|
|| Help at Work Links
||
||
Home
||Start The Day || || Privacy Policy ||
Bookstore || Public Speaking
|| |
|
|
|| Help at Work Links
||
||
Home
||Start The Day || || Privacy Policy ||
Bookstore || Public Speaking
|| |
|
 |
Additional Derivative and Hybrid Terms
All-or-nothing option: An option that pays out a specified amount if the underlying asset price is above or below the strike price at the time of expiration. The amount by which the option is in-the-money does not affect the payoff.
American option: An option that can be exercised at any time prior to expiration.
Amortizing option: An interest rate or swap option whose notional principal decreases during the life of the option. These options include caps, collars, and swaptions.
Asian option: An Asian option is one whose settlement value is based on the difference between the strike price and the average price (or rate) of the underlying on selected dates over the life of the option. A typical option is one whose settlement value is based on the difference between the strike price and the value of the underlying at settlement.
Barrier options: Option contracts with trigger points that, when crossed, automatically generate buying or selling of other options.
Barrier options include:
Basis: The difference between the spot price and future contract price.
Basket options: An option giving the owner the right to receive designated currencies in exchange for a base currency, either at the prevailing spot market rate or at a pre-agreed rate of exchange.
Bear call spread: A spread option strategy in which the investor attempts to take advantage of falling asset prices by selling a call option with a low strike price and simultaneously buying a call with a high exercise price.
Bear put spread: A spread option strategy in which the investor attempts to take advantage of falling asset prices by purchasing a put option with a high strike price and simultaneously selling a put with a low excercise price.
Best-of-two option (either-or option or alternative option): An option that provides a payoff based on the independent performances of two separate and distinct securities or indices.
Bermuda option: An option that has attributes of both a European and American option. Typically, it can be exercised on a number of predetermined occasions specified by the option contract. It is a limited exercise or quasi-limited American option.
Better-of-two-assets option: An option that pays out on the better performing of two underlying assets. Such as option pays out the better performing of two stock indices.
Book entry: An electronic issuance and transfer system for securities transactions, such as that maintained by the Federal Reserve System.
Bull call spread: A spread designed to take advantage of rising asset prices by selling a call option with a low exercise price and buying one with a high exercise price.
Bull put spread: A spread designed to take advantage of rising asset prices by selling a put option with a high exercise price and buying one with a low exercise price.
Butterfly spread (futures): A spread taken out in two adjacent contracts together with an opposite spread in the later contact and the next maturity contract. This transaction involves placing two inter-delivery spreads in opposite directions with the center delivery month common to both spreads.
Butterfly spread (options): A combination of a bull and bear spread, either put or call, using three different exercise prices. This transaction involves a trading strategy.
Buy - writes: Strategies that involve the purchase of stock and the simultaneous writing of call options against it. This transaction reduces the cost of the stock purchase to the extent of the premium received.
Calendar spread: A spread involving the simultaneous sale of an option with a nearby expiration date and the purchase of an option with a more deferred expiration date, both with the same excercise date. This is also known as a "horizontal" or "time" spread.
Cap: An option that pays an amount of interest on an agreed-upon amount of notional principal whenever the market index is above the cap contract's index rate.
Caption: An option to buy a cap option contract. This is a form of compound option giving the holder the right, but not the obligation, to enter into a cap contract at a predetermined rate on a predetermined date.
Carry: The cost of holding an asset (storage, insurance, damage, loss) including the cost of borrowing to purchase it.
Carry basis: The difference between the cash price and the fair futures price. This reflects the net carrying cost. Actual basis is the sum of carry basis and value basis.
Cash and carry: A theoretically riskless transaction consisting of a long position in the spot market and a shot position in the futures contract that is designed to be held until the futures contract expires.
Chicago Board of Options Exchange (CBOE): One of the world’s largest organized futures markets.
Chicago Board of Trade (CBOT): One of the world’s largest organized futures markets.
Collar: An option made up of a cap and floor option.
Combination: A transaction created by purchasing either a put and a call or by writing a put and a call. On the same underlying but with different exercise prices and/or expiration dates.
Commodity Futures Trading Commission (CFTC): The federal agency that regulates the futures market in the United States.
Compound option: An option on an option. The holder has the right to purchase another option on a pre-set date, at a pre-set option premium. (A put on a call. A call on a put. A put on a put. A call on a call.)
Contingent option: An option where the premium is paid only if the value of the underlying reaches a specified level.
Coupon stripping: The process of taking coupon interest paying bonds and creating new debt instruments for each of the interest and principal payments.
Covered call: The writing of a call option when the writer owns the underlying.
Covered option: A option written in which the writer has an offsetting position in the underlying.
Covered put: The writing of a put option while simultaneously shorting an identical amount of the underlying.
Cross hedging: The hedging with a futures contract whose underlying is different, but similar, to the cash instrument.
Deferred strike or deferred start option (forward start option): An options that allows the owner to defer the setting of the strike price until some future time, up to an agreed deadline.
Difference option: An option whose payout is based on the difference between the prices of two underlyings.
Digital options: An option whose payout is a fixed amount if the price of the underlying reaches a predetermined level.
Dividend capture hedging program: A tax strategy in which a corporation attempts to earn dividend income by buying stock shortly before the ex dividend date and hedging the price of the stock with short call options or other contracts.
Double option: An option to buy or sell but not both. Exercise of the right to buy caused the right to sell to expire.
Down-and-out call: A call option that expires if the asset price falls below a predetermined level.
Dual-currency option: An option that allows the holder to buy either of two currencies.
Dual-strike option: An interest rate option with one rate for part of the option’s life an another for the rest of its life.
Epsilon: The change in the price of an option associated with a 1% change in the implied variety of the option.
Equity index swap: A swap that exchanges the return on a stock index for the return on a bond index or other equity index.
European option: An option that can only be exercised on the expiration date.
Extinguishable option: An option in which the holder’s right to exercise is canceled if the value of the underlying passes a specified level.
Fiva: A forward or futures contract on implied volatility.
Fixed hedge: A hedge in which the quantity being hedged is matched by the quantity that the options give the right to buy and sell.
Floor: An option that pays an amount of interest on an agreed-upon amount of notional principal whenever the market index is below the floor's predetermined base.
Floortion: An option on a floor.
Forward: An agreement between two parties to buy an asset or currency at a later date at a fixed price.
Forward/forward rate: The rate agreed upon in a forward contract for a loan or the rate implied by the relationship between interest rates for different maturities.
Forward market: A market in which forward contracts are traded.
Forward spread agreement: The counterparties contract into a spread between two forward rate agreement rates applied to a nominal amount of one currency.
Forward start option: An option that provides the purchaser the right, after a contractual period of time, to hold a standard put or call option with an at-the-money exercise price at the time the option is granted rather than when it is activated.
Front running: An illegal trading practice in which a party, aware of impending information, such as a large buy order, executes a trade in the futures or options market prior to the release of the information in order to profit from an anticipated favorable price move.
Fugit: The probability of early exercise on an American-style option.
Hi-low option: A combination of two look-back or path-dependent options.
Intercommodity spread: A futures transaction involving a long position in a futures on one commodity and a short position in a future on another.
Index option: An option written on a stock index.
Interest rate option: An option to pay, or receive, a specified rate of interest on or from a predetermined date.
Intermarket Clearing Corporation: A subsidiary of the Options Clearing Corporation for AMEX Commodities Corporation, the New York Futures Exchange, and the Philadelphia Board of Trade.
Inter-market spread: The sale of a futures contract on one exchange and the simultaneous purchase of the same contract with the same delivery month on another exchange.
International Commodities Clearing House (ICCH): A organization that clears futures and options traded on London exchanges.
Interval: The standard interval between exercise prices of traded options contracts.
Intra-contract spread: A futures transaction consisting of a long position in a futures expiring in one month and a short position in an otherwise identical futures expiring in another month.
Inverted market: A futures market in which the nearer months are selling at a premium to the more distant months.
Irish Futures and Options Exchange (IFOX): An organized exchange dealing is contracts on Irish gilts and the ISEQ index located in Dublin, Ireland.
Jelly rolls (options): An arbitrage strategy comprised of a long synthetic asset position in one month and a short synthetic asset position in a different month, where both synthetic positions are done at the same exercise price.
Knock-outs: A standard option with an "insurance rider" in the form of a second out-of-the-money strike price. This "out-strike" is effectively a stop-loss order: If the strike price is crossed by the cash-market spot price, the option contract is self-canceling. Knock-ins are just the reverse. The knock-in option contract does not exist unless and until the spot market prices crosses the out-of-the-money "in-strike" price that triggers the contract.
Ladder: An option strategy consisting of buying a call, selling a higher strike price call and another even higher strike price call or sell a put, sell a higher strike price put, and buy a even higher strike price put.
Lifting a leg: Closing out one half of a spread position.
Linkage: The ability to trade a contract on one exchange and later trade it on another.
London International Financial Futures and Options Exchanges (LIFFE): One of the world’s largest organized futures and options organized exchanges.
London Options Clearing House (LOCH): A London-based clearinghouse.
London Securities and Derivatives Exchange (OMLX): The Swedish options exchange located in London. It lists Swedish equities, indices, and debt securities.
Long-term equity anticipation securities (LEAPS): LEAPS are long-term options, typically with 2-3 year expirations.
Ladder option (step-lock option): An option allowing the owner to lock in gains on an underlying security during the life of the option, before its expiration.
Lookback option: An option on which the payout is calculated using the highest intrinsic value of the underlying security or index over the life of the option. In the case of a lookback call, the highest market price is used whereas for a lookback put, the lowest underlying security price is used.
Marche a Terme International de France (MATIF): A Paris-based exchange listing futures on interest rates and stock indices.
Marche des Options Negociables de Paris (MONEP): A Paris-based options change.
Multi-index option: An option that gives the holder the right to buy the asset that performs best out of a number of assets.
Naked call writing: Writing a call without owning the underlying.
Nearby: The nearest delivery or expiration month for a contract.
Normal backwardation: A condition in which the futures price is less than the expected futures spot price at expiration.
Normal contango: A condition in which the futures price is greater than the expected future spot price at expiration.
Osaka Securities Exhange (OSE): An futures and options exchange on Japanese securities and indices.
Outperformance option: A call option which allows the owner to capitalize on diverging performances of two underlying securities, which can be individual stocks, baskets of stocks or an index.
Participating cap: The simultaneous purchase of an out-of-the-money cap and sale of a lesser amount of in-the-money floors.
Participating option: An option where the buyer forgoes a certain percentage of potential profits in return for a reduced premium.
Path dependent option: An option with a payout directly related to movements in the price of the underlying during the life of the option that is not related to a point of time.
Philadelphia Stock Exchange (PHLS): A U.S.-based exchange which lists options.
Portfolio insurance: An investment strategy employing combinations of securities, options and futures that is designed to provide downside price protection for the portfolio.
Program trading: The use of computers to detect mispricing in the relationship of derivative contracts to the underlying or other contracts in order to develop arbitrage trading strategies.
Protective put: A strategy calling for a long position in a put and a stock to provide a minimum selling price for the stock.
Rolling hedge: A hedge with a relatively long hedge horizon in which the longer maturity futures are added as nearby futures expire.
Roll-over: The substitution of a futures or options contract with a more distant expiration date for a previously established position.
Round trip (turn): A futures transaction in which a long or short position is established and subsequently closed out with a offsetting transaction.
Securities and Investments Board (SIB): The UK regulatory body for futures and options.
Singapore International Monetary Exchange (SIMEX): An organized Singapore exchange.
Spread: Options or futures transactions involving a long position in one contract and a short position in another similar contract.
Step-up Notes: A bond whose interest rate with two interest rates, a lower rate which applies for a short period of time and a higher (step-up) rate that applies after the initial period. The bonds are typically callable.
Stock option/debt hybrids [Linked Deposits; Market Index Target Term Series, (MITTS); Liquid Yield Option Notes (LYONS); and Liquid Yield Exchangeable Notes, (LYNX)]. Debt instruments that have embedded options tied to the price of common stock or a stock index.
Swaption: An option to purchase a futures contract.
Value at risk (VAR.) models: A calculation (using one of several methodologies) that expresses the amount of money that can be made or lost, and the probability of that profit or loss occurring. For instance, if you have an call option to buy a contract at a strike price of $30 and a put sold at a strike price of $35, your total derivative portfolio is $65, but your VAR is only $5, plus or minus any difference in the option premiums paid and received to open the offsetting positions. If the price at the exercise of these contracts was $40, the call would be exercised at $30 for a $10 profit and the put would be exercised at a $35 for a $5 loss. The net would be a $5 loss. The VAR is usually expressed as the amount of value a portfolio could lose under the model's scenario of short-term market moves.
Most VAR models are more sophisticated than this example. VAR is sometimes defined as the minimum loss that might be experienced over some time interval for some selected level of probability of occurrence. If a firm states that its VAR is $100,000 for a 24-hour period with 95% probability, it means that the firm expects that it can lose more than $100,000 only 5% of the time. VAR considers the amount of loss and probability that the loss can occur.
Time value: The amount by which an option’s premium exceeds its intrinsic value.
Tokyo International Financial Futures Exchange (TIFFE): A Japanese market for contracts on currencies and interest rates.
Up-and-in option: A form of barrier option that becomes actvated when the price of the underlying reaches a particular level.
Up-and-out option: A form of barrier option that ceases to exist when the price of the underlying reaches a particular level.
Value basis: The difference between the theoretical and actual future prices.
Variation margin: The margin in a futures transaction computed by taking the gains or losses on open positions which are calculated by marking to market at the end of each trading day, and credited or debited by the clearinghouse to each clearing member’s account, and by members to their customers’ accounts.
Vertical bear spread: An option strategy calling for the purchase of an option with a high exercise price and the sale of an option with a lower exercise price. Both options will have the same expiration date and can be puts or calls.
Vertical bull spread: An option strategy calling for the sale of an option with a high exercise price and the purchase of an option with a lower exercise price. Both options will have the same expiration date and can be puts or calls.
Quantos: Currency options with a guaranteed exchange rate, enabling buyers who like the asset, British bonds, for example, but not the asset's pricing currency, to arrange to be paid in a different currency.
Zero-cost option: A strategy in which the option premiums of sold options covers the cost of purchased options.
For more information please Click Below to E-Mail 
The Digital Financier
Back To Top of Section
||
Home || Start The Day || Bookstore ||
|| Work || News
|| Career Help ||
||About DFIN || Privacy Policy
||
COPYRIGHT @ 2000 - 2006