Financial Glossary

A quanto is a type of derivative in which the underlying is denominated in one currency, but the instrument itself is settled in another currency at some fixed rate.

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An abusive market practice whereby a large number of orders to buy or sell a financial instrument are placed and cancelled immediately afterwards.

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A single option linked to two or more underlying assets. In order for the option to pay off, all the underlying assets must move in the intended direction.

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A range note is a structured note, which pays a coupon for each day that the underlying spot stays within a prespecified range (sometimes called the accrual corridor).

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A trading strategy whereby the value of a portfolio after rebalancing is equal to its value at any previous time.

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The Sharpe ratio describes the extent to which an investment compensates for extra risk. This ratio is also called the risk-return ratio. The higher the ratio, the higher the risk compensation an investment offers.

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A path-dependent option that allows the investor to lock in profits if he thinks the market has reached a high (for a call) or low (for a put). The strike is set at the price at which the investor shouts.

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Technology that determines to which exchanges orders or trades are sent. Smart routers can be programmed to send out pieces of large orders (after they are broken up by a trading algorithm) so as to get cost-effective trade execution.

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The current interest rate appropriate for discounting a cash flow of some given maturity.

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A model that contains a random variable the outcome of which is based on probability.

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Volatility of an underlying assumed to be driven by a stochastic process.

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An option strategy in which the buyer takes a long position on a call and a put on the same underlying asset with same strike and maturity. Straddle is a good investment strategy if the investor expects a large movement in the price of the underlying asset but is not sure about the direction of the movement.

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An option strategy similar to Straddle. The buyer goes long on an out of the money call and an out of the money put with same strike and maturity.

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Exercise price for a put or call option.

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A digital option that pays out a proportion of the assets underlying a portfolio if the asset lies between a prespecified range at the expiry of the option.

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A contract between two parties to exchange cash flows in the future based on agreed predetermined formulas.

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A contract that gives its holder the option to enter into a swap on a later date.

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Change is option price on decrease of one day from time to maturity.

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A model in which the basic assumption is that prices or rates can move to one of three possible values over any short time period. At any time step the price or rate direction can be upward, neutral, or downward.

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A barrier option which gets activated only when the underlying asset price rises above the prespecified barier level.

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A barrier option which gets deactivated when the underlying asset price rises above rge prespecified barrier level.

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Value At Risk (VAR) represents the total proportion of market value that is at risk or faces risk due to speculation, due to uncertainty in market caused by presence of an external or un-systemic risk or internal risk parameter or systemic risk. Algorithmic trading is able to capitalize on VAR estimation, to capitalize on risk estimation, and bring down value of traded security in the market.

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Equities realize better returns if their current value is higher than their current price. A value strategy makes use of valuation ratios to select stocks that are attractively priced relative to their fundamentals. Frequently used ratios are price-to-book and price-earnings ratios.

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A common option, such as a European put or call.

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A simple swap agreement where one party pays fixed and the counter party pays floating rate.

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Rate of change of option vega with respect to the change in the underlying asset.

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The rate of change in the price of a derivative security relative to the volatility of the underlying security.

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Implied volatility versus strike graph is typically smile shaped and hence called a ‘volatility smile’. The underlying distribution is found to be leptokurtic and hence the observed option prices of out of the money options are found to be higher.

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Expected return on a portfolio of all a firm’s securities. Used as a hurdle rate for capital investment. Often the weighted average of the cost of equity and the cost of debt The weights are determined by the relative proportions of equity and debt in a firm’s capital structure.

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Fifth letter of a Nasdaq stock symbol indicating that listing is a mutual fund.

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The interest rate that will make the present value of the future cashflows from an investment equal to the price of thr investment.

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Applies mainly to convertible securities. Difference in current yield between the convertible and the underlying common.

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Term structure of yield rates.

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A term structure of yields for zero-coupon bonds – zero rates versus maturity dates.

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A bond without interim coupon payments. It is sold at at a discount to the notional and on maturity the notional is returned.

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A portfolio constructed to have zero systematic risk, that is, having a beta of zero.

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