1

Glossary of
Finance Jargon
Your essential guide to the language of banking, finance
and capital markets!

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Glossary of Finance Jargon

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-A-
ADR
American Depository Receipt. A financial asset issued by a US Depository Bank representing
shares in a non-US company held by them. These receipts are traded in the US.

AGM
The annual meeting of a company which is required by law.

AIM
Alternative Investment Market

AMEX
American 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.

APT
Automated Pit Trading

ATM
At the Money. When the price of the underlying transaction equals the strike price of the
option.

ASB
Accounting Standards Board

ASDA
Actual Settlement Date Accounting

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

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

Accrual accounting

A method of reporting income when earned and expenses when incurred, as opposed to
reporting income when received and expenses when paid.

Accrued Interest
Interest earned on a bond since the previous interest payment and not yet paid to the
bondholder.

Acid-Test Ratio
A measure of a corporation's liquidity, calculated by adding cash, cash equivalents, and
accounts and notes receivable, and dividing the result by total current liabilities. It is a more
stringent test of liquidity than current ratio.
 3

Acquisition Fee
The total charges and commissions paid by any party in connection with the selection or
purchase of property by a direct participation program. Included in the total are any real estate
commission, acquisition expense, development fee, and selection fee or construction fee of a
similar nature. The fee is added to the basis in the asset for the purpose of depreciation and
calculating gain or loss.

Adjusted Basis
The value attributed to an asset or security that reflects any deductions taken on or capital
improvements to, the asset or security. Adjusted basis is used to compute the gain or loss on
the sale or other disposition of the asset or security.

Adjusted Beta
The estimation of a securities future beta calculated from historical data, but modified by the
assumption 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 Line
A technical analysis tool representing the total of differences between advances and declines
of security prices. The advance/decline line is considered the best indicator of market
movement 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 he
actually receives or simply solicits orders.

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

Alpha
The difference between a securities expected return and its real return.

American Style Option

An option that may be exercised at any time up until expiry.

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.

Amortising
A range of instruments where the notional amount on which the instrument is based decreases
during its life – used for depreciating intangible assets for tax purposes. These can include
swaps, swaptions, floors & collars.

Annuity Swap
An interest rate swap where irregular cashflows are exchanged for a stream of regular
cashflows of the equivalent present value.

Annuity
A contract that guarantees a fixed or variable annual payment.

Apportionment
The allocation of stock to a buyer

Appreciation
The increase in the value of an asset over a period of time.
 4

Arbitrage
The simultaneous purchase and sale of the same or related securities to take advantage of a
market inefficiency.

Arbitrage Pricing Theory

An equilibrium model of asset pricing stating the expected return on a security is a linear
function of the securities function to various common factors.

Ask
The 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 Allocation
The optimal apportioning of investment funds amongst categories of assets.

Asset Backed Securities

Notes or Bonds backed by assets or structured cashflows receivable.

Asset-Liability Management
The process of matching a level of debt to an amount of assets. Carried out by financial
institutions when matching the maturity of their deposits with the length of their loan
commitments as protection against changes in interest rates.

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

Assignment
The sale of a swap to a new counterparty or buyout of a swap by a new counterparty.

At-the-Opening Order
An order that specifies it is to be executed at the opening of the market or of trading in that
security or else it is to be cancelled. The order does not have to be executed at the opening
price.

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

Auction Market
A market in which buyers enter competitive bids and sellers enter competitive offers
simultaneously. The NYSE is an auction market.

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

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

-B-
BBAIRS Terms
 5

Standard terms for shorter-term interbank interest rate swaps, provided by the British Bankers
Association.

BD
Broker Dealer. A member firm, acting as agent or as principal, who is not a registered market
maker in the security in which they are dealing.

BET
Book 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.

BOTCC
Board of Trade Clearing Corporation

Balance of Payments (BOP)

An international accounting record of all transactions made by one particular country with
others during a certain time period; it compares the amount of foreign currency the country
has taken in to the amount of its own currency it has paid out.

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

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

Balance Sheet Equation

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

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

Bargain
A transaction to buy or sell securities on a stock exchange.

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

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

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

Basis Risk
The risk that the value of a futures contract does not move in line with the underlying
exposure – also the risk of movement between two interest rate profiles [e.g. LIBOR vs. Fed
Funds].

Basis Swap
A swap from one floating rate to another.

Basis Trading Facility

A process whereby futures and the underlying can be traded simultaneously to buy/sell the
basis.
 6

Bear
One who expects market prices to fall.

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

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

Bearer Share
A security where possession is taken as proof of ownership as the certificate does not contain
the name of the registered owner.

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

Beneficial Owner
The owner of a security who is entitled to the benefits of that security. The beneficial and
legal owner may be different.

Best Execution
Dealing at the best possible price in the required size.

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

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

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

Black – Scholes Model

A model used to value options, which calculates a theoretical ‘fair value’ by constructing an
instantaneously 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. The
model takes 5 major factors into account: the risk free interest rate, the strike price of the
option, the price of the underlying, the option’s maturity and the assumed volatility.

Blue Chip Stock

The equity issues of financially stable well-established companies that have demonstrated
their ability to pay dividends in both good and bad times.

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

Bond Basis
Swap rate based on a 365 day year in accordance with the accrual conventions in the US
Treasury Bond market.

Bond Rating
An evaluation of the possibility of default by a bond issuer, based on an analysis of the
issuer's financial condition and profit potential. Bond rating services are provided by, among
others, Standard & Poor's and Moody's Investors Service.
 7

Bond Value
The market value a convertible bond would have if it were a straight [fixed rate] bond with no
conversion rights.

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

Bootstrapping
A method used to derive the zero-coupon yield curve.

Brady Bonds
Emerging market debt, partly securitised by US Treasuries, issued when bank loans are
exchanged for bonds.

Breakeven/Payback
A ratio [expressed in years] that compares the size of a conversion premium with the
difference between the yield on a convertible security and the dividend yield on the shares
into 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 strike
price minus the premium paid.

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

Bull
One who thinks that prices will rise.

Bull Market
A market in which prices of a certain group of securities are rising or are expected to rise. See
also bear market.

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

Butterfly Spread
The sale of an at-the-money straddle and the simultaneous purchase of an out-of-the-money
strangle.

-C-
CAD
Cash against delivery/documents

CAD
Capital Adequacy Directive – the requirement for banks & financial services organisations to
have sufficient capital to carry out their activities.

CBOE
Chicago Board Options Exchange.

CBOT [Chicago Board of Trade]

The oldest commodities exchange in the United States; established in 1886. The exchange
lists agricultural commodity futures such as corn, oats and soybeans, in addition to more
recent innovations as GNMA mortgages and the Nasdaq 100 Index.
 8

CCSS
Crest Courier & Sorting Service

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

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

CGT
Capital Gains Tax

CFTC
Commodity Futures Trading Commission

CJA
Criminal Justice Act 1993

CME
Chicago Mercantile Exchange

CREST
Certificateless Register of Electronic Stock & Share Transfer

CRR
Counterparty Risk Requirement

CS
Cash settlement.

CSD
Central Securities Depository. Their primary function is to immobilise or dematerialise
securities thus assuring most transactions are processed in book entry form.

CSDA
Contractual Settlement Date Accounting. Global Custodians in certain conditions and in
developed markets will give clients cash value for securities traded irrespective of whether
they have received the money themselves.

CSP
Central Stock Payment

CUSIP
Committee on Uniform Securities Identical Procedures

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

Callable Swap
A swap that gives the fixed rate payer an option to cancel the swap agreement, usually on one
specific future date.

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

Cap
A contract in which the seller agrees to pay the buyer the difference between a reference rate
and an agreed strike rate as in the case when the reference exceeds the strike. This is done in
return for annuity payments or a one off premium.
 9

Capital Asset Pricing Model [CAPM]

Represents the relationship between expected risk and expected return – states that the return
on an asset or security should be equal to the risk-free return + a premium.

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

Capitalisation Issue
See bonus issue

Capital Markets
Financial markets in which instruments with a term to maturity, at issue, are issued and
traded.

Cash Flow
The money received by a business minus the money paid out. Cash flow is also equal to net
income plus depreciation or depletion.

Cash Market
The underlying currency or market where the instruments that relate to derivatives are bought
and sold.

Cash Settlement
A security dealt for settlement the business day after dealing.

CEDEL
An International Central Securities Depository & clearing system based in Luxembourg and
owned by a consortium of banks. Now called CLEARSTREAM BANKING.

Certificated
Securities represented in the form of paper certificates

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

Circuit Breaker
A suspension of trading in a particular market in times of high volatility

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

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

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

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

Clean Price
The market price of a bond, excluding accrued interest – the price at which bonds are traded
in the market.

Clearing House
An organisation responsible for the reconciliation of sales and purchases, organising
settlements & margins and providing guarantees to market users in the event of default.

Collar
 10

The simultaneous purchase of an interest rate cap and an interest rate floor therefore limiting
exposure to changing interest rates within a defined range.

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

Commercial Paper
An unsecured, short-term promissory note issued by a corporation for financing accounts
receivable and inventories. It is usually issued at a discount reflecting prevailing market
interest rates.

Commission
A fee charged by a broker for a service.

Commodity
A product traded on a commodity exchange.

Compliance Officer
Someone appointed by an organisation to ensure that it complies with local & international
regulatory requirements.

Concert Party
Investors buying securities in agreement between themselves.

Contract
A standard unit of trading in futures & traded options.

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

Convergence
Movement of the price of a futures contract towards the price of the underlying.

Conversion Premium
The 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 Price
The share price at which a convertible can be exchanged into shares.

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

Convertible Loan Stock

An interest bearing security with an option to convert into a specific amount of equity by a
future date.

Convexity
Mathematical concept measuring the sensitivity of the market price of an interest-bearing
bond to a change in interest rates.

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

Corporation
The most common form of business organisation, in which the total worth of the organisation
is divided into shares of stock; each share representing a unit of ownership. A Corporation is
characterised by a continuous life span and the limited liability of its owners.
 11

Correlation
A statistical measure which measures the degree of mutual variation between two random
variables.

Coupon
Interest payment.

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

Credit Enhancement
Improving the credit rating of bonds by obtaining a third party guarantee or credit risk
insurance.

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

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

Cross Border Trade

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

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

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

Currency Risk
Uncertainty in the return from a foreign financial asset due to unpredictability regarding the
exchange rate.

Currency Swap
A transaction in which two parties agree to swap fixed or floating cash flows in different
currencies for a specific period.

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

-D-
DIE
Designated Investment Exchange

DM
Deutschemark

DTC
Depository Trust Company

DTB
Deutsche Terminborse

DTI
Department of Trade and Industry
 12

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

DTI
Department of Trade & Industry [UK]

Daily Official List

Produced each day by the London Stock Exchange to record the previous day’s trading prices.

Day Order
An order placed for execution during one trading session only – the order is automatically
cancelled if not filled that day.

Dealer
An institution or individual who trades financial assets, either for their own account or on
behalf of clients.

Debentures
Interest bearing security, secured on the borrowers assets.

Debt-Equity Swap
A 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 Security
Normally interest bearing bonds.

Debt Service
The schedule for repayment of interest and principal (or the scheduled sinking fund
contribution) on an outstanding debt.

Debt Warrant
Gives 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 Swap
A type of swap, where due to accounting or tax reasons, payments [rather than the whole
swap] are deferred to a later period.

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

Delta
A measure of the relationship between an option price and the price of the underlying futures
contract or a stock price. The rate of change of delta is an option’s gamma.

Dematerialised Securities
Securities where the certificates or documents of title have been destroyed and replaced by
electronic 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.

Derivatives
 13

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

Designated Market Maker

A dealer who continuously provides bid & ask prices at which they are obliged to deal, as
well as a size.

Devaluation
A substantial fall in the value of a currency as compared to the value of gold or to the value of
another country's currency.

Difference Option
An option that pays the difference in the price of two assets. The option is originally valued
by the strike price.

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

Diluted Earnings
A reduction in earnings per share of common stock. Dilution occurs because of the issuance
of additional common shares through the exercising of options and/or the conversion of
convertible securities.

Dirty Price
Price payable for a bond on settlement of a purchase transaction. The clean price plus accrued
interest.

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

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

Dividend
A distribution of the earnings of a corporation. Dividends may be in the form of cash, stock or
property. The board of directors must declare all dividends.

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

Dow Jones Index

A US stock market index.

Due Diligence
The careful investigation by the underwriters that is necessary to ensure that all material
information pertinent to an issue has been disclosed to prospective investors.

Duration
The average life of the present values of all future cash flows from a bond. Essentially a
measure of bond price volatility by measuring its ‘length’ i.e. weighted average, term-tomaturity
of a bonds cash flow.

-E-
EASDAQ
 14

European Association of Securities Dealers Automated Quotation – A pan European market

for smaller companies based in Brussels.

EB
Early bargain

EBITDA
Earnings before interest, tax, depreciation and amortisation - This method of valuation shows
the free cashflow of a company excluding distortions due to differing depreciation policies.

ECN
Electronic communications network

ECU
European Currency Unit

EDR
European depository receipt – non-Paris listings.

EDSP
Exchange Delivery Settlement Price

EEA
European Economic Area [EU + EFTA]

EFP
Exchange for Physicals

EFTA
European Free Trade Area (Norway, Liechtenstein & Iceland)

EGM
Extraordinary General Meeting.

EMH
Efficient Market Hypothesis

EPS
Earnings per share. A common valuation yardstick for equities.

ERISA
Employee Retirement Income Security Act of 1974 allowing US Domestic funds to diversify
into non-US securities.

EU
European Union

EuroDR
European depository receipt – Paris listed.

EuroNM
Europe-wide stock exchange for smaller companies

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

Econometrics
 15

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

Efficient Portfolio
A portfolio which offers investors both the maximum return for varying levels of risk & the
minimum risk for varying levels of return.

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

Emerging Markets
These 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 interest
from foreign investors from the developed markets pour money in to an emerging market.

Equity
Ownership. Normally applied to company shareholders. The shares they hold are called
equity.

Equity Index Swap

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

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

Escrow Agreement
The certificate provided by an approved bank that guarantees that the indicated securities are
on deposit at that bank. An investor who writes a call option and can present an escrow
agreement is considered covered and does not need to meet margin requirements.

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

Eurobond
Bond issued and traded in the international bond market.

Euroclear
An ICSD [International Central Securities Depository] based in Brussels and clearing
Eurobonds and international securities.

Euroconvertibles
Convertible securities issued and traded on the international securities market.

Ex Date
This is the date specified by the local stock exchange to determine whether the buyer or seller
is entitled to the benefit of a dividend. Normally the seller of a security during the ex period
will be entitled to the dividend.

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

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

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

Exercise Price
Also called the strike price. The agreed fixed price at which the option holder can exercise the
 16

option to buy/sell the underlying item.

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

Expected Return
The return on a security or portfolio over a holding period that an investor anticipates
receiving.

Expiry Date
The date on which an option holders rights expire.

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

Exposure
A term referring to the existence of risk.

Extraordinary Item
A large expense or item of income deriving from abnormal events or transactions outside the
ordinary activities of a company.

-F-
FAS
Financial Accounting Standard

FAST
Fast Automated Screen Trading

FER
Foreign Exchange Requirement

FIFO
First in, first-out

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

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

FRS
Financial Reporting Standard

FSA
Financial Services Act [1986]

FSA
Financial Services Authority

FT-SE
Financial Times-Stock Exchange

Firm Underwriting
A firm underwriter will buy new securities whereas an ordinary underwriter will take any
unwanted shares.
 17

Fixed Rate Bond

A bond that pays interest at a fixed coupon rate.

Flat Yield Curve

A chart showing the yields of bonds with short maturities as equal to the yields of bonds with
long maturities.

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

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

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

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

Fund Manager
A person responsible for the management of the investments in a fund and who invests money
on behalf of someone else.

Future
An exchange traded standardised contract to purchase or sell an agreed amount of a
commodity or financial instrument for future delivery.

Futures Market
An exchange that trades futures contracts.

-G-
G30
A private sector group made up of 30 market participants who are concerned with the
workings of the international financial system. In 1989 they came up with a set of 9
recommendations for improving settlement, trading etc following the 1987 crash.

GAAP
Generally accepted accounting policies.

GDP [Gross Domestic Product]

The total value of goods and services produced in a country during one year. It includes
consumption, government purchases, investments, and exports minus imports.

GDR
Global depository receipt

GEMM
Gilt Edged Market Makers

GTC
Good till cancelled

Gamma
When there is a small change in the underlying, the Gamma is referred to as the rate of change
in the Delta of an option.
 18

Gearing
A measure of the indebtedness of a company that compares the size of the company’s debts to
its total capitalisation or the size of its equity capital.

Gilts
UK government securities

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

Gross Yield
Return on an investment before taking into account any tax payable on this return by the
investor.

Guaranteed Bond
Issued by one corporation but backed by another corporation.

Guaranteed Exchange Rate Option

Also called a quanto option, this is an option on a particular asset in one currency
denominated in another currency.

-H-
Head and Shoulders
On a technical analyst's trading chart, a pattern that has three peaks resembling a head and two
shoulders. The stock price moves up to its first peak (the left shoulder), drops back, then
moves 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 and
indicates a market reversal. A head and shoulders bottom (an inverted head and shoulders)
indicates a market advance.

Hedge Ratio
The expected change in the value of an option per $ change in the market price of the
underlying asset.

Hedging
Taking action to remove or reduce an exposure to financial risk.

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

High Coupon Swap

Also called a premium swap, the fixed rate payments succeed the market rates.

High Low Option

The difference between the high and low of the underlying item is paid – a combination of
two lookback options.

Historical Volatility
The measure of the past volatility of a financial instrument.

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

Horizontal Spread
Also called a calendar spread, this is a strategy where the same number of options contracts
with the same exercise price, but with differing maturity dates, are bought & sold.
 19

Hull-White Model
An option pricing model.

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

IMRO
Investment Management Regulatory Organisation

INS
Institutional Net Settlement

IPE
International Petroleum Exchange

IPO [Initial Public Offering]

The first sale of common stock by a corporation to the public.

ISD
Investment Services Directive

ISDA
The International Swap & Derivative Association.

ISIN
International Securities Identification Number. A coding system developed by the ISO to
create one unique number on a global basis for identifying individual securities.

ISO
International Organisation for Standardisation. This is a global federation of national
standards bodies to develop standards for communications and standards within industries
internationally.

ISMA
International Securities Market Association

ISSA
International Society of Securities Administrators. It was set up in 1979 to promote progress
in global securities administration. Symposia are held biennially to look at particular areas of
concern.

Immobilised
This is when securities are warehoused safely by a CSD but held on their books in book entry
form.

Implied Correlation
When having two or multi-factor models with two or more underlying assets, this is the
correlation which is assumed.

Implied Repo Rate

The return which is earned by buying a cheapest-to-deliver bond for a bond futures contract
and selling it forward via a futures contract.

Implied Volatility
The value of the volatility in the price of an option.

In the Money
Where the strike price of an option/warrant is more advantageous that the current market price
 20

of the underlying.

Index Fund
A fund that invests in the constituent parts of an index and is designed to replicate the
performance of the index.

Insider Dealing
Use of unpublished, price-sensitive information, or passing on price-sensitive information to
enable someone to profit by dealing in securities.

INSTINET
Electronic brokerage owned by Reuters

Interest Rate Swap

An agreement to exchange net future cash flows, where one party pays fixed rate and the other
floating rate on a notional principal amount [not exchanged].

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

Introduction
Method of gaining a listing on an exchange. Generally, no new stock is issued and no new
money raised.

Inverted Yield Curve

Where the short term interest rates are higher than medium to long term ones.

Investment Trust / Investment Fund

Closed-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 exceptions
to the definition of issuer. In the case of voting-trust certificates or collateral-trust
certificates, 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, or
mining titles or leases where payments are made out of production.

-J-
JGB
Japanese government bond

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

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

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

-K-
 21

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

-L-
LCH
London Clearing House

LER
Large Exposure Requirement

LIBOR
London Interbank Offered Rate

Liffe
London International Financial Futures & Options Exchange.

LIFO
Last-in, first-out.

LSE
London Stock Exchange

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

Leverage
Borrowing or trading a multiple of assets.

Leveraged Buyout
The process of taking over a company using borrowed funds. The security for these funds is
normally the assets of the company being acquired.

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

Listing
Part of the process of bringing a company to market i.e. getting a listing on a particular
exchange.

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

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

Lloyd’s
International insurance market, based in London.

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

Long Hedge
A futures contract bought for protection against a rise in another contract that must be
honoured.
 22

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

-M-
M1
A category of the money supply that includes all coins, currency and demand deposits

M2
A category of the money supply that includes M1 in addition to all time deposits, savings
deposits and non-institutional money market funds.

M3
A 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 large
liquid assets.

MBO
Management buyout

MATIF
Marche a Terme International de France

MLRO
Money Laundering Reporting Officer

MM
Market maker.

MMC
Monopolies & Mergers Commission.

MPL
Maximum Publication Level

MQP
Mandatory Quote Period

MV
Market value

Margin
A cash deposit payable to a futures & options exchange by the buyer & seller of a future and
the seller of a traded option.

Margin Call
In order to bring a margin account up to the required level, the investor can be called upon to
deposit further margin.

Market Maker
A dealer willing to accept the risk of holding a particular security in its own account to
facilitate trading in that security.

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

Matched Bargain
Transaction where a buyer & seller have to be found before the deal is done.
 23

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

Merger
Combining two or more companies by offering the stockholders of one company securities in
another company in exchange for the surrender of their stock.

Money Back Option

An option which at expiry repays at least the original option premium.

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

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

Monte Carlo Simulation

A simulation of the evolution of a variable many times over. The model outcome of the
discounted average outcome is an approximation of the value of the derivative – therefore a
method to help value complex options.

Mortgage Backed Securities

Asset-backed securities where the underlying assets are mortgage loans.

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

Multi-Factor Model
A model, which allows realistic modelling of options, where there are two or more parameters
that are uncertain.

Multiple Growth Model

A type of dividend discount model where dividends are assumed to grow at different rates
over specifically defined time periods.

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

-N-
NAPF
National Association of Pension Funds – trade body.

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

NC
Not for central settlement

NMS
Normal market size

NNT
Neural network trading

NPV
 24

No par value shares or ‘net present value’ which results from comparing the purchase price of
a financial instrument with the present value of the stream of cashflows arising from it.

NSCC
National Securities Clearing Corporation

NYSE [New York Stock Exchange]

The largest stock exchange in the United States. It is a corporation, operated by a board of
directors, and it is responsible for setting policy, supervising Exchange and member activities,
listing securities, overseeing the transfer of members' seats on the Exchange and judging
whether an applicant is qualified to be a specialist.

Nikkei-Dow
Main stock market index in Japan

Naked
Writing an option where you do not own the underlying.

Naked Option
An option where there is no underlying security position.

Net Present Value

The present value of the future cash flows expected to be received from a particular
investment less the cost of that investment.

Net Worth
The amount by which assets exceed liabilities.

Nominal Value
Face value of a security. A security is priced at par when its market value is the same as its
nominal value.

Nominal Yield
The interest rate stated on the face of a bond that represents the percentage of interest to be
paid by the issuer on the face value of the bond.

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

Non Factor Risk

That part of a securities total risk that can be diversified away and is not related to moves in
various common factors.

Normal Backwardation
The relationship between the expected spot price of an asset and its future date on the delivery
date of the contract – normal backwardation states that the spot price will be less than the
futures price.

Normal Yield Curve

A chart showing long-term debt instruments having higher yields than short-term debt
instruments.

Novation
The replacement of one legal agreement by a new obligation, with the agreement of all parties
e.g. Clearing Houses use this process since they stand in the middle of futures contracts and
act as guarantor – hence the need to novate.

-O-
OAT
 25

French government bond

OMLX
London Securities and Derivatives Exchange

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

OTM
Out of the money – where the subscription price for an underlying instrument is above the
instruments current market price.

Obligation Bond
A mortgage bond where the value of the underlying property is less than the face value of the
bond.

Ofex
An OTC trading facility for illiquid or infrequently traded company shares.

Offer for Sale

A method of issuing shares in the primary market.

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

Omega
The risk of currency fluctuations that the seller or buyer of an option has to take into account
when being exposed to a transaction in a different currency.

Open Ended Fund

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

Open Outcry
Face 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 by
overriding royalty interests.

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

Optimark
Equity trading system

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

Order Driven
A trading system where transactions are initiated by a buyer or a seller and the price is set by
them.

Ordinary Shares
The most common type of company shares.
 26

-P-
P/E Ratio
Price earnings ratio

PHLX
Philadelphia Stock Exchange

PIA
Personal Investment Authority

PIBS
Permanent Interest Bearing Shares

PL
Publication level

PLC
Public Limited Company

POSIT
“Black Box” equity trading system

PPS
Protected Payments System

PRR
Position Risk Requirement

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

Participating Cap
Situation where an out of the money cap is bought and at the same time an in the money floor
is sold.

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

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

Par Value
The nominal value of a security.

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

Passive Income
Earnings derived from a rental property, limited partnership or other enterprise in which the
individual is not actively involved. Passive income therefore does not include earnings from
wages or active business participation, nor does it include income from dividends, interest and
capital gains.

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

Paying Agent
A bank appointed to pay interest & principal on a bond issue
 27

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

Placing
A method of issuing new shares – they are placed with a small number of institutional
investors.

Position
The amount of a security either owned (a long position) or owed (a short position) by an
individual or by a dealer. Dealers take long positions in specific securities to maintain
inventories and thereby facilitate trading.

Positive Yield Curve.

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

Preference Shares
A 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.

Present Value
A valuation in today’s money of a stream of future cash flows, after allowing for interest
costs.

Primary Market
Market for the issue of new securities.

Principal Trading
Trading by a firm for its own account.

Private Placement Market

US market for unregistered shares.

Programme Trading
Simultaneous sell or purchase of 15 stocks or more

Prospectus
A document issued by organisations planning to issue securities.

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

Put Call Parity

When a put and call have the same market price, expiry date and underlying stock this is the
relationship that exists between them.

Put Option
An option that gives the holder the right to sell a quantity of an item at a fixed price on or
before a specified date in the future.

-Q-
 28

QCB
Qualifying corporate bond

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

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

Quoted Security
Security whose price is quoted on a stock exchange.

-R-
RADR
Rule 144A depository receipt

RIE
Recognised Investment Exchange

RCH
Recognised Clearing House

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

RIE
Recognised Investment Exchange

ROIE
Recognised Overseas Investment Exchange

RPB
Recognised Professional Body

RSMM
Reduced Size Market Maker

Random Walk Theory

A theory that states that the future prices of financial instruments cannot be predetermined by
past prices –prices are reactions from information in the market and influences occur in a
random fashion.

Rate Anticipation Swap

A swap where an investor exchanges bonds expected to perform poorly for ones that are
expected to perform well if interest rates change.

Rate of Return
Over a specified period of time, this is the percentage change in the value of an asset or
portfolio.

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

Rating Service
 29

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

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

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

Redemption
The return of an investor's principal in a security, such as a bond, preferred stock or mutual
fund shares.

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

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

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

Regression Analysis
Used in the risk/return analysis of portfolio theory & in the market analysis of securities, this
measures the correlation between the independent and dependent variables and tries to value
the independent variable.

Reinvestment
Using dividends, interest and capital gains earned in a mutual fund investment to purchase
additional shares, rather than receiving the distributions in cash.

Repo
A sale & repurchase agreement – a collateralised loan.

Return on equity
A measure of a corporation's profitability.

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

Reverse Cash & Carry Arbitrage

Buying a futures contract and selling the underlying.

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

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

Risk – Counterparty
Risk of non-fulfilment of a trade contract due to either inability or unwillingness of the
counterparty.

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

Risk – Settlement
Risk that a party will default on one or more delivery or payment obligation to its
counterparty or to a settlement agent.
 30

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

Roller Coaster Swap

An interest rate swap, whereby one of the parties involved alternates between paying the
floating & fixed rate.

Rolling Premium Put Convertible

A convertible that gives its holder a series of put options at different dates.

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

Rump Placing
Placing those rights not taken up by investors

-S-
2BCD
Second Banking Co-ordination Directive

SBLI
Stock borrowing & lending intermediary – formerly known as money brokers.

SD
Sales Docket

SDRT
Stamp Duty Reserve Tax

SEAQ
Stock Exchange Automated Quotation system

SEATS
Stock Exchange Alternative Trading Service

SEC
Securities & Exchange Commission

SEDOL
Stock Exchange Daily Official List

SEMB
Stock Exchange Money Broker

SEPON
Stock Exchange Pool Nominees

SFA
Securities and Futures Authority

SIMEX
Singapore International Monetary Exchange

SPAN
Standard Portfolio of Risk
 31

SRO
Self Regulatory Organisation

SSAP
Statement of Standard Accounting Practice

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

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

Secondary Market
A 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 is
composed of five commissioners appointed by the president of the United States and
approved by the Senate. The SEC enforces, among other acts, the Securities Act of 1933, the
Securities Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment Company
Act of 1940 and the Investment Advisers Act of 1940.

Secured Debt
Where assets are used as security against a loan

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

Securities Lending
Authorised institutions lend their assets and, when permitted, those of their clients to market
makers through a network of intermediaries for a fee

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

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

Settlement
The process of completing a transaction whereby cash moves from the buyer to the seller and
a product or asset moves the other way.

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

Settlement – Rolling
Settlement 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 Position
Term used to describe a dealing position where the dealer involved has sold something they
don’t own in the hope that they can buy it back at a cheaper price.

Single Premium Put Convertible

A convertible security that gives its holder a put option.
 32

S&P [Standard & Poor's Corporation]

A company that rates stocks and corporate and municipal bonds according to risk profiles and
that produces and tracks the S&P indexes. The company also publishes a variety of financial
and investment reports.

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

Soft Commission
Giving goods and services in return for business.

Solvency
The ability of a corporation both to meet its long-term fixed expenses and to have adequate
money for long-term expansion and growth.

Special Purpose Vehicle

Company established for the purpose of issuing asset backed securities.

Spot price
The actual price at which a particular commodity can be bought or sold at a specified time and
place.

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 Option
When one option is being purchased at one exercise price and another with the same
underlying is being sold simultaneously at a different exercise price.

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

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

Stock Lending
The lending & borrowing of stock to facilitate trades or to increase the total yield form
securities.

Sub Custodian
A sub agent

Swap
An arrangement between two parties to exchange a future stream of payments during a
contract period.

Swaption
An option on a swap.

Syndicate
A group of securities houses that act under the leadership of a lead manager to place a
eurobond issue with investors or a group of banks that combine to provide a large loan to a
borrower.

-T-
TAURUS
 33

Transfer & Automated Registration of Uncertified Stock. This has been superseded by
CREST.

TIFFE
Tokyo International Financial Futures Exchange

Takeover
The acquisition of one company by another

Technical Analysis
The use of charts, computer programmes and historical data to identify & predict price
movements in financial instruments.

Tick
Upward or downward price movement in a securities price.

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

Time Value
The value of an option, other than its intrinsic value.

Time Value of Money

The price put on the time an investor has to wait to get a return on an investment – calculating
the present value of the investment at maturity.

Touch
The best bid and offer in an instrument

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

Tradepoint
RIE – an alternative exchange for trading shares listed on the LSE. An order driven matching
system.

Tranche
A release of Gilts by the Bank of England which may not be identical to existing stock in
circulation.

Treasury Bill
A marketable government debt security with a maturity of less than one year. Treasury bills
are issued through a competitive bidding process at a discount from par; there is no fixed
interest rate.

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

-U-
Underlying
The variable on which a derivative is based.

Underwriter
An institution that guarantees to buy any securities not purchased by anyone else in a new
issue – in return they receive a commission.

Unit Trust
See open-ended funds.
 34

-V-
Variable Annuity
An insurance contract in which at the end of the accumulation stage the insurance company
guarantees 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 also
fixed annuity.

Variable Death Benefit

The amount paid to a decedent's beneficiary that is dependent on the investment performance
of an insurance company's separate account; the amount is added to any guaranteed minimum
death benefit.

Variable Life Insurance Policy

An insurance contract that provides financial compensation to the insured's named
beneficiaries in the event of the insured's death. The insurance company guarantees payment
of a minimum amount plus an additional sum according to the performance of a separate
account, usually invested in equities or other relatively high-yielding securities.

Vertical Line Charting

A type of chart used by technical analysts where the high, low and closing prices of an
instrument are shown on one vertical line and the closing price indicated by a horizontal mark.

Vertical Spread
Buying 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. The
IRS and the Employee Retirement Income Security Act of 1974 set minimum
requirements for vesting in a qualified plan.

Vega
The measure of change in an option price due to volatility.

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

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

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

Writer
The seller of an option.
 35

-X-
XETRA
German equity trading system

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

Yellow Book
The listing rules of the London Stock Exchange
Yield
The return from an investment.

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

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

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

Zero-Coupon Convertible
As above but with conversion rights attached…

Glossary of
Finance Jargon
Your essential guide to the language of banking, finance
and capital markets!
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