12B-1 FEES: The percent of a mutual fund's assets used to defray marketing and distribution expenses. The amount of the fee (if applicable) can be found in a fund's prospectus. 12b-1 FEE: A fee charged by some mutual funds to its fundholders, to pay for the cost of marketing the fund, the theory being that more fundholders will result in lower expenses for each fundholder. 403(b) PLAN: Tax-sheltered retirement plans available to employees of government agencies and nonprofit organizations such as hospitals and universities. A 403(b) account is established by an individual and is similar to an IRA. A 403(b)(7) plan is offered by the employer and allows workers to contribute pretax dollars to selected investments. 404(c): A section of ERISA dealing with participant self-direction. The section has garnered much interest as a means for plan sponsors to avoid or reduce fiduciary liability for participant investment choices in a participant-directed investment plan. In order to qualify, the plan must comply with specific requirements regarding information about investment options, number and type of investment options, as well as an ability to move balances between those options on a reasonably frequent basis. 40L(K) PLAN: A defined contribution plan that allows employees to contribute pretax dollars through salary deferral. Many plans offer a variety of investment options--including stocks, bonds, short-term reserves, mutual funds, and company stock--and employers often match a percentage of employee contributions. 401(k) savings grow tax deferred until retirement (or early withdrawal, in which case a penalty tax applies). 412(i) PLAN: "Code section 412(I) insurance contracts" are contracts that provide retirement benefits under a plan that are guaranteed by an insurance carrier. In general, such contracts must provide for level premium payments over the individual's period of participation in the plan (to retirement age), premiums must be timely paid as currently required under the contract, no rights under the contract may be subject to a security interest and no policy loans may be outstanding. If a plan is funded exclusively by the purchase of such contracts, the otherwise applicable minimum funding requirements of section 412 of the Code and section 302 of ERISA do not apply for the year and a Schedule B is not required to be filed. 457 PLAN: Allows state and local government and tax exempt organizations to set up deferred compensation plans similar to a 401(k). This plan is not subject to ERISA. The funds belong to the employer, subject to the claims of the employer's general creditors. 529 PLAN: A college savings plan sponsored by individual states. Like a Coverdell Education Savings Account (formerly known as Education IRA), contributions to a 529 are made with after-tax dollars and any earnings compound tax-deferred. In addition, beginning in 2002, when the money is withdrawn for qualified higher education expenses both the contributions and earnings are not subject to taxes. ABATEMENT: A reduction or decrease. Usually applies to a decrease of assessed valuation of property for ad valorem taxes. ABSTRACT OF TITLE: A publicly available summary of the title changes on a specific property, beginning with the original land grant. ACCEPTANCE: In contract law, the offeree's notification to the offerer that the offeree agrees to be bound by the terms of the offerer's proposal. Although historically the terms of acceptance had to be the mirror image of the terms of the offer, the Uniform Commercial Code provides that even modified terms of the offer in a definite expression of acceptance constitute a contract. ACCOMMODATION RECORDING: Recording of instruments with the county recorder by a title company merely as a convenience to a customer and without assumption of responsibility for correctness or validity. ACCORD AND SATISFACTION: After the payment has been accepted or other performance has been made, the "accord and satisfaction" is complete and the obligation is discharged. ACCRETION: The gradual addition to the shore or bank of a waterway. ACCRUAL ACCOUNTING: The process that accountants use in adjusting raw transaction data into refined measures of a firm's economic performance. ACCRUED INTEREST:Interest which has been earned on a hand but not yet paid. Typically, interest accrues on a daily basis from the previous coupon date (inclusive) to the value date (exclusive). An investor buying a bond must pay accrued interest to the seller. ACCUMULATION: The first phase of a bullmarket. While most discouraged, and worst, some start buying shares. ACTIVE RETURN: Return relative to a benchmark. If a portfolio's return is 5%, and the benchmark's return is 3%, then the portfolio's active return is 2%. ACTIVE RISK: The risk (annualized standard deviation) of the active return. This is also called the tracking error. ACTUS REUS: The commission of a prohibited act is one of the two essential elements required for criminal liability, the other element being the intent to commit a crime. AD VALOREM TAX:A tax based on the value of the property ADAPTED: depends on current & future values with no foresight ADAPTIVE FILTER: Continuously updating the weighting of past prices for smoothing or forecasting purposes. ADAPTIVE FILTER: Smoothing and/or forecasting prices with continuously updated weighting of past prices. ADHESION CONTRACT: A "standard-form" contract, such as that between a large retailer and a consumer, in which the stronger party dictates the terms. ADVANCE-DECLINE LINE: Each day's number of declining issues is subtracted from the number of advancing issues. The net difference is added to a running sum if the difference is positive or subtracted from the running sum if the difference is negative. ADVANCE/DECLINE LINE: Each days declining issues aresubtracted from that days advancing issues. The difference isadded to (subtracted from if negative) a running sum. Failureof this line to confirm a new high is a sign of weakness. Failure of this line to confirm a new low is a sign of strength. ADVERSE EXCURSION: The loss attributable to price movement against the position in any one trade. ADVERSE SELECTION: False signaling. AFFIRMATIVE DEFENSE: A response to a plaintiff's claim that does not deny the plaintiff's facts but attacks the plaintiff's legal right to bring an action. An example is the running of the statute of limitations. After-acquired evidence A type of evidence submitted in support of an affirmative defense in employment discrimination cases. Evidence that, prior to the employer's discriminatory act, the employee engaged in misconduct sufficient to warrant dismissal had the employer known of it earlier. AGENCY BY ESTOPPEL: Arises when a principal negligently allows an agent to exercise powers not granted to the agent, thus justifying others in believing that the agent possesses the requisite agency authority AGENT: A person or company that has the power to act on behalf of another or to transact business for another; e.g., a title agent under contract with Old Republic Title to issue policies of title insurance. AGREEMENT CORPORATION: Similar to an Edge Act Corporation, but state chartered. It has agreed to abide by the same federal regulations that apply to an Edge Act. AIR LOT: A unit of space individually owned in a multilevel condominium. AIR RIGHTS: The right to ownership of everything above the physical surface of the land. ALL-IN COST (AIC): rate of return on the fixed side of a swap. Fixed-for-floating interest rate swaps are quoted as AIC vs. the floating rate. ALLAIS PARADOX: A simple illustration of Maurice Allais' general theory of random choice. Just as the St. Petersburg Paradox led Daniel Bernoulli to replace the principle of maximization of the mathematical expectation of monetary values by the Bernoullian principle of maximization of cardinal utilities, the Allais paradox leads to adding to the Bernoullian formulation a specific term characterizing the propensity to risk which takes account of the distribution as a whole of cardinal utility and not merely the average of the distribution. ALLODIAL SYSTEM: The system of landownership that permits individuals to own land in fee simple title; used in the United States. ALPHA: In chaos, terminology, the measure of the peakedness of the probability density function. In the normal distribution, alpha equals two. For Fractal distributions, alpha is between one and two. The inverse of the Hurst Exponent, H. ALPHA: The expected excess return or the expected residual return. Alpha is sometimes defined as the expected exceptional return and sometimes defined as the realized residual or exceptional return. From the equation, Rs = Alpha + Rf + Beta * (Rm - Rf) where Rs = Return of a security, Rf = Risk Free Return and Rm = return of the market. See also Beta. ALPHA:The premium an investment earns above a set standard. This is usually measured in terms of the DOW Industrials or the S&P 500. How the stock performs independent of the market. AMERICAN DEPOSITORY RECEIPTS (ADRs):A depository receipt issued against foreign securities by an American bank that holds those securities. AMERICAN OPTION An option which can be exercised prior to its expiration date. AMORTIZATION: The process of fully paying off indebtedness by installments of PRINCIPAL and earned interest over a definite time sufficient to pay off the loan by maturity. AMORTIZATION: The systematic process of allocating the cost of intangible assets to the periods in which the assets benefit the company. ANALYSIS OF VARIANCE: It can be used for identifying relationships between predictor and criterion variables, whether the predictor variables are quantitative or qualitative in nature. Analysis of the effects of one treatment variable on an interval-scaled or ratio-scaled dependent variable ANERGY: Negative synergy. Instead of a "2 + 2 = 5" effect, anergy implies "2 + 2 = 3." ANNOUNCEMENT DATE (or LAUNCH DATE): The day most of the terms of the bond are made public such as the issue size and maturity date. ANTI-PERSISTENCE: In R/S Analysis, an anti-persistent time series reverses itself more often than a random series would. If the system had been up in the previous period, it is more likely that it will be down in the next period and vice versa. Also called pink noise, or 1/f noise. ANTICIPATORY REPUDIATION: An assertion or action by a party indicating that he or she will not perform an obligation that the party is contractually obligated to perform at a future time. ANTIGREENMAIL AMENDMENT: Corporate charter amendment which prohibits targeted share repurchases at a premium from an unwanted acquirer without the approval of nonparticipating shareholders. ANTISELECTION: A tendency of consumers, on average, to act in their best interest when making financial decisions. ANTITAKEOVER AMENDMENT: A corporate charter amendment which is intended to make it more difficult for an unwanted acquirer to take over the firm. ANTITHETIC FORECASTS: Two forecasts whose errors are negatively correlated. ANTITRUST LAW: The body of federal and state laws and statutes protecting trade and commerce from unlawful restraints, price discrimination, price fixing, and monopolies. The principal federal antitrust statues are the Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914. ANY-OR-ALL OFFER: A tender offer which does not specify a maximum number of shares to be purchased, but none will be purchased if the conditions of the offer are not met. APPRAISAL RIGHT: The right of minority shareholders to obtain an independent valuation of their shares to determine the appropriate back-end value in a two-tier tender offer. APPRAISED VALUE: the economic value of a company both as a continuing going concern and as a resource converter. Includes consideration of net asset value, breakup value, liquidation value, and replacement cost. ARBITRAGE PRICING THEORY: Return is allowed to be determined as a function of various synthetic eignevalue variables. Varimax rotation is periodically used to find eignevectors of synthetic undelying independent variables or "principal factors" (macroeconomic or local financial conditions) whereafter stochastic optimisation is used to pick instantaneously optimal securities. ARBITRAGE: A transaction which generates a risk-free profit; buying in one market and simultaneously selling at a profit in another. ARBITRAGE: In its simplest form, the process of simultaneously buying and selling the same commodity at slightly different prices, and profiting from the difference. For example, buying gold in New York at $380/ounce, and selling it at the same time in London at $382/ounce would net $2/ounce. If you can execute the two transactions for less than $2/ounce (and not move the market in doing so), you make money. AREA PATTERN: When a stock or commodities upward or downward trend has stalled. The sideways movement in price which follows forms a pattern. Some of these patterns may have predictive value. Examples of these patterns are head & shoulders, triangles, pennants, flags, wedges, and broadening formations. ARMS INDEX (aka TRading INdex,TRIN): An advance/decline stock market indicator. A reading of less than 1.0 indicates bullish demand, while greater than 1.0 is bearish. The index is often smoothed with a simple moving average. ARMS INDEX: This is an indicator which relies on advances and declines in the stock market. A reading above 1 or in some software 100, is bearish. A number below 1 or in some software 100, is bullish. The higher the number the more bearish. The lower the number, the more bullish. In the normal course of trading, this number is usually between about 40 and 60. Very high or very low numbers occur infrequently. The formula is: ((# of advancing issues/# of declining issues)/ (Total up volume/ Total down volume)). ARTISAN'S LIEN: A possessory lien given to a person who has made improvements and added value to another person's personal property as security for payment for services performed. ASCENDING TREND CHANNEL: The tops of an ascending priceline develop along a line parallel to the trend line which slopesupward across the bottoms of the down waves. ASIAN OPTION: An option whose pay-off depends on the average value of an underlier over a specified period. ATTENUATION: The fractional part of reduced energy or lost power due to smoothing or filtering. ATTRACTOR: In non-linear dynamic series, an attractor defines the equilibrium level of the system. The point from which an destabilising vortex comes out or into which a stabilising vortex goes into. AUTO-REGRESSIVE CONDITIONAL HETEROSCEDASTICITY (ARCH): Projecting future implied volatilities; Skedacity is Greek for Variance. Variance is time-varying, and conditional upon the past variance. ARCH processes have frequency distributions which have high peaks at the mean and fat-tails, much like fractal distributions. AUTO-REGRESSIVE(AR) PROCESS: Meanreverting process estimable as fct of prev vals. A stationary stochastic process where the current value of the time series is related to the past p values, where p is any integer, is called an AR(p) process. When the current value is related to the previous two values, it is an AR(2) process. An AR(1) process has an infinite memory. The partial autocorrelation plot is used to determine the number of AR terms, such that PACF(p+1) approaches zero for an AR(p) model. AUTOMATED CLEARINGHOUSE (ACH): A computer-based clearing and settlement operation, often operated by a Federal Reserve Bank, established for the exchange of electronic transactions among participating depository institutions. Such electronic transactions can be substituted for paper checks used to make recurring payments such as payroll or preauthorized insurance premiums. The U.S. Treasury uses the ACH extensively to pay certain obligations of the government. AVERAGE DIRECTIONAL MOVEMENT INDEX (ADX): Indicator developed by J. Welles Wilder to measure market trend intensity. AVULSION: Loss of land due to sudden change in the flow of water. BACK BOND (VIRGIN BOND): bullet bond issued to an investor exercising a debt warrant. BACK MONTH: The out, or back, contract month, as opposed to the current contract month; the expiration month farther in the future than the current, or spot, month. BACK-END RIGHTS PLAN: A poison pill takeover defense in which target shareholders are issued a rights dividend exercisable if an acquirer obtains over a triggering amount of target stock. Shareholders (excluding the acquirer) may exchange each right-and-share-of-stock held for senior securities or cash equal in value to a back-end price set by the target board. This back-end price is set higher than the market price and becomes a minimum takeover price below which no takeover can succeed. BACK-END VALUE: The amount paid to remaining shareholders in the second stage of a two-tier or partial tender offer. BACKWARDATION: A condition where spot prices exceed forward prices. BACKWARDATION: A futures market term which indicates that nearby futures contracts are more expensive than the distant contracts. See Contango. BAILMENT: A situation in which the personal property of one person (a bailor) is entrusted to another (a bailee), who is obligated to return the bailed property to the bailor or dispose of it as directed. BANDPASS FILTER: An oscillator that accentuates only the frequencies in an intermediate range and rejects high and low frequencies. Implemented by first applying a low pass filter to the data and then a high pass filter to the resulting data (e.g., two SMA crossover system). BANK FOR INTERNATIONAL SETTLEMENTS (BIS): located in Basle, established in 1930 to administer the post-World War I reparations agreements. Since the 1960s, the BIS has evolved into an important international monetary institution, and has provided a forum in which central bankers meet and consult on a monthly basis. As an independent financial organization, the BIS performs a variety of banking, trustee, and agent functions, primarily with central banks. At present the BIS has 29 members, 28 of which are central banks. The Federal Reserve is represented at BIS meetings, but is not a member. BANK HOLDING COMPANY ACT: An act of Congress that limits ownership of banks to banking companies, and restricts interstate banking. There have been a number of exceptions since the act became law in 1956. See Douglas Amendment, Gramm-Leach-Bliley Act, Riegle-Neal Act. BANKERS ACCEPTANCE: A draft whose payment at maturity has been assured by a bank. BANKERS ACCEPTANCE: These are negotiable time drafts, or bills of exchange, that have been accepted by a bank which, by accepting, assumes the obligation to pay the holder of the draft the face amount of the instrument on the maturity date specified. Bankers Acceptance's are generally used to finance the export, import, shipment, or storage of goods. BARGAIN ISSUES: share price below realizable assets or net working capital per share defined as net current assets alone, excluding plant and equipment and other assets, and after deducting all liabilities ahead of the stock in liquidation. BARRIER OPTION: payoff depends on ordinary option payoff an whether a certain barrier has been crossed. (up,down)-and(in,out) BASIS POINT: percent of a percent, or a permyriad, or a myriadiost. BAYES DECISION RULE: A rule that states the strategy chosen from those available is that for which the expected value of payoff is the greatest. BDS STATISTIC: A statistic based upon the correlation integral which examines the probability that a purely random system could have the same scaling properties as the system under study. BEAR HUG: A takeover strategy in which the acquirer, without previous warning, mails the directors of the target a letter announcing the acquisition proposal and demanding a quick decision. BEAR PUT SPREAD: strategy in the options market designed to take advantage of a fall in the price of a security or commodity. The investor, would purchase a put option and sell a second put option with a lower strike price. BEAR SPREAD: An option strategy with maximum profit when the price of the underlying security declines. Maximum loss occurs if the underlying security rises in price. The strategy involves the purchase and simultaneous sale of options. Puts or calls can be used. A higher strike price is purchased and a lower strike price is sold. The options have the same expiration date. BEAR TRAP: A false signal which indicates that the risingtrend of a stock or index has reversed when in fact it has not. BEAR TRAP: A situation that occurs when prices break below a significant level and generate a sell signal, but then reverse course and negate the sell signal, thus "trapping" the bears that acted on the signal with losses. BEARER FORM: The holder of the bond is the owner. Physical certificates exist. BERMUDA OPTION: cross between American an European. Excercised only at fixed intervals. BETA: Ratio of two covariance of a security divided by market proxy variance. Covar (r[i]/rMkt)/var(rMkt) In the capital asset pricing model, the systematic risk of the asset. Rs = Alpha + Rriskfree + Beta * (Rmarket - Rriskfree) rho12*sig1*sig2=cov12=sig12 Artifact of linear univariate regression confounding within-group variation and between-group variation and calculated from an arbitrary choice of time periods and market proxy indices. BIFURCATION DIAGRAM: A graph that shows the critical points where bifurcation occurs, and the possible solutions that exist at that point. BIFURCATION: When a non-linear dynamic system develops twice the possible solutions that it had before it passed its critical level. A bifurcation cascade is often called the period doubling route to chaos because the transition from an orderly system to a chaotic system often occurs when the number of possible solutions begins increasing, doubling each time. BILATERAL NETTING: Netting between two parties. BILL OF LADING: A document that serves both as evidence of the receipt of goods for shipment and as documentary evidence of title to the goods. BINARY OPTION: A type of option which features a discontinuous pay-off. BLENDED PRICE: The weighted average price in a two-tier tender offer. The front-end price is weighted by the percent of shares purchased in the first step of the transaction, and the lower, back-end price is weighted by the percent of shares purchased to complete the transaction. BLIND BROKER: System A mechanism for inter-dealer transactions which maintains the anonymity of both parties to the trade. The broker serves as the agent to the principals' transactions. BOARD BROKER: the exchange member in charge of keeping the book of public orders on exchanges utilizing the "market-maker" system, as opposed to the "specialist system," of executing orders. BOARD-OUT CLAUSE: A provision in most supermajority antitakeover amendments which gives the board of directors the power to decide when and if the supermajority provision will be in effect. BOND ANTICIPATION NOTE (BAN): short-term debt instrument issued by a state or municipality that will be paid off with the proceeds of a forthcoming larger bond issue. BOUNDED RATIONALITY: Refers to the limited capacity of the human mind to deal with complexity. BOX SPREAD: a type of option arbitrage in which both a bull spread and a bear spread are established for a riskless profit. One spread is established using put options and the other is established using calls. The spreads may both be debit spreads (call bull spread vs. put bear spread), or both credit spreads (call bear spread vs. put bull spread). BREADTH: The percentage of assets or stocks advancing relative to those unchanged or declining. Also the number of independent forecasts available per year. A stock picker forecasting returns to 100 stocks every quarter exhibits a breadth of 400, assuming each forecast is independent (based on separate information). BREAK FORWARD: option on a forward contract that allows the contract to be canceled. The purchaser can cancel (at a specified price) if it is advantageous to do so. BREAKUP VALUE: the amount of money that could be realized when a company is broken up into individual parts and marketed separately. Certain companies at critical times are worth more dead than alive. The ultimate breakup of a going concern is liquidation, sometimes in bankruptcy proceedings, and some investors seek out these special situations. The breakup value represents a floor on the value of the company to the extent that if the market price of the common stock falls below the breakup value of the company, the company becomes attractive as a takeover target. BROKER-AGENT: Independent insurance salesperson who represents particular insurers but also might function as a broker by searching the entire insurance market to place an applicant's coverage to maximize protection and minimize cost. This person is licensed as an agent and a broker. BROKER: Party who is licensed to handle property listings. Brundage clause Provision in a mortgage that calls for the mortgagor to pay all taxes on the property. Insurance salesperson that searches the marketplace in the interest of clients, not insurance companies. BROKERED DEPOSITS: Time deposits (usually just under $100M, the FDIC insurance limit) brought into a bank by an independent third party (the broker), who receives a fee from the bank for doing it. It is a way for a bank to raise money outside its own market area. Since the deposits are insured, the depositors usually don't care who the bank is. BROWNIAN MOTION: ever-finer random walk:martingale w 0 drift and 1 volatility - Wiener process (dx = mean dt + stdev dz) also called a linear coefficient SDE BULL SPREAD: an option strategy that achieves its maximum potential if the underlying security rises far enough, and has its maximum risk if the security falls far enough. An option with a lower striking price is bought and one with a higher striking price is sold, both generally ' having the same expiration date. Either puts or calls may be used for the strategy. BULL TRAP: A false signal which is generated which indicates that the price of a stock or index has reversed to an upward trend but which proves to be false. BULLDOGS: sterling-denominated bonds issued by non-U.K. companies in the U.K. BULLET MATURITY: A bond whose principal is paid only on the final maturity date. BULLETS: noncallable debt with a single principal payment at maturity. BURGLARY: The unlawful entry into a building with the intent to commit a felony BUTTERFLY SPREAD: An option strategy combining a bulland bear spread. Three strike prices are used. The lower two strike prices are used in the bull spread and the higher two strike prices are used in the bear spread. Either puts or calls can be used. This strategy has limited risk and limited profit. BUY ON CLOSE: To buy at the end of a trading session at a price within the closing range. BUY ON OPENING: To buy at the beginning of a trading session at a price within the opening range. BUY-WRITE STRATEGY: option strategy that entails buying stocks and then writing call options on them. Investors receive both the dividends from the stock and the premium income from the call options. However, the investor may have to sell the stock below the current market price if the call is exercised. BUYDOWN: A lump sum payment made to the creditor by the borrower or by a third party to reduce the amount of some or all of the consumer's periodic payments to repay the indebtedness. CALENDAR COMBINATION: An option strategy where a trader opens a call calendar spread and a put calendar spread at the same time. The strike price of the calls is higher than the strike price of the puts. CALENDAR SPREAD: An option strategy where a trader sells a shorter term option and buys a longer term option. Both options have the same strike price. CALL OPTION: An option to purchase an asset. CALL RATIO: The ratio of put trading volume divided by the call trading volume. Moving averages can be used to smooth this chart out. CALLABLE BOND: A bond which provides the borrower with an option to redeem the issue before the original maturity date. Usually, certain terms are set before the issue, such as the date after which the bond is callable and the price at which the issuer may retire the bond. The holder of the bond is usually paid a premium for early termination of the investment. CALMAR RATIO: Takes the average rate of return for the last 36 months and divides it by the maximum drawdown for the same period. It is usually calculated on a monthly basis. A negative value for the Calmar ratio means that the system or trader had a negative performance over the last three years. CAMELS: A rating system used by bank regulators to judge the health of a bank. It uses a 1 - 5 scale (1 being the best), rating a bank on its capital, asset quality, management ability, earnings, liquidity, and sensitivity to market risks. CANDLESTICK CHARTS: A charting method originally developed in Japan. The high and low are described as shadows and plotted as a single line. The price range between the open and close is plotted as a rectangle on the single line. If the close is above the open, the body of the rectangle is white. If the close of the day is below the open, the body of the rectangle is black. CAP: pays current-specified interest only if positive (CAPLET: indiv pmt; FLOOR: inverse of cap) CAPITAL ASSET PRICING MODEL (CAPM): Return is a function of risk, r[i]=alpha+beta[i]*rMkt, by Sharpe,Lintner&Mossin re=rf(1-tx)+be[rm-rf(1-tx)] WACC=re*E/(E+D)+rd(1-tx)D/(E+D) rd=rf+bd[rm-rf(1-tx)] re=ra+(D/E)[ra-rd(1-tx)] betaasset=be(E/V)+bd(D/V)(1-tx) E(Rp) = RF + [ E(Rm) - RF ] bpm CAPITAL INTENSITY: In economics, the ratio of investment required per dollar of sales. In finance, the sales to investment ratio. The steel industry and manufacturing generally are more capital intensive than the wholesale or retail industries. CAPITAL LEASE OBLIGATION: The liability reported in connection with a lease arrangement that is structured such that, economically, it is similar to a debt-financed purchase. CAPITAL LEASE: Accounted for as if the lease agreement transfers ownership of the asset from the lessor to the lessee. CAPITAL MARKET LINE: A line which describes the optimal relationship between risk and reward for an investment portfolio tangential to optimal frontier. CAPITAL PRESERVATION: maintaining the real value or purchasing power of the capital in an investment portfolio or account CAPITALIZATION-WEIGHTED INDEX: A stock index which is computed by adding the capitalizations (float times price) of each individual stock in the index, and then dividing by the divisor. The stocks with the largest market values have the heaviest weighting in the index. CAPITATION: A rate paid, usually monthly, to a health care provider. In return, the provider agrees to deliver thehealth services agreed upon to any covered person. CAPPED-STYLE OPTION: A capped option is an option with an established profit cap. The cap price is equal to the option's strike price plus a cap interval for a call option or the strike price minus a cap interval for a put option. A capped option is automatically exercised when the underlying security closes at or above (for a call) or at or below (for a put) the Option's cap price. CAPS: Convertible adjustable preferred stock - adjustable-rate preferred stock with a conversion feature. Every three months, the preferred stock is convertible into shares of common stock or cash, at the issuer's discretion. CASH BOND: continuously compounded at instantaneous rate CASH FLOW ADEQUACY RATIO: Computed as cash from operations divided by expenditures for fixed asset additions and acquisitions of new businesses. CASUALTY: Liability or loss resulting from an accident. CATEGORICAL IMPERATIVE: A concept developed by the philosopher Immanuel Kant as an ethical guideline for behavior. In deciding whether an action is right or wrong, or desirable or undesirable, a person should evaluate the action in terms of what would happen if everybody else in the same situation, or category, acted the same way CATS: Certificate of Accrual on Treasury Securities - a stripped U.S. bond. CBOE: the Chicago Board Options Exchange; the first national exchange to trade listed stock options. CEDEL: Centrale de Livraison de Valeurs Mobilieres; a clearing system for Euro-currency and international bonds. Cedel is located in Luxembourg and is jointly owned by a large number of European banks. CENTRAL LIMIT THEOREM: 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. CERTAINTY EQUIVALENT RETURN: 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%. CERTIFICATE OF DEPOSIT (CD): A time deposit at a bank or savings institution with fixed maturity. Large CDs are negotiable instruments, which effectively eliminates fixedness of maturity. CERTIFICATE OF PARTICIPATION (COP): Financing whereby an investor purchases a share of the lease revenues of a program rather than the bond being secured by those revenues. Usually issued by authorities through which capital is raised and lease payments are made. The authority usually uses the proceeds to construct a facility that is leased to the municipality, releasing the municipality from restrictions on the amount of debt that they can incur. CHAIKIN OSCILLATOR: An oscillator created by subtracting a 10 day exponential moving average from a 3 day exponential moving average of the accumulation distribution line. CHANNEL: Used in charting, it allows the user to draw parallel lines connecting the low points and the high points. It can be ascending or descending. A body of water between England & France. CHAOS: A deterministic non-linear dynamic system that can produce random looking results. A chaotic system must have a fractal dimension, and exhibit sensitive dependence on initial conditions. CHARACTERISTIC PORTFOLIO: 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 asset betas is the benchmark. It is the minimum risk beta = 1 portfolio. CHATTEL: Personal property, movable in nature. CHI-SQUARE TEST: A test that statistically determines significance in the analysis of frequency distributions. CHINESE WALL: The imaginary barrier separating investment banking and arbitrage functions within a financial intermediary. CLASS 3-6 BONDS (% OF PHS): This test measures exposure to noninvestment grade bonds as a percentage of surplus. Generally, noninvestment grade bonds carry higher default and illiquidity risks. The designation of quality classifications that coincide with different bond ratings assigned by major credit rating agencies. CLASSIFIED BOARD: Also called a staggered board. An antitakeover measure which divides a firm's board of directors into several classes, only one of which is up for election in any given year, thus delaying effective transfer of control to a new owner in a takeover. CLAYTON ACT: Federal antitrust law originally passed in 1914 and strengthened in 1950 by the Celler-Kefauver amendment. Section 7 gives the Federal Trade Commission (FTC) power to prohibit the acquisition of one company by another if adverse effects on competition would result, or if the FTC perceived a trend which might ultimately lead to decreased competition. CLEAN PRICE: The clean price of a bond does not include accrued interest CLEAN-UP MERGER: Also called a take-out merger. The consolidation of the acquired firm into the acquiring firm after the acquirer has obtained control. CLEARINGHOUSE INTERBANK PAYMENTS SYSTEM (CHIPS): An automated clearing system used primarily for international payments. This system is owned and operated by the New York Clearinghouse banks. It engages Fedwire for settlement. CLEOs: Collateralized lease equipment obligations - securities whose underlying assets are leasing receivables. CLIENTELE EFFECT: A dividend theory which states that high-tax bracket shareholders will prefer to hold stock in firms with low dividend payout rates and low-tax bracket shareholders will prefer the stock of firms with high payouts. CLOSED BOOK PERIOD: A period, usually the two or three weeks before each coupon due date. The coupon is paid to the person holding the bond prior to the closed-book period. If this person sells the bond during this period, he must compensate the buyer for any accrued interest. CLOSED-END CREDIT: Generally, any loan or credit sale agreement in which the amounts advanced, plus any finance charges, are expected to be repaid in full over a definite time. Most real estate and automobile loans are closed- end agreements. CLOSED-END FUNDS: A mutual fund that does not sell unlimited shares; one with a specific number of outstanding shares. CLOSING: Also known as "escrow" or "settlement." The process of executing legally binding documents, such as deeds and mortgages most commonly associated with the purchase of real estate and the borrowing of money to assist in the purchase . COEFFICIENT OF DETERMINATION: R-squared. The proportion of the variation in the data explained by the model. COEFFICIENT OF DETERMINATION: RSQ A measure of that portion of the total variance of a variable that is accounted for by knowing the value of another variable. COFI: Cost of Funds Index. COHERENT MARKET HYPOTHESIS: 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. COINSURANCE EFFECT: The combination of two firms whose cash flows are not perfectly correlated will result in cash flows of less variability for the merged firm, thus decreasing the risk to lenders to the firm and thereby increasing its debt capacity. COINSURANCE: In property insurance, requires the policyholder to carry insurance equal to a specified percentage of the value of property to receive full payment on a loss. For health insurance, it is a percentage of each claim above the deductible paid by the policyholder. For a 20% health insurance coinsurance clause, the policyholder pays for the deductible plus 20% of his covered losses. After paying 80% of losses up to a specified ceiling, the insurer starts paying 100% of losses. COLLAR: A combination of a cap and a floor so that payments are made to the purchaser on each payment date if the reference price is either above the cap rate or below the floor rate. No payments are made if the reference price is between the cap and floor rates. COLLAR: Sometimes called a cylinder. Buying a cap and selling a floor. Taken together, they would place upper and lower limits on interest rate (currency, commodity price) fluctuations. A zero-cost collar is where the fee paid for buying the cap is exactly offset by the fee received for selling the floor. COLLATERAL RESTRAINTS: Agreements between the parties to a joint venture to limit competition between themselves in certain areas. COMBINED RATIO AFTER POLICYHOLDER DIVIDENDS: The sum of the loss, expense and policyholder dividend ratios not reflecting investment income or income taxes. This ratio measures the company's overall underwriting profitability, and a combined ratio of less than 100 indicates an underwriting profit. COMITY: A deference by which one nation gives effect to the laws and judicial decrees of another nation. This recognition is based primarily on respect. COMMERCIAL PAPER: Short-term (maximum 270 days in the US), unsecured corporate IOU's generally sold at a discount and redeemed at maturity at par. For the largest, most creditworthy banks and corporations, it is an important source of funds. Commercial paper is the corporate equivalent of a US government treasury bill - the only difference is the issuer. COMMON FACTOR: 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 P/B and yield, industries and risk indices. COMMUNITY REINVESTMENT ACT (CRA): This act encourages banks to help meet the credit needs of their communities for housing and other purposes, particularly in neighborhoods with low or moderate incomes. The banks are also expected to maintain safe and sound operations. COMPARABILITY: A fundamental concept of accounting which states that financial accounting information is more useful when it can be reliably compared to similar information from the same company in past years or from other companies in the same industry. COMPLETE MARKET: every risk hedgeable COMPLEXITY THEORY: The theory that processes with a large number of seemingly independent agents can spontaneously organize themselves into a coherent system. COMPTROLLER OF THE CURRENCY: The Comptroller of the Currency is an officer of the Treasury Department responsible for chartering national banks and has primary supervisory authority over them. All national banks are required to be members of the Federal Reserve System and are insured by the Federal Deposit Insurance Corporation. OCC regulated banks before the FRB or FDIC, as far back as the "Call Reports" of the 1790s. CONCENTRATION: Measures of the percentage of total industry sales accounted for by a specified number of firms, such as 4, 8 or 20. CONCENTRIC MERGER: A merger in which there is carry-over in specific management functions (e.g., marketing) or complementarity in relative strengths among specific management functions rather than carry-over/complementarities in only generic management functions (e.g., planning). CONDOMINIUM: Individual ownership of a single unit in a multiunit structure or group of buildings, with joint ownership of common elements. CONFIRMATION: At least two indicators or indexes corroboratea market turn or trend. In the case of the stock market, withrespect to Dow Theory, it would be the Dow Industrials and theDow Transports. CONFORMING GOODS: Goods that conform to contract specs CONGESTION AREA: At a minimum, a series of trading days in which there is no or little progress in price. CONJECTURAL VARIATION: The reaction of rival firms as one firm, Firm A, restricts output or raises prices. Ranges from - 1 to +1; a negative conjectural variation indicates competitive behavior, i.e., Firm A's action is offset by the reactions of competing rival firms. CONSERVATISM: A concept that can be summarized as follows: When in doubt, recognize all losses but don't recognize any gains CONSIDERATION: Generally the value given in return for a promise. The consideration, which must be present to make the contract legally binding, must be something of legally sufficient value and bargained for and must result in a detriment to the promisee or a benefit to the promisor. CONSIGNMENT: A transaction in which an owner of goods (the consignor) delivers the goods to another (the consignee) for the consignee to sell. The consignee pays the consignor for the goods when they are sold by the consignee. CONSISTENCY: Comparability of accounting data for the same company over time. CONSTRUCTIVE EVICTION: A form of eviction that occurs when a landlord fails to perform adequately any of the undertakings (such as providing heat in the winter) required by the lease, thereby making the tenant's further use and enjoyment of the property exceedingly difficult or impossible. CONSUMER DEBENTURES: investment notes issued by a financial institution and marketed directly to the public. CONTANGO: A condition where forward prices exceed spot prices. CONTANGO: A futures market term which indicates that distant futures contracts are more expensive than nearby contracts. See Backwardation. CONTINGENT ORDER: an order to buy stock and sell a covered call option that is given as one order to the trading desk of a brokerage firm. Also called a "net order." This is a "not held" order. CONTINGENT VOTING RIGHTS: Rights to vote in corporate elections which become exercisable upon the occurrence of a particular event. Examples: Preferred stockholders may win the right to vote if preferred dividends are missed; convertible debt may be viewed as having voting rights contingent upon conversion. CONTRARIAN: a style of investment characterized by acting opposite to the crowd, and therefore not independent critical thinking but rather negative groupthink. CONTROL PARAMETERS: In a nonlinear dynamic system, the coefficient of the order parameter; the determinant of the influence of the order parameter on the total system. CONVERSION ARBITRAGE: a riskless transaction in which the arbitrageur buys the underlying security, buys a put, and sells a call. The options have the same terms. CONVERSION RATIO, PRICE: The ratio or price at which a corporation will sell stock to the convertible bond or convertible preferred security holder, CONVERTIBLE SECURITY: a security that is convertible into another security. Generally, a convertible bond or convertible preferred stock is convertible into the underlying stock of the same corporation. The rate at which the shares of the bond or preferred stock are convertible into the common is called the conversion ratio and is usually prespecified. CONVEXITY: (d^2 ln(B))/((d(1+r))^2) CONVEYANCE: The' transfer of a title to land from one person to another by deed; a document (such as a deed) by which an interest in land is transferred from one person to another. COOPERATIVE: Ownership of shares or stock in a corporation for which the owner obtains a proprietary lease. CORRECTION: A price reaction of generally 1/3 to 2/3 of the precious gain. CORRELATION DIMENSION: 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. CORRELATION INTEGRAL: The probability that two points are within a certain distance from one another. Used in the calculation of the correlation dimension. CORRELATION: covar[i,j] / sqrt (var[i]*var[j]) CORRESPONDENT BANK: A bank that accepts deposits of and performs banking services for other depository institutions. COUGRS: Certificates of government receipts - a stripped U.S. bond. COUNTEROFFER: An offerees response to an offer in which the offeree rejects the original offer and at the same time makes a new offer. COVARIANCE: E(XY)-E(X)*E(Y) COVENANT RUNNING WITH THE LAND: An executory promise made between a grantor and a grantee to which they and subsequent owners of the land are bound. COVENANT: A set of conditions imposed upon a borrower, documented in a loan agreement, as a way of protecting the lender, who is generally obligated to lend the money unless a covenant is breached. Affirmative covenants are conditions the borrower must meet (e.g., make payments on time), negative covenants are those the borrower must not (e.g., take on additional debt without the bank's permission). COVER: Under the Uniform Commercial Code, a remedy of the buyer or lessee that allows the buyer or lessee, on the seller's or lessor's breach, to purchase the goods from another seller or lessor and substitute them for the goods due under the contract. If the cost of cover exceeds the cost of the contract goods, the breaching seller or lessor will be liable to the buyer or lessee for the difference. In obtaining cover, the buyer or lessee must act in good faith and without unreasonable delay. COVERED CALL OPTION WRITING: A strategy in which one sells call options while simultaneously owning an equivalent position in the underlying security or strategy in which one sells put options and simultaneously is short an equivalent position in the underlying security. COVERED WRITE: Writing a call against a long position in the underlying stock. By receiving a premium, the writer intends to realize additional return on the underlying common stock or gain some element of protection (limited to the amount of the premium less transaction costs) from a decline in the value of that underlying stock. CRACK SPREADS: The spread between crude oil and its products: heating oil and unleaded gasoline plays a major role in the trading process. CRAM-DOWN: A provision of the Bankruptcy Code that allows a court to confirm a debtor's Chapter 11 reorganization plan even though only one class of creditors has accepted it. To exercise the court's right under this provision, the court must demonstrate that the plan does not discriminate unfairly against any creditors and is fair and equitable. CRAMDOWN: the practice of forcing an investor to accept an unfavorable feature in his investment. CREDIT DERIVATIVE: A derivative instrument designed to transfer credit risk from one party to another. CREDIT ENHANCEMENT: Any methodology that reduces the credit exposure of a transaction with a counterparty. CREDIT EXPOSURE: Exposure to possible default by a counterparty. CREDIT RISK: Combined risk or exposure from default risk and market risk. CREDIT SCORING SYSTEM: A statistical system used to determine whether or not to grant credit by assigning numerical scores to various characteristics related to creditworthiness. Usually the acceptable mix is derived for the entire institution using linear programming. CREDIT SWAP: a contractual exchange of exposure to one counterparty for exposure to another counterparty. Credit swaps may reduce counterparty risk for holders with significant concentrations of credit risk. CRISP SETS: The fuzzy set term for traditional set theory. That is, an object either belongs to a set, or does not. See Fuzzy Sets. CRITICAL LEVELS: Values of control parameters where the nature of a non-linear dynamic system changes. The system can bifurcate, or make the transition from stable to turbulent behavior. An example is the straw that breaks the camels back. CROSS HEDGE: A hedge relationship in which the basis of the hedge instrument differs from that of the hedging item, e.g., a deutsche mark option used to hedge a commitment to deliver Swiss francs, or a LIBOR-based swap used to hedge commercial paper. Also referred to as proxy hedge. (FASB Report, June 1993) CUMULATIVE ABNORMAL RETURN: In event studies, the sum of daily abnormal returns over a period relative to the event. CUMULATIVE VOTING: A method of shareholder voting designed to allow minority shareholders to be represented on the board of directors. With cumulative voting, the number of members of the board to be elected is multiplied by the total number of voting shares held. The result equals the number of votes a shareholder has, and this total can be cast for one or more nominees for director. CUMULATIVE VOTING: Instead of one vote per candidate selected, shareholders can vote (the number of shares they hold times the number of directors to be elected) for one candidate or divide the total votes among a desired number of candidates. Example: A shareholder has 100 shares; six directors are to be elected. With cumulative voting the shareholder has 600 votes to distribute among six candidates however he or she chooses. CUP AND HANDLE: A pattern on bar charts. The pattern can be as short as seven weeks and as long as 65 weeks. The cup is in the shape of a U. And the handle has a slight downward drift. The right hand side of the pattern has low trading volume. CURRENCY SWAPS: An exchange between two enterprises of the currencies of two different countries pursuant to an agreement to reexchange the two currencies at the same rate of exchange at a specified future date. (SFAS No. 52) CURRENT ACCOUNT BALANCE: The difference between the nation's total exports of goods, services, and transfers and its total imports of them. It excludes transactions in financial assets and liabilities. CURRENT RATIO: A comparison of current assets (cash, receivables, and inventory) with current liabilities. CURTESY: The right of a husband to his wife's estate upon her death. CUSIP: A number assigned to a security for the purposes of information processing. For example, a company might issue several types of equity securites (common and preferred stocks) and several different bond issues. Each would have a unique CUSIP number. Developed by the Committee for Uniform Security Information Processing. CUSTODIAN: A bank which holds securities on behalf of investors. CUTTING DATE: The day on which the coupon is physically "cut" from the bond CYCLE: the expiration dates applicable to various classes of options. There are three cycles: January/April/July/October, February/May/August/ November, and March/June/September/December. CYLINDER: a transaction involving the simultaneous purchase and sale of options at different strike prices to reduce the net premium cost. DAILY RANGE: The difference between the high and lowduring one trading day. DATED DATE (or Coupon Start Date): The day interest starts accruing on a new issue or tap, frequently the issue date. DAY ORDER: An order that is placed for execution during only one trading session. If the order cannot be executed that day, it is automatically canceled. DCF MODEL: originated by John Burr Williams for the appraisal of the pure, true, intrinsic economic value of companies and their common stock. It is pure because there are no accretions such as beta or market timing. It is true because it is based on economic value rather than so-called accounting value (book value) or market value (market capitalization of equity or share price times number of shares outstanding). There are many empirical versions of the DCF Model, each designed to simplify the data requirements. The DCF Model could be called the Capital Asset Valuation Model (CAVM) to emphasize its radical difference from the Capital Asset Pricing Model (CAPM). DEAD CAT BOUNCE: A rebound in a market that sees prices recover and come back up somewhat. DEBENTURES: Bonds that are issued without any specific security to back them. DEBTOR IN POSSESSION: In Chapter 11 bankruptcy proceedings, a debtor who is allowed to continue in possession of the estate in property (the business) and to continue business operations. DECLINING-BALANCE DEPRECIATION: Yearly depreciation is calculated by applying a fixed percentage rate to an asset's remaining book value at the beginning of each year. DEED OF TRUST: Deed that secures repayment of a debt, held by a trustee until the note is paid. DEED: A formal written instrument by which title to real property is transferred from one owner to another. The deed should contain an accurate description of the property being conveyed, should be signed and witnessed according to the laws of the State where the property is located, and should be delivered to the purchaser at closing day. There are two parties to a deed: the grantor and the grantee. DEFALCATION: The misuse of funds. DEFEASANCE: Providing collateral (usually cash or US government securities) irrevocably to a trustee to assure repayment of outstanding debt (usually bonds of some sort). Even though the bonds are still outstanding, for all practical purposes they are extinguished. The effect is to release the issuer of the bonds from some or all of the terms of the indenture. DEFENSIVE DIVERSIFICATION: Entering new product markets to offset the limitations of the firm's existing product-market areas. DEFERRAL HEDGE ACCOUNTING: A hedge accounting approach in which the recognition of some or all gains (or losses) on the hedging instrument are deferred until losses (or gains) on the hedged item are recognized. (FASB Report, June 1993) DEFINED BENEFIT: A type of pension plan in which the employer guarantees a specific level of pension benefits to its employees (usually based on length of service and salary), and is obligated to provide sufficient funding to assure that payout. See Defined Contribution. DEFINED CONTRIBUTION: A type of pension plan in which the employer agrees to provide certain annual contributions in the names of its employees (usually a percentage of salary), and the amount each employee receives upon retirement depends only on the investment performance of the funds. No level of benefits is guaranteed. Certain defined contribution plans allow the employee to make contributions as well. See Defined Benefit. DELTA HEDGE: A hedging position which causes a portfolio to be delta neutral. Solving the equations such that Delta is zero. DELTA HEDGING: A technique used by option writers for attempting to assure that changes in the short option position are offset by opposite changes in a long underlying position, so the position makes money no matter what happens to the market (a market neutral strategy). Delta hedging often works better on paper than in the real world, as the conditions necessary to delta hedge do not always exist in rapidly moving and/or illiquid markets. DELTA SPREAD: a ratio spread that is established as a neutral position by utilizing the deltas of the options involved. The neutral ratio is determined by dividing the delta of the purchased option by the delta of the written option. DELTA: dV/dS amount by which an option's price will change for a corresponding one point change in price by the underlying entity. Call options have positive deltas, while put options have negative deltas. Technically, the delta is an instantaneous measure of the option's price change, so that the delta will be altered for even fractional changes by the underlying entity. Consequently, the terms "up delta" and "down delta" may be applicable. They describe the option's change after a full 1-point change in price by the underlying security - either up or down. The "up delta" may be larger than the "down delta" for a call option, while the reverse is true for put options. In bonds, is hedge ratio, dB/dI=-bx>=0 where x=T-t and I=r-forward. DEMAND DEPOSIT: checking account. DEMISE; The conveyance of an estate under lease. DEPOSIT CEILING RATES OF INTEREST: Maximum interest rates that can be paid on savings and time deposits at federally insured commercial banks, mutual savings banks, savings and loan associations, and credit unions. The National Credit Union Administration establishes the ceilings on credit union deposits. The Depository Institutions Deregulation Committee (DIDC) establishes the ceilings on deposits held by the other depository institutions. Under current law, deposit interest rate ceilings are being phased out over a six-year period, ending in 1986 under the oversight of the DIDC. DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE (DIDC): The Committee responsible for the orderly phase-out over a six-year period of interest rate ceilings on time and savings accounts at depository institutions. Voting members of the DIDC are the Secretary of the Treasury and the Chairmen of the Federal Reserve Board, Federal Deposit Insurance Corporation, Federal Home Loan Bank Board, and National Credit Union Administration Board. The Comptroller of the Currency serves as a non-voting member. DEPOSITORY TRUST CORPORATION (DTC): a corporation that will hold securities for member institutions. Generally used by option writers, the DTC facilitates and guarantees delivery of underlying securities if assignment is made against securities held in DTC. DIAGONAL SPREAD: An options strategy in which the purchased options have a longer maturity than the written options. The purchased options also have different strike prices. Examples of Diagonal Spreads are: diagonal bull spreads, diagonal bear spreads, and diagonal butterfly spreads. DIFFUSION: stochastic proces as soln to SDE DIFFs: futures contracts traded on the Chicago Mercantile Exchange representing the difference between Eurodollar deposit rates on one hand and Eurosterling, Euro-DM, or Euroyen deposit rates on the other. DISAFFIRMANCE: The legal avoidance, or setting aside, of a contractual obligation. DISCOUNT POINTS: A percentage charged by the lender to increase the yield of the loan. Each point represents 1 percent of the loan amount. DISCOUNT RATE: the investor-specific reward for abstinence or patience or delaying consumption sought by the investor. At a minimum, the lowest risk (a.k.a. riskless or risk-free) rate of return on an alternative investment available to the investor with a time horizon comparable to that of the investor. The investor's time horizon is the duration from the present time of potential purchase of the investment to the planned future time of realization by selling the investment. This rate reflects the economic opportunity cost of the investor and is usually the yield on a national government security. For example, for an investor in the U.S. the discount rate could be the yield on a U.S. Government bond with an appropriate term to maturity. The longest term for a U.S. government bond is 30 years. DISCOUNT WINDOW: Descriptive term for Federal Reserve facility for extending credit directly to eligible depository institutions (those with transaction accounts or nonpersonal time deposits). DISCOUNTED CASH FLOW (DCF): a class of appraisal models based on discounting at an appropriate interest rate the net cash flows attributable to an investment opportunity; the best known DCF model is the so-called dividend discount model. NPV=-P0+P/WACC=sum( c/f * (1+r)^-t ) DISCRIMINATORY POISON PILL: Antitakeover plans which penalize acquirers who exceed a given shareholding percentage (the kick-in point). DIVIDEND ARBITRAGE: in the riskless sense, an arbitrage in which a put is purchased and so is the underlying stock. The put is purchased when it has time value premium less than the impending dividend payment by the underlying stock. The transaction is closed after the stock goes ex-dividend. Also used to denote a form of risk arbitrage in which a similar procedure is followed except that the amount of the impending dividend is unknown and therefore risk is involved in the transaction. DIVIDEND DISCOUNT MODEL (DDM): economic value appraisal model originated by John Burr Williams in his application of Irving Fisher's theory of interest (see citations for both authors in the Special and General Books, respectively); a more descriptive name is "cash distributions discount model" because this model includes either dividends in perpetuity, or equivalently, distributions from not only dividends but also future selling price as estimated by either book value/price, price/earnings, or dividend/price ratio; in his application of this model,Williams avoided the theoretical problem known as the Petersburg Paradox DIVIDEND DISCOUNT MODEL: A model of asset pricing, based on discounting the future expected dividends. Primarily applicable to the valuation of common stocks, DIVIDEND DISCOUNT RETURN: The rate of return which equates the present value of future expected dividends with the current market price of a security. DIVIDEND METHOD DUAL-CLASS RECAPITALIZATION: Most widely used method of converting to dual-class stock ownership. A stock split or dividend is used to distribute new inferior voting stock. The previously existing common stock is redesignated as superior-vote class B stock. DIVIDEND MODELS: Involve dividends in a form such as d ln S - n(t) (1-divdd) = sig dW + mu dt, n=dividends-to-date DIVIDEND YIELD: The dividend per share divided by the price per share. Also known as the yield. DOCUMENT OF TIDE: Paper exchanged in the regular course of business that evidences the right to possession of goods (for example, a bill of lading or a warehouse receipt). DOLEANS EXPONENTIAL: X[t]=exp(M[t]-.5 integral [0,t] (dM[t])^2 local martingale soln of local martingale DOLLAR COST AVERAGING: Using the same amount of funds to regularly invest (often quarterly or monthly) and not take into consideration whether the securities being purchased are high or low in price. By using this method, an investor will see an average between their investment costs and the market's up and down movements. DOMINANT TENANT: Land benefiting from an appurtenant easement. DOUBLE BOTTOM: The price action of a security or market average where it has declined (advanced) two times to the same approximate level, indicating the existence of a support (resistance) level and a possibility that the down ward (upward) trend has ended. DOUGLAS AMENDMENT: An amendment to the Bank Holding Company Act that prohibits a bank holding company from acquiring a bank outside its home state, unless the other state allows it. See Riegle-Neal Act. DOWER: The right of a wife in her husband's estate at the time of his death. DOWN-AND-OUT: an option that in addition to having a fixed expiration date, also expires when the option is out-of-the-money by more than a certain amount. DRIFT: mean, coef of dt in SDE DUAL AGENCY: The representation of a third party by a broker already in a principal-agent alliance, thereby creating two principals. DUAL-CLASS RECAPITALIZATION: Corporate restructuring used to create two classes of common stock with the superior-vote stock concentrated in the hands of management. DUAL-CLASS STOCK: Two (or more) classes of common stock with equal rights to cash flows, but with unequal voting rights. DUPONT SYSTEM: A financial planning and control system focusing on return on investment by relating asset turnover (effective asset management) to profit margin on sales (effective cost control). DURATION: d ln B / d r = modifDurn = MacaulayDurn(@1+r)/(1+r) MacaulayDurn = Sum {[C/F*(1+BEQVYLD/2 )^-t ]/[Sum C/F*(1+BEQVYLD/2 )^-t] } Average life of a bond. DURBIN-WATSON STATISTIC: The probability that first order correlation exists. With a range between zero and 4, the closer to 2.0, the lower the probability is. DUTCH AUCTION: a pricing mechanism in which buyers submit bids. The price for all buyers is the marginal price at which the entire issue can be sold. DYNAMICAL NOISE: When the output of a dynamical system becomes corrupted with noise, and the noisy value is used as input during the next iteration. Also called System Noise. DYNAMICAL SYSTEMS: A system of equations where the output of one equation is part of the input for another. A simple version of a dynamical system is linear simultaneous equations. Non-linear simultaneous equations are non-linear dynamical systems. EAFE: The Europe Australia Far East Index of internaitonal equity security performance compiled by Margan Stanley Capital International. EARLY ENTRY: A large price movement in one direction within the first 15 minutes after the open of the daily session. EARLY EXERCISE: Prior to expiration, the exercise orassignment of an option. EARNEST MONEY: Deposit given by buyer on signing a contract for the purchase of property. EARNINGS YIELD: inverse of P/E ratio. EASEMENT APPURTENANT: An easement that runs with the land, such as a shared driveway. EASEMENT IN GROSS: An easement that does not run with the land and is personal in nature. EASEMENT: A nonpossessory right to use another's property in a manner established by either express or implied agreement. EASEMENT: Right to use another's property for access, light, and so on. ECE: Expected Credit Exposure. EDGE ACT CORPORATION: An exception to the McFadden Act restriction that a bank may not accept a deposit outside its home state. An Edge Act office, which generally contains "international" as part of its name, is a separately chartered bank that can do so, as long as those deposits relate to the international business of those depositors. EDGE ACT CORPORATION: An organization chartered by the Federal Reserve to engage in international banking operations. The Board acts upon applications by U.S. and foreign banking organizations to establish Edge corporations. It also examines Edge corporations and their subsidiaries. The Edge corporation gets its name from Senator Walter Edge of New Jersey, the sponsor of the original legislation to permit formation of such organizations. EFFICIENT FRONTIER: A theoretical set of portfolios offering optimal risk-reward tradeoffs. r:sig effic frontierr plot gets curve start at ss/NRLB like 1-exp(-sig) can do unslope like tangent if intro riskfree asset (cap mkt lin). Constructing the efficient frontier: sum(wts)=1 sum(wt*avgrtn)=expctrtn min (wt' coVar wt)/2 + lgrg1(r_e-w'mu) +lgrg2(1-w 1) wrt w,lgrg1,lgrg2 To find the minimum variance portfolio, set ds1 / dx1 = 0 => x1 = (s22 - s1s2 r12) / (s21 + s22 - 2 s1s2 r12) For an equally weight portfolio with all std dev's equal and all covariances equal to zero: Var(Rp) = (1/N2) Si=1,n Var(Ri) = (1/N) Var(Ri) = (1/N) s2i and sp = (1/N1/2) si EFFICIENT MARKET HYPOTHESIS (EMH): The semi-strong form states that current prices reflect all public information. Therefore, it is impossible for one market participant to have an advantage over another and reap excess profits. ELASTICITY: of x wrt y = - d ln x / d ln y ELLIOT WAVE THEORY: Originally published by Ralph Nelson Elliot in 1939. It is a pattern recognition theory. It holds that the stock market follows a pattern of five waves up and three waves down to form a complete cycle. Many technicians believe that this pattern can hold true for as short a time period as one day. However, it is generally used to measure long periods of time in the market. ELLIOTT WAVE ANALYSIS: An approach to market analysis that is based on repetitive wave patterns and the [81]Fibonacci number sequence. An ideal Elliott wave pattern shows a five wave advance followed by a three wave decline. See ChartSchool article on [82]Elliott Wave Theory. EMBEDDED OPTION: an option contained within another security, such as a bond. EMPLOYMENT RETIREMENT INCOME SECURITY ACT (ERISA): 1974 federal legislation regulating pension plans including some ESOPs. Sets vesting requirements, fiduciary standards, minimum funding standards. Established Pension Benefit Guarantee Corporation (PBGC) to guarantee pensions. ENCROACHMENT: The act of trespassing or intruding upon the domain of another, such as tree branches. ENTERPRISE RISK REDUCTION TEST: A requirement that a hedged item exposes the enterprise to risk and that the hedging instrument reduces that risk. In considering whether a hedged item or group of hedged items exposes the enterprise to risk, the enterprise would need to consider whether other assets or liabilities (recognized or unrecognized) already offset or reduce that exposure. (FASB Report, June 1993) ENTERPRISE VALUE = market cap + long term debt - net cash & investments ENTITY CONCEPT: The fundamental idea that the accounting for a distinct economic unit should be done such that the transactions of the economic unit are kept separate from those of its owners. ENTROPY: The level of disorder in a system. EQUIPMENT TRUST CERTIFICATE: Bonds secured by a down payment (usually 20%) and also secured by the equipment they are being used to purchase. EQUITY CARVEOUT: A transaction in which a parent firm offers some of a subsidiary's common stock to the general public, to bring in a cash infusion to the parent without loss of control. EQUITY KICKER: offer of an ownership position in a deal that involves loans. In return for the equity kicker, the lender is likely to charge a lower interest rate. EQUITY METHOD: A method of accounting for the ownership of equity securities when between 20 percent and 50 percent of the shares of the investee are owned. EQUITY OF REDEMPTION: The right of a mortgagor who has breached the mortgage agreement to redeem or purchase the property prior to foreclosure proceedings. EQUITY SWAP: exchanging of the returns from one set of equity investments for those of another while the underlying portfolios remain with the swap parties. One goal may be to avoid withholding taxes many countries impose on foreign investors. EQUIVALENCE: If A is possible under P and also possible under Q, then P qnd Q are equivalent and the Radon-Nikodym derivative allows the transformation E[Q](x[t])= E[p]( (dP/dQ) x[t] ) and E[Q] (x[t] | Filtr[s]) = zeta^-1 [s] E[P] (zeta[t] x[t] | Filtr[s]) with t bounded by s and T. dQ/dP= exp(-integral[0,T] (gamma[t] dW - .5 gamma[t] dt)) as by Cameron-Martin-Girsanov where gamma is the change-of-measure drift, usu (mean-r)/drift. Generalised by summing over multiple W values. EQUIVALENT LIFE: The arithmetic weighted average maturity of a bond where the weights are the present value of the redemption payments discounted by the internal rate of return. EQUIVOLUME CHART: Richard Arms created this type of chart. It measures the relationship between price and volume. Price is measured on the vertical axis and volume is measured on the horizontal axis. EQUIVOLUME CHART: Richard Arms created this type ofchart. It measures the relationship between price and volume.Price is measured on the vertical axis and volume is measuredon the horizontal axis. ERISA: Employee Retirement Income Security Act. A 1974 act of Congress that set minimum standards for defined benefit pension plans, specified that the assets of the plan are not company assets, but rather belong to the plan participants and their beneficiaries, and that there be a trustee to hold the assets on behalf of the participants. ESCHEAT: The passing of assets to the state after a certain period of account inactivity ESCROW: Property (typically cash) deposited by one party with a second party (the escrow agent), to be released to a third party upon fulfillment of certain prespecified conditions. ESTOP: To bar, impede, or preclude. ESTOPPEL CERTIFICATE: An instrument executed by the mortgagor to the assignee upon the sale of the mortgage, revealing the amount owed. Also known as declaration of no set off and estoppel certificate. ESTOPPEL: The principle that a party's own acts prevent him or her from claiming a right to the detriment of another who was entitled to and did rely on those acts. ESTRAY STATUTE: A statute defining finders' rights in property when the true owners are unknown. EURIBOR: Euro Interbank Offered Rate. EUROCLEAR: An international clearing system for Euro-currency and foreign securities. Euroclear is based in Brussels and managed by Morgan Guaranty Trust Company EUROCURRENCY: money deposited by corporations and national governments in banks away from their home countries. EURODOLLAR BOND: bond issued offshore that pays interest and principal in U.S. dollars. Such bonds are not registered with the SEC, and because there are fewer regulatory delays and costs in the Euromarket, Eurodollar bonds normally can be sold at lower yields than in the U.S. EURODOLLAR: Dollars deposited in foreign banks, with the futures contract reflecting the rates offered between London branches of top US banks and foreign banks. EUROPEAN OPTION: An option which can only be exercised on its expiration date. EUROYEN BOND: yen-denominated Eurobond. Such a bond can be issued at lower rates than in the Japanese capital markets. EVENING STAR PATTERN: The bearish counterpart of the morning star pattern; a top reversal, it should be acted on if it arises after an uptrend. EVENT RISK: the risk that existing debt will suffer a decline in creditworthiness as a result of the issuance of additional securities, usually in connection with a leveraged buyout. Some bonds are issued with poison puts or super poison puts, which allow the bonds to be put to the issuer if such an event (defined in the debt covenants) occurs. EX PARTE CONTACT: Communications with an administrative agency that are not placed in the record. EX-DIVIDEND DATE: The day when the dividend is subtracted from the price of a stock. The ex-dividend date is the date on which this takes place. Investors who own the stock are paid their dividend on that date. Investors who are short the stock must pay the dividend on that date. EXCEPTIONAL RETURN: Residual return plus benchmark timing return. For a given asset with beta equal to one, if its residual return is 2%, and the benchmark portfolio exceeds its consensus expected returns by 1%, then the asset's exceptional return is 3%. EXCESS RETURN: Return relative to the risk free return. If an asset return is 3% and the risk free return is 0.5%, then the asset's excess return is 2.5%. EXCHANGE METHOD DUAL-CLASS RECAPITALIZATION: Means of converting to a dual-class stock corporate structure. High-vote stock is issued to insiders in exchange for their currently outstanding (low-vote) stock. The remaining low-vote stock, in the hands of outside shareholders, generally receives a higher dividend. EXCULPATORY CLAUSE: A clause that releases a contractual party from liability in the event of monetary or physical injury, no matter who is at fault. EXERCISE SETTLEMENT AMOUNT: The difference between the exercise price of the option and the exercise settlement value of the index on the day an exercise notice is tendered, multiplied by the index multiplier. EXERCISE: The process by which the holder of an option makes or receives delivery of shares of the underlying secu rity. EXIT BOND: bond issued by the government of a less-developed country to its creditors to retire its existing obligations to such creditors. Such a bond typically does not have very attractive terms, but the terms may be the best the lender can hope for. EXIT-TYPE FIRM: In Jensen's free cash flow hypothesis, a firm with positive free cash flows. The theory predicts that for such a firm, stock prices will increase with unexpected increases in payout. EXPANDED ACCOUNTING EQUATION: Assets = Liabilities + Paid- in Capital + (Revenues - Expenses - Dividends). EXPONENTIAL MARTINGALE: local martingale exponential of martingale EXPONENTIAL MOVING AVERAGE: A moving average that gives greater weight to more recent data in an attempt to reduce the lag of (or "smooth") the moving average. See ChartSchool article on [90]moving averages. EXTENDIBLE (RETRACTABLE) BOND: A bond with a call provision that gives the issuer the option to extend the maturity date (if the call is not exercised) and reset the coupon at any rate. The investor then may choose to put the bond at the call price or accept the new coupon. F-STATISTIC: A test statistic that measures the ratio of one sample variance to another sample variance, such as the variance between groups to the variance within groups. FACILITATOR: A licensee who has no fiduciary responsibility as no agency has been formed. FACTOR LOADING: A measure of the importance of a variable in measuring a factor; a means for interpreting and labeling a factor. factor score A number that represents each observation's calculated value on each factor in a factor analysis. FACTOR PORTFOLIO: A factor portfolio is the minimum risk portfolio with unit exposure to the factor and zero exposures to all other factors. The return to the factor portfolio is the factor return. FACTOR RETURN: The return attributable to a particular common factor. We decompose asset returns into a common factor component, based on the asset's exposures to common factors times the factor returns, and a specific return. FAILING FIRM DEFENSE: A defense against a merger challenge alleging that in the absence of the merger, the firm(s) would fail. The 1982 Merger Guidelines spell out the conditions under which this defense will be acceptable. FAIR-PRICE AMENDMENT: An antitakeover charter amendment which waives the supermajority approval requirement for a change of control if a fair price is paid for all purchased shares. Defends against two-tiered offers which do not have board approval. FALLEN ANGEL: A bond issued at investment grade whose rating is subsequently dropped to below investment grade, below BBB. FANNIE MAE: colloquial name for FNMA. FARMER MAC: pass-through certificate of interest in farm mortgage loans issued by one of the U.S. government-sponsored, farm-lending agencies such as the Bank for Cooperatives, Federal Land Banks, or Federal Intermediate Credit Banks. FAS: Free alongside. A contract term that requires the seller, at his or her own expense and risk, to deliver the goods alongside the ship before risk passes to the buyer. FEDERAL FUNDS: Reserve balances that depository institutions lend each other, usually on an overnight basis. In addition, Federal funds include certain other kinds of borrowings by depository institutions from each other and from federal agencies. FEDERAL HOME LOAN BANK BOARD (FHLBB): The agency of the federal government that supervises all federal savings and loan associations and federally insured state-chartered savings and loan associations. The FHLBB also operates the Federal Savings and Loan Insurance Corporation, which insures accounts at federal savings and loan associations and those state-chartered associations that apply and are accepted. In addition, the FHLBB directs the Federal Home Loan Bank System, which provides a flexible credit facility for member savings institutions to promote the availability of home financing. The FHL Banks also own the Federal Home Loan Mortgage Corporation, established in 1970 to promote secondary markets for mortgages. FEDERAL MARGIN CALL: A broker's demand upon a customer for cash, or securities needed to satisfy the required Regulation T down payment for a purchase or short sale of securities. The word federal is usually omitted from the phone call. Generally, the broker will call up and say "margin call". Anyone receiving a margin call has to transfer additional funds into his account to meet the Regulation T minimum margin requirements. FEDERAL OPEN MARKET COMMITTEE (FOMC): A 12-member committee consisting of the seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank presidents. The president of the Federal Reserve Bank of New York is a permanent member while the other Federal Reserve presidents serve on a rotating basis. The Committee sets objectives for the growth of money and credit. These objectives are implemented through purchases and sales of U.S. government securities in the open market. The FOMC also establishes policy relating to System operations in the foreign exchange markets. FEDERAL RESERVE FLOAT: Checkbook money that for a period of time appears on the books of both the payor and payee due to the lag in the collection process. Federal Reserve float often arises during the Federal Reserve's check collection process. In order to promote an efficient payments mechanism with certainty as to the date funds become available, the Federal Reserve has employed the policy of crediting the reserve accounts of depository institutions depositing checks according to an availability schedule before the Federal Reserve is able to obtain payment from others. FEDWIRE: The Federal Reserve funds transfer system. Fedwire is used for transferring reserve account balances of depository institutions and government securities. Fedwire is also used for the settlement of other clearing systems, such as CHIPS. FEE SIMPLE (ABSOLUTE): An absolute form of property ownership entitling the property owner to use, possess, or dispose of the property as he or she chooses during his or her lifetime. FEE SIMPLE DEFEASIBLE: A fee simple estate that can be lost by violation of a condition or use restriction placed in the transfer by the grantor. FEE SIMPLE DETERMINABLE: Full title to land so long as certain conduct is avoided; e.g., "To A so long as the premises are never used for a bar." FEE SIMPLE SUBJECT TO A CONDITION SUBSEQUENT: Full title provided that there is compliance with a condition; e.g., "To A upon the condition that the property is used for school purposes." FEEDBACK SYSTEMS: An equation where the output becomes the input in the next iteration. This is much like a public address system where the microphone is placed next to the speakers generating feedback as the signal is looped through the PA system. FELLOW-SERVANT DOCTRINE: A doctrine that bars an employee from suing his or her employer for injuries caused by a fellow employee. FENCE: a type of portfolio insurance considered to be less expensive than standard portfolio insurance because it involves the purchase of a put below the market coupled with the sale of a call above the market. FFIEC: Federal Finnacial Institutions Examinations Council - joint body of Federal Reserve, Comptroller of Currency, FDIC and other agencies which jointly specify "Call Reports" used for Bank Supervision. FHLMC: Federal Home Loan Mortgage Corporation, a Federal agency. Known as Freddie Mac, it issues mortgage-backed securities known as participation certificates (PCs). FIBONACCI NUMBERS: (1,2,3,5,8,13,21,34,55,89,144,...) is constructed by adding the first two numbers to arrive at the third. The ratio of any number to the next number is 61.8 percent FIBONACCI: ratio between any two successive numbers in the Fibonacci sequence, ratio of any number to the next higher number is approximately 0.618 (known as the Golden Mean or Golden Ratio), and to the lower number approximately 1.618 (the inverse of the Golden Mean), after the first four numbers of the series. (0, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233...). FILL ORDER: An order that must be filled immediately (or canceled). FILTER POINT: The time at which a portfolio insurance program makes an adjusting trade. FILTRATION: history of a process up to time t geq 0 FINANCIAL CAPITAL MAINTENANCE: Concept that income exists when the dollar amount of a company's net assets (assets - liabilities, or owners' equity) increases during the year, after excluding the effects of new owner investment or payment of dividends to owners. FIRM COMMITMENT: An agreement, usually legally enforceable, under which performance is probable because of sufficiently large disincentives for nonperformance. (The Research Report on hedge accounting; Statement 80, paragraph 15; FASB Report, June 1993) FIRM OFFER: An offer (by a merchant) that is irrevocable without consideration for a period of time (not longer than three months). A firm offer by a merchant must be in writing and must be signed by the offerer. FIRREA: Financial Institutions Reform, Recovery, and Enforcement Act of 1989. The thrift industry bailout bill. FIRST NOTICE DAY: The first day a buyer of a futurescontract can be called upon to take delivery. FIXING DATE: The date on which the reference rate is observed for purposes of calculating the cash payment or settlement amount due on an interest rate option such as a cap or floor. FIXTURE: Personal property that becomes real when permanently affixed to real property, such as a light fixture, oven and range, or bookcase. FLASH FILL: Order filled immediately by hand signal on the trading floor. FLIP-OVER POISON PILL PLAN: The most popular type of poison pill antitakeover defense. Shareholders of the target firm are issued rights to purchase common stock at an exercise price high above the current market price. If a merger occurs, the rights flip over and allow shareholders to purchase the acquiring firm's common stock at a substantial discount. FLIPPING: the practice of selling newly issued securities into the secondary market within hours after the security hits the new issues market. FLOAT: the number of shares outstanding of a particular common stock. FLOOR BROKER: An exchange member who is paid a fee for executing orders for Clearing Members or their customers. A Floor Broker executing orders must be licensed by the exchange he is working on. FLOOR TRADER: An exchange member who generally trades only for his/her own account or for an account controlled by him/her. Also referred to as a "local." FNMA: Federal National Mortgage Association, a publicly owned, U.S. government-sponsored corporation. The agency (known as Fannie Mae) mostly purchases mortgages backed by the Federal Housing Administration and resells them to investors. FOB: Free on board. A contract term that indicates that the selling price of the goods includes transportation costs (and that the seller carries the risk of loss) to the specific EO.B. place named in the contract. The place can be either the place of initial shipment (for example, the seller's city or place of business) or the place of destination (for example, the buyer's city or place of business). FORCE MAJEURE CLAUSE: A provision in a contract stipulating that certain unforeseen events—such as war, political upheavals, acts of God, or other events—will excuse a party from liability for nonperformance of contractual obligations. FOREIGN CURRENCY SWAP: A contract between two parties that requires each party to either make or receive periodic payments over a specified term based on the difference between the exchange rate for one currency (e.g., U.S. dollar) and the exchange rate for another currency (e.g., Japanese yen), applied to a notional quantity of one of the currencies. Some contracts may require an exchange of principal rather than periodic payments on the difference. (FASB Report, June 1993) FORM 20F: The form required of the SEC from foreign companies listing their shares for sale in the U.S. that reconciles their reported net income to what net income would have been had U.S. GAAP been applied. FORWARD CONTRACT: An agreement between two parties to exchange a specified amount of a commodity, security, or foreign currency at a specified date in the future with the price or exchange rate being set now. FORWARD RATE: 1 + f[m,n] = ( 1 + r[n] ) / ( 1 + r[m] ) FORWARD-RATE AGREEMENTS (FRAs): Cash payments are made daily as the spot rate varies above or below an agreed -upon forward rate and can be hedged with Eurodollar futures. FORWARD: An agreement to execute a transaction at some time in the future. f(t,T)="price of forward @ T"=-d ln p(t,T)/dT; p=exp(-r(T-t)). FOUR-FIRM CONCENTRATION RATIO: The sum of the shares of sales, value added, assets, or employees held by the largest four firms in an industry. A measure of competitiveness, according to the structural theory. FRACTAL DISTRIBUTION: A probability density function that is statistically self-similar. That is, in different increments of time, the statistical characteristics remain the same. FRACTAL MARKET HYPOTHESIS: The fractal market hypothesis states that (1) a market consists of many investors with different investment horizons, and (2) the information set that is important to each investment horizon is different. As long as the market maintains this fractal structure, with no characteristic time scale, the market remains stable. When the market's investment horizon becomes uniform, the market becomes unstable because everyone is trading based upon the same information set. FRACTAL: self-similar subreplication. line=fractal dim 1 Br mo = 1.5 FRACTIONAL BROWNIAN MOTION: A biased random walk. Unlike standard Brownian motion, the odds are biased in one direction or the other. It is like playing with loaded dice. FRACTIONAL NOISE: A noise which is not completely independent of previous values. FRAMING OR FRAME DEPENDENCE: (behavioral finance) The tendency to evaluate current decisions within the framework in which they have been presented. Making decisions based on perceptions of risk/return rather than pure risk and return. The usual example is categorization of where money comes from and what it is "assigned" to instead of recognizing its fungibility. The alternative is to speak of frame independence, wherein behavior is not influenced by how the decision is framed. Examples are loss aversion, hedonic editing, loss of self-control, regret, and money illusion. FRANCHISE: Any arrangement in which the owner of a trademark, trade name, or copyright licenses another to use that trademark, trade name, or copyright, under specified conditions or limitations, in the selling of goods and services. FRAUD: Any misrepresentation, either by misstatement or omission of a material fact, knowingly made with the intention of deceiving another and on which a reasonable person would and does rely to his or her detriment. FRCS-80: This is the communications network of the Federal Reserve. It interconnects Federal Reserve Bank offices, the Board of Governors, depository institutions, and the Treasury. It is used for Fedwire transfers, transfers of U.S. securities, as well as for transfer of Federal Reserve administrative, supervisory, and monetary policy information. FREE CASH FLOW HYPOTHESIS: Jensen's theory of how the payout of free cash flows helps resolve the agency problem between managers and shareholders. Holds that bonding payout of current (and future) free cash flows reduces the power of management as well as subjecting them more frequently to capital market scrutiny. FREE CASH FLOW TO EQUITY: free cash flow for the common stock equity account or the cash available for distribution to the uultimate equity owners; a measure of the ability to generate discretionary cash flow; an accounting concept that is equal to net income plus non-cash charges (depreciation, depletion and amortization) minus debt and other fixed obligations net of tax savings on interest expense minus preferred dividends minus fixed capital expenditures needed to maintain the company's economic productive capacity at the same level minus the increase in working capital needed to maintain the company's economic productive capacity at the same level. Such adjustments for working capital are not generally required except in usual situations. FREE-RIDER PROBLEM: Atomistic shareholder reasons that its decision has no impact on the outcome of the tender offer and refrains from tendering to free-ride on the value increase resulting from the merger, thus causing the bid to fail. FRONT-END LOADING: A tender offer in which the offer price is greater than the value of any unpurchased shares. Resolves the free-rider problems by providing an incentive to tender early. FRONT-LOADED: Commission and fees taken out of investment capital before the money is put to work. FRONT-RUNNING: The practice of trading ahead of large orders to take advantage of favorable price movement. Brokers are prohibited from this practice. FRUSTRATION OF PURPOSE: A court-created doctrine under which a party to a contract will be relieved of his or her duty to perform when the objective purpose for performance no longer exists (due to reasons beyond that party's control). FULL EX POST SETTLING UP: A manager's compensation is frequently adjusted over the course of his or her career to fully reflect his or her performance, thus eliminating an incentive to shirk. FULL-COST METHOD: All exploratory costs are capitalized, the reasoning being that the cost of drilling dry wells is part of the cost of locating productive wells. FUNCTIONAL CURRENCY: An entity's functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash. (SFAS No. 52) FUNDAMENTAL ANALYSIS: a method of appraising operating companies that uses data in external accounting reports to stockholders, such as those filed by U.S. companies with the U.S. Securities and Exchange Commission, rather than market-generated data. FUTURE: An agreement to execute a transaction at some time in the future. FUZZY LOGIC: A system which mathematically models complex relationships which are usually handled in a vague manner by language. Under the title of "Fuzzy Logic" falls formal fuzzy logic (a multi-valued form of logic), and fuzzy sets. Fuzzy sets measure the similarity between an object and a group of objects. A member of a fuzzy set can belong to both the set, and its compliment. Fuzzy sets can more closely approximate human reasoning than traditional "crisp" sets. FUZZY SYSTEMS: Systems which process inexact information inexactly. It describes ambiguity instead of uncertainty of an occurrence. This is not Boolean. GAMMA OF THE GAMMA: a mathematical measure of risk that measures by how much the gamma will change for a one point move in the stock price. GAMMA: d^2(V=C or P)/(dS)^2 a measure of risk of an option that measures the amount by which the delta changes for a one point change in the stock price; alternatively, when referring to an entire option position, the amount of change of the delta of the entire position when the stock changes in price by one point. In bonds, the second order hedge ratio, d^2B/(dI)^2=b(x^2)>=0 where x=T-t and I=r-forward GAP: In terms of interest rates, the difference between assets and liabilities that are repriced (have their rates adjusted to current or near-current market rates) within a particular time period (rate sensitive assets minus rate sensitive liabilities for the period). The same concept can be applied to foreign currencies, and represents the difference between maturing foreign currency assets and liabilities. GAUSSIAN: A system whose probabilities are well described by the normal distribution, or bell shaped curve. GENERAL OBLIGATION BONDS: Voter approved bonds that are backed by the full faith, credit and unlimited taxing power of the issuer. These have superior claim to most other bonds. GENERAL UTILITIES DOCTRINE: An IRS rule which allowed firms to not recognize gains on the distribution of appreciated property in redemption of its shares (e.g., in "legal" liquidation). Repealed by 1986 Tax Reform Act. GENETIC ALGORITHMS: Models that optimize rules by mimicking the Darwinian Law of survival of the fittest. A set of rules are chosen by those that work the best. The weakest are discarded. In addition, two successful rules can be combined (the equivalent to genetic cross-overs) to produce offspring rules. The offspring can replace the parents, or they will be discarded if less successful than the parents. Mutation is also accomplished by randomly changing elements. Mutation and cross-over occur with low probability, as in nature. GEOMETRIC PROCESS: Includes Black Scholes and Square Root processes. d(ln(x))=mean dt + stdev dz or more generally dx=mean*(x^n)*dt+stdev*(x^m)*dz Black-Scholes currency model involves currency rate as d ln r = sig dW + mu dt. Recursive in r: Vasicek: d r=sigma dW = (theta- a * r )dt; Black-Karasinsky: d ln r = sigma dW + (theta - a * ln r) dt. GILTS: sterling-denominated government bonds issued by the Bank of England. GIVE-UP: When a broker executes an order for another broker's client and the two brokers split the commission; the client pays nothing extra. GLASS-STEAGALL ACT: Banking Act of 1933. An act of Congress that prohibited banks from engaging in the securities underwriting business. The Gramm-Leach-Bliley Act removed the restriction. See Section 20. GLOBAL MTN: medium-term-note (MTN) issued by U.S. borrowers in nondollar denominations in either the U.S. or Euromarket. The borrowers often swap the nondollar proceeds back into dollars. GNMA: Government National Mortgage Association, a U.S. government-owned corporation (known as Ginnie Mae) that approves the issue of mortgage-backed securities whose principal and interest is fully guaranteed by the U.S. Treasury. GOLDEN PARACHUTE: Provision in the employment contracts of top management providing for compensation for loss of jobs following a change of control. GOOD TILL CANCELED: An order placed with a broker meaning that it is good until either filled or canceled. In practice, this order has to be re-confirmed twice annually. GOOD WILL: The excess of the purchase price paid for a firm over the book value received. Recorded on the acquirer's balance sheet, to be amortized over not more than 40 years (amortization not tax deductible). GORDON DIVIDEND GROWTH MODEL: Price = Divdd/(r-growth) r=(D/P)+g P = D / re + PVGROPS GRADUATED PAYMENT: Repayment terms calling for gradual increases in the payments on a closed-end obligation. Negative amortization is usually associated with a graduated payment loan. GRAHAM AND DODD, SECURITY ANALYSIS: The Classic 1934 Edition. Chapter LII Market Analysis and Security Analysis, pp. 607-16: "Forecasting security prices is not properly a part of security analysis. ... Most emphasis is laid in Wall Street upon the science, or art, or pastime, of prophesying the immediate action of the "general market," which is fairly represented by the various averages used in the financial press. ... [T]here is no generally known method of chart reading which has been continuously successful for a long period of time. If it were known, it would be speedily adopted by numberless traders. This very following would bring its usefulness to an end." GRAMM-LEACH-BLILEY ACT: The Financial Services Modernization Act of 1999. This act removes most of the restrictions concerning the activities of banks and bank holding companies that are contained within the Bank Holding Company Act and the Glass-Steagall Act. In particular, it permits mergers among banks, insurance companies, and securities firms, and thus will allow newly authorized financial holding companies (either via direct subsidiaries, or through bank or bank holding company subsidiaries) to underwrite insurance and securities. GREENMAIL: The premium over the current market price of stock paid to buy back the holdings accumulated by an unwanted acquirer to avoid a takeover. GROSS LEASE: A straight lease; the lessee pays only rent to the owner, as in an apartment lease. GROUND LEASE: Rent on unimproved land. GROWTH INVESTING: an ambiguous term that generally refers to the use of fundamental analysis with an emphasis on growth in earnings and that relies on forecasts of earnings growth rates rather than appraisal of value. Some growth creates economic value, but some growth does not. Any company in any industry can buy growth. In the short run this may benefit the company's customers, but in the long run it is unlikely to benefit the company's stockholders. It is often contrasted with value investing as a style, but not with value investing as an approach. The two styles are like Siamese twins joined at the hip. GROWTH/SHARE MATRIX: A guide to strategy formulation which emphasizes attainment of high market share in industries with favorable growth rates. GUARANTEED INVESTMENT CONTRACT (GIC): a negotiated contract generally between an insurance company (issuer) and an investor, typically a pension plan or savings and investment plan. GICs generally provide for a specified return on principal invested over a specified period. HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT of 1976: Expands power of Department of Justice in antitrust investigations; provides for waiting period (15 days for tender offers, 30 days for mergers) following submission of information to Department of Justice and Federal Trade Commission before transaction can be completed; expands power of state Attorneys General to institute triple damage antitrust lawsuits on behalf of their citizens. HEAD & SHOULDERS PATTERN: This can also be inverted. It is a reversal pattern And it is one of the more common and reliable patterns. It is comprised of a rally which ends a fairly extensive advance. It is followed by a reaction on less volume. This is the left shoulder. The head is comprised of a rally up on high volume exceeding the price of the previous rally. And the head is comprised of a reaction down to the previous bottom on light volume. The right shoulder is comprised of a rally up which fails to exceed the height of the head. It is then followed by a reaction down. this last reaction down should break a horizontal line drawn along the bottoms of the previous lows from the left shoulder and head. This is the point in which the major decline begins. The major difference between a head and shoulder top and bottom is that the bottom should have a large burst of activity on the breakout. HEAD AND SHOULDERS BOTTOM: A well-known reversal pattern marked by three (or more) prominent troughs with a middle trough (the head) that is lower than the other troughs (the shoulders). When the trendline (neckline) connecting the peaks at the top of the pattern is broken, the pattern is complete. HEDGE FUND: A mutual fund involving speculative investing in stocks and options. HEDGE FUND: Private investment vehicles which are exempt from regulation under the Investment Company Act of 1940. They are usually limited to less than 100 US investors, an unlimited number of foreign investors, and generally accept only large minimum investments (typically $250M and up). The term hedge as used in this context is somewhat misleading, since hedging is a risk-reducing technique. Hedge funds seek out risk (sometimes in very exotic ways by using various derivatives, short positions, leverage, etc.) in an attempt to create large returns. HEDGE RATIO: the mathematical quantity that is equal to the delta of an option. It is useful in facilitation in that a theoretically riskless hedge can be established by taking offsetting positions in the underlying stock and its call options. HEDGE: To take offsetting risks. HEREDITAMENTS: Inheritable property, real or personal. HERFINDAHL-HIRSCHMAN INDEX (HHI): The measure of concentration under the 1982 Merger Guidelines, defined as the sum of the squares of the market shares of all the firms in the industry. HETEROSCEDASTICITY: Non-constant volatility. HIDDEN EQUITY: Undervalued assets whose market value exceeds their depreciated book value, but is not reflected in stock price. HIGH-YIELD BOND: A bond which pays a high yield due to significant credit risk. HINES RATIO: A modified put/call ratio that refines traditional option ratio analysis by including the open interest figures in the equation and can be defined as (Total put volume/Total put open interest) divided by (Total call volume/Total call open interest) HOLD-HARMLESS AGREEMENT: An agreement by which one party assumes the liability of another. Hold-harmlessagreements are often found in leases; the lessee (tenant) agreeing to assume the lessor's (landlord's) liability if membersof the public are injured through some faulty condition in the premises occupied by the lessee. HOLDUP: Whenever a resource is dependent on (specialized to) the rest of the firm, there may be a temptation for others to try to expropriate the quasi-rent of the dependent resource by withholding their complementary resources; this is holdup. However, each resource in the team (firm) may be dependent on all the others, and thus all are vulnerable to expropriation. HOOK DAY: A trading day in which the open is above/below the previous day's high/low and the close is below/above the previous day's close with narrow range. HORIZONTAL MERGER: A combination of firms operating in the same business activity. HORIZONTAL PROPERTY ACT: Legislation that permits the creation of condominiums. HORIZONTAL SPREAD: an option strategy in which the options have the same striking price, but different expiration dates. HOST BOND: the debt instrument to which a debt warrant was originally attached. HOUSING BONDS: Bonds which are secured by mortgage re-payments on single family homes or multi unit rental properties. HUBRIS HYPOTHESIS: (Winner's curse) Roll's theory that acquiring firm managers commit errors of overoptimism in evaluating merger opportunities (due to excessive pride, animal spirits), and end up paying too high a price for acquisitions. HURST EXPONENT (H): A measure of the bias in fractional Brownian motion. H=0.50 for Brownian motion. 0.50= 0 for k = 1,2,...,K and hj(X) = 0 for j = 1,2,...,J. Let the Lagrangian Function F(X,U,V) = f(X) - ukgk(X) - vjhj(X). The Kuhn Tucker Conditions are as follows: grad f(X0) - sum uk grad gk(X0) - sum vj grad hj(X0) = 0; gk(X0) >= 0 for k = 1,2,...,K; hj(X0) = 0 for j = 1,2,...,J; ukgk(X0) = 0 for k = 1,2,...,K; uk >= 0 for k = 1,2,...,K. KURTOSIS: Descriptive measure of how flat or pointed a distribution is. The fourth moment (Skewness is the third, standard devaition the second and mean the first.) LAST TRADING DAY: the third Friday of the expiration month. Options cease trading at 3:00 PM Eastern Time on the last trading day. LATENT DEBT CAPACITY HYPOTHESIS: A theory that postmerger increases in financial leverage are due to underleverage in the premerger period. LBO (LEVERAGED BUYOUT): A common form of takeover in which a company is bought out with borrowed funds (hence the term leveraged). LEAPS (LONG-TERM EQUITY ANTICIPATION SECURITIES): long-term stock or index options. LEAPS are available in two types, calls and puts. They have expiration dates up to three years in the future. LEG: a risk-oriented method of establishing a two-sided position. Rather than entering into a simultaneous transaction to establish the position (a spread, for example), the trader first executes one side of the position, hoping to execute the other side at a later time and a better price. The risk materializes from the fact that a better price may never be available, and a worse price must eventually be accepted. LEPTOKURTOSIS: The condition of a probability density curve to have fatter tails and a higher peak at the mean than the normal distribution. LETTER OF CREDIT (LC): instrument issued by a bank guaranteeing the payment of a customer's drafts up to a stated amount for a specified period. LETTER OF GUARANTEE: a letter from a bank to a brokerage firm which states that a customer (who has written a call option) does indeed own the underlying stock and the bank will guarantee delivery if the call is assigned. Thus the call can be considered covered. Not all brokerage firms accept letters of guarantee. LETTERED SECURITY: stock or bond that is not registered with the SEC and, therefore, cannot be sold in the public market. LEVERAGE: Modigliani and Miller proposed that the capital structure of a firm did not affect its value, assuming no taxes, no bankruptcy costs, no transaction costs.. more unrealistic assumptions is that of no taxes. VL = VU + tc D After-tax income = (debt income)*( 1 - td ) For equity holders, After-tax income=(equity income)* (1-tc)*(1-te) Relative Advantage (RA) = (1-tc)(1-te)/(1-td) LEVERAGED ESOP: An employee stock ownership plan recognized under ERISA in which the ESOP borrows funds to purchase employer securities. (Banks have tax incentives to make loans to ESOPs.) The employer then makes tax-deductible contributions to the ESOP sufficient to cover both principal repayment and interest on the loan. LEVERAGED RECAPITALIZATION (LCO, LEVERAGED CASHOUT): A defensive reorganization of the firm's capital structure in which outside shareholders receive a large one-time cash dividend, and inside shareholders receive new shares of stock instead. The cash dividend is largely financed with newly borrowed funds, leaving the firm highly leveraged and with a greater proportional ownership share in the hands of management. LIABILITY ON AN ACCOUNT: Legal responsibility to repay debt. LIBID (LONDON INTERBANK BID RATE): This is the opposite of LIBOR, and reflects the rate of interest that international banks dealing in the London market are willing to pay for funds. LIBOR (LONDON INTERBANK OFFERED RATE): The rate of interest at which the most creditworthy international banks dealing in the London market are willing to lend to each other. LIEN: An encumbrance on a property to satisfy a debt or protect a claim for payment of a debt. LIFE CYCLE MODEL OF FIRM OWNERSHIP: A theory which suggests firms will attract different shareholder clienteles (high or low tax bracket investors) over different periods of firm development depending on changing investment needs and profitability. LIFE ESTATE: A grant or reservation of the right of use, occupancy, and ownership for the life of an individual. LIMIT CYCLES: An attractor for non-linear dynamic systems which has periodic cycles or orbits in phase space. An example is an undamped pendulum which will have a closed circle orbit equal to the amplitude of the pendulum's swing. LIMIT ORDER: An order to buy or sell at a fixed price. A person can also place a limit order with discretion. This enable the broker to buy or sell within a small range, usually 1/8 of a point. LIMIT UP/ LIMIT DOWN: Commodity exchange restriction on the maximum amount of movement up or down that a commodity can trade in a given day. LIQUIDATION MLP: The complete liquidation of a corporation into a master limited partnership. LIQUIDITY RISK: the primary risk in a down market because one does not wish to readily sell devalued assets at a loss, hoping to avoid realising the loss. Liquidty risk is the absence of readily available, ie, liquid, funds to be used in buy new assets or discharging old obligations. LIQUIDITY: The ease with which a stock may be bought or sold in volume on the marketplace without causing dramatic price fluctuations. A highly liquid stock is characterized by a large volume of trading and a large pool of interested buyers and sellers. LITTORAL RIGHTS: Rights of a landowner who borders a lake or other nonflowing body of water to use the water. LJUNG-BOX STATISTIC: A chi-square test of significance of higher order correlation existence. The marginal significance level is the probability that a no more higher order correlation exists. LOADING: The amount added to net premiums to cover the company's operating expenses and contingencies. The loadingincludes the cost of securing new business, collection expenses, and general management expenses. Precisely: The excess ofthe gross premiums over net premiums. LOCAL MARTINGALE: driftless but not necessarily martingale LOCK-IN AMENDMENT: A corporate charter amendment which makes it more difficult to void previously passed (antitakeover) amendments, e.g., by requiring supermajority approval for a change. LOCK-UP OPTION: An option to buy a large block of newly issued shares which target management may grant to a favored bidder, thus virtually guaranteeing that the favored bidder will succeed. Target management's ability to grant a lock-up option induces bidders to negotiate. LOGNORMAL DISTRIBUTION: a statistical distribution that is often applied to the movement of the stock prices. It is a convenient and logical distribution because it implies that stock prices can theoretically rise forever but cannot fall below zero - a fact which is, of course, true. LONG HEDGE: (futures) The purchase of a futures contract in anticipation of an actual purchase in the cash market. Used by processors or exporters as protection against and advance in the cash price LOOK-BACK OPTION: an option whose strike price is not fixed but is the most favorable (to the buyer) reference rate achieved during the period the option is outstanding. LOSS RATIO: The ratio of incurred losses and loss-adjustment expenses to net premiums earned. This ratio measures the company's underlying profitability, or loss experience, on its total book of business. LOSS RESERVE: The estimated liability, as it would appear in an insurer's financial statement, for unpaid insurance claims or losses that have occurred as of a given evaluation date. Usually includes losses incurred but not reported (IBNR), losses due but not yet paid, and amounts not yet due. For individual claims, the loss reserve is the estimate of what will ultimately be paid out on that claim. LOWER OF COST OR MARKET: accounting principle that requires the carrying amount of an asset to be the lower of its original cost or its market value on the reporting date. LYAPUNOV EXPONENTS: A measure of the dynamics of an attractor. Each dimension has a Lyapunov exponent. A positive exponent measures sensitive dependence on initial conditions, or how much our forecasts can diverge based upon different estimates of starting conditions. Another way to view Lyapunov exponents is the loss of predictive ability as we look forward into time. Strange Attractors are characterized by at least one positive exponent. A negative exponent measures how points converge towards one another. Point Attractors are characterized by all negative variables. M0: demand deposits plus dollars abroad. M1: currency held by public, plus traveler checks, plus demand deposits, plus other checkable deposits (i.e., negotiable order of withdrawal [NOW] accounts, and automatic transfer service [ATS] accounts, and credit union share drafts.) Wenninger proved not measurable after 1987, largely due to SuperNOW accounts. Volker inability to measure M1 was the short-term cause of the 1987 crash (long-term cause was change of capital gain sturcture). M2: M1 plus savings accounts and small denomination time deposits, plus shares in money market mutual funds (other than those restricted to institutional investors), plus overnight Eurodollars and repurchase agreements. Partland proved unmeasurable after 1992, largely due to electronic money, subject to conditions of Peristiani after 1998. M3: M2 plus large-denomination time deposits at all depositor institutions, large denomination term repurchase agreements, and shares in money market mutual funds restricted to institutional investors. MAILBOX RULE: A rule providing that an acceptance of an offer becomes effective on dispatch (on being placed in a mailbox), if mail is, expressly or impliedly, an authorized means of communication of acceptance to the offerer. MAINTENANCE PERFORMANCE BOND (MAINTENANCE MARGIN): A sum, usually smaller than, but part of, the initial performance bond, which must be maintained on deposit in the customer's account at all times. If a customer's equity in any futures position drops to, or under, the maintenance performance bond level, a "performance bond call" is issued for the amount of money required to restore the customer's equity in the account to the initial margin level. MANAGEMENT BUY-OUT (MBO): A going-private transaction led by the incumbent managers of the formerly public firm. MANDELBROT SET: Complex but structured pattern produced by an equation in which the result is fed back into the equation repeatedly; self-similarity. MARGIN CALL: The demand by a broker to an investor toput up money because his security(s) have declined in value. Thereare minimum amounts of capital required by the exchanges or thebroker. MARGIN OF SAFETY: the difference between price and value for a common stock. MARGIN REQUIREMENT FOR OPTIONS: The amount an uncovered (naked) option writer is required to deposit and maintain to cover a position. The margin requirement is calculated daily. MARGIN STOCK: Any stock listed on a national securities exchange, any over-the-counter security approved by the SEC for trading in the national market system, or appearing on the Board's list of over-the-counter margin stock and most mutual funds. There are certain requirements a stock must meet before it can be margined. The most important of which is that the price must be greater than $5.00 MARKED TO MARKET (M2M): At the end of each business day the open positions carried in an account held at a brokerage firm are credited or debited funds based on the settlement price of the open positions that day. MARKET BASKET: a portfolio of common stocks whose performance is intended to simulate the performance of a specific index. MARKET BREADTH: The shares of a particular stock traded during a specific period. Usually refers to the overall strength and trading volume of the market. MARKET DAY: A day when the domestic bond market is open. MARKET IF TOUCHED: Resting order with the floor broker that becomes a market order to be executed if the trigger price is traded. MARKET MAKER: A broker or bank continually prepared to make a two-way price to purchase or sell for a security or currency. MARKET NOT HELD ORDER: also a market order, but the investor is allowing the floor broker who is executing the order to use his own discretion as to the exact timing of the execution. If the floor broker expects a decline in price and he is holding a "market not held" buy order, he may wait to buy, figuring that a better price will soon be available. There is no guarantee that a "market not held" order will be filled. MARKET ON CLOSE: An order specification that requires the broker to get the best price available on the close of trading, usually during the last five minutes of trading. MARKET ORDER - An order to buy or sell a security at the present market price. As long as there is a market for this security, the order will be filled. This type of order takes precedence over all other orders. MARKET ORDER: Instructions to the broker to immediately sell to the best available bid or to buy from the best available offer. MARKET PORTFOLIO: A theoretical portfolio which comprises all risky assets available to investors. MARKET RISK: Risk or exposure arising from the behavior of a market indicator, e.g., a price, rate, index, or value. MARKET TIMING: any attempt to use past prices and other market-generated data to accurately forecast or prophesy future prices of securities or indexes, whether long-term or intra-day, consistently and persistently. Includes asset allocation, technical analysis, charting, momentum investing, and quantitative analysis using neural networks, genetic algorithms, artificial intelligence (AI), fuzzy logic, chaos theory or other non-linear techniques. As the offering circulars are required to disclose: "Past results are no guarantee of future performance." MARKET VALUE: one of three concepts of stock value, also known as market equity and as market capitalization; market value is measured by market-generated figures and is equal to the number of shares of common stock outstanding multiplied times the market price per share; alternatively, the number of shares outstanding not held in private is used in the calculation; see value. MARKET-ADJUSTED RETURN: The return for a firm for a period is its actual return less the return on the market index for that period. MARKET-EXTENSION MERGER: A combination of firms whose operations had previously been conducted in non-overlapping geographic areas. MARKOV CHAIN: A set of processes where the probabilities for the next state are dependent on the present state. MARKOV PROCESS: future independent of past conditional on present MARKOVIAN DEPENDENCE: The condition where observations in a time series are dependent on previous observations in the near term. Markovian dependence dies quickly, while long-memory effects like Hurst dependence, decay over very long time periods. MARRIED PUT and STOCK: a put and stock are considered to be married if they are bought on the same day, and the position is designated at that time as a hedge. MARTINGALE: expected future value is current value condtl on present E(m[t]|f[s]=m[s,s