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Magic
of diversification
The
effective reductions or risk (variance) of a portfolio, achieved
without reduction to expected returns through the combination of
assets with low or negative correlations (covariances). Related:
Markowitz diversification
Maintenance
margin requirement
A
sum, usually smaller than – but part of the original margin,
which must be maintained on deposit at all times. If a customer’s
equity in any futures position drops to, or under, the maintenance
margin level, the broker must issue a margin call for the amount
at money required to restore the customer’s equity in the
account to the original margin level. Related: Margin,
Margin call
Management
fee
An
investment advisory fee charged by the financial advisor to a fund
based on the fund’s average assets, but sometimes determined on
a sliding scale that declines as the dollar amount of the fund
increases.
Margin
Also
called security deposit. An amount of funds that must be deposited
with the broker for each contract as a good faith deposit on the
contract. Related: Security deposit (initial).
Margin
call
A
demand for additional funds because of adverse price movement.
Maintenance margin requirement, Security deposit maintenance.
Mark-to-Market
The
daily adjustment of an account to reflect profits and losses.
Market-if-Touched
(MIT)
A
price order, below market if a buy or above market if a sell, that
automatically becomes a market order if the specified price is
reached. Related: Market order
Market
conversion price
Also
called conversion parity price, the price that an investor
effectively pays for common stock by purchasing a convertible
security and then exercising the conversion option. This price is
equal to the market price of the convertible security divided by
the conversion ratio.
Market
impact costs
Also
called price impacts costs, the result of a bid/ask spread and a
dealer’s price concession.
Market
model
This
relationship is sometimes called the single-index model. The
market model says that the return on a security depends on the
return on the market portfolio and the extent of the security’s
responsiveness as measured, by beta (i). In addition, the return
will also depend on conditions that are unique to the firm.
Graphically, the market model can be depicted as a line fitted to
a plot of asset returns against returns on the market portfolio.
Market
order
An
order for immediate execution given to a broker to buy or sell at
the best obtainable price.
Market
portfolio
A
portfolio consisting of all assets available to investors, with
each asset held in proportion to its market value relative to the
total market value of all assets.
Market
risk
Related:
Systematic risk
Market
sectors
The
classification of bonds by issuer characteristics, such as state
government, corporate, or utility.
Market
segmentation theory
A
biased expectations theory that asserts that the shape of the
yield curve is determined by the supply of and demand for
securities within each maturity sector.
Market
timer
A
money manager who assumes he or she can forecast when the stock
market will go up and down.
Market
timing costs
Costs
that arise from price movement of the stock during the time of the
transaction which is attributed to other activity in the stock.
Marketplace
price efficiency
The
degree to which the prices of assets reflect the available
marketplace information. Marketplace price efficiency is sometimes
estimated as the difficulty faced by active management of earning
a greater return than passive management would, after adjusting
for the risk associated with a strategy and the transactions costs
associated with implementing a strategy.
Markowitz
diversification
A
strategy that seeks to combine assets a portfolio with returns
that are less than perfectly positively correlated, in an effort
to lower portfolio risk (variance) without sacrificing return. Related:
Naïve diversification
Markowitz
efficient frontier
The
graphical depiction of the Markowitz efficient set of portfolios
representing the boundary of the set of feasible portfolios that
have the maximum return for a given level of risk. Any portfolios
above the frontier cannot be achieved. Any below the frontier are
dominated by Markowitz efficient portfolios.
Markowitz
efficient portfolio
Also
called a mean-variance efficient portfolio, a portfolio that has
the highest expected return at a given level or risk.
Markowitz
efficient set of portfolios
The
collection of all efficient portfolios, graphically referred to as
the Markowitz efficient frontier.
Matching
concept
The
accounting principle that requires the recognition of all costs
that are associated with the generation of the revenue reported in
the income statement.
Maturity
date
For
a bond, the date on which the principal is required to be repaid.
In an interest rate swap, the date that the swap stops accruing
interest.
Maturity
phase
A
phase of company development in which earnings continue to grow at
the rate of the general economy. Related: Three-phase DDM
Maturity
spread
The
spread between any two maturity sectors of the bond market.
Maturity
value
Related:
Par value
Maximum
price fluctuation
The
maximum amount the contract price can change, up or down, during
one trading session, as fixed by exchange rules in the contract
specification. Related: Limit price
Mean-variance
efficient portfolio
Related:
Markowitz efficient portfolio
Medium-term
note
A
corporate debt instrument that is continuously offered to
investors over a period of time by an agent of the issuer.
Investors can select from the following maturity bands: 9 months
to 1 year, more than 1 year to 18 months, more than 18 months to 2
years, etc., up to 30 years.
Minimum
price fluctuation
Smallest
increment of price movement possible in trading a given contract.
Also called point or tick. Related: Point, Tick minimum
variance zero-beta portfolio. The zero-beta portfolio with the
least risk.
Modified
duration
The
ratio of Macaulay duration to (1 + y), where y = the bond yield.
Modified duration is inversely related to the approximate
percentage change in price for a given change in yield.
Money
center banks
Banks
that raise most of their funds from the domestic and international
money markets, relying less on depositors for funds.
Money
market
The
market for trading short-term debt instruments (those that mature
in less than one year). Related: Capital market
Money
market demand account
An
account that pays interest based on short-term interest rates.
Mortgage-backed
securities
Securities
backed by a pool of mortgage loans.
Mortgage
bond
A
bond in which the issuer has granted the bondholders a lien
against the pledged assets. Collateral trust bonds.
Mortgage
pass-through security
Also
called a passthrough, a security created when one or more mortgage
holders form a collection (pool) of mortgages and sell shares or
participation certificates in the pool.
Most
distant futures contract
When
several futures contracts are considered, the contract settling
last. Related: Nearby futures contract
Multiperiod
immunization
A
portfolio strategy in which a portfolio is created that will be
capable of satisfying more than one predetermined future liability
regardless if interest rates change.
Multirule
system
A
technical trading strategy that combines mechanical rules, such as
the CRISMA (cumulative volume, relative strength, moving average)
Trading System of Pruitt and White.
Mutual
offset
A
system, such as the arrangement between the CME and SIMEX, which
allows trading positions established on one exchange to be offset
or transferred on another exchange.
Naïve
diversification
A
strategy whereby an investor simply invests in a number of
different assets and hopes that the variance of the expected
return on the portfolio is lowered. Related: Markowitz
diversification
Naked
strategies
An
unhedged strategy making exclusive use of one of the following:
long call strategy (buying call options), short call strategy
(selling or writing call options), long put strategy (buying put
options), and short put strategy (selling or writing put options).
By themselves, these positions are called naked strategies because
they do not involve an offsetting or risk-reducing position in
another option or the underlying security. Related: Covered,
Hedge option strategies
National
Association of Securities Dealers Automatic Quotation (NASDAQ)
System
An
electronic quotation system that provides price quotations to
market participants about the more actively traded common stock
issues in the OTC market. About 4,000 common stock issues are
included in the NASDAQ system.
National
Futures Association (NFA)
The
futures industry self regulatory organization established in 1982.
Nearby
futures contract
When
several futures contracts are considered, the contract with the
closet settlement date is called the nearby futures contract. The
next futures contract is the one that settles just after the
nearby contract. The contract farthest away in time from
settlement is called the most distant futures contract.
Nearby
The
nearest active trading month of a financial or commodity futures
market. Related: Deferred futures
Negative
carry
Related:
Net financing cost
Negative
convexity
A
bond characteristic such that the price appreciation will be less
than the price depreciation for a large change in yield of a given
number of basis points.
Neglected
firm effect
The
tendency of firms that are neglected by security analysts to
outperform firms that are the subject of considerable attention.
Net
asset value (NAV) per share
The
basis of a mutual fund’s share price, which is found by
subtracting from the market value of the portfolio the mutual fund’s
liabilities and then dividing by the number of mutual fund shares
outstanding.
Net
financing cost
Also
called the cost of carry or, simply, carry, the difference between
the cost of financing the purchase of an asset and the asset’s
cash yield. Positive carry means that the yield earned is greater
than the financing cost; negative carry means that the financing
cost exceeds the yield earned.
Net
operating margin
The
ratio of net operating income to net sales.
Next
futures contract
The
contract settling immediately after the nearby futures contract.
No-load
fund
A
mutual fund that does not impose a sales commission. Related:
Load fund
Nominal
price
Price
quotations on futures for a period in which no actual trading took
place.
Non-cumulative
preferred stock
Preferred
stock whose holders must forgo dividend payments when the company
misses a dividend payment. Related: Cumulative preferred
stock
Non-parallel
shift in the yield curve
A
shift in the yield curve in which yields do not change by the same
number of basis points for every maturity. Related: Parallel shift
in the yield curve
Normal
portfolio
A
customized benchmark that includes all the securities from which a
manager normally chooses, weighted as the manager would weight
them in a portfolio.
Notes
Debt
instruments with maturities of less than 10 years.
Notice
day
A
day on which notices of intent to deliver pertaining to a
specified delivery month may be issued. Related: Delivery
notice.
Notional
principal amount
In
an interest rate swap, the predetermined dollar principal on which
the exchanged interest payments are based.
Odd
lot
A
trading order for less than 100 shares of stock. Compare round
lot.
Offer
Indicates
a willingness to sell at a given price. Related: Bid
Offset
Elimination
of a current long or short position by making an opposite
transaction. Related: Buy in, Evening up, Liquidation
Omnibus
account
An
account carried by one futures commission merchant with another
futures commission merchant in which the transactions of two or
more persons are combined and carried in the name of the
originating broker, rather than designated separately. Related:
Commission house, Futures commission merchant
Open
contracts
Contracts
which have been bought or sold without the transaction having been
completed by subsequent sale or purchase, or by making or taking
actual delivery of the financial instrument or physical commodity.
Open-end
fund
Also
called a mutual fund, an investment company that stands ready to
sell new shares to the public and to redeem its outstanding shares
on demand at a price equal to an appropriate share of the value of
its portfolio, which is computed daily at the close of the market.
Open
interest
The
total number of futures contracts traded in a given commodity that
have not yet been liquidated either by an offsetting futures
transaction or by delivery. Related: Liquidation
Open
order
An
order to a broker that is good until it is canceled or executed.
Open-Outcry
The
method of trading used at futures exchanges, typically involving
calling out the specific details of a buy or sell order, so that
the information is available to all traders.
Opening,
the
The
period at the beginning of the trading session officially
designated by the exchange during which all transactions are
considered made "at the opening". Related: Close,
the
Opening
price
The
range of prices at which the first bids and offers were made or
first transaction were completed. Related: Range
Operating
cycle
The
average time intervening between the acquisition of materials or
services and the final cash realization from those acquisitions.
Operationally
efficient market
Also
called an internally efficient market, one in which investors can
obtain transactions services that reflect the true costs
associated with furnishing those services.
Opportunity
costs
The
difference in the performance of an actual investment and a
desired investment adjusted for fixed costs and execution costs.
The performance differential is a consequence of not being able to
implement all desired trades.
Optimal
portfolio
An
efficient portfolio most preferred by an investor because its
risk/reward characteristics approximate the investor’s utility
function. A portfolio that maximizes an investor’s preferences
with respect to return and risk.
Optimization
approach to indexing
An
approach to indexing which seeks to Optimize some objective, such
as to maximize the portfolio yield, to maximize convexity, or to
maximize expected total returns.
Option
The
right, but not the obligation, to buy or sell an underlying
futures contract.
Original
margin
The
margin needed to cover a specific new position. Related:
Margin, Security deposit (initial)
Option-adjusted
spread (OAS)
The
spread over an issuer’s spot rate curve, developed as a measure
of the yield spread that can be used to convert dollar differences
between theoretical value and market price.
Option
premium
The
option price.
Option
price
Also
called the option premium, the price paid by the buyer of the
options contract for the right to buy or sell a security at a
specified price in the future.
Option
seller
Also
called the option writer, the party who grants a right to trade a
security at a given price in the future.
Option
writer
Option
seller.
Options
contract
A
contract that, in exchange for the option price, gives the option
buyer the right, but not the obligation, to buy (or sell) a
financial asset at the exercise price from (or to) the option
seller within a specified time period, or on a specified date
(expiration date).
Options
contract multiple
A
constant, set at $100, which when multiplied by the cash index
value gives the dollar value of the stock index underlying an
option. That is, dollar value of the underlying stock index = cash
index value x $100 (the options contract multiple).
Options
on physicals
Interest
rate options written on fixed-income securities, as opposed to
those written on interest rate futures contracts.
Out-of-the-Money
A
put option with a strike price lower than the underlying futures
price, or a call option with a strike price higher than the
underlying futures price. Related: In-the-Money
Over-the-counter
market (OTC)
A
decentralized market (as opposed to an exchange market) where
geographically dispersed dealers are linked together by telephones
and computer screens.
Overlay
strategy
A
strategy of using futures for asset allocation by pension sponsors
to avoid disrupting the activities of money managers.
Overnight
repo
A
repurchase agreement with a term of one day.
Overreaction
hypothesis
The
supposition that investors overreact to unanticipated news,
resulting in exaggerated movement in stock prices followed by
corrections.
P&S
Purchase
and sale statement. A statement provided by the broker showing
change in the customer’s net ledger balance after the offset of
a previously established position(s).
Par
value
Also
called the maturity value or face value, the amount that the
issuer agrees to pay at the maturity date.
Parallel
shift in the yield curve
A
shift in the yield curve in which the exchange in the yield on all
maturities is the same number of basis points. Related: Non-parallel
shift in the yield curve
Parity
value
Related:
Conversion value
Passive
portfolio strategy
A
strategy that involves minimal expectational input, and instead
relies on diversification to match the performance of some market
index. A passive strategy assumes that the marketplace will
reflect all available information in the price paid for
securities. Related: Active portfolio strategy
Perfect
hedge
A
hedge in which the profit and loss are equal.
Performance
attribution analysis
The
decomposition of a money manager’s performance results to
explain the reasons why those results were achieved. This analysis
seeks to answer the following questions: (1) What were the major
sources of added value? (2) Was short-term factor timing
statistically significant? (3) Was market timing statistically
significant? and (4) Was security selection statistically
significant?
Perpetual
warrants
Warrants
that have no expiration date.
Pit
A
specific area of the trading floor that is designated for the
trading of an individual futures or options contract.
Pit
committee
A
committee of the exchange that determines the daily settlement
price of futures contracts.
Point
Related:
Minimum price fluctuation.
Policy
asset allocation
A
long-term asset allocation method, in which the investor seeks to
assess an appropriate long-term "normal" asset mix that
represents an ideal blend of controlled risk and enhanced return.
Portfolio
A
collection of investments.
Portfolio
insurance
A
strategy using a leveraged portfolio in the underlying stock to
create a synthetic put option.
Portfolio
internal rate of return
The
rate of return computed by first determining the cash flows for
all the bonds in the portfolio and then finding the interest rate
that will make the present value of the cash flows equal to the
market value of the portfolio.
Position
A
market commitment; the number of contracts bought or sold for
which no offsetting transaction has been entered into. The buyer
of a commodity is said to have a long position and the seller of a
commodity is said to have a short position. Related: Open
contracts
Positive
carry
Related:
Net financing cost
Positive
convexity
A
property of option-free bonds whereby the price appreciation for a
large change in interest rates will be greater (in absolute terms)
than the price depreciation for the same change in interest rates.
Posstrade
benchmarks
Prices
after the decision to trade.
Preferred
stock
A
class of stock that shares characteristics of both common stock
and debt.
Premium
The
price of an options contract; also, in futures trading, the amount
the futures price exceeds the price of the spot commodity. Related:
Inverted market premium payback period. Also called break-even
time, the time it takes to recover the premium per share of a
convertible security.
Pre-trade
benchmarks
Prices
occurring before or at the decision to trade.
Price
compression
The
limitation of the price appreciation potential for a callable bond
in a declining interest rate environment, based on the expectation
that the bond will be redeemed at the call price.
Price
discovery process
The
process of determining the prices of the assets in the marketplace
through the interactions of buyers and sellers.
Price-earnings
(P/E) ratio
The
current market price of the stock divided by some measure of
earnings per share.
Price
momentum
Related:
Relative strength
Price
persistence
Related:
Relative strength
Price
risk
The
risk that the value of a security (or a portfolio) will decline in
the future.
Price
value of a basis point (PVBP)
Also
called the dollar value of an 01, a measure of the change in the
price of the bond if the required yield changes by one basis
point.
Price-volume
relationship
A
relationship espoused by some technical analysts that signals
continuing rises and falls in security prices based on
accompanying changes in volume traded.
Pricing
efficiency
Also
called external efficiency, a market characteristic where prices
at all times fully reflect all available information that is
relevant to the valuation of securities.
Primary
market
The
principal underlying market for a financial instrument or physical
commodity.
Profit
margin
The
ratio of earnings available to stockholders to net sales.
Program
trades
Also
called basket trades, orders requiring the execution of trades in
a large number of different stocks at as near the same time as
possible. Related: Block trade
Protective
put buying strategy
A
strategy that involves buying a put option on the underlying
security that is held in a portfolio. Related: Hedge option
strategies
Provisional
call feature
A
feature in a convertible issue that allows the issuer to call the
issue during the non-call period if the price of the stock reaches
a certain price.
Pure
expectations theory
A
theory that asserts that the forward rates exclusively represent
the expected future rates. Related: Biased expectations
theories
Pure
index fund
A
portfolio that is managed so as to perfectly replicate the
performance of the market portfolio.
Put
An
option granting the right to sell the underlying futures contract.
Opposite of a call. Related: Call
Put-call
parity relationship
The
relationship between the price of a put and the price of a call on
the same underlying with the same expiration date, which prevents
arbitrage opportunities.
Put
swaption
A
swaption in which the buyer has the right to enter into a swap as
a floating-rate payer. The writer of the swaption therefore
becomes the floating-rate receiver/fixed-rate payer.
Quality
option
Also
called the swap option, the seller’s choice of deliverables in
Treasury bond and Treasury note futures contract. Related:
Cheapest to deliver issue
Quality
spread
Also
called credit spread, the spread between Treasury securities and
non-Treasury securities that are identical in all respects except
for quality rating. For instance, the difference between yields on
Treasuriers and those on single A-rated industrial bonds.
Quick
ratio
Related:
Acid-test ratio
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