A broad-based index of common stocks composed of 40
of the 100 largest companies listed on the forward segment of the
official list of the Paris
Bourse.
Describes the tendency of stocks to perform differently at
different times, including performance anomalies like the January
effect, month-of-the-year effect, day-of-the-week effect, and
holiday effect.
Applies to derivative products. A strategy in which there is
a simultaneous purchase and sale of options of the same class at
different strike prices, but with the same expiration date.
Applies mainly to convertible securities. Redeemable by the
issuer before the scheduled maturity under specific conditions
and at a stated price, which usually begins at a premium to par
and declines annually. Bonds are usually called when interest
rates fall so significantly that the issuer can save money by
issuing new bonds at lower rates.
The organized OTC market of
Canada. Formerly known as the Canadian Over-the-Counter Automated
Trading System (COATS), the CDN became a subsidiary of the
Toronto Stock Exchange in 1991.
The CEG is an association among the Toronto Stock Exchange,
the Montreal Exchange, the Vancouver Stock Exchange, the Alberta
Stock Exchange, and the Winnipeg Stock Exchange for the purpose
of providing Canadian market data to customers outside
Canada.
Refers to over-the-counter trading. "I have a buyer who will
pay $xxx for the stock". Usually a standard markdown (1/8) from
$xxx is applied to this price in bidding the seller for its stock. Antithesis of cost me.
To void an order to buy or sell from (1) the floor, or (2) the
trader/salesperson's scope. In
Autex, the indication still remains on record
as having once been placed unless it is expunged.
In the context of general equities, cannot accommodate
customers at that price level (i.e., compete with other market makers), often because
there is no natural opposite
side of the trade.
In the context of general equities, inability to finish an order on a principal or agency basis, given prevailing price
instructions and/or market
conditions.
An economic theory that describes the relationship between risk and expected return, and serves as
a model for the pricing of risky securities. The CAPM asserts that the
only risk that is priced by rational investors is systematic risk, because that
risk cannot be eliminated by diversification. The CAPM says that
the expected return of
a security or a portfolio is equal to the rate on a
risk-free security plus a risk premium multiplied by the assets
systematic risk. Theory was invented by William Sharpe (1964) and
John Lintner (1965).
When a stock is sold for a profit, the capital gain is the
difference between the net sales price of the securities and their net cost, or
original basis. If a stock is
sold below cost, the difference is a capital loss.
The tax levied on profits
from the sale of capitalassets. A long-term capital gain, which is achieved
once an asset is held for at
least 12 months, is taxed at a maximum rate of 20% (taxpayers in
28% tax bracket) and 10%
(taxpayers in 15% tax
bracket). Assets held for less than 12 months are taxed at
regular income tax levels,
and, since January 1, 2000, assets held for at least five years
are taxed at 18% and 8%.
Used to describe industries that require large investments in capital assets to produce their
goods, such as the automobile industry. These firms require large
profit margins and/or low
costs of borrowing to
survive.
The view that issuing debt is
generally valuable, but that the firm's optimal choice of capital structure
involves various other views of capital structure (net
corporate/personal tax, agency
cost, bankruptcy cost, and pecking order), that result from
considerations of asymmetric information,
asymmetric taxes, and transaction costs.
Placing limits on the amount of new investment undertaken by
a firm, either by using a higher cost of capital, or by setting a
maximum on the entire capital budget or parts of
it.
Stock authorized by a firm's charter and having par value,
stated value, or no par value. The number and the value of issued
shares are usually shown, together with the number of shares
authorized, in the capital accounts section of the balance sheet.
See: Common stock.
Also called financial leverage
ratios, these ratios compare debt to total capitalization and thus
reflect the extent to which a corporation is trading on its equity. Capitalization ratios can
be interpreted only in the context of the stability of industry and company earnings and cash flow.
A table showing the capitalization of a firm, which
typically includes the amount of capital obtained from each source - long-termdebt and common equity - and the respective
capitalization ratios.
An exotic option. It represents a call option on a put
option. That is, you purchase the option to buy a put option at a particular price on or before the expiriation date.
A loose quantity term sometimes used to describe the amount
of a commodityunderlying one commoditycontract; e.g., "a car of bellies."
Derived from the fact that quantities of the product specified in
a contract once corresponded
closely to the capacity of a railroad car.
Agreement concluded among country representatives in 1988 in
Switzerland to develop standardized risk-based capital requirements for banks across
countries.
A group of businesses or nations that act together as a
single producer to obtain market
control and to influence prices in their favor by limiting
production of a product. The United States has laws prohibiting
cartels.
The value of assets that can
be converted into cash immediately, as reported by a company.
Usually includes bank accounts and marketable securities, such as
government bonds and banker's acceptances. Cash
equivalents on balance
sheets include securities
that mature within 90 days (e.g., notes).
The value of assets that can
be converted into cash immediately, as reported by a company.
Usually includes bank accounts and marketable securities, such as
government bonds and Banker's Acceptances. Cash
equivalents on balance
sheets include securities (e.g., notes) that mature within 90 days.
In general, the time between cash disbursement and cash
collection. In net working
capital management, it can be thought of as the operating
cycle less the accounts
payable payment period.
A dividend paid in cash to
a company's shareholders.
The amount is normally based on profitability and is taxable as
income. A cash distribution may include capital gains and return of capital in addition to the
dividend.
In investments, cash flow represents earnings before depreciation, amortization, and non-cash
charges. Sometimes called cash earnings. Cash flow from operations (called funds from
operations by real estate and other investment trusts) is
important because it indicates the ability to pay dividends.
A firm's net cash inflow resulting directly from its regular
operations (disregarding extraordinary items such as the sale of
fixed assets or transaction costs associated
with issuing securities),
calculated as the sum of net income plus noncash expenses that
are deducted in calculating net income.
Refers to the efficient management of cash in a business in
order to put the cash to work more quickly and to keep the cash
in applications that produce income, such as the use of lock
boxes for payments.
Often used in risk arbitrage. Proposal, either hostile or
friendly, to acquire a target company through the
payment of cash for the stock of
the target. Compare to exchange offer.
Transaction in which a contract is settled on the same day as
the trade date, or the next day
if the trade occurs after 2:30 p.m. EST and the parties agree to
this procedure. Often occurs because a party is strapped for cash
and cannot wait until the regular five-business day settlement.
See: Settlement
date.
A transaction in which exchange is immediate in the form of
cash, unlike a forward
contract (which calls for future delivery of an asset at an agreed-upon price).
A country's main bank whose responsibilities include the issue of currency, the
administration of monetary
policy, open market operations, and engaging in transactions designed to facilitate
healthy business interactions. See: Federal Reserve
System.
The Law of Large Numbers states that as a sample of
independent, identically distributed random numbers approaches
infinity, its probability density
function approaches the normal distribution. See: Normal Distribution.
The certain (zero risk) return an investor would trade for a given
(larger) return with an
associated risk. For example, a
particular investor might
trade an uncertain expected 4% active return with 6% risk, for a certain
active return of 1.5%.
Also called a time
deposit this is a certificate issued by a bank or thrift that indicates
a specified sum of money has been deposited. A CD has a maturity date and a specified interest rate, and can be
issued in any denomination. The duration can be up to five years.
A person who has passed examinations accredited by the
Certified Financial Planner Board of Standards, showing that the
person is able to manage a client's banking, estate, insurance,
investment, and tax
affairs.
Provisions of the Bankruptcy Reform Act under which
the debtor firm is reorganized by a court because
the estimated value of the reorganized firm exceeds the
expected proceeds from its liquidation.
The market model
applied to a single security;
a regression of security returns on the benchmark return. The slope of the
regression line is a security's beta.
A portfolio which
efficiently represents a particular asset characteristic. For a given
characteristic, it is the minimum risk portfolio, with portfolio characteristic equal to 1.
For example, the characteristic portfolio of assetbetas is the benchmark. It is the minimum risk
beta = 1 portfolio.
An irrevocable trust that pays income to a designated person
or persons until the grantor's death, when the income is passed
on to a designated charity. A charitable lead trust by contrast allows the charity to
receive income during the grantor's life, and the remaining
income to pass to designated family members upon the grantor's
death.
An experienced financial analyst who has passed examinations in
economics, financial accounting, portfolio management, security analysis, and standards
of conduct given by the institute of Chartered Financial
Analysts.
Purchasing a security at a
higher price than expected because prices are rapidly climbing,
or selling a security at a
lower level when prices are quickly falling.
A not-for-profit corporation owned by its members. Its
primary functions are to provide a location for trading futures and options, to collect and disseminate market information, to maintain a
clearing mechanism, and to enforce trading rules. Applies to
derivative products. Primary place futures (OTC 250 industrial stock price index, S& P 100 and 500
index) and futuresoptions (S&P 500 stock index) are traded.
Applies mainly to convertible securities. Trading hedge in which one is short the convertible and long the underlying common, in the hope that
the convertible's premium will
fall. Antithesis of set-up.
Communication barrier between financiers at a firm
(investment bankers) and traders. This barrier is erected to
prevent the sharing of inside information that bankers are likely
to have.
Underwriters, actual or
potential, often seek out and "circle" investor interest in a new
issue before final pricing. The
customer circled has basically made a commitment to purchase the
issue if it is available at an agreed-upon price. If the actual
price is other than that stipulated, the customer supposedly has
first offer at the actual
price.
Measures instituted by exchanges to stop trading temporarily when the market has fallen by a certain
percentage in a specified period. They are intended to prevent a
market free fall by permitting
buy and sell orders to
rebalance.
In the case of derivative products, options of the same type-put or call-with the same underlying security. See:
Series. In general, refers to a
category of assets such as: domestic equity, fixed income,
etc.
A legal complaint filed by a lawyer or group of lawyers for a
group of petitioners with an identical grievance, often with an
award proportionate to the number of shareholders involved.
The division of stock into
more than one class of common stock, usually called Class
A and Class B. The specific features of each class, which are set out in the charter
and bylaws, usually give certain advantages to the Class A shares, such as increased voting
power.
In the context of general equities, purchase/sale of all the
remaining supply of stock, or the
last piece of a block, in a
trade-leaving a net zero position.
To settle a trade is settled
out by the seller delivering securities and the buyer delivering
funds in the proper form. A trade that does not clear is said to
fail. Comparison of the details of a transaction between broker/dealers prior to settlement; final exchange of
securities for cash on delivery.
Title to ownership that is untainted by any claims on the
property or disputed interests, and therefore available for sale.
This is usually checked through a title search by a title
company.
A computerized clearing system for sterling funds that began
operations in 1984. It includes 14 member banks, nearly 450
participating banks, and is one of the clearing companies within
the structure of the Association for Payment Clearing Services
(APACS).
An adjunct to a futuresexchange through which
transactions executed on its
floor are settled by a process of matching purchases and sales. A
clearing organization is also charged with the proper conduct of
delivery procedures and the
adequate financing of the entire operation.
A member firm of a clearing house. Each clearing member must
also be a member of the exchange. Not all members of the
exchange, however, are members of the clearing organization. All
trades of a non-clearing member
must be registered with, and eventually settled through, a
clearing member.
Describes the tendary of funds or investments to be followed
by groups of investors who have a similar preferences that the
firm follow a particular financing policy, such as the amount of
leverage it uses.
An investment company
that has only a set number of shares of the mutual fund that it manages, and
does not create new shares if demand increases. Antithesis of an
open-end management company.
An investment company
that has only a set number of shares of the mutual fund that it manages, and
does not create new shares if demand increases. Antithesis of an
open-end management company.
A company who has a small group of controlling shareholders.
In contrast, a widely-held firm has many shareholders. It is
difficult or impossible to wage a proxy battle for any
closely-held firm.
Also known as the range. The
high and low prices, or bids and offers, recorded during the period
designated as the official close.
Related: Settlement
price.
The net of the number of stocks whose closing prices are higher
than their previous trades (uptick) against the number of
stocks whose closing prices were
lower than their previous trades
(downtick). A positive closing
tick indicates "buying at the
close", or a bullishmarket; a negative closing tick indicates "selling at the close," or
a bearishmarket. See: TRIN.
Applies to derivative products. Buy or sell transaction that eliminates an
existing position (selling a
long option or buying back a short option). Antithesis of opening
transaction.
Any claim or encumbrance, usually discovered in a title
search, that may impair the title to a property, and make its
validity questionable. See: bad
title.
A statistical technique that identifies clusters of stocks
whose returns are highly correlated within each cluster
and relatively uncorrelated across clusters. Cluster analysis has
identified groupings such as growth, cyclical, stable, and energy
stocks.
A measure of the goodness of fit of the relationship between
the dependent and independent variables in a regression analysis; for
instance, the percentage of variation in the return of an asset explained by the market portfolio return. Also
known as R-square.
A hypothesis that the probability density
function of the market may be determined by a combination of
group sentiment and fundamental bias. Depending on combinations
of these two factors, the market can be in one of four states: random walk, unstable
transition, chaos, or
coherence.
The ratio of a company's accounts receivable to its
average daily sales, which gives the average number of days it
takes the company to convert receivables into cash.
A bank that ranks just below a lead manager in a syndicated Eurocredit or
international bondissue. Comanagers may assist the lead
manager bank in the pricing and issue of the instrument.
A division of the New York Mercantile Exchange (NYMEX).
Formerly known as the Commodity Exchange, COMEX is the leading US
market for metals futures and
options trading.
A letter from an independent auditor in securitiesunderwriting agreements to assure
that information in the registration statement and prospectus is correctly prepared to
the best of the auditor's knowledge.
Similar to MBS but backed by
loans secured with commercial rather than residential property.
Commercial property includes multi-family, retail, office, etc.,
They are not standardized so there are a lot of details
associated with structure, credit enhancement, diversification,
etc., that need to be understood when valuing these
instruments.
In the context of securities, this involves mixing
customer-owned securities with
brokerage firm-owned securities. This process is referred
to as rehypothecation,
which is the use of customers' collateral to secure their loans.
This is legal with customer consent, although some securities and collateral must be kept
separately.
The fee paid to a broker to
execute a trade, based on number of shares, bonds, options, and/or their dollar value. In
1975, deregulation led to the establishment of discount brokers,
who charge lower commissions than full service brokers. Full service brokers offer
advice and usually have a staff of analysts who follow specific
industries. Discount brokers
simply execute a client's order and usually do not offer an
opinion on a stock. Also known as
a round-turn.
A broker on the floor
of an exchange who acts as
agent for a particular brokerage house and buys and sells stocks for the brokerage
house on a commission basis.
A fee paid to a commercial bank in return for its legal
commitment to lend funds that have not yet been advanced. Often
used in risk arbitrage. Payment to institutional investors in the
U.K. (pension funds and life insurance companies) by the lead underwriter of a takeover that takes place when the
underwriter provides the target company's shareholders
with a cash alternative for a target company'sshares in exchange for the bidding
companies' shares. The payment is typically 0.5% for the first 30
days, 1.25% for each week thereafter, and a final 0.75%
acceptance payment when the takeover is completed.
Committee that assigns identifying numbers and codes for all
securities. These "CUSIP" numbers and symbols are used when
recording all buy or sell orders.
The location of five New York futures exchanges: Commodity Exchange,
Inc. (COMEX); the New York Mercantile Exchange (NYMEX); New York
Cotton Exchange, Coffee, Sugar ;& Cocoa Exchange (CS;&CE), and
New York Futures Exchange (NYFE).
An index used in technical analysis. High values mean a
potential future correction (downward movement in underlying
asset) and low values potentially forecast a rally. Details in
Donald Lambert's October 1980 article in Commodities
Magazine.
An agreement to buy a specific amount of a commodity at a specified price on a
particular date in the future, allowing a producer to guarantee
the price of a product or raw material used in production.
A nine-digit identification code issued jointly by CEDEL and Euroclear. As of January 1991 common
codes replaced the earlier separate CEDEL and Euroclear codes.
An element of return that
influences many assets. According
to multiple factor risk
models, the common factors determine correlations between
asset returns. Common factors include size (often measured by market
capitalization), valuation measures such as price to book
value ratio and dividend yield, industries and risk indices.
In general, a public corporation has two types of shares,
common and preferred. The common shares usually entitle the shareholders to vote at
shareholders meetings. The common shares have a discretionary
dividend.
A statement in which all items are expressed as a percentage
of a base figure, useful for purposes of analyzing trends and
changing relationship among financial statement items. For
example, all items in each year's income statement could be
presented as a percentage of net sales.
Securities that represent equity ownership in a company. Common shares let an investor vote on such matters as the
election of directors. They also give the holder a share in a
company's profits via dividend
payments or the capital appreciation of the security. Units of ownership of a
public corporation with junior status to the claims of
secured/unsecured creditors, bondholders and preferred
shareholders in the event of liquidation.
Often used in risk arbitrage. Situation whereby another OTCmarket maker has transacted with
investment bank at the stated market level before the bid/offer
has been made.
An undertaking either (1) to complete a project so that it
meets certain specified performance criteria on or before a
certain specified date, or (2) to repay project debt if the
completion test cannot be met.
Best defined by example. If you invest $100 today and make 5%
in the first year and reinvest ($105) and make 8% in the second
year, the compound annual growth rate is 6.489%. The calculation
is $100x1.05x1.08=$113.4 which is what you end up with at the end
of year two. The average return is [square root(113.4/100) -1]=
0.06489 or 6.489%. Note 1. If we had three compounding periods we
would take the cubic root (power of 1/3). Note 2. If we had
invested at exactly 6.489 in both periods, we get
$100x1.06489x1.06489=$113.4. Note 3. The example is directed to a
return - but CAGR could be applied to earnings growth, GDP
growth, etc.
The process of accumulating the time value of money forward
in time. For example, interest
earned in one period earns additional interest during each
subsequent time period.
The investigation of a firm's business in conjunction with a
securities offering to determine whether the firm's business and
financial situation and its prospects are adequately disclosed in
the prospectus for the offering.
A government official, appointed by the president, who keeps
control over all national banks, and receives reports from the
banks at least quarterly, to be published in newspapers.
Applies mainly to convertible securities. Circumstances under
which a company can effect an earlier call, usually stated as
percentage of a stock's trading price during a particular period,
such as 140% of the exercise price during a 40-day trading
span.
A protective guarantee that, in the event a high yield bond is called, the issuing corporation will
replace the bond with a noncallablebond of the same life and terms as the bond that is being called.
Similar to equipment trust certificates, except that the
lender is either the equipment manufacturer or a bank or finance
company to which the manufacturer has sold the conditional sales
contract.
Applies to derivative products. Option strategy consisting of
both puts and calls at different strike prices to capitalize on a
narrow range of volatility. The payoff diagram takes the shape of
a bird.
A measure of investors' faith in the economy and the
securities market. A low or deteriorating level of confidence is
considered by many technical analysts as a
bearish sign.
Statement by an investment bank that it is highly confident
that the financing for its client/acquirer's takeover can and
will be obtained. Often used in risk arbitrage.
Used for listed equity securities. "Go to the floor and check
with the specialist or floor
broker that my previously active order has been canceled and was not executed". One does not have to honor
any trade reported after given a "firm out".
The written statement that follows any "trade" in the
securities markets. Confirmation is issued immediately after a trade is executed. It spells out settlement date, terms, commission, etc.
Bondholders and stockholders may have interests in a
corporation that conflict. Sources of conflict include dividends, distortion of investment,
and underinvestment. Protective covenants in bond documents work to
resolve these conflicts.
A government bond with no maturity . Popular in Great Britain.
The formula for valuing these bonds is simple. The consol payment
divided by yield to
maturity is the price of the bond.
Used for listed equity securities. Combined ticker tapes of the NYSE and the curb. Network A covers the NYSE-listed
securities and is used to identify the originating market.
Network B does the same for AMEX-listed securities
and also reports on securities listed on regional stock
exchanges. See: tape.
A merchant banking
subsidiary set up by several banks that may or may not be of the
same nationality. Consortium banks are common in the Euromarket
and are active in loan syndication.
Method of purchasing securities by investing a fixed amount
of money at set intervals. The investor buys more shares when the price is low and fewer
shares when the price is high,
thus reducing the overall cost.
Also called the Gordon-Shapiro model, an application of the
dividend discount
model that assumes (1) a fixed growth rate for future dividends,
and (2) a single discount
rate.
Maintaining a predetermined ratio between stock and fixed income investments through regular
adjustments of distribution of funds into different investments. See: formula investing.
The CPI, as it is called, measures the prices of consumer
goods and services and is a measure of the pace of US inflation. The US Department of Labor
publishes the CPI every month.
Excess correlation of
equity or bond returns. For example, under usual conditions we
might observe a certain level of correlation of market returns. A period of
contagion would be associated with much higher-than-expected
correlation. Some examples are the conjectured contagion in East
Asian markets beginning in July 1997 when the Thai currency
devalued and the impact across many emerging markets of the
Russian default. Contagion is difficult to identify because you
need some sort of measure of the expected correlation. It is
complicated because correlation's are known to change through
time, for example, see Erb, Harvey and Viskanta's article in the
1994 Financial Analysts Journal. In periods of negative returns,
correlation's (and volatility) are known to increase,
so what might appear to be excessive may not be contagion.
In the context of general equities, order to buy one
security, if the trader can sell another, usually given that
certain price limits or conditions reach a certain level. Swap,
switch order.
An arrangement in which the money manager pursues an active
bondportfolio strategy until an adverse
investment experience drives the then-available potential return down to the safety net
level. When that point is reached, the money manager is obligated to
pursue an immunization strategy to
lock in the safety-net level return.
The process of accumulating the time value of money forward
in time on a continuous, or instantaneous, basis. Interest is
earned constantly, and at each instant, the interest that accrues
immediately begins earning interest on itself.
A term of reference describing a unit of trading for a financial or commodity future. Also, the actual
bilateral agreement between the buyer and seller of a transaction
as defined by an exchange.
An amount that by legal agreement must be paid periodically
to the buyer of a security;
contractual claim may also specify the time at which the principal must be repaid and other
details.
Holder of an indirect claim in through a legal agreement that
specifies that the individual must make periodic, fixed payments
to the intermediary in exchange for the right to receive payments
from the intermediary in the future.
A plan in which fixed dollar amounts of mutual fundshares are purchased through periodic investments, usually featuring
some sort of additional incentive for the fixed period
payments.
In the context of general equities, stock that tends to go
against the trend of the market as a whole, such as a
commodities-related stock or one in an industry out of favor with
investors in a bull market.
An investment style that leads one to buy assets that have
performed poorly and sell assets that have performed well. There
are two possible reasons this strategy might work. The first is a
mean-reversion argument; that is, if the asset has deviated from
its usual level, it should eventually return to that usual level.
The second reason has to do with overreaction. Investors might
have overreacted to bad news sending the asset price lower than
it should be.
Money placed in an individual retirement
account (IRA), an employer-sponsored retirement plan, or
other retirement plan for a particular tax year. Contributions
may be deductible or nondeductible, depending on the type of
account.
The upper and lower limits on the acceptable level of cash
that minimizes the sum of the opportunity cost of excessive
cash and the cost of marketable securitytransactions.
In a nonlinear dynamic system, the coefficient of the order
parameter; the determinant of
the influence of the order parameter on the total system. See: Order Parameter.
An annual statement filed by a life insurance company in each
state where it does business in compliance with that state's
regulations. The statement and supporting documents show, among
other things, the assets, liabilities, and surplus of the reporting
company.
The movement of the price of a futures contract toward the
price of the underlyingcash commodity. At the
start, the contract price is
higher because of time
value. But as the contract nears expiration, and time value
decreases, the futures price
and the cash price converge.
Applies mainly to convertible securities. Relationship that
determines how many shares of common stock will be received
in exchange for each convertible bond or preferred stock when a
conversion takes place. It is determined at the time of issue and is expressed either as a ratio
or as a conversion
price from which the ratio can be figured by dividing the par value of the convertible by
the conversion
price.
General debt obligation of a
corporation that can be exchanged for a set number of common shares of the issuing
corporation at a prestated conversion price.
Goldman Sachs index of the 100 convertibles of greatest
institutional importance. Weighted by issue size, it measures the performance
of its components against that of their underlyingcommon stock and against other
broad market indexs as
well.
An organization owned by its members. Examples are
agriculture cooperatives that assist farmers in selling their
products more efficiently and apartment buildings owned by the
residents who have full control of the property.
One of the three areas of the discipline of finance. It deals with the operation of
the firm (both the investment decision and the financing
decision) from the firm's point of view.
The time that elapses between receipt of payment from a
customer and the deposit of the customer's check in the firm's
bank account; the time required to process customer
payments.
Active buying by a corporation of its own stock in the marketplace. Reasons for
repurchase include putting idle cash to use, raising EPS, creating support for a
stock price, increasing internal
control (shark
repellant), or stock for ESOP or pension
plans. Repurchase is subject to rules, such as that buying must
be on a zero minus or a
minus tick, after the opening and before 3:30 p.m.
A legal entity that is separate and distinct from its owners.
A corporation is allowed to own assets, incur liabilities, and sell securities, among other things.
Reverse movement, usually downward, in the price of an
individual stock, bond, commodity, or index. If prices have been rising on the
market as a whole, and then fall
dramatically, this is know as a correction within an upward
trend. Antithesis of a technical rally. See: Dip, break.
Statistical measure of the degree to which the movements of
two variables (stock/option/convertible prices or returns)
are related. See: Correlation
coefficient.
An estimate of the Fractal Dimension which
measures the probability that two points chosen at random will be
within a certain distance of each other, and examines how this
probability changes as the distance is increased. White noise will fill its space
since its components are uncorrelated, and its correlation
dimension is equal to whatever dimension it is placed in. A
dependent system will be held together by its correlations and
retain its dimension whatever embedding dimension it is placed
in, as long as it is greater than its fractal dimension.
A financial organization that performs services (acts as an
intermediary) in a market for
another organization that does not have access to that market.
Refers to over-the-counter trading. "The price I must pay to
obtain the securities you wish
to buy is [$]". Usually, a standard
markup (1/8) is then applied for resale to this buyer. Antithesis
of can get.
Inflation caused by
rising prices, usually from increased raw material or labor costs
that push up the costs of production. Related: Demand-pull
inflation.
A group of economists appointed by the President of the
United States to provide economic counsel and help prepare the
president's budget presentation to Congress.
In the balance of
payments, counterpart items are analogous to unrequited
transfers in the current
account. They arise through the double-entry system in
balance of payments accounting and refer to adjustments in reserves owing to monetization or
demonetization of gold, allocation or cancellation of SDRs, and revaluation of
the various components of total reserves.
A type of active international management that measures the
contribution to performance attributable to investing in the
better-performing stock
markets of the world.
A statistical measure of the degree to which random variables move together.
A positive covariance implies that one variable is above (below)
its mean value when the other variable is above (below) its
mean value.
Provisions in a bondindenture or preferred stock agreement that
require the bond or preferred stock issuer to take certain specified actions
(affirmative covenants) or to refrain from taking certain
specified actions (negative covenants).
Usually refers to the fact that analysts begin following a
particular security. This usually happens when there is enough
trading in it to warrant attention by the investment community.
A loan denominated in a currency other than that of the
borrower's home country, for which repayment terms are
prearranged through the use of a forward currency
contract.
The principle that the yields
from interest-bearing foreign and domestic investments should be equal when the
forward currencymarket is used to predetermine the
domestic currency payoff from a foreign investment.
Strategies that involve a position in an option as well as a position in the underlyingstock, designed so that one position will help offset any unfavorable price movement in
the other, including covered call
writing and protective put buying.
Related: Naked
strategies
A put optionposition in which the option writer also is short the corresponding stock or has deposited, in a cash
account, cash or cash equivalents equal to the exercise of the option. This limits the option writer's risk because money or stock is already set aside. In the event
that the holder of the put
option decides to exercise
the option, the writer's risk is more limited than it would be on
an uncovered or naked put option.
A merger in which stockholders are forced to accept
undesirable terms, such as junk
bonds instead of cash or equity, due to the absence of any better
alternatives.
An automatic system for revising the exchange rate. It involves
establishing a par value
around which the rate can vary up to a given percent. The par value is revised regularly
according to a formula determined by the authorities.
Evaluating information on companies and bondissues in order to estimate the ability
of the issuer to live up to its
future contractual
obligations. Related: Default
risk.
A note whose cash flow depends upon a credit event or credit
measure of a referenced entity or asset such as default, credit
spread, or rating change. The manager would purchase such a note
to hedge against possible down grades, or loan defaults that
would guarantee payment into the portfolio of the manager even if
moneys on referenced assets are reduced.
Applies to derivative products. Difference in the value of
two options, when the value of
the one sold exceeds the value of the one bought. One sells a
"credit spread." Antithesis of a debit spread Related: Quality spread.
The process by which a group attempting to circumvent certain
provisions of the Williams
Act gradually acquires shares of a target company in the open market.
CREST is CrestCo's real-time settlement system for UK and
Irish shares and other corporate securities. CrestCo has provided
settlement systems for government bonds and money market
instruments in the UK since 1990.
Values of control
parameters where the nature of a nonlinear dynamic system
changes. The system can bifurcate, or make the transition
from stable to turbulent behavior. An example is the straw that
breaks the camel's back.
Securities transaction in
which the same broker acts as agent for both sides of the trade; a legal practice only if the
broker first offers the
securities publicly at a price higher than the bid.
Concluding a transaction by a network of factors across
borders. The exporter's factor can contact correspondent factors
in other countries to handle the collection of accounts receivable.
Describes the volatility
of returns on international investments caused by events
associated with a particular country as opposed to events
associated solely with a particular economic or financial agent.
Applies to derivative products. Hedging with a futures contract that is
different from the underlying being hedged. Use of a
hedging instrument different from the security being hedged. Hedging instruments are usually
selected to have the highest price correlation to the underlying.
The holding by one corporation of shares in another firm. One needs to
allow for cross-holdings when aggregatingcapitalizations of firms.
Ignoring cross-holdings leads to double-counting.
The exchange rate
between two currencies expressed as the ratio of two foreign exchange rates that
are both expressed in terms of a third currency. Foreign exchange
rate between two currencies other than the US dollar, the
currency in which most exchanges are usually quoted.
A method of analysis that compares a firm's ratios with some
chosen industrybenchmark. The benchmark usually chosen is the
average ratio value for all firms in an industry for the time
period under study.
The prohibited practice of offsetting buy and sell orders without recording the trade on the exchange, thus not allowing other traders to take advantage of a
more favorable price.
A particularly profitable or otherwise particularly valuable
corporate unit or asset of a
firm. Often used in risk arbitrage. The most desirable entities
within a diversified corporation as measured by asset value,
earning power, and business prospects; in takeover attempts, these entities
typically are the main objective of the acquirer and may be sold by a takeover
target to make the rest
of the company less attractive. See: Scorched earth
policy.
With dividend; said of a
stock whose buyer is eligible to
receive a declared dividend. Stocks are usually "cum dividend"
for trades made on or before the
fifth trading day preceding the record date, when the register of
eligible holders is closed for that dividend period. Antithesis
of ex-dividend.
Sum of the differences between the expected return on a stock (systematic risk multiplied by the
realized market return) and the actual return often used to
evaluate the impact of news on a stock price.
A function that shows the probability that the random variable will attain a
value less than or equal to each value that the random variable
can take on.
An entry in a translated balance sheet in which gains
and/or losses from translation have been accumulated over a
period of years. The C.T.A. account is required under the FASB No. 52 rule.
A system of voting for directors of a corporation in which shareholder's total number of
votes is equal to the number of shares held times the number of
candidates.
The value of a portfolio
of specific amounts of individual currencies, used as the basis for
setting the market value
of another currency. It is also referred to as a currency
cocktail.
Using more than one currency as an investing or financing
strategy. Exposure to a diversified currency portfolio typically entails less exchange rate risk than if
all the portfolio exposure were in a single foreign
currency.
Applies mainly to international equities. Hedging technique to guard against foreign exchange
fluctuations (i.e., short Euro
l00 mm when holding a long
position of Euro l00 mm in stocks).
Applies mainly to international equities: (1) consideration
that a currency is overvalued if private demand for the currency
at the going exchange
rate is less than total private supply (i.e., central banks
are buying up the difference, supporting the value of the
currency through foreign
exchange intervention); (2) currency value exceeding
purchasing power parity.
An agreement to swap a series
of specified payment obligations denominated in one currency for
a series of specified payment
obligations denominated in a different currency.
A bond selling at or close to
par, that is, a bond with a
coupon close to the yields currently offered on new bonds of
a similar maturity and credit
risk.
The translation of all of a foreign subsidiary's current assets and liabilities into home currency at the
current exchange rate
while noncurrent assets and liabilities are translated at the historical exchange
rate; that is, the rate in effect at the time the asset was acquired or the liability
incurred.
Indicator of short-term debt-paying ability. Determined by
dividing current assets
by current
liabilities. The higher the ratio, the more liquid the
company.
An agreement by the parties to a transaction to share the
currency risk associated with the
transaction. The arrangement involves a customized hedgecontract embedded in the underlying transaction.
High-coupon bonds that sell
at only at a moderate premium
because they are callable at a
price below that at which a comparable noncallable bond would
sell. Cushion bonds offer considerable downside protection in a
falling market.
Either (1) a bank, agent, trust company, or other
organization responsible for safeguarding financial assets, or (2) the
individual who oversees the mutual fundassets of a minor's custodial
account.
Applies mainly to international equities. Bank or other
financial institution that keeps custody of stock certificates and other assets of a mutual fund, individual, or
corporate client. See: Depository Trust Company
(DTC)
Agreement signed by a margin
customer that allows a broker to
borrow margined securities up to the level of the
customer's debit balance to help cover other customers' short positions.