing new shares – they are placed with a small number of institutionalinvestors.

PositionThe amount of a security either owned (a long position) or owed (a short position) by anindividual or by a dealer. Dealers take long positions in specific securities to maintaininventories and thereby facilitate trading.

Positive Yield Curve.Where medium to long term interest rates are higher than short term ones.

Preference SharesA type of share which carries the right to a fixed dividend every year.

Premium(1) The amount of cash that an option buyer pays to an option seller.(2) The difference between the higher price paid for a security and the security's face amount

at issue.

Glossary 32


Present ValueA valuation in today’s money of a stream of future cash flows, after allowing for interestcosts.

Primary MarketMarket for the issue of new securities.

Principal TradingTrading by a firm for its own account.

Private Placement MarketUS market for unregistered shares.

Programme TradingSimultaneous sell or purchase of 15 stocks or more

ProspectusA document issued by organisations planning to issue securities.

ProxyA limited power of attorney from a stockholder authorising another person to vote onstockholder issues according to the first stockholder's instructions. In order to vote oncorporate matters, a stockholder must either attend the annual meeting or must vote by proxy.

Put Call ParityWhen a put and call have the same market price, expiry date and underlying stock this is therelationship that exists between them.

Put OptionAn option that gives the holder the right to sell a quantity of an item at a fixed price on orbefore a specified date in the future.

-Q-QCBQualifying corporate bond

Quanto ProductAn asset or liability, usually equity index futures, interest rate swaps or bond optionsdenominated in a currency different to the one in which it is being traded.

Quote DrivenA market where prices are made by market makers advertising on a screen.

Quoted SecuritySecurity whose price is quoted on a stock exchange.

Glossary 33


-R-RADRRule 144A depository receipt

RIERecognised Investment Exchange

RCHRecognised Clearing House

RFPRequest for Proposal. Used when making a major change to custody arrangements. An RFPis a questionnaire for custodians to fill in and provide details of their services, costs etc

RIERecognised Investment Exchange

ROIERecognised Overseas Investment Exchange

RPBRecognised Professional Body

RSMMReduced Size Market Maker

Random Walk TheoryA theory that states that the future prices of financial instruments cannot be predetermined bypast prices –prices are reactions from information in the market and influences occur in arandom fashion.

Rate Anticipation SwapA swap where an investor exchanges bonds expected to perform poorly for ones that areexpected to perform well if interest rates change.

Rate of ReturnOver a specified period of time, this is the percentage change in the value of an asset orportfolio.

RatingAn evaluation of a corporate or municipal bond's relative safety, according to the issuer'sability to repay principal and make interest payments. Bonds are rated by variousorganisations such as Standard & Poor's and Moody's. Ratings range from AAA or Aaa (thehighest) to C or D, which represents a company in default.

Rating ServiceA company, such as Moody's or Standard & Poor's, that rates various debt and preferred stockissues for safety of payment of principal, interest or dividends. The issuing company ormunicipality pays a fee for the rating.

Glossary 34


Ratio SpreadThe process of buying similar options having different strike prices – selling out of the moneyoptions will finance the purchase the purchase of in the money options.

ReceiverThe party in a swap transaction who receives a fixed interest rate and pays a floating rate.

RedemptionThe return of an investor's principal in a security, such as a bond, preferred stock or mutualfund shares.

Redemption YieldThe average annual return on a redeemable security, up to its redemption date, expressed as a% of the security’s current market price.

Registered SecuritySecurity for which the record of ownership is maintained in a register.

RegistrarA specialist organisation that maintains registers of securities on behalf of client companies.

Regression AnalysisUsed in the risk/return analysis of portfolio theory & in the market analysis of securities, thismeasures the correlation between the independent and dependent variables and tries to valuethe independent variable.

ReinvestmentUsing dividends, interest and capital gains earned in a mutual fund investment to purchaseadditional shares, rather than receiving the distributions in cash.

RepoA sale & repurchase agreement – a collateralised loan.

Return on equityA measure of a corporation's profitability.

ReversalEliminating an existing swap by transacting a second swap in the opposite direction.

Reverse Cash & Carry ArbitrageBuying a futures contract and selling the underlying.

RhoThe measure of sensitivity of an option to a change in interest rates.

Rights IssueAn issue of new shares, offered pro-rata to existing investors.

Glossary 35


Risk – CounterpartyRisk of non-fulfilment of a trade contract due to either inability or unwillingness of thecounterparty.

Risk – OperationalRisk of loss due to clerical errors, delays, fraud, systems failure etc.

Risk – SettlementRisk that a party will default on one or more delivery or payment obligation to itscounterparty or to a settlement agent.

Risk – SystemicRisk that the inability of one institution to meet its obligations when due will cause otherparticipants or financial firms to be unable to meet their obligations when due.

Roller Coaster SwapAn interest rate swap, whereby one of the parties involved alternates between paying thefloating & fixed rate.

Rolling Premium Put ConvertibleA convertible that gives its holder a series of put options at different dates.

Rolling SettlementSystem for settling transactions whereby settlement must occur a given number of days afterthe date on which the transaction was made

Rump PlacingPlacing those rights not taken up by investors

-S-2BCDSecond Banking Co-ordination Directive

SBLIStock borrowing & lending intermediary – formerly known as money brokers.

SDSales Docket

SDRTStamp Duty Reserve Tax

SEAQStock Exchange Automated Quotation system

SEATSStock Exchange Alternative Trading Service

Glossary 36


SECSecurities & Exchange Commission

SEDOLStock Exchange Daily Official List

SEMBStock Exchange Money Broker

SEPONStock Exchange Pool Nominees

SFASecurities and Futures Authority

SIMEXSingapore International Monetary Exchange

SPANStandard Portfolio of Risk

SROSelf Regulatory Organisation

SSAPStatement of Standard Accounting Practice

SWIFTThe Society for Worldwide Interbank Financial Telecommunications. Established in 1977 toservice the payments needs of the banking industry through standardised, electronic messages.In 1987 the securities markets were invited to join and stock exchanges, brokers anddepositories joined the SWIFT network.

Scrip DividendThe payment of a company dividend in the form of new shares rather than cash.

Secondary MarketA market for trading securities that have already been issued.

Securities and Exchange Commission (SEC)Commission created by Congress to regulate the securities markets and protect investors. It iscomposed of five commissioners appointed by the president of the United States andapproved by the Senate. The SEC enforces, among other acts, the Securities Act of 1933, theSecurities Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment CompanyAct of 1940 and the Investment Advisers Act of 1940.

Secured DebtWhere assets are used as security against a loan

Glossary 37


Securities BorrowingA method by which market makers and other market participants are able to borrow securitiesto make up a shortage in those securities i.e. to make a delivery – in exchange for a fee.

Securities LendingAuthorised institutions lend their assets and, when permitted, those of their clients to marketmakers through a network of intermediaries for a fee

Semi-Fixed SwapAn interest rate swap where there is the possibility of two fixed rates.

Senior DebtSecured debt that ranks ahead of other creditors in rights to payment.

SettlementThe process of completing a transaction whereby cash moves from the buyer to the seller anda product or asset moves the other way.

Settlement – FixedThe predetermined date in a month when transactions are due to settle.

Settlement – RollingSettlement takes place on a certain number of days after the trade date e.g. in the UK it is T +5. It therefore settles on the 5th calendar day after the trade.

Short PositionTerm used to describe a dealing position where the dealer involved has sold something theydon’t own in the hope that they can buy it back at a cheaper price.

Single Premium Put ConvertibleA convertible security that gives its holder a put option.

S&P [Standard & Poor's Corporation]A company that rates stocks and corporate and municipal bonds according to risk profiles andthat produces and tracks the S&P indexes. The company also publishes a variety of financialand investment reports.

S&P 500A leading stock market index in the US.

Soft CommissionGiving goods and services in return for business.

SolvencyThe ability of a corporation both to meet its long-term fixed expenses and to have adequatemoney for long-term expansion and growth.

Special Purpose VehicleCompany established for the purpose of issuing asset backed securities.

Glossary 38


Spot priceThe actual price at which a particular commodity can be bought or sold at a specified time andplace.

Spread(1) In a quotation, the difference between the bid and the ask prices of a security.(2) An options position established by purchasing one option and selling another option of the

same class but of a different series.

Spread OptionWhen one option is being purchased at one exercise price and another with the sameunderlying is being sold simultaneously at a different exercise price.

StabilisationA price supporting process used to maintain a certain price level in a new issue of securities.

StagSomeone who subscribes for shares in a new issue, expecting the price to rise and therefore tosell & make a quick profit.

Stock LendingThe lending & borrowing of stock to facilitate trades or to increase the total yield formsecurities.

Sub CustodianA sub agent

SwapAn arrangement between two parties to exchange a future stream of payments during acontract period.

SwaptionAn option on a swap.

SyndicateA group of securities houses that act under the leadership of a lead manager to place aeurobond issue with investors or a group of banks that combine to provide a large loan to aborrower.

-T-TAURUSTransfer & Automated Registration of Uncertified Stock. This has been superseded byCREST.

TIFFETokyo International Financial Futures Exchange

Glossary 39


TakeoverThe acquisition of one company by another

Technical AnalysisThe use of charts, computer programmes and historical data to identify & predict pricemovements in financial instruments.

TickUpward or downward price movement in a securities price.

ThetaMeasures the effect on an options price of a one-day decrease of the time to expiration.

Time ValueThe value of an option, other than its intrinsic value.

Time Value of MoneyThe price put on the time an investor has to wait to get a return on an investment – calculatingthe present value of the investment at maturity.

TouchThe best bid and offer in an instrument

Tracker ShareA share that gives the right to the cashflows from an enterprise but not ownership

TradepointRIE – an alternative exchange for trading shares listed on the LSE. An order driven matchingsystem.

TrancheA release of Gilts by the Bank of England which may not be identical to existing stock incirculation.

Treasury BillA marketable government debt security with a maturity of less than one year. Treasury billsare issued through a competitive bidding process at a discount from par; there is no fixedinterest rate.

TurnIf a trader buys an instrument and then sells it quickly at a profit, then they make a turn.

-U-UnderlyingThe variable on which a derivative is based.

UnderwriterAn institution that guarantees to buy any securities not purchased by anyone else in a newissue – in return they receive a commission.

Glossary 40


Unit TrustSee open-ended funds.

-V-Variable AnnuityAn insurance contract in which at the end of the accumulation stage the insurance companyguarantees a minimum total payment to the annuitant. The performance of a separate account,generally invested in equity securities, determines the amount of this total payment. See alsofixed annuity.

Variable Death BenefitThe amount paid to a decedent's beneficiary that is dependent on the investment performanceof an insurance company's separate account; the amount is added to any guaranteed minimumdeath benefit.

Variable Life Insurance PolicyAn insurance contract that provides financial compensation to the insured's namedbeneficiaries in the event of the insured's death. The insurance company guarantees paymentof a minimum amount plus an additional sum according to the performance of a separateaccount, usually invested in equities or other relatively high-yielding securities.

Vertical Line ChartingA type of chart used by technical analysts where the high, low and closing prices of aninstrument are shown on one vertical line and the closing price indicated by a horizontal mark.

Vertical SpreadBuying an option at one strike price whilst selling one at the next higher or lower strike price.

Vesting(1) An ERISA guideline stipulating that employees must be entitled to their entire retirement

benefits within a certain period of time even if they are no longer with the employer.(2) The amount of time that an employee must work before retirement or benefit plan

contributions made by the employer become the employee's property without penalty. TheIRS and the Employee Retirement Income Security Act of 1974 set minimumrequirements for vesting in a qualified plan.

VegaThe measure of change in an option price due to volatility.

Voting RightThe right of a stockholder to vote for members of the board of directors and on matters ofcorporate policy - particularly the issuance of senior securities, stock splits and substantialchanges in the corporation's business. A variation of this right is extended to variable annuitycontract holders and mutual fund shareholders, who may vote on material policy issues.

Glossary 41


-W-WarrantThe right but not the obligation to buy or sell a financial instrument at a fixed price on orbetween fixed dates.

With-holding TaxTax deducted at source from dividends on investments, which are paid to foreign investors. Ifthere is a double taxation agreement in place between the two countries involved the investorcan claim back.

WriterThe seller of an option.

-X-XETRAGerman equity trading system

-Y-Yearling BondLocal authority stocks with a life of one or two years.

Yellow BookThe listing rules of the London Stock Exchange

YieldThe return from an investment.

Yield CurveA graph showing the term structure of interest rates by plotting the yields of all bonds of thesame quality with maturities ranging from the shortest to the longest available.

Yield to PutThe average annual return on a convertible security with a put option.

-Z-Zero-Coupon BondA security that is issued at a discount to its face value, makes no periodic interest paymentsand is redeemed at par. The return is therefore in the form of a capital gain.

Zero-Coupon ConvertibleAs above but with conversion rights attached.

glossary of financial terms

Documents

portfolio income

gross income agiearned

financial asset

securities salesperson

tosell securities

securities trades

securities real beta

selection fee