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Face
value
Related:
Par value
Fair
price
The
equilibrium price for futures contracts. Also called the
theoretical futures price.
Feasible
portfolio
A
portfolio that an investor can construct given the assets
available.
Federal
funds
Deposits
held in reserve for depository institutions at their district
Federal Reserve Bank.
Federal
funds market
The
market where banks can borrow or lend reserves, allowing banks
temporarily short of their required reserves to borrow reserves
from banks that have excess reserves.
Federal
funds rate
The
interest rate charged to borrow funds in the federal funds market.
Fill
The
price at which an order is executed.
Fill
or kill order
A
trading order that is canceled unless executed within a designated
time period. Related: Open order
Filter
The
percentage by which the price of a security must change in order
to trigger its purchase or sale.
Financial
market
An
organized institutional structure or mechanism for creating and
exchanging financial assets.
Financial
risk
The
risk that the cash flow of an issuer will not be adequate to meet
its financial obligations.
First-in-first-out
(FIFO)
A
method of valuing the costs of goods sold that uses the cost of
the oldest item in inventory first.
First
notice day
The
first day, varying by contracts and exchanges, on which notices of
intent to deliver actual financial instruments or physical
commodities against futures are authorized.
Fixed-income
equivalent
Also
called a busted convertible, a convertible security that is
trading like a straight security because the optioned common stock
is trading low.
Fixed-income
instruments
Assets
that pay a fixed-dollar amount, such as bonds and preferred stock.
Fixed-income
market
The
market for trading bonds and preferred stock.
Fixed-rate
payer
In
an interest rate swap the counterparty who pays a fixed rate,
usually in exchange for a floating-rate payment.
Flattening
of the yield curve
A
change in the yield curve where the spread between the yield on a
long-term and short-term Treasury has decreased. Compare
steepening of the yield curve and butterfly shift.
Floatingprate
contract
A
guaranteed investment contract where the crediting rate is tied to
some variable ("floating") interest rate benchmark, such
as a specific-maturity Treasury yield.
Floating-rate
payer
In
an interest rate swap, the counterparty who pays a rate based on a
reference rate, usually in exchange for a fixed-rate payment.
Floor
broker
A
member who is paid a fee for executing orders for clearing members
of their customers. A floor broker executing customer orders must
be licensed by the CFTC.
Floor
trader
A
member who generally trades only for his own account, for an
account controlled by him or who has such a trade made for him.
Also referred to as a "local".
Foreign
market
Part
of a nation’s internal market, representing the mechanisms for
issuing and trading securities of entities domiciled outside that
nation. Compare external market and domestic market.
Forward
contract
A
cash market transaction in which delivery of the commodity is
deferred until after the contract has been made. It is not
standardized and is not traded on organized exchanges.
Forward
rate
A
projection of future interest rates calculated from either the
spot rates or the yield curve.
Full
faith-and-credit obligations
The
security pledges for larger municipal bond issuers, such as states
and large cities which have diverse funding sources.
Full
price
Also
called dirty price, the price of a bond including accrued
interest.
Fund
family
Set
of funds with different investment objectives offered by one
management company. In many cases, investors may move their assets
from one fund to another within the family at little or no cost.
Fundamental
beta
The
product of a statistical model to predict the fundamental risk of
a security using not only price data but other market-related and
financial data.
Fundamental
descriptors
In
the model for calculating fundamental beta, ratios in risk indexes
other than market variability, which rely on financial data other
than price data.
Funding
ratio
The
ratio of a pension plan’s assets to its liabilities.
Funding
risk
Related:
Interest rate risk.
Futures
A
term used to designate all contracts covering the sale of
financial instruments or physical commodities for future delivery
on a commodity exchange.
Futures
commission merchant
A
firm or person engaged in soliciting or accepting and handling
orders for the purchase or sale of futures contracts, subject to
the rules of a futures exchange and, who, in connection with such
solicitation or acceptance of orders, accepts any money or
securities to margin any resulting trades or contracts. The FCM
must be licensed by the CFTC. Related: Commission house,
Omnibus account
Futures
contract
A
standardized, transferable legal agreement to make or take
delivery of a specified amount of a certain commodity of a certain
grade or type at a specific point in the future. The price is
determined at the time the agreement is made. Futures contracts
must be traded on organized futures exchanges.
Futures
contract multiple
A
constant, set by an exchange, which when multiplied by the futures
price gives the dollar value of a stock index futures contract.
Futures
option
An
option on a futures contract. Related: Options on physicals
Futures
price
The
price at which the parties to a futures contract agree to transact
on the settlement date.
Gamma
The
ratio of the change in a call option’s delta to the change in
price of underlying stock.
General
obligation bond
A
debt instrument of a municipality which is secured by the issuer’s
unlimited taxing power.
Geographic
risk
Risk
that arises when an insurer has policies concentrated within
certain geographic areas, such as the risk of damage from a
hurricane or an earthquake.
Give
up
An
order executed by one brokerage house, but cleared by another
house at the request of the customer.
GTC
(Good till canceled)
An
order to buy or sell at a fixed price. It holds until executed or
canceled.
Gross
profit margin
The
ratio of gross profit to net sales.
Group
rotation manager
A
top-down manager who infers the phases of the business cycle and
allocates assets accordingly.
Growth
manager
A
money manager who seeks to buy stocks that are typically selling
at relatively high P/E ratios due to high earnings growth, with
the expectation of continued high (or higher) earnings growth.
Growth
phase
A
phase of development in which a company experiences rapid earnings
growth as it produces new products and expands market share. Related:
Three-phase DDM
Guaranteed
investment contract (GIC)
A
pure investment product in which a life company agrees, for a
single premium, to pay the principal amount and a predetermined
annual crediting rate over the life of the investment, all of
which is paid at the maturity date.
Hedger
One
who purchases or sells a futures contract as a temporary
substitute for a transaction to be made at a later date. Related:
Hedge
Holder
The
purchaser of an option. Also known as the option buyer.
Holding
period return
Also
called the ex post return, the return on a portfolio over a period
of time.
Hybrid
security
A
convertible security whose optioned common stock is trading in a
middle range, causing the convertible security to trade with the
characteristics of both a fixed-income security and a common stock
instrument.
Immunization
strategy
A
bond portfolio strategy whose goal is to immunize a portfolio
against a general change in the rate of interest.
Implied
repo rate
The
rate that a seller of a futures contract can earn by buying an
issue and then delivering it at the settlement date. Related: Cheapest
to deliver issue
Implied
volatility
The
expected volatility in a stock’s return derived from its option
price, using an option-pricing model.
Income
statement
A
statement showing the revenues, expenses, and income (the
difference between revenues and expenses) of a corporation over
some period of time.
Indexing
A
passive instrument strategy consisting of the construction of a
portfolio of stocks designed to track the total return performance
of an index of stocks.
Indifference
curve
The
graphical expression of a utility function, where the horizontal
axis measures risk and the vertical axis measures expected return.
Inflation
risk
Also
called purchasing-power risk, the risk that changes in the real
return the investor will realize after adjusting for inflation
will be negative.
Information-motivated
trades
Trades
in which an investor believes he or she possesses pertinent
information not currently reflected in the stock’s price.
Informationless
trades
Trades
that are the result of either a reallocation of wealth or an
implementation of an investment strategy that only utilizes
existing information.
Initial
margin requirement
When
buying securities on margin, the proportion of the total market
value of the securities that the investor must pay for in cash.
The Security Exchange Act of 1934 gives the board of governors of
the Federal Reserve the responsibility to set initial margin
requirements, but individual brokerage firms are free to set
higher requirements. In futures contracts, initial margin
requirements are set by the exchange.
Input-output
tables
Tables
that indicate how much each industry requires of the production of
each other industry in order to produce each dollar of its own
output.
Institutional
investors
Organizations
that invest, including insurance companies, depository
institutions, pension funds, investment companies, and endowment
funds.
Institutionalization
The
gradual domination of financial markets by institutional
investors, as opposed to individual investors. This process has
occurred throughout the industrialized world.
Insured
bond
A
municipal bond backed both by the credit of the municipal issuer
and by commercial insurance policies.
Intangible
asset
A
legal claim to some future benefit, typically a claim to future
cash. Financial assets, also called financial instruments or
securities, are intangible assets.
Interest
coverage ratio
The
ratio of the earnings available for paying the interest for a
given year to the annual interest expense.
Interest
rate agreement
An
agreement whereby one party, for an upfront premium, agrees to
compensate the other at specific time periods if a designated
interest rate (the reference rate) is different from a
predetermined level (the strike rate).
Interest
rate cap
Also
called an interest rate ceiling, an interest rate agreement in
which payments are made when the reference rate exceeds the strike
rate.
Interest
rate ceiling
Related:
Interest rate cap
Interest
rate floor
An
interest rate agreement in which payments are made when the
reference rate falls below the strike rate.
Interest
rate risk
For
a bond, the risk that a rise in interest rates will decrease the
bond’s price. For a depository institution, also called funding
risk, the risk that spread income will suffer because of a change
in interest rates.
Interest
rate swap
A
binding agreement between counterparties to exchange periodic
interest payments on some predetermined dollar principal, which is
called the notional principal amount.
Intermarket
sector spread
The
spread between the interest rate offered in two sectors of the
bond market for issues of the same maturity.
Intermarket
spread swaps
An
exchange of one bond for another based on the manager’s
projection of a realignment of spreads between sectors of the bond
market.
Internal
market
The
mechanisms for issuing and trading securities within a nation,
including its domestic market and foreign market. Compare external
market.
Internally
efficient market
Operationally
efficient market.
Internal
rate of return
Dollar-weighted
rate of return.
International
Depository Receipt (IDR)
A
receipt issued by a bank as evidence of ownership of one or more
shares of the underlying stock of a foreign corporation that the
bank holds in trust. The advantage of the IDR structure is that
the corporation does not have to comply with all the regulatory
issuing requirements of the foreign country where the stock is to
be traded. The U.S. version of the IDR is the American Depositary
Receipt (ADR).
International
market
Related:
See external market
In-the-Money
A
put option that has a strike price higher than the underlying
futures price, or a call option with a strike price lower than the
underlying futures price. For example, if the march COMEX silver
futures contract is trading at $6 an ounce, a March call with a
strike price of 550 would be considered in-the-money by $0.50 an
ounce. Related: Put
Intramarket
sector spread
The
spread between two issues of the same maturity within a market
sector. For instance, the difference in interest rates offered for
five-year industrial corporate bonds and five-year utility
corporate bonds.
Intrinsic
value
The
amount by which an option is in-the-money. An option which is not
in-the-money has no intrinsic value. Related: In-the-Money
Inverted
market
A
futures market in which the nearer months are selling at price
premiums to the more distant months. Related: Premium
Investment
grade
A
bond that is assigned a rating in the top four categories by
commercial credit rating companies. Related: High-yield
bond
Issue
A
particular financial asset.
Issuer
An
entity that issues a financial asset.
Jensen
Index
An
index that uses the capital asset pricing model to determine
whether a money manager outperformed a market index.
Joint
Clearing Members
Firms
that clear on more than one exchange.
Junk
bond
Also
called a high-yield bond, one with a quality rating below triple
B.
Kappa
The
ratio of the dollar price change in the price of an option to a 1%
change in the expected price volatility.
Ladder
strategy
A
bond portfolio strategy in which the portfolio is constructed to
have approximately equal amounts invested in every maturity within
a given range.
Last
trading day
The
final day under an exchange’s rules during which trading may
take place in a particular futures or options contract. Contracts
outstanding at the end of the last trading day must be settled by
delivery of underlying physical commodities or financial
instruments, or by agreement for monetary settlement depending
upon futures contract specifications.
Law
of one price
An
economic rule stating that a given security must have the same
price regardless of the means by which one goes about creating
that security. This implies that if the payoff of a security can
be synthetically created by a package of other securities, the
price of the package and the price of the security whose payoff it
replicates must be equal.
Leveraged
buy-out (LBO)
A
transaction used for taking a public corporation private, financed
through the use of debt funds: bank loans and bonds. Because of
the large amount of debt relative to equity in the new
corporation, the bonds are typically rated below investment grade,
properly referred to as high-yield bonds or junk bonds. Investors
can participate in an LBO through either the purchase of the debt
(i.e., purchase of the bonds or participation in the bank loan) or
the purchase of equity through an LBO fund that specializes in
such investments.
Leveraged
portfolio
A
portfolio that includes risky assets purchased with funds
borrowed.
Liability
A
financial obligation, or the cash outlay that must be made at a
specific time to satisfy the contractual terms of such an
obligation.
Liability
funding strategies
Investment
strategies that select assets so that cash flows will equal or
exceed the client’s obligations.
Liability
swap
An
interest rate swap used to alter the cash flow characteristics of
an institution’s liabilities so as to provide a better match
with its assets.
Limit
order
An
order given to a broker by a customer which has restrictions upon
its execution. The customer specifies a price and the order can be
executed only if the market reaches or betters that price.
Limit
price
Maximum
price inflation.
Limit
order book
A
record of unexecuted limit orders that is maintained by the
specialist. These orders are treated equally with other orders in
terms of priority of execution.
Liquidation
Any
transaction that offsets or closes out a long or short position. Related:
Buy in, Evening up, Offset
Liquidity
A
market is liquid when it has a high level of trading activity,
allowing buying and selling with minimum price disturbance. Also a
market characterized by the ability to buy and sell with relative
ease.
Liquidity
risk
The
risk that arises from the difficulty of selling an asset. It can
be thought of as the difference between the "true value"
of the asset and the likely price, less commissions.
Liquidity
theory of the term structure
A
biased expectations theory that asserts that the implied forward
rates will not be a pure estimate of the market’s expectations
of future interest rates because they embody a liquidity premium.
Listed
stocks
Stocks
that are traded on an exchange.
Load
fund
A
mutual fund that tends to impose large commissions, typically
ranging from 8.5% on small amounts invested down to 1% on amounts
of $500,000 or over. Related: No-load fund
Loan
value
The
amount a policyholder may borrow against a whole life insurance
policy at the interest rate specified in the policy.
Local
expectations theory
A
form of the pure expectations theory which suggests that the
returns on bonds of different maturities will be the same over a
short-term investment horizon.
Long
One
who has bought a contract(s) to establish a market position and
who has not yet closed out this position through an offsetting
sale; the opposite of short. Related: Short
Long
hedge
The
purchase of a futures contract(s) in anticipation of actual
purchases in the cash market. Used by processors or exporters as
protection against an advance in the cash price. Related:
Hedge, Short hedge
Long
position
In
the cash market, the ownership of securities. In the futures
market, the purchase of a futures contract with no offsetting
short position. In the options market, the purchase of an option
with no offsetting short position. Related: Short position
Long
straddle
A
straddle in which a long position is taken in both a put and call
option.
Long-term
debt to equity ratio
A
capitalization ratio comparing long-term debt to shareholders’
equity.
Low
price-earnings ratio effect
The
tendency of portfolios of stocks with a low price earnings ratio
to outperform portfolios consisting of stocks with a high
price-earnings ratio.
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