| Acceptance credit | The use of
bills of exchange by a company as an alternative
to short-term bank borrowing. The company draws a bill of exchange
on an accepting house (a financial institution which guarantees
payment of the bill on the maturity date) and sells the bill to a
bank for less than its face value. The accepting house pays the
bank the face value of the bill on the maturity date; the company
must fund the repayment. In effect, the company has borrowed money;
the discount at which it sells the bill to the bank is equivalent
to interest. |
| Accruals | Accounting basis that
brings income and expenses into account in the accounting period to
which they relate. |
| AFS | See “available for
sale” |
| American option (or
American-style option) | An
option which can be exercised on any business day
until
expiry. See also
European option,
Bermudan option. |
| Amortisation | Gradual redemption of a
debt through a periodic repayment of
principal. |
Amortised cost
| A method of measuring a
financial instrument by taking the amount at which an asset or
liability is measured at initial recognition minus any repayments
of principal, any reduction for impairment or uncollectability and
plus or minus the cumulative amortisation of the difference between
the initial amount and the maturity amount.
|
| Amortising swap | A swap whose underlying
principal amount declines in stages through the life of the
swap. |
| Arbitrage | Taking advantage of
profitable opportunities in the derivatives, foreign exchange,
money or equity markets that arise from pricing anomalies.
Arbitrage profits are possible if two instruments with identical
characteristics are trading at different prices in different
markets - the arbitrageur can simultaneously sell the higher-priced
asset and buy the lower-priced asset. |
| ASB | Accounting Standards
Board |
| Asian option | An option where the
amount received at settlement depends on the difference between the
average price of the
underlying asset over a particular period and the
strike price. Also known as an average rate
option. |
| Ask (or offer) price | The price at which a
trader or market maker is willing to sell currency, securities,
derivative contracts or other instruments. |
| Asset-backed security
(ABS) | Tradable debt (normally
issued by a corporation) backed by some asset, such as stocks of
finished goods or raw materials, or trade debts. If the issuer
defaults, the bondholders have first claim on the asset backing the
bond. |
| Asset-linked
security | Security whose value is
linked to the value of an underlying asset, such as land or
shares. |
| Asset swap | A swap that enables the
investor to alter the characteristics of an investment, such as its
interest rate characteristics or denominated currency. An example
is the combination of a bond paying fixed rate interest and a
fixed/floating interest rate swap (see
CFM11092), to create a synthetic
floating rate investment. |
| Assign | To transfer an asset,
such as a bond, share or option, to another person. |
| Assignment (options) | A notice sent by the
clearing house to the
writer of an option telling him it has been
exercised. |
| Assignment swaps | Where the original
counterparty to a swap seeks a third party to take his place. |
| At the money (ATM)
option | An option where the
strike price is at the current market level of the
underlying. See also
in the money,
out of the money |
| Available for sale | IAS 39 categorises
financial instruments into four types, which determine the
presentation and measurement of the instruments in the accounts.
All non-derivative financial assets that are not classified in
another category are categorised as “available for
sale”. |
| Average rate option | See
Asian option |
| Bad and doubtful
debts | Debts proved or estimated
to be wholly or party irrecoverable, and either written off by the
lender (in the case of a debt which is wholly bad) or written down
in the lender's books to their realisable value. |
| Basis point | A change of 0.01% (a
hundredth of a per cent) in an interest rate |
| Basis swap | An
interest rate swap where two different types of
floating rate interest are exchanged, for example
6-month
LIBOR for 3-month LIBOR. |
| BBA | British Bankers'
Association |
| Bearer security | A bond or other security
issued in paper rather than electronic form. Title to the bond is
evidenced by possession of the physical paper, rather than by the
holder of the bond being registered. |
| Bear market | A falling market. |
| Bermudan (or Bermudan
style) option | An option which can be
exercised on any one of a range of dates. (See
CFM11080). |
| Bid | An offer or undertaking
to buy something at a specific price |
| Bid price | The price at which a
market maker or trader is willing to buy a financial instrument or
other asset. The opposite of
ask price, or offer price. |
| Bid-offer spread | The difference between
the
bid price and the
offer price of a particular asset. |
| Bifurcation | Where an embedded
derivative is accounted for separately from its host contract
because it is not closely related to the host contract. |
| Bill of exchange | An unconditional order
written and signed by one person (the drawer) and addressed to
another person (the drawee). The order instructs the drawee to pay
a specified sum of money to a specified person (the payee) to the
bearer, either on demand or at a specified future date. The drawee
must 'accept' the bill (accept liability to pay the amount when the
bill matures) by signing the face of the bill. The bill then
becomes an 'acceptance'. A bill of exchange is a negotiable
instrument: the payee can turn it to account immediately by selling
it, usually at a discount, to a bank or to some other person. (See
acceptance credit). A cheque is a special form of
bill of exchange, with a clearing bank as the drawee. |
| Bill of lading | A foreign trade document
used to describe the full details of the goods being sent. In the
UK it is a negotiable instrument which gives the holder the right
to possession of the goods. |
| Billion | In the financial world,
used exclusively in the US sense of one thousand million
(1,000,000,000). Traders sometimes use the term yard (from the
French 'milliard') to avoid confusion with 'million'. |
| Black-Scholes model | The classic pricing model
for the valuation of
European-style options developed by Fischer Black
and Myron Scholes in 1973. |
| Bond | A negotiable written
instrument evidencing a debt. Under the terms of the contract, the
issuer is obliged, among other things, to pay the
holder a fixed
principal amount on a specified future date, and
often to also make periodic payments of interest. Companies,
governments, or local authorities or other public bodies usually
issue bonds. |
| Bond stripping | Separating an
interest-bearing security into separate components: the right to
receive the
principal (called the
principal strip) and the right to receive interest
(a series of
coupon strips). The separate components are
repackaged and can be traded individually. US Treasury Bonds are
widely traded in stripped form. US bond strips are called STRIPS
(Separately Traded Principal and Interest Securities). The strip
market in Europe, including the UK, is less active, although there
is a market in
gilt strips. |
| Broker | An individual or firm
that, in return for a fee, brings potential buyers and sellers into
contact with each other. |
| Broker-dealer | One who buys and sells
securities on his or her own account and also acts as broker for
clients. |
| Bull market | A rising market. |
| Bund future | A futures contract based
on a notional German government bond (Bundesanleihen, or Bund) with
a 4%
coupon and 8.5 to 10.5 year
maturity. |
| Callable | Of a bond, the issue
terms are such that the
issuer has an option to redeem the bond before the
maturity date. |
| Call option | An option giving the
holder the right, but not the obligation, to buy the underlying
subject matter at a pre-agreed price on or before a specified
future date. |
| Cap | An option product that
limits the holder's interest rate exposure but still allows the
holder to profit from advantageous interest rate movements (see
CFM11215). |
| Capital instruments | Debt or shares issued by
a company |
| Capped floater | A
floating rate note with a maximum (but no minimum)
rate of interest. |
| Cash flow hedge | A hedge of the exposure
to variability in cash flows that is attributable either to a
particular risk associated with an asset or liability or a highly
probable future transaction, and could affect profit or loss. |
| Cash settlement | The settlement between
the parties to a derivative contract (or other financial product)
of their mutual rights and obligations by means of payment of a
cash sum by one party to the other, or the exchange of cash sums.
(See
CFM11026). |
| CBOT | Chicago Board of Trade.
An exchange established in 1848, for trading financial, metal and
commodity futures and options. |
| Central Gilts Office
(CGO) | The computerised
settlement system for
gilt transactions originally operated by the Bank
of England. In July 2000 the Bank transferred the system to the
CRESTsystem and decommissioned the CGO. |
| Certificate of deposit
(CD) | A transferable document
normally issued by a bank, which acknowledges the deposit of a sum
of money and recognises the issuer's obligation to repay the amount
to the bearer of the CD on a future date. A CD is like an
interest-bearing bank account, but with the advantage of being
tradeable. It is a very safe investment, but with a low rate of
return. A CD may either pay interest or be redeemable at a
premium. |
| CFD | See
contract for differences. |
| Clean price | The price of a bond is
quoted 'clean', that is without taking account of accrued interest.
The clean price plus accrued interest is called the
dirty price. |
| Clearing | In the context of futures
and options trading, the process of registration, settlement,
margining and the provision of a guarantee that the transaction
will be performed. |
| Clearing house | An entity (which may be
part of, an affiliate of, a futures or options exchange or
independent) that matches and guarantees the performance of trades
and holds collateral lodged by participants, usually by being
central
counterparty as principal to every trade it
guarantees. (See
CFM11030). |
| Clearing member | A member of an exchange,
of guaranteed reputation and creditworthiness, with which the
clearing house will enter into contracts as principal. (See
CFM11030). |
| Close out | When a futures or options
position has been closed out, the person has no
further interest in the market. Closing out a position is usually
effected by entering into a transaction opposite to that by which
the position was opened. Thus someone who has sold futures
contracts will close out the position by buying an equal number of
the same contracts, and vice versa. |
| CME | Chicago Mercantile
Exchange. An exchange for
open outcry and automated trading of financial and
commodity futures and options. |
| Commercial paper | Short term unsecured
corporate debt, usually sold at a
discount to face value. |
| Compound interest | Interest calculated on
the principal plus the interest accrued to date. |
| Compound option | An option over an
option. |
| Compound financial
instruments | Non-derivative financial
instruments which have both a liability and an equity
component. |
| Consideration | The value given in
payment for something, either in cash or another form. |
| Collar | A combination of an
interest rate
ceiling and
floor. See
CFM11216. |
| Constant rate of
return | The result of an
arithmetical calculation which takes the total
yield that a lender receives from a loan and works
out what percentage of the outstanding capital they would receive
each year if that yield accrued in equal amounts from year to
year. |
| Contract for
differences | Usually abbreviated to
CFD or CfD. A legally enforceable arrangement between two parties
to realise a profit, or avoid a loss, by reference to movements in
the price or value of a financial or non-financial asset, an index
or other factor. There is a statutory definition at para 12(3) Sch
26 FA2002. Swaps and futures or options settled in cash rather than
by delivery of the underlying are examples of CfDs. (See
CFM11110a) |
| Convertible (debt) | Debt that gives the
holder the option of either receiving repayment of the principal at
maturity, or converting the debt into shares (either in the issuing
company or some other company). |
| Counterparty | The opposing side in any
two-way financial transaction which is undertaken (such as entering
into a derivative contract). |
| Coupon | The nominal annual rate
of interest receivable on a fixed income security. It is generally
paid to the holder of the security annually, semi-annually or
quarterly, depending on the type of security. The term is sometimes
used loosely to denote any income-like return on an investment.
(From the French 'couper', to cut. On a security issued in
bearer form, each coupon is physically detachable
from the security for presentation to the issuer or his agent as
evidence of entitlement to an interest payment.) |
| Coupon strip | See
bond strip. |
| Coupon swap | An
interest rate swap in which a stream of fixed rate
interest payments is exchanged for a stream of
floating rate interest payments. |
| Covered option | The sale of a call option
while
long the underlying subject matter (covered call)
or the sale of a put option while long cash (covered put). The
opposite of
naked option. |
| Credit default swap | An arrangement which
allows the credit risk associated with an asset (such as a loan) to
be transferred to another party, without transfer of the asset. See
CFM11220a. |
| Credit spread | The difference in yield
between a specific asset, usually a bond issued by a company, and
an agreed benchmark, which is usually a very low risk investment
such as a
gilt. The less creditworthy is the company issuing
the bond, the greater is the return which investors will expect, in
order to compensate them for the increased credit risk; so the
greater will be the credit spread. |
| CREST | CREST is the London-based
electronic settlement system for dealings in shares and bonds. |
| Cross rate | The exchange rate between
two currencies expressed in terms of their relationship with a
third currency. See
CFM7011. |
| Cum coupon | The purchaser of a bond
thus denoted is entitled to receive the next interest payment. |
| Cumulative preference
shares | As
preference shares, but with the right to receive a
missed dividend in a subsequent year. |
| Currency forward | A
forward foreign exchange contract. |
| Currency swap | An obligation between two
parties to exchange, for a set period, interest obligations on
notional principal amounts in two different currencies, and then to
exchange the corresponding principal amounts at the end of the
period at an exchange rate agreed at the beginning of the swap.
(See
CFM11092). |
| Day trade | A position opened and
closed within the same trading day. |
| Debenture | A term applicable to any
certificate that an amount of money is owed by a specified person.
In the UK, it often refers to a loan secured on the assets of the
company; however, the term may be used interchangeably with
'bond'. |
| Debt/equity swap | Exchange of debt for
equity, often part of a company reconstruction or takeover. |
| Debt instrument | A legal document
evidencing a debt. |
| Delivery month | The specified month in
which an
exchange traded futures or options contract is
fulfilled. For contracts traded on
LIFFE, and many other exchanges, delivery months
are March, June, September and December. |
| Delta | The measure of how
sensitive the value of an option is to changes in the price of the
underlying. |
| Demand loan | A loan where the lender
could ask for repayment at any time 'on demand', for example where
a loan is still outstanding past its repayment date. |
| Depositary receipt | Document proving
ownership of an asset deposited with a bank for safe keeping.
Depositary receipts of certain kinds are tradeable, particularly
where the assets concerned are shares. |
| Derecognition | The removal of a
previously recognised financial asset or financial liability from
an entity’s balance sheet. |
| Derivative | A financial instrument
the value of which changes in response to an underlying price or
index, which requires no or minimal initial net investment and
which is settled at a future date. (See
CFM11020). |
| Designated assets or
liabilities | A company may designate a
financial asset or liability to be measured at fair value through
profit or loss upon initial recognition. |
| Direct quotation | The price of each unit of
foreign currency expressed in terms of the home currency, which
will be sterling in the UK, e.g. £0.6960=$1. |
| Dirty price | The value of a bond is
the dirty price - that is the
clean price plus accrued interest. It is also
referred to as the present value or cost. |
| Discount |
- The difference between the value of a bond or other loan
relationship at any time, and its (higher) maturity or face value.
Issuing a bond at a discount is a way of rewarding the investor,
either instead of or as well as paying interest. See also market
discount and issue discount.
- The difference between the
spot price of a foreign currency and the (lower)
forward exchange rate. See
CFM7037.
- The difference between the forward price of, or the future in,
any financial instrument or commodity and its (higher) current
value.
|
| Discounted security | A security issued at a
discount to its face value. |
| Discount factor | The rate used to derive
the net present value of a sum of money to be received at a future
date; the assumed rate of return which someone could get if they
received the money today and invested it. See
present value. |
| Disintermediation | The substitution of
direct borrowing by companies, government agencies etc from the
investing public, for bank intermediation between borrowers and
lenders. This eliminates banks' traditional interest turn, but
creates scope for fee income in managing new issues of securities.
See
securitisation. |
| Drawdown | The drawing of funds made
available by financial institutions. |
| Economic accruals | A method used by
accountants to allocate the
yield from a loan relationship to accounting
periods in such as way as to give a
constant rate of return. |
| EDSP | Exchange Delivery
Settlement Price. The price of the underlying subject matter when
an exchange-traded future or option reaches expiry. This determines
the price for physical delivery or
cash settlement. |
| Effective interest
method | A method of calculating
the amortised cost of a financial asset or financial liability, and
of allocating the interest income or expense over the relevant
period |
| Embedded derivative | A feature within a
contract (“the host contract”) such that the cash flows
associated with that feature behave in a similar fashion to a
stand-alone derivative. |
| Entity | Any business operation
that draws up accounts. The term includes not only UK and foreign
companies, but also such things as joint ventures, limited
liability partnerships, branches of companies and partnerships and
similar associations set up under the laws of overseas
countries. |
| Equity | The residual interest in
the assets of an entity after deducting all liabilities; equivalent
to shareholders’ funds or reserves. |
| Equity derivative | A future, option or swap
whose underlying asset is, or whose underlying assets include, a
specific share or shares, or a share index. |
| Equity instrument | A contract that evidences
a residual interest in the assets of an entity after deducting all
its liabilities. |
| Eurex | The main futures and
options exchange in Germany. |
| Eurobond | Tradable debt security
issued in London, not necessarily by a UK issuer, under the law of
England and Wales, often (but by no means exclusively) denominated
in US dollars See
eurodollar. This is the general market usage and
differs from the definition implied by s349 (4) ICTA. |
| Eurodollar | A dollar deposit held
outside the US: the term is normally applied to US dollar deposits
in London. In the 1960s, domestic controls led US banks to start
doing business outside the reach of US law, and London came to
dominate this offshore dollar market. Banks in London, often
branches of US banks, started to trade deposits in other currencies
as well. The 'euro' terminology is used for other London currency
deposits, as in euroyen, euroswiss and even euroeuro. It has also
been extended to bond issues - see
eurobond. |
| European (or European
style) option | An option which can be
exercised only on the expiry date. |
| Exchange traded | A derivative contract
which is traded on a regulated futures or options exchange. See
also
over the counter. |
| Exercise price | See
strike price. |
| Exotic derivatives | Non standard or recently
developed types of derivative. This is not a fixed term of art and
its meaning will depend on the view taken by the user about the
derivative concerned. (See
CFM11095). |
| Expiry date | The last date on which an
option can be exercised. |
| Exposure | Susceptibility to any
perceived financial risk. |
| Factoring | An arrangement whereby a
company sells its invoiced debts, at a
discount from their face value, to a specialist
debt factor. This gives the company immediate cash and transfers
the credit risk from the company to the debt factor. |
| Fair value | The amount which a
company would receive or pay if it sold or bought an asset in a
current transaction between willing parties; or, in the case of a
liability, the amount it would have to pay an independent party to
settle or dispose of the liability.
|
| Fair value hedge | A hedge of the exposure
to changes in fair value of a recognised asset or liability, or an
unrecognised firm commitment. |
| Fair value through profit
or loss | IAS 39 categorises
financial instruments into four types, which determine the
presentation and measurement of the instruments in the accounts. A
financial asset or liability categorised FVTPL is measured at fair
value, with changes going through the profit and loss account. This
category includes financial assets and liabilities held for trading
and all derivatives except those designated as held for
hedging. |
| Financial instrument | A contract that gives
rise to both a financial asset of one entity and a financial
liability or equity instrument of another entity |
| Financial Services
Authority (FSA) | Body responsible for
regulating banking, insurance and financial services in the
UK. |
| Firm commitment | A binding agreement for
the exchange of a specified quantity of resources at a specified
price on a specified future date or dates e.g. a company that has
signed a contract to buy or sell trading stock or some other asset
will have a firm commitment |
| Fixed rate loan | A loan paying interest at
a fixed rate for the duration of the loan |
| Floating rate | An interest rate that is
periodically varied in line with a benchmark of commercial interest
rates, such as
LIBOR. |
| Floor | An option product that
guarantees a lender or depositor a minimum interest return. |
| Forecast transaction | An uncommitted but
anticipated future transaction. |
| Foreign operation | An entity that is a
subsidiary, associate, joint venture or branch of the reporting
entity, the activities of which are based or conducted in a country
or currency other than those of the reporting entity. |
| Forward foreign exchange
contract | A contract to buy or sell
foreign currency at an agreed price for delivery on a specified
future date. |
| Forward rate (or
price) | The price at which a
currency, or some other asset, can be purchased for delivery at a
specified future date. See
spot price. |
| Forward rate agreement
(FRA) | An agreement fixing the
rate of interest to be applied to a notional loan or deposit, for a
specified future period. (See
CFM11072). |
| FRED | Financial Reporting
Exposure Draft - an exposure draft published by the ASB. |
| FRN | Floating Rate Note. See
floating rate. |
| Functional currency | The currency of the
primary economic environment in which the company operates. |
| Future | A derivative financial
instrument, usually exchange traded, obliging the holder to buy or
sell the underlying subject matter on a specified future date at an
agreed price. A future is statutorily defined at para 12(6) Sch 26
FA 2002. (See
CFM11074) |
| FVTPL | See “fair value
through profit or loss”. |
| FX | Foreign exchange |
| Hedge (
noun) | A transaction that
reduces or mitigates financial risk |
| Hedge efficiency | How successful a hedging
transaction is in reducing financial risk. |
| Hedge fund | Funds which accept
capital from rich individuals and institutions and trade it
aggressively in the market. They may take positions that are many
times larger than their capital. Investment in hedge funds is
therefore high risk. |
| Hedged item | An asset, liability, firm
commitment, highly probable forecast transaction or net investment
in a foreign operation that (a) exposes the entity to the risk of
changes in fair value or future cash flows and (b) is designated as
being hedged.
|
| Hedging | Refers to designating a
derivative (or, for hedges of foreign currency risk only, a
non-derivative financial instrument) as a complete or partial
offset in profit and loss to the change in fair value or cash flows
of a hedged item. |
| Hedging instrument | A designated derivative
(or, for a hedge of the risk of changes in foreign currency
exchange rates only, a designated non-derivative financial asset or
non-derivative financial liability) whose fair value or cash flows
are expected to offset changes in the fair value or cash flows of a
designated hedged item. |
| Held for trading | For IAS 39 purposes an
item is classified as held for trading if it is acquired or
incurred principally for the purpose of selling or repurchasing it
in the near future or is a derivative (except a derivative
designated as held for hedging). |
| Held to maturity | IAS 39 categorises
financial instruments into four types, which determine the
presentation and measurement of the instruments in the accounts.
Held to maturity investments are non-derivative financial assets
with fixed maturity and determined or determinable payments that an
entity has the positive intention and ability to hold to
maturity. |
| HFT | See “held for
trading” |
| Holder | Someone who has bought or
subscribed for a bond or similar debt security, and therefore has a
right to receive the
principal sum from the
issuer when the bond matures.
Someone who has bought an option. |
| HTM | See “held to
maturity” |
| Hybrid financial
instrument | A financial instrument
combining a non-derivative host contract with an embedded
derivative e.g. a convertible bond held by a company. |
| IAS | International Accounting
Standards issued by the IASB to be used in the presentation of
financial statements worldwide. |
| IASB | International Accounting
Standards Board (successor in 2001 to the IASC). |
| IASC | International Accounting
Standards Committee (succeeded in 2001 by the IASB. |
| IBOR | A generic term for
interest rate fixings which stands for 'inter-bank offer rate' ie
the rate at which banks are prepared to lend to each other banking
associations (such as the BBA in London) conduct interest rate
fixings which are published in the financial press. Libor rates are
interest rates in various currencies quoted in London; Euribor is a
fixing of the cost of borrowing in euros, conducted by the European
Banking Federation; and the Japanese banking association produces
Tibor, the cost of borrowing in Yen in Tokyo. |
| Impaired debt | Debt sold at less than
face value because of doubts over whether it will be repaid in full
- see
market discount. |
| Implied volatility | See
volatility. |
| Imputed interest | Interest deemed under the
transfer-pricing legislation to be receivable on certain
transactions not at arm's length |
| Income statement | Interchangeable with
profit and loss account – the primary statement giving
information about the company’s performance. |
| Indemnity | Legal exemption from
loss. |
| Index linked gilt
(ILG) | A
gilt on which both the
coupon and the capital repayment on redemption are
adjusted in line with inflation, as measured by the Retail Price
Index, thus protecting the investor against inflation. |
| Indirect quotation | The price of each unit of
the home currency (sterling) expressed as a value in an overseas
currency, eg. $1.4358=£1. |
| Initial margin | In the context of
exchange-traded futures and options, a collateral
deposit placed with the
clearing house when a position (whether it be
buying or selling contracts) is first opened. (See CFM11030a). |
| Interest rate
guarantee/interest rate insurance | Terms used generically to
denote any derivative products, such as
forward rate agreements,
caps,
floors and
collars, which limit a borrower's or lender's
exposure to interest rate changes. |
| Interest rate swap | An agreement between two
parties to exchange interest-related payments, based on the same
notional principal amount and in the same currency. It is possible
to swap a fixed for a floating rate of interest (a coupon swap) or
one type of floating rate interest for another (a basis swap). (See
CFM11092) |
| International Petroleum
Exchange (IPE) | An exchange for the
trading of futures and options over oil, gas oil and other
petroleum products. |
| In the money (ITM)
option | An option where the
strike price is more advantageous than current market value of the
underlying subject matter. See
CFM11082. An in the money option will
normally be exercised at the earliest possible date. See
at the money,
out of the money. |
| Intrinsic value | One of the components of
the value of an option - the amount by which the option is
in the money. See also
time value. (See
CFM11084a) |
| ISDA | International Swaps and
Derivatives Association, Inc. (See
CFM11050a). |
| Issue discount | The difference between
what someone subscribing to a new bond issue pays and the (higher)
nominal value of the bond. |
| Issuer | Someone (a government,
bank, company, local authority etc) who issues bonds or other debt
securities as a way of raising loan finance. A UK company issuing
bonds has, for tax purposes, a debtor loan relationship. |
| Letter of credit | A non-negotiable order in
writing from a bank, authorising the payment of a sum of money to
the person named in the letter; often required by exporters as
proof that they will be paid before the goods are shipped. |
| Leverage | An arrangement whereby a
small change at one end of a series of transactions creates a
disproportionately large change at the other. For example, a
leveraged player with capital of £1 million might buy an asset
costing £10 million, supplying bonds worth £9 million
through a
stock loan. If the price of the asset rises by
10%, he or she can realise a £1 million profit, as against
someone that has invested only £1 million and thus makes a
£100,000 profit. Also another name, more common in America,
for 'gearing'. |
| LIBID | The London inter-bank bid
rate. The rate of interest at which first-class banks in London
will bid for deposit funds. Often used as a benchmark for deposit
rates. LIBID is not fixed in the same way as
LIBOR, but is typically one-sixteenth to
one-eighth of a per cent below LIBOR. |
| LIBOR | London Inter Bank Offered
Rate. A benchmark interest rate fixed by the
BBA at 11 am each London business day. The fixing
is achieved by the BBA asking 16 banks for the rate at which that
bank can borrow in US dollars for 3 months, if it were to ask for
and accept inter-bank offers just before 11 am. The four highest
and four lowest quotations are discarded and the remaining 8
averaged to give 3-month US dollar LIBOR. 1-day, 1-week, 2-week,
1-month, and 2- through 12-month LIBOR is fixed daily in the same
way. Rates for differing maturities are also fixed in sterling,
euros and other major currencies. See also
IBOR. |
| LIFFE | London International
Financial Futures and Options Exchange In 1992 it merged with the
London Traded Options Market (LTOM) and then merged with the London
Commodity Exchange (LCE) in 1996. It now trades a wide range of
financial futures and options, including equity derivatives, plus a
range of agricultural commodity contracts. LIFFE was recently
acquired by the Euronext. |
| Limit order | An order given to a
broker by a customer specifying that the trade can
only be executed if the market reaches or betters a particular
price. |
| Liquidity | The market in a financial
asset is said to be liquid if it is possible to buy or sell a large
number of units in a short period without significantly affecting
the price of the asset. |
| Loan note | Instrument giving
evidence of a loan or another name for a
bond. |
| Loan relationship | Taxes term for a money
debt arising from the lending of money. |
| Loans and
receivables | IAS 39 categorises
financial instruments into four types, which determine the
presentation and measurement of the instruments in the accounts.
Loans and receivables must be unquoted non-derivative financial
assets having fixed or determinable payments. |
| London Clearing House
(LCH) | The
clearing house for
LIFFE and some other UK exchanges. |
| London Metal Exchange
(LME) | An exchange for the
trading of futures and options over non-ferrous metals, such as
copper, aluminium, tin, zinc etc. |
| London Stock Exchange
(LSE) | The main UK exchange for
the trading of quoted UK and international equities, debentures,
convertibles and warrants. |
| Long | Someone who owns
quantities of a particular financial or non-financial asset; thus
someone who has bought gilts is 'long in gilts'. Someone who has
bought futures contracts might be described as 'long the future' or
having a 'long position'. See also
short. |
| Lot | Standardised contract
size. (See
CFM11074a)
* |
| Macro hedging | A technique whereby
financial instruments with similar risks are grouped together and
the risks of the portfolio as a whole are hedged. |
| Manufactured payment | Payment representing
interest or dividends made by the interim holder of a share or
security to the original holder. |
| Margin | See
initial margin and
variation margin. |
| Market discount | The difference between
the market price of a bond or other tradable debt security and its
(higher)
nominal value. If the market value of the bond is
higher than its nominal value, it trades at a market premium. |
| Market maker | A financial institution
or individual who has both the right to buy and sell securities on
their own account, coupled with the obligation to quote buying and
selling prices for those securities in the
secondary market. See also
broker-dealer. |
| Mark to market | The process whereby
exchange-traded futures or options are revalued on a daily basis;
regular periodic revaluation of any financial asset or liability by
reference to its current fair value. (See
CFM5130). |
| Maturity | The date on which the
principal amount of a bond becomes due and payable
to the holder. |
| Mezzanine finance | Partway between debt and
equity, it has the characteristics of debt but may carry a right to
shares. |
| Mirror bonds | Reset bonds issued in pairs: one loses value and
the other gains in value by a corresponding amount when the terms
are reset following a trigger event. |
| Money market | The wholesale market in
deposits and short-term (less than a year) financial
instruments. |
| Multicurrency
facility | A borrowing facility
where advances can be drawn down in more than one currency. |
| Off balance sheet | An asset, liability or
commitment, which is not reflected in a company’s balance
sheet, is said to be off balance sheet. The term is often applied
to the contingent liabilities created when a company writes
options or enters into
swaps. |
| Off-exchange | In relation to a
transaction, entered into other than under and subject to the rules
of an exchange. |
| Offer price | See
ask price. |
| On-exchange | In relation to a
transaction, entered into under and subject to the rules of an
exchange. |
| Open outcry | A method of face to face
trading on a futures or options exchange, where bids and offers for
a particular contract are made audibly (and visibly, through hand
signals) to other members of the exchange. |
| Option | An agreement between two
parties whereby the holder of the option has the right, but not the
obligation, to buy (
call option) or sell (
put option) something for a specified price on or
before a specified date. (See
CFM11080). |
| OTC | See
over the counter. |
| Out of the money (OTM)
option | An option with a
strike price more disadvantageous than the current
market value of the underlying. An option will not normally be
exercised while it is out of the money. |
| Over the counter
(OTC) | The market for
derivatives or other investments created outside organised
exchanges, by parties (such as companies, banks and dealers)
entering into contracts directly with each other. See
off-exchange and on-exchange. (SeeCFM11040) |
| Paper | Generic term for any
short-term negotiable debt instrument. See
commercial paper,
certificates of deposit,
promissory note. |
| Participating preference
shares | As
preference shares but carrying a right to a profit
share as well as a fixed dividend. |
| Participator | A person with a share of,
or interest in, a company. |
| Pay-off profile | A diagram showing how the
amount of money which the holder or
writer of an option receives or pays changes as
the price of the underlying asset changes. |
| Performance bond | An arrangement intended
to ensure that a contract or arrangement is completed properly. If
there is a failure, the bank issuing or guaranteeing the
performance bond is liable to pay compensation. |
| Perpetual debt | Debt that has no maturity
date. Interest coupons are paid forever (in theory). Such debt
represents a very considerable credit risk to the investor, and
would therefore be expected to carry a high rate of interest. |
| Physical ('the
physical') | The physical commodity
underlying a commodity option or future. Also referred to as 'the
actual'. |
| Position | An interest in the
market, either
long or
short, in the form of open futures or options
contracts. |
| Preference shares | Shares that carry
preferential rights to dividends (usually fixed) and to repayment
in a winding up, but no voting rights. |
| Premium | The sum paid to purchase
an option.
A sum paid on maturity of a debt security, over and above
the principal sum, by way of reward to the investor.
The difference between the market value or issue price of a
bond and the (lower) nominal value.
In foreign exchange, the amount by which the forward price
of a currency exceeds the spot price ('forward premium').
|
| Present value | The current value of a
future cash flow. Money receivable immediately can be invested at
interest and earn more money; it is therefore worth more than the
same sum receivable at a future date. A future cash flow must
therefore be discounted at an appropriate interest rate to arrive
at its present value. See
discount factor. |
| Presentation
currency | The currency in which the
financial statements are prepared. Under IAS21 and FRS23 a company
can prepare its accounts in any currency. The presentation currency
does not have to be the
functional currency. |
| Primary economic
environment | This is usually the main
area in which the company operates – the country whose
currency is used for most sales and expenses. It is usually obvious
but where it is not a decision is made by the company after
considering all relevant economic factors. |
| Primary market | The market for the
placement of new securities, such as new government or corporate
bonds, or new share issues. Contrasts with
secondary market. |
| Principal | The amount which is
repayable when a bond or other debt matures (excluding any
premium or accrued interest which may be
paid). |
| Principal strip | A
zero coupon bond created when a government bond or
other security is stripped. It consists of the right to receive the
principal on the maturity date, but no interest
coupons. See
bond stripping. |
| Promissory note | A written promise to
pay. |
| Prop trader | A proprietary trader, an
employee of a bank or similar financial institution who uses his or
her employer's money to make more money (for the employer). |
| Purchasing power
parity | The theory that an
exchange rate between two currencies is related to the purchasing
power of the same goods in each currency. See
CFM7036. |
| Put option | An option that gives the
holder the right, but not the obligation, to sell the underlying
asset at an agreed price on or before a specified future date. See
also
call option. |
| Recovery | Amount of debt repaid by
borrower after being written off by the lender. |
| Recognition | A company is required by
IAS to recognise all financial assets and liabilities, including
derivatives, on its balance sheet at the time when it becomes party
to the contract concerned. |
| Redeemable preference
shares | As
preference shares, with the issuer having the
right to redeem them, so they have debt characteristics. |
| Redemption | The repayment of shares
or securities, usually at a set time for a fixed amount. |
| Release | Giving up rights to
repayment of a debt. |
| Relevant discounted
security (RDS) | Security where the issue
price is less than the redemption amount and the difference amounts
to a
deep gain. |
| Repo | A means of providing
short term finance against collateral. The 'borrower' agrees to
sell securities (such as government bonds or shares) to the
'lender', with an agreement to buy them back (repurchase) at a
specified later date, either at an agreed higher price or at the
market price. The interest rate implied from this 'lending'
transaction is called the repo rate. There is a statutory
definition of a repo in S730A (1) ICTA88. See also 'stock
loan'. (SeeCFM6000). |
| Repurchase agreement | See
repo. |
| Reset bond | A medium or long-term
bond issued with one or more
coupons already fixed, but with later coupons
remaining to be fixed at a future date according to a reference
index, or some event unascertainable at the time of issue. Such
bond have been used in avoidance schemes where a trigger event
changes the terms, and so the value, after issue. |
| Revolving credit | A credit arrangement
allowing the borrower some flexibility as to the scale and timing
of a proposed borrowing or note issue. The borrower can usually
increase or reduce his indebtedness with some freedom during an
agreed period. |
| Secondary market | The market in which bonds
or shares trade once they have been issued. See also
primary market. |
| Securitisation | The packaging of debt or
other receivables into the form of a tradable security. (See
CFM3602) |
| Senior debt | Debt which is not
subordinated. |
| Settlement price | The price used for daily
revaluation of open futures or options positions (
see mark to market). |
| Short | Someone who sells assets
(such as bonds, shares or commodities) that he does not own in the
hope of buying them more cheaply later is said to go short, or take
a short position. The opposite of
long. |
| SPAN | Standard Portfolio
Analysis of Risk. A method of calculating
initial margin requirements by evaluating
portfolio risk under a number of scenarios used by LCH,
LIFFE and other exchanges or clearing houses. |
| Spot | In the foreign exchange
market, the price agreed today at which a currency can be bought or
sold for settlement in two business days' time. More generally,
spot price refers to the price payable for any asset that is to be
delivered immediately, or almost immediately. 'Asset' in this
context includes money: for example, the spot price of 3-month
money is the interest rate at which money could be borrowed today,
for three months. See
forward price. |
| Spread | Bid-offer spread is the
difference between quotations for selling and buying a financial
asset, which makes up the dealer's profit.
The term 'spread' is also used to describe combinations of
derivative contracts with different 'pay
-off profiles'. |
| Stepped interest
bond | An otherwise fixed rate
bond whose
coupon is set to vary at prescribed
intervals. |
| Stock loan | An arrangement between
two parties whereby party A transfers securities, such as bonds or
shares, to the party B with an agreement that the securities will
be transferred back on a specified future date. This will normally
happen where B has a
short position in the bond or share in question. B
can use the stock loan to fulfil his obligation to sell the
security to another party, and later buy the security in the market
in order to transfer it back to A. There is a statutory definition
of a stock loan at S263B TCGA92. See also
repo. |
| Straddle | An option trading
strategy involving buying one
call option and one
put option with the same
strike price and same
expiry date. |
| Strangle | An option strategy
involving one
call and one
put with different
strike prices but the same
expiry date. |
| STRGL | Statement of Total
Recognised Gains and Losses. |
| Strike price | The pre-agreed price at
which the holder of an option can buy or sell the underlying
subject matter. |
| Strip | One of the tradable
products (principal strip or coupon strip) obtained from stripping
a bond. (See
bond stripping).
A sequential series of short-term forward contracts or
options used to hedge a longer-term exposure.
|
| Structured product | A financial product
consisting of bonds or equities combined with one or more
derivatives, engineered to give a particular desired pattern of
cashflows. (See
CFM11095). |
| Subordinated debt | Debt, which is issued on
terms that stipulate it, will only be repaid once the claims of
more
senior creditors have been satisfied. |
| Surrender | Giving up rights. |
| Swap | An agreement between two
parties to exchange payments over a specific period. The prices,
values or levels of the asset(s) or indices underlying the swap
determine the payments. (See
CFM11090). |
| Swaption | An option to enter into a
swap. |
| Syndicated loan | A loan issued by a group
of lenders, usually banks or financial institutions. |
| Synthetic position | A position constructed in
order that its cashflows and/or its risk/reward characteristics
replicate those of some other financial asset or liability. For
example, a synthetic
floating rate note can be constructed from a fixed
rate note plus a fixed/floating
interest rate swap. Someone may construct a
synthetic position for the purposes of
arbitrage (there is a price differential between
the synthetic and the straightforward asset), or because it is
simpler than dealing in the asset, or because the synthetic and the
asset are taxed differently. |
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