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<H<1.00 for persistent, or
trend-reinforcing series. 0<H<0.50 for an anti-persistent, or mean-reverting
system. The inverse of the Hurst exponent is equal to alpha, the
characteristic exponent for Stable Paretian distributions. The fractal
dimension of a time series, D, is equivalent to 2-H.
HYPOTHECATION: The posting of collateral. (ypothiki=mortgage in Greek)
I/0: interest-only mortgage-backed strips.
IMMUNIZATION: An investment management technique which structures a
fixed income portfolio in order to minimize the effect of changing
interest rates on the overall portfolio return. The duration of the
portfolio is set to equal the portfolio's time horizon.
IMPLICIT CLAIM: A tacit rather than contractual promise of continuing
service and delivery of expected quality to customers and job security to
employees.
IMPLIED VOLATILITY: a measure of the volatility of the underlying
stock, it is determined by using prices currently existing in the market at
the time, rather than using historical data on the price changes of the
underlying stock.
IMPLIED WARRANTY: A warranty that the law derives by implication
or inference from the nature of the transaction or the relative situation
or circumstances of the parties.
IN PARI DELICTO: At equal fault.
IN PERSONAM JURISDICTION: Court jurisdiction over the "person"
involved in a legal action; personal jurisdiction.
IN REM JURISDICTION: Court jurisdiction over a defendant's property
Incidental beneficiary A third party who incidentally benefits
from a contract but whose benefit was not the reason the contract
was formed; an incidental beneficiary has no rights in a contract and
cannot sue to have the contract enforced.
INCENTIVE STOCK OPTION (ISO): An executive compensation plan to align
the interests of managers with stockholders. Executives are issued options
whose exercise price is equal to or greater than the stock price at the time
of issue and thus have value only if the stock price rises, giving managers
incentives to take actions to maximize stock price.
INCOME (ADJUSTMENT) BONDS: Bonds which promise to pay interest
only if earned and to the extent earned. Failure to pay timely interest does
not lead to immediate default.
INCREASED DEBT CAPACITY HYPOTHESIS: A theory that postmerger
financial leverage increases are the result of increased debt capacity (as
opposed to the firms involved having been underleveraged before the merger)
due to reduced expected bankruptcy costs.
INCREMENTAL RETURN CONCEPT: a strategy of covered call writing in
which the investor is striving to earn an additional return from option
writing against a stock position which he is targeted to sell - possibly at
substantially higher prices.
INDENTURE: The contract between a firm and its bondholders which sets
out the terms and conditions of the borrowing, and the rights and obligations
of each party (covenants).
INDEX OPTION: An option whose underlying security is an index. An
example would be the S&P 100 (OEX). A trader can buy index options and bet on
the direction of the OEX. Most index options are cash-based.
INDUSTRIAL DEVELOPMENT BOND or INDUSTRIAL REVENUE BOND or IRDB: bond
issued by a state or local government to finance plants and facilities, which
are then leased to private businesses. The purpose is to attract industry to
a particular locality. In effect, these are tax-exempt bonds of a private
issuer.
INDUSTRY LIFE CYCLE: A sigmoidal hyperbolic tangent model of the
different stages of an industry's development. (1) Development stage - new
product, high investment needs, losses; (2) Growth stage - consumer
acceptance, expanding sales, high profitability, ease of entry; (3) Maturity
stage - sales growth slows, excess capacity, prices and profits decline - key
period for merger strategy; (4) Decline stage - substitute products emerge,
sales growth declines, pressure for mergers to survive.
INEFFICIENT MARKETS: (behavioral finance) Driven by frame dependence
and heuristic bias, when market prices stray from fundamental values.
INFERIOR-VOTE STOCK: In dual-class stock firms, the class of common
stock which has less voting power, e.g., may be able to elect only a minority
on the board of directors; may be compensated with higher dividends.
INFORMATION COEFFICIENT: The correlation of forecast returns with
their subsequent realizations. A measure of active portfolio management skill
or forecasting skill.
INFORMATION RATIO: The ratio of annualized expected residual return
to residual risk. A central measurement for active management, value added is
proportional to the square of the information ratio.
INITIAL PUBLIC OFFERING (IPO): The first offering to the public of
common stock, e.g., of a former privately-held firm, or a portion of the
common stock of a hitherto wholly-owned subsidiary.
INNKEEPER'S LIEN: A possessory or statutory lien allowing the
innkeeper to take the personal property of a guest, brought into the
hotel, as security for nonpayment of the guest's bill (debt).
Innocent misrepresentation A false statement of fact or an act
made in good faith that deceives and causes harm or injury to
another.
INSIDE DAY: A day in which the daily price range is completely within
the previous day's daily price range.
INSURANCE TO VALUE: The amount of insurance written on
property is approximately equal to its value. An insured most always
wants to insure all property to value.
INTEREST RATE 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 two specified interest rates or indexes,
applied to a notional principal amount. The most common swaps specify a fixed
interest rate and a floating interest rate (a rate that varies with a
specified index such as LIBOR). Some contracts may require an exchange of
interest payments rather than payments based on the difference between the
rates. (FASB Report, June 1993)
INTERMARKET SPREAD: a futures spread in which futures contracts in
one market are spread against futures contracts trading in another market.
Examples: Currency spreads (Yen versus Deutschemark) or TED spread (T-Bills
versus Eurodollars).
INTERMITTENCY: When a non-linear dynamical system alternates between
periodic and chaotic behavior.
INTERNAL RATE OF RETURN (IRR): A capital budgeting method which finds
the discount rate (the IRR) which equates the present value of cash inflows
and investment outlays. The IRR must exceed the relevant risk-adjusted cost
of capital for the project to be acceptable.
INTERNATIONAL BANKING FACILITY (IBF): In general, these facilities
can accept time deposits from foreign customers free of reserve requirements
and interest rate limitations, and can lend to foreigners if the funds are
for the conduct of foreign business outside of the U.S. Net borrowing from
these facilities by domestic banking offices is subject to reserve
requirements.
INTERNATIONAL MONETARY FUND (IMF): An international organization
with 146 members, including the United States. The main functions of the
International Monetary Fund are to lend funds to member nations to finance
temporary balance of payments problems, to facilitate the expansion and
balanced growth of international trade, and to promote international monetary
cooperation among nations. The IMF also creates special drawing rights
(SDR's), which provide member nations with a source of additional
reserves. Member nations are required to subscribe to a Fund quota, paid
mainly in their own currency. The IMF grew out of the Bretton Woods
Conference of 1944.
INTESTATE: Person who dies without leaving a will.
INTRAMARKET SPREAD: a futures spread in which futures contracts are
spread against other futures contracts in the same market; example, buy May
soybeans, sell March soybeans.
INTRINSIC VALUE: The difference between the market price of the item
underlying an option contract and the option's strike price; it is the amount
by which an option is in-the-money. For a call option, intrinsic value is the
amount by which the market price of the underlying item exceeds the
contract's strike price; for a put option, intrinsic value is the amount by
which the strike price exceeds the market price of the underlying item. (The
Research Report on hedge accounting; FASB Report, June 1993)
INVERTED YIELD CURVE: unusual situation where short-term interest
rates are higher than long-term rates.
INVESTMENT ADVISERS ACT of 1940 (IAA): Federal securities legislation
providing for registration and regulation of investment advisers.
INVESTMENT COMPANY ACT of 1940 (ICA): Federal securities legislation
regulating publicly-owned companies in the business of investing and trading
in securities; subjects them to SEC rules. Amended in 1970 to place more
controls on management compensation and sales charges.
INVESTMENT REQUIREMENTS RATIO: A firm's investment expenditures (or
opportunities) in relation to after-tax cash flows.
INVESTMENT STYLE: the method used to achieve a given investment
objective including asset allocation, stock selection, transaction order
handling, and other means. A distinction can be made between intended style
and historical style. Styles can be changed like fashions. Styles can be
mixed or hybrid. Style is a misnomer when applied to value investing which is
not a fashion and is not mixed with other approaches to form a hybrid but
rather is a pure long term permanent commitment to the method of valuation
only.
IRREVOCABLE OFFER: An offer that cannot be revoked or recalled by
the offerer without liability. A merchant's firm offer is an example of
an irrevocable offer.
IRS FORM 5300: Form used to apply for an Employee Benefit Plan
determination letter.
IRS FORM 5307: Form filed with the IRS for employers who adopt a
standard plan document of a service provider (also known as a master
plan, prototype, regional prototype, or volume submitter plans) filing
for a determination letter on the effect of a minor plan amendment.
IRS FORM 5500: Form which must be filed with the IRS for each year in
which a qualified plan has assets. IRS Form 5500 is filed for plans
with 100 or more participants, IRS Form 5500 C or R for those plans
with less than 100 participants, and IRS Form 5500 EZ for qualified
plans with less than 2 participants. Plans that qualify for IRS Form
5500 C/R must file 5500 Form C for the first year, and every three
years thereafter. In intervening years those plans may file IRS Form
5500-R.
ISDA: International Swaps and Derivatives Association, an
organization formed in 1985 to promote the industry. The ISDA has created
standardized contracts for interest rate swaps, thereby facilitating such
transactions by reducing legal costs.
ISLAND REVERSAL: A trading range where there is an exhaustion gap
down, then prices trade in a narrow range, then there is a breakaway gap
up. This leaves a sort of island of prices in the middle. If the trading
range is only one day, it is considered a one day reversal.
ISSUE (or PAYMENT or PRIMARY) DATE: The day the issuer
receives payment for a new issue or tap
ITO LEMMA: stochastic chain rule dY = SUM stdev*f'dW + (mean*f' +.5
SUM stdev^2 f" )dt. Accompanying product rule: d(XY) = XdY + ydX +
SUM(stdev(X)*stdev(Y))dt.
JANUARY EFFECT: The tendency for securities prices to recover in
January after tax-related selling is completed before the year-end.
JENSEN MEASURE: (performance) [E(Rp)-E(RF)]-[E(RB)-E(RF)]bp
JOINT BOND: ond that has more than one obligor or that is
guaranteed by a party other than the issuer (e.g., bonds issued by a
subsidiary and guaranteed by its parent).
JOINT PRODUCTION: Production using complementary inputs in which the
output cannot be unambiguously attributed to any single input; and in which
the output is greater than the sum of the inputs (i.e., synergy). Problems in
assigning returns may arise if the inputs are not owned by the same entity.
JOINT TENANCY: Method of co-ownership that gives title to the property
to the last survivor.
JOSEPH EFFECT: The tendency for persistent time series (0.50<H<1.00),
to have trends and cycles. The term "Joseph Effect" was coined by Mandelbrot
in reference to Joseph's interpretation of Pharaoh's dream of seven fat years
followed by seven lean years.
KALMAN FILTER: A linear system in which the mean squared error
between the desired and the actual output is minimized when the input is a
random signal.
KICK-IN POINT: The level of share ownership by an acquiring firm
which activates a poison-pill antitakeover defense plan.
KICK-IN-THE-PANTS HYPOTHESIS: Attributes the increase in a takeover
target's stock price to the impetus given by the bid to target management to
implement a higher-valued strategy.
KITCHEN-SINK BOND: securities collateralized by residuals and other
hard-to-sell pieces from several existing CMO pools. The objective is to make
these pieces more marketable.
KNOCK-OUT OPTION: option that automatically expires if a
pre-established price for the underlying instrument is reached.
KUHN TUCKER CONDITIONS: Let f be convex, the equality constraints all
linear, and the inequality constraints all concave. If a point (X0, U0, V0)
satisfies the Kuhn Tucker conditions for this problem, then X0 is the optimal
solution to the problem. For a point X0 to solve the problem: minimize f(X)
subject to gk(X) >= 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<t] - a fair gamble. A laxer form of risk-free or arbitrage
conditions used in calculating up/dow binomial tree probabilities. From
roulette: a tactical system that requires doubling your bet after each loss,
so that winning once you recoup the amount originally bet.
MASTER LIMITED PARTNERSHIP (MLP): hybrid form of ownership in which
normal corporate operations are carried out within a partnership form. The
Tax Reform Act of 1987 effectively eliminated MLPs in industries other than
real estate and oil and gas. However, MLPs in existence at the time of the
act were grandfathered.
MATCHED SALE-PURCHASE AGREEMENTS: A matched sale-purchase agreement,
is when the Federal Reserve sells a security outright for immediate delivery
to a dealer or foreign central bank, with an agreement to buy the security
back on a specific date (usually within 7 days) at the same price. Matched
sale-purchase agreements are the reverse of repurchase agreements. Matched
sale-purchase agreements allow the Federal Reserve to withdraw reserves on a
temporary basis.
MATERIALITY: Whether an item is large enough to make any
difference to anyone.
MATIF: Marche A Terme Des Instruments Financiers exchange in
Paris.
MAXIMUM LIMIT OFFER: A stock repurchase tender offer in which all
tendered shares will be purchased if the offer is undersubscribed; but if the
offer is oversubscribed, shares may be purchased only on a pro rata basis.
MAXIMUM PRICE FLUCTUATION (futures): The maximum amount the contract
price can change, up or down, during one trading session, as stipulated by
Exchange rules.
MCA80 (DEPOSITORY INSTITUTIONS DEREGULATION AND MONETARY CONTROL ACT
OF 1980): Among its major provisions, this Act applied uniform reserve
requirements to all depository institutions with certain types of accounts
and required reports from these depository institutions. It also extended
access to the Federal Reserve discount window and to other Federal Reserve
services in step with the implementation of a fee schedule. Intended also to
undo the infationary policies of G. William Miller.
MCCARRAN-FERGUSON ACT: A federal law, passed in 1945, affirming that
regulation of insurance by the states was inthe public interest and
exempted insurers from federal law and regulations if the federal laws
impaired state regulation.
MCFADDEN ACT: The 1927 act of Congress that essentially prohibits
interstate branching by banks. It lets each state choose how (or if)
the banks in its state can branch. See Riegle-Neal Act.
MEAN REVERSION: A tendency for a stochastic variable to drift
toward a long-term mean level.
MECHANIC'S LIEN: A statutory lien on the real property of another,
created to ensure payment for work performed and materials furnished
in the repair or improvement of real property, such as a building.
MELLO ROO'S: Bonds used for developments that benefit a particular
district (schools, prisons, etc.) and are secured by special taxes based on
the assessed value of the properties within the district. Tax assessment is
included on the county tax bill.
METES AND BOUNDS: Measurements and boundaries that
describe a property; using directions and distances from a point of
beginning.
MEZZANINE FINANCING: Subordinated debt issued in connection with
leveraged buy-outs. Sometimes carries payment-in-kind (PIK) provisions, in
which debt holders receive more of the same kind of debt securities in lieu
of cash payments under specified conditions.
MINIMUM PRICE FLUCTUATION: Smallest increment of price movement
possible in trading a given contract, more commonly referred to as a "tick."
MINORITY SQUEEZE-OUT: The elimination by controlling shareholders of
noncontrolling (minority) shareholders.
MIRROR IMAGE RULE: A common law rule that requires, for a valid
contractual agreement, that the terms of the offeree's acceptance
adhere exactly to the terms of the offerer's offer.
MISAPPROPRIATION DOCTRINE: A rationale for insider trading
prosecution of outsiders who trade on the basis of information which they
have "misappropriated," e.g., stolen from their employers or obtained by
fraud.
MISDEMEANOR: A lesser crime than a felony, punishable by a fine
or imprisonment for up to one year in other than a state or federal
penitentiary.
MM: Short-hand notation for "millions." (M=thousands)
MOB spread: a spread transaction with municipal bond index futures
on one side and Treasury bond futures on the other.
MODERN PORTFOLIO THEORY: The blanket name for the quantitative
analysis of portfolios of risky assets based upon expected return, or the
mean expected value, and the risk, or standard deviation of a portfolio of
securities. According to MPT, investors would require a portfolio with the
highest expected return for a given level of risk.
MODIFIED ENDOWMENT CONTRACT: Life insurance in which funds such as
policy loans, assignments, pledges, and partial surrenders are considered
gross income and subject to income tax.
MOMENTUM FILTER: A measure of change, derivative or slope of the
underlying trend in a time series. Implemented by first applying a low pass
filter to the data and then applying a differencing operation to the results.
MOMENTUM INDICATOR: A market indicator utilizing price and volume
statistics for predicting the strength or weakness of a current market and
any overbought or oversold conditions, and to note turning points within the
market.
MOMENTUM: A leading indicator measuring a security's rate-of-change.
The rationale is that the hot get hotter and the cold get colder.
MOMENTUM: A time series representing change of today's price from
some fixed number of days back in history. The strength behind an upward or
downward movement in price. Graphically, momentum is represented as a
horizontal line which fluctuates above and below an equilibrium line.
MONEY MARKET CERTIFICATE: A certificate of deposit in a minimum
denomination of $10,000 with a maturity of six months. The interest rate on
money market certificates is related to the yield on six-month Treasury
bills, in accordance with regulations issued by the Depository Institutions
Deregulation Committee.
MONTHLY INCOME PREFERRED STOCK (MIPS): a preferred stock issued by a
subsidiary that is set up solely to lend the proceeds to the parent. In
consolidated financial statements, the intercompany loan is eliminated and
the preferred stock is generally presented as a minority interest. The
primary goals are to have the preferred stock treated as a minority interest
(i.e., not debt) for financial reporting purposes while deducting for tax
purposes the interest expense on the intercompany debt. Specific details of a
particular transaction structure need to be evaluated to assess whether these
goals can be achieved.
MORAL HAZARD: One party (principal) relies on the behavior of another
(agent) and it is costly to observe information or action. Opportunistic
behavior in which success benefits one party and failure injures another,
e.g., high leverage benefits equity holders under success and injures
creditors under failure.
MORAL HAZARD: The effect of personal reputation, character, associates,
personal living habits, financialresponsibility, and environment upon
an individual's general insurability.
MORAL OBLIGATION BONDS: Bonds sold by the states without voter
approval which are used for specific purposes. In the event of a shortfall,
it is implied that the state will make up the difference
MORBIDITY: The rate at which people become sick.
MORNING STAR: A bottom reversal pattern, according to Steve Nison a
signal that the bulls have seized control.
MORTALITY: The rate at which people die.
MORTGAGE BANKER: A specialized lending institution that lends money
solely with respect to real estate and secures loans with mortgages on
the real estate.
MORTGAGE BROKER: A person or company that buys and sells mortgages for
another on commission or who arranges for and negotiates mortgage
contracts.
MORTGAGE: A written instrument giving a creditor (the mortgagee) an
interest in (a lien on) the debtors (mortgagor's) property as security
for a debt.
MOVING AVERAGE (MA) PROCESSES: A stationary stochastic process, where
the observed time series is the result of the moving average of an unobserved
random time series. An MA(q) process is a q period moving average.
MOVING AVERAGE CONVERGENCE/DIVERGENCE: An indicator developed by
Gerald Appel that is calculated by subtracting the 26-period
exponential moving average of a given security from its 12-period
exponential moving average.
MOVING AVERAGE CROSSOVERS: The point where the various moving average
lines intersect each other or the price line on a moving average price bar
chart. Technicians use crossovers to signal price-based buy and sell
opportunities eg MA(50dy):MA(200dy).
MRP: Market risk premium, defined as rm - rf (1-tx)
MULTICOLINEARITY: Two variables that have a correlation of greater
than 0.70 or less than -0.70 in a regression model. The final result is the
two variables explaining the same portion of variation where either variable
would be sufficient.
NAKED OPTION: An option for which the buyer or seller has no
underlying position. A writer of a naked call option, therefore, does not own
a long position in the asset on which the call has been written. Similarly,
the writer of a naked put option does not have a short position in the asset
on which the put has been written.
NARROW-BASED: Generally referring to an index, it indicates that the
index is composed of only a few stocks, generally in a specific industry
group. Narrow-based indices are NOT subject to favorable treatment for naked
option writers.
NASDAQ. Stock quotation system of the National Association of
Securities Dealers for stocks which trade over the counter as opposed
to on an organized exchange. NASD was formed by act of Congress but later
bought AmEx.
NECKLINE: A trendline drawn along the support or resistance points of
various reversal and consolidation pattern (i.e., head and shoulder, double
and triple top/bottom formations).
NEGATIVE AMORTIZATION: Repayment schedule calling for periodic
payments that are insufficient to fully amortize the loan. Earned, but unpaid
interest is added to the principal, increasing the debt. At some point in the
future, payments must be rescheduled to fully repay the debt.
NEGATIVE CONVEXITY: the phenomenon observable in mortgage-backed
bonds that prices do not increase indefinitely as yields decrease. The reason
for the phenomenon is that, at some point, decreasing interest rates will
prompt borrowers to refinance.
NEGATIVE DIVERGENCE: When two or more indicators, indexes, or
averages, fail to show confirming trends.
NEGLIGENCE PER SE: An act (or failure to act) in violation of a
statutory requirement.
NEGOTIABLE ORDER OF WITHDRAWAL (NOW) Account: An interest earning
account on which checks may be drawn. Withdrawals from NOW accounts may be
subject to a 14-day or more notice requirement although such is rarely
imposed. NOW accounts may be offered by commercial banks, mutual savings
banks, and savings and loan associations. NOW accounts may be owned only by
individuals and certain nonprofit organizations and governmental units.
NEGOTIATED SHARE REPURCHASE: Refers to buying back the stock of a
large block holder (an unwanted acquirer) at a premium over market price
(greenmail).
NET LEASE: A lease whereby the lessee assumes some or all of the
expenses normally paid by the owner.
NET OPERATING LOSS CARRY-OVER: Tax provision allowing firms to use
net operating losses to offset taxable income over a period of years before
and after the loss. Available to firms which acquire a loss firm only under
strictly specified conditions.
NEURAL NETS: Models which mimic the massive parallel processing that
occurs in the brain.
NO LOAD FUND: A type of mutual fund that does not levy initial or
back-end sales charge.
NO-LOAD: Without any sales charge. For mutual funds, shares sold at
net asset value.
NOAH EFFECT: The tendency of persistent time series (0.50<H<1.00) to
have abrupt, and discontinuous changes. The normal distribution assumes
continuous changes in a system. However, a time series which exhibits Hurst
statistics may abruptly change levels, skipping values either up or
down. Mandelbrot coined the term "Noah effect" after the biblical story of
the deluge.
NOB SPREAD: a spread transaction with Treasury note futures on one
side and Treasury bond futures on the other.
NOISE: Fluctuations in the market which can confuse one's
interpretation of market direction. Loosely, Volatility.
NOISY CHAOS: A chaotic dynamical system with either observational or
system noise added.
NOMINAL DAY: Any calendar day without regard to whether the bond
market is open or not.
NOMINAL PAYMENT (or COUPON DUE) DATES: The dates on which coupons are
scheduled to be paid. This day is used to calculate the accrued interest clue
to the holder. If the nominal payment date falls on a non-market day, the
actual coupon payment is usually on the next market day.
NON-EQUITY OPTION: an option whose underlying entity is not common
stock; typically refers to options on physical commodities, but may also be
extended to include index options.
NON-LEVERAGED ESOP: An employee stock ownership plan recognized under
ERISA which does not provide for borrowing by the ESOP. Essentially the same
as stock bonus plans.
NONDISCRIMINATORY POISON PILL: Antitakeover defense plans which do
not penalize acquirers exceeding a given shareholding limit. Include
flip-over plans, preferred stock plans, and ownership flip-in plans which
permit cash offers for all shares.
NONPARAMETRIC STATISTICS: Statistical procedures that use nominal- or
ordinal-scaled data and make no assumptions about the distribution of
the population (or sampling distribution) .
NOPLAT: Net Operating Profits Less Adjusted Taxes
NORMAL DISTRIBUTION: The well known bell shaped curve. According to
the Central Limit Theorem, the probability density function of a large number
of independent, identically distributed random numbers will approach the
normal distribution. In the fractal family of distributions, the normal
distribution only exists when alpha equals 2, or the Hurst exponent equals
0.50. Thus, the normal distribution is a special case which in time series
analysis is quite rare.
NORMAL PORTFOLIO: A benchmark portfolio consisting of the set of all
assets normally (typically) used by the investment manager. For example, an
active manager specializing in large capitalization growth stocks might be
assigned a benchmark or normal portfolio of the S&P Growth Index, the large
capitalization growth stocks in the S&P 500 Stock Index.
NOTICE PERIOD: the time during which the buyer of a futures contract
can be called upon to accept delivery. Typically, the 3 to 6 weeks preceding
the expiration of the contract.
NOTIONAL AMOUNT: The quantity of an underlier to which a
derivative contract applies.
NOVATION: The substitution, by agreement, of a new contract for an
old one, with the rights under the old one being terminated.
Typically, there is a substitution of a new person who is responsible
for the contract and the removal of an original party's rights and
duties under the contract.
NUISANCE: A common law doctrine under which persons may be
held liable for using their property in a manner that unreasonably
interferes with others' rights to use or enjoy their own property
NUMERAIRE: basis for judging basket (usu cash bond)
OATs (Obligations assimilables du tresor): bonds issued by the
French government. They are issued in a variety of fixed- and floating-rate
forms. Although their book-entry form precludes them from being traded
overseas, they are available in ADR form in the U.S.
OBSERVATIONAL NOISE: The error between the true value in a system and
its observed value due to imprecision in measurement. Also called Measurement
Noise.
ODD COUPONS: Sometimes, the first or last coupon period is either
longer or shorter than a normal coupon period and therefore the coupon
payment is more or less than a normal coupon payment. Calculating the odd
coupon payment is roughly the same as calculating accrued interest for the
number of days in the odd coupon period.
ODD LOT: A block of stock consisting of less than 100 shares. When
odd lots trade, a premium is usually added by the specialist or market maker
so these receive the least favorable price and trade last.
OFF-BALANCE SHEET RISK: a measure of risk due to excessive rates
of growth, contingent liabilities or other items not reflected on the
balance sheet.
ONE-TAILED T-TEST: statistical test of significance for a
distribution that changes its shape as N gets smaller; based on a variable t,
equal to the difference between the mean of the sample and the mean of the
population divided by a result obtained by dividing the standard deviation of
the sample by the square root of the number of individuals in the sample.
OPEN CORPORATIONS: Fama and Jensen's term for large corporations
whose residual claims (common stock) are least restricted. They identify the
following characteristics: (1) They have property rights in net cash flows
for an indefinite horizon; (2) Stockholders are not required to hold any
other role in the organization; (3) Common stock is alienable (transferrable,
saleable) without restriction.
OPEN INTEREST: Total number of futures or options on futures
contracts that have not yet been offset or fulfilled by delivery. An
indicator of the depth or liquidity of a market (the ability to buy or sell
at or near a given price) and of the use of a market for risk- and/or
asset-management.
OPEN MARKET OPERATIONS: Purchases and sales of government and
certain other securities in the open market by the New York Federal Reserve
Bank as directed by the FOMC in order to influence the volume of money and
credit in the economy. Purchases inject reserves into the depository system
and foster expansion in money and credit; sales have the opposite
effect. Open market operations are the Federal Reserve's most important and
most flexible monetary policy tool. They are used to promote either higher or
lower growth in money and credit and to offset undesired changes in the
reserve positions of depository institutions stemming from movements in
currency, float, Treasury deposits, and other factors.
OPEN ORDER: An order to a broker that is good until it is canceled
or executed.
OPEN TRADE EQUITY: the unrealized gain or loss in a trading account.
OPEN-END CREDIT: Commonly referred to as a line of credit. It may be
used repeatedly up to a certain limit, also called a charge account or
revolving credit.
OPEN-END LEASE: Many times referred to as a finance lease. This is a
lease that may involve a balloon payment based on the value of the property
when it is returned.
OPEN-MARKET SHARE REPURCHASE: Refers to a corporation's buying its
own shares on the open market at the going price just as any other investor
might buy the corpora-tion's shares; as opposed to a tender offer for share
repurchase or a negotiated repurchase.
OPENING TRANSACTION: a trade which adds to the net position of an
investor. An opening buy transaction adds more long securities to the
account. An opening sell transaction adds more short securities.
OPERATING INCOME: Measures the performance of the fundamental business
operations conducted by a company and is computed as gross profit
minus operating expenses.
OPERATING LEASES: Accounted for as rental agreements with
no transfer of effective ownership associated with the
lease.
OPERATING RATIO (IRIS): Combined ratio less the net investment income
ratio (net investment income to net premiums earned). The operating
ratio measures a company's overall operational profitability from
underwriting and investment activities. This ratio doesn't reflect
other operating income/expenses, capital gains or income taxes. An
operating ratio of more than 100 indicates a company is unable to
generate profits from its underwriting and investment activities.
OPERATING SYNERGY: Combining two or more entities results in gains in
revenues or cost reductions because of complementarities or economies of
scale or scope.
OPTION CLAUSE: A clause that grants the right to buy for a limited
time.
OPTIONS CLEARING CORPORATION (OCC): the issuer of all listed option
contracts that are trading on the national option exchanges. Not to be
confused with OCC of Treasury dept: Office of Comptroller of the Currency.
ORDER PARAMETER: In a nonlinear dynamic system, a variable-acting
link a macrovariable, or combination of variables-that summarizes the
individual variables that can affect a system. In a controlled experiment,
involving thermal convection, for example, temperature can be a control
parameter; in a large complex system, temperature can be an order parameter,
because it summarizes the effect of the sun, air pressure, and other
atmospheric variables.
ORIGINAL ISSUE DISCOUNT: the discount from face value in the price
of a bond at its original issue date.
ORIGINAL PLAN POISON PILL: Also called preferred stock plan. An early
poison pill antitakeover defense in which the firm issues a dividend of
convertible preferred stock to its common stockholders. If an acquiring firm
passes a trigger point of share ownership, preferred stockholders (other than
the large block holder) can put the preferred stock to the target firm (force
the firm to redeem it) at the highest price paid by the acquiring firm for
the target's common or preferred stock during the past year. If the acquirer
merges with the target, the preferred can be converted into acquirer voting
stock with a market value no less than the redemption value at the trigger
point.
ORNSTEIN-UHLENBECK: meanreverting drift dx=sig dz - (theta - alpha x)
dt (technically this is the formula for all mean-revertings and Ornstein has
theta zero)
OTC MARGIN BOND: A debt security not traded on the national
securities exchange which meets certain Regulation T requirrements as to size
of original offering, available information, and status of interest payments.
OTHER RISK-ADJUSTING ACTIVITIES: Strategies that adjust level of
risk, up or down, but not necessarily reduce it. (FASB Report, June 1993)
OUT OF THE MONEY: A call whose strike price is abovethe current market
price of the underlying equity. A put whosestrike price is below the current
price of the underlying security.
OUT-TRADES: A situation that results when there is some confusion or
error on a trade. A difference in pricing, with both traders thinking they
were buying, for example, is a reason why an out-trade may occur.
OVER-THE-COUNTER OPTION (OTC): an option traded over-the-counter, as
opposed to a listed stock option. The OTC option has a direct link between
buyer and seller, has no secondary market, and has no standardization of
striking prices and expiration dates, a privately negotiated agreement. A
dealer market in which transactions take place via telephone, telex, and
other electronic forms of communication as opposed to trading on the floor of
a formal exchange. Such markets allow for great flexibility in product
design.
OVERBOUGHT/OVERSOLD INDICATOR: An indicator that attempts to define
when prices have moved too far and too fast in either direction and thus are
vulnerable to a reaction.
OVERCOLLATERALIZE: the practice followed in issuing asset-backed
securities of boosting the creditworthiness of the bonds by pledging more
than a dollar of collateral for each dollar of debt.
OVERVALUED: describing a security trading at a higher price than it
logically should. Based on the Graham and Dodd P:E ratio (aka "multiple") of
12 which is actually the sum of the inverse of the discount rate plus the
inverse of the growth rate.
OWNERSHIP FLIP-IN PLAN: A poison pill antitakeover defense often
included as part of a flip-over plan. Target stockholders are issued rights
to purchase target shares at a discount if an acquirer passes a specified
level of share ownership. The acquirer's rights are void, and his or her
ownership interest becomes diluted.
P/E RATIO: The Price/Earnings Ratio. The price of a security divided
by earnings per share. Usually the earnings per share is expected or
forecasted earnings for the coming or current fiscal year.
P/O: principal-only mortgage-backed strips.
PAIRS TRADING: Non-directional relative value investment strategy that
seeks to identify two companies with similar characteristics whose
equity securities are currently trading at a price relationship that is
out of their historical trading range. Investment strategy will entail
buying the undervalued security, while short-selling the overvalued
security.
PAIRS TRADING: a hedging technique in which one buys a particular
stock and sells short another stock. The two stocks are theoretically
linked in their price history, and the hedge is established when the
historical relationship is out of line in hopes that it will return to
its former correlation.
PAR VALUE: The face value of a bond, generally $1,000.
PAR: The full principal amount of an investment instrument.
PARETO'S LAW: A law that states that 80% of results come from 20% of
the effort.
PARITY: describing an in-the-money option trading for its intrinsic
value: that is, an option trading at parity with the underlying stock. Also
used as a point of reference - an option is sometimes said to be trading at a
half-point over parity or at a quarter-point under parity, for example. An
option trading under parity is a discount option.
PAROL EVIDENCE RULE: A substantive rule of contracts under which a
court will not receive into evidence the parties' prior negotiations,
prior agreements, or contemporaneous oral agreements if that evidence
contradicts or varies the terms of the parties' written contract.
PAROL EVIDENCE RULE: Oral evidence; not in writing and cannot change
the terms of the written document.
PAROL EVIDENCE: oral evidence
PARTICIPATING FORWARD CONTRACT: a combination of a purchased option
and a written option at the same strike price but with the written option of
a smaller amount, e.g., on 70 percent of the purchased option amount. In its
most common form, both options have equal premiums, netting to zero premium
to the holder.
PARTICIPATING PREFERRED STOCK: preferred stock that, in addition to
paying a stipulated dividend, gives the holder the right to participate with
common stockholders in additional distributions of earnings under specified
conditions. Venture capital holdings are typically such stock.
PARTICIPATING STRATEGY: A combination of a purchased option and a
written option at the same strike price but with the written option having a
smaller foreign currency amount than the purchased option. In its simplest
form, both options have equal premiums that net zero premium for the
holder. However, other combinations are possible in which the holder pays a
net premium or receives a net premium, depending on the various strike prices
and participating percentages. Participating strategies may involve two
separate options or a single instrument, which is often referred to as a
participating forward.
PARTLY PAID: In the United Kingdom, the full issue price of a Gilt
is often paid in either two or three installments. The initial payment is
made upon application and the remaining payment(s) is made within a couple of
months. for example, f50 of the 8.5% February 1994 'B' tranche was paid on
March 16, 1988, while the remaining f47 of the f97 issue price was paid on
April 25, 1988.
PARTNERSHIP BY ESTOPPEL: A judicially created partnership that
may, at the court's discretion, be imposed for purposes of fairness.
PAYMENT-IN-KIND PROVISION (PIK): A clause which provides for issuance
of more of the same type of securities to bondholders in lieu of cash
interest payments.
PAYOUT RATIO: The ratio of dividends to earnings. The fraction of
earnings paid out as dividends.
PAYROLL-BASED ESOP (PAYSOP): A type of employee stock ownership plan
in which employers could take a tax credit of 0.5 percent of ESOP-covered
payroll. Repealed by the Tax Reform Act of 1986.
PENNANTS: A short compact wedge accompanied by receding volume.
PER CURIAM: By the whole court; a court opinion written by the
court as a whole instead of being authored by a judge or justice.
PER SE: A Latin term meaning "in itself" or "by itself."
PERCS (PREFERRED EQUITY REDEMPTION CUMULATIVE STOCK): Issued by a
corporation, this preferred stock pays a higher dividend than the common and
has a price at which it can be called in for redemption by the issuing
corporation. As such, it is really a covered call write, with the call
premium being given to the holder in the form of increased dividends,
PERFECT COMPETITION: Set of assumptions for an idealized economic
model; (1) Large numbers of buyers and sellers so none can influence market
prices or output; (2) Economies of scale exhausted at relatively small size
and cost efficiencies are the same for all companies; (3) No significant
barriers to entry; (4) Constant innovation, new product development; (5)
Complete knowledge of all aspects of input/output markets is costlessly
available.
PERFORMANCE BOND CALL (MARGIN CALL): A demand for additional funds
because of adverse price movement.
PERPENDICULAR SPREAD: option strategy using options with similar
expiration dates and different strike prices. A perpendicular spread can be
designed for either a bullish or a bearish outlook.
PERPETUAL BOND: bond that has no maturity date and pays interest
indefinitely. Perpetuity. British Consul Bond.
PERSISTENCE: In R/S analysis, a persistent series is one which tends
to follow trends. That is, if the system had increased in the previous
period, the chances are it will continue to increase in the next
period. Persistent time series have a long memory. That is there is long term
correlation between current events and future events. Also called black
noise.
PETERSBURG PARADOX: As applied to stock valuation, what is the
investment value of an infinite series of perpetually increasing cash
payments that become infinite in size? The mathematical expectation of the
series is equal to infinity. Is the present value therefore infinite? The
principle of the mathematical expectation of monetary gains has proven to be
open to question in the case of the St. Petersburg Paradox outlined by
Nicolas Bernoulli.
PHASE SPACE: A graph which shows all possible states of a system. In
phase space we plot the value of a variable against possible values of the
other variables at the same time. If a system has three descriptive
variables, we plot the phase space in three dimensions, with each variable
taking one dimension.
PHYSICAL OPTION: an option whose underlying security is a physical
commodity that is not stock or futures. The physical commodity itself -
typically a currency or Treasury debt issue - underlies that option
contract.
PIBOR: Paris Interbank Offered Rate.
PIERCE THE CORPORATE VEIL: To disregard the corporate entity, which
limits the liability of shareholders, and hold the shareholders
personally liable for a corporate obligation.
PLANNED AMORTIZATION CLASS (PAC): a particular class of pay-through
bond designed to amortize in a predictable manner. The risk of prepayment of
the underlying collateral is shifted to another tranche, whose owners are
willing to accept such risk.
PLASTICITY: (Alchian and Woodward) Resources are considered plastic
when a wide range of discretionary uses can be employed by the user. If
monitoring costs are high, moral hazard problems are likely to develop.
POINT ATTRACTOR: In non-linear dynamics, an attractor where all
orbits in phase space are drawn to one point, or value. Essentially, any
system which tends to a stable, single valued equilibrium will have a point
attractor. A pendulum which is damped by friction will always stop, so its
phase space will always be drawn to the point where velocity and position are
equal to zero.
POINTS: Finance charges paid by the borrower at the beginning of a
loan in addition to monthly interest; each point equals one percent of the
loan amount.
POISON PILL: Any antitakeover defense which creates securities that
provide their holders with special rights (e.g., to buy target or acquiring
firm shares) exercisable only after a triggering event (e.g., a tender offer
for or the accumulation of a specified percentage of target shares). Exercise
of the rights would make it more difficult and/ or costly for an acquirer to
take over the target against the will of its board of directors.
POISON PUT: A provision in some new bond issues designed to protect
bondholders against takeover-related credit deterioration of the issuer
(hostile takeovers). Following a triggering event, bondholders may put their
bonds to the corporation at an exercise price in excess of 100 percent of the
bond's face amount.
POISSON: discontinuous random process
POOLING OF INTERESTS: A method used in accounting for
business combinations that simply adds the individual
account balances of the combining companies together.
PORTFOLIO BALANCE STRATEGY: A balance in business segments based on
market-growth/ market-share criteria. Combine high-growth/ high-market-share
(stars), low-growth/ high-market-share (cash cows), low-growth/
low-market-share (dogs) segments to achieve favorable overall growth,
profitability and sufficient internal cash flows to finance positive NPV
investment opportunities.
POSITION LIMIT: The maximum number of option contracts on the same
side of the market which can be held by any one investor or group of related
investors. A long call and a short put are on the same side of the market. A
long put and a short call are on the same side of the market.
POSITION MANAGEMENT RATIO: The ratio of profits extracted on winning
transactions versus losses suffered on trades that liquidate unprofitably.
POSITIVE YIELD CURVE: a common situation in which interest rates are
higher on long-term debt securities than on short-term debt securities of the
same quality.
PREDICTION: an estimate based on understanding the causal
relationships among the key variables in a system; contrasted with a forecast
which is an estimate based on a projection of historical data into the
future.
PREPONDERANCE OF THE EVIDENCE: A standard in civil law cases under
which the plaintiff must convince the court that, based on the
evidence presented by both parties, it is more likely than not that
the plaintiff's allegation is true.
PREVISIBLE: leftcontinuous adapted process
PRICE-COST MARGIN (PCM): Defined as (Price minus Marginal Cost)
divided by Price. That is, operating profit as a percentage of price. A zero
PCM reflects perfect competition, i.e., Price = Marginal Cost.
PRICE-WEIGHTED INDEX: A stock index which is computed by adding the
prices of each stock in the index, and then dividing by the divisor.
PRIMA FACIE CASE: A case in which the plaintiff has produced
sufficient evidence of his or her conclusion that the case can go to
to a jury; a case in which the evidence compels the plaintiff's
conclusion if the defendant produces no evidence to disprove it.
PRIME BROKERAGE: The provision by securities houses of financing,
clearing, securities lending, and other services to smaller
broker/dealers or hedge funds.
PRISONER'S DILEMMA: A situation in which the inability of individuals
to communicate/cooperate leads them to willingly accept an outcome which
leaves them worse off and would not have been chosen had collective action
been possible.
PRIVILEGE: In tort law, the ability to act contrary to another person's
right without that person's having legal redress for such acts.
PRIVITY OF CONTRACT: The relationship that exists between the
promisor and the promisee of a contract.
PROBATE A court of law with the authority to verify the legality
of a will and carry out its instructions.
PRODUCT-EXTENSION MERGER: A type of conglomerate merger; a
combination between firms in related business activities that broadens the
product lines of the firms; also called concentric mergers.
PRODUCTIVITY: The amount of physical output for each unit of
productive input. Since statistics are often released on productivity GROWTH,
one should be careful not to confuse productivity with its growth.
PROFIT A PRENDRE: The right to remove something for profit from
another's land such as minerals, oil, or timber.
PROMISSORY ESTOPPEL: A doctrine that applies when a promisor makes a
clear and definite promise on which the promisee justifiably relies;
such a promise is binding if justice will be better served by the
enforcement of the promise. See also Estoppel
PROPERTY INVESTMENT CERTIFICATE (PINC): British publicly traded
securities representing a holding in a specially formed company that owns
real estate. The company exists to avoid the capital gains taxes that it
would pay under direct ownership.
PROSPECTUS: The official document that describes a mutual fund to
investors. The prospectus contains information required by the SEC,
such as investment objectives and policies, risks, services and fees. A
fund's prospectus should always be read carefully before investing.
PROTECTED STRATEGY: a position that has limited risk. A protected
short sale (short stock, long call) has limited risk, as does a protected
straddle write (short stradde, long out-of-the-money combination).
PROXIMATE CAUSE: The factor causing damage or loss for which there is an
unbroken chain of events between theoccurrence of an insured peril and
the resulting injury or damage.
PRUDENT MAN: Requires that a plan fiduciary use the "care, skill, and
diligence" that would be used by a reasonably prudent person familiar
with "such matters." While essentially an extension of the common-law
requirement of good faith in handling other people's money, it creates
a "prudent expert" test that places an additional burden on the plan
sponsor--to know what a person in this position of responsibility
should know, rather than a reliance on the knowledge level of the
general populace.
PUBLIC BOOK (of orders): the orders to buy or sell, entered by the
public, that are away from the current market. The board broker or specialist
keeps the public book. Market-makers on the CBOE can see the highest bid and
lowest offer at any time. The specialist's book is closed (only he knows at
what price and in what quantity the nearest public orders are).
PUBLIC UTILITIES HOLDING COMPANY ACT OF 1935: Federal securities
legislation to correct abuses in financing and operation of gas and electric
utility holding company systems.
PUNITIVE DAMAGES: Money awarded by a jury as a result of a negligent
act, to punish a negligent party and deterothers from committing the
same act. These damages are over and above compensatory damages.
PURCHASE METHOD: A method of accounting for a business
combination in which one company is assumed to have
acquired the other; this method of accounting results in
the revaluation of assets and in the recognition of
goodwill.
PURE RACE STATUTE: Recording priority statute that awards title (in the
event of multiple conveyances) to the first purchaser to record.
PURPOSE CREDIT: Credit used for the purpose of buying, carrying, or
trading in securities.
PUT OPTION: A contract which gives the purchaser theright, not the
obligation, to sell a security at a specific pricein for a specified period
of time.
PUT OPTION: An option to sell an asset.
PUT-CALL PARITY: forward=call - put at same strike
PUT-CALL RATIO: the ratio of put trading volume divided by call
trading volume; sometimes calculated with open interest instead of trading
volume. Can be calculated daily, weekly, monthly, etc. Moving averages are
often used to smooth out short-term, daily figures.
Q-RATIO: (Tobin) The ratio of the market value of a firm's
securities to the replacement costs of its physical assets.
QUANTUM MERUIT: Literally, "as much as he deserves"—an expression
describing the extent of liability on a contract implied in law (quasi
contract). An equitable doctrine based on the concept that one who
benefits from another's labor and materials should not be unjustly
enriched thereby but should be required to pay a reasonable amount for
the benefits received, even absent a contract.
QUASI-RENT: The excess return to an asset above the return necessary
to maintain its current service flow.
QUESTION OF FACT: In a lawsuit, an issue involving a factual dispute
that can only be decided by a judge (or, in a jury trial, a jury).
Question of law In a lawsuit, an issue involving the application
or interpretation of a law; therefore, the judge, and not the jury
decides the issue.
QUITCLAIM DEED: A deed intended to pass any title, interest, or
claim that the grantor may have in the property but not warranting
that such title is valid. A quitclaim deed offers the least amount of
protection against defects in the title.
R-SQUARE: A statistic usually associated with regression analysis,
where it describes the fraction of observed variation in data captured by the
model. R-Square varies between 0 and 1 (or 0 and 100%).
RADR: Risk Adjusted Discount Rate
RALLY REACTION: A decline in prices following an advance. The
opposite of rally. An upward movement of prices following a decline; the
opposite of a reaction.
RANDOM WALK: Brownian motion, where the previous change in the value
of a variable is unrelated to future or past changes.
RANGE FORWARD CONTRACT: a combination of a purchased option and a
written option of equal amounts with a "range" between the strike prices. In
a zero-cost range strategy, generally both options are slightly out of the
money and have equal premiums, netting to zero premium to the holder, i.e.,
the premium paid on the purchased option equals the premium received on the
written option.
RANGE STRATEGY: A combination of a purchased option and a written
option on equal currency amounts but with a "range" between the strike
prices. In its simplest form, both options are out-of-the-money and have
equal premiums that net to zero premium for the holder. However, other
combinations are possible in which the holder pays a net premium or receives
a net premium, depending on the absolute level of the strike prices in
relation to the current exchange rate at inception and the width of the
range. Range strategies can involve two separate options or a single
instrument, which is often referred to as a range forward.
RAROC: Risk-adjusted return on capital. A method of assigning capital
to bank activities such that riskier activities are assigned greater
capital, meaning such activities must earn a higher return to make it
worthwhile investing in that activity in the first place. Similar in
concept to risk-based capital. Sometimes referred to as RORAC, return
on risk-adjusted capital.
RATIO CALENDAR COMBINATION: a strategy consisting of a simultaneous
position of a ratio calendar spread using calls and a similar position using
puts, where the striking price of the calls is greater than the striking
price of the puts.
RATIO CALENDAR SPREAD: Option strategy using either puts or calls,
whereby one sells more near term options than longer term options are
purchased. All options have the same strike price.
RATIO SPREAD: Option strategy using either puts or calls.The trader
purchases a certain amount of options and then sells a larger amount of out of
the money options.
RATIO STRATEGY: a strategy in which one has an unequal number of long
securities and short securities. Normally, it implies a preponderance of
short options over either long options or long stock.
RATIO WRITE: Buying stock and selling calls against the stock. It
can also be constructed by shorting stock and then selling puts against the
short stock.
RATIONALITY, MARKET: although individual market participants may
vary in their degree of rational choice and rational action, the aggregate
outcomes for the market as a whole are considered rational to the extent that
the market is efficient.
REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA): Federal statute
regulating disclosure of closing costs in advance and prohibiting
kickbacks for referring customers to title companies.
REALIZED: A gain or loss that has actually been finalized
through an arms' length transaction.
RECAPTURE OF DEPRECIATION: The amount of prior depreciation which
becomes taxable as ordinary income when an asset is sold for more than its
tax basis.
RECIPROCAL LICENSE: The ability of a licensee to obtain a license in
another state, depending on that state's requirements.
RECOGNITION ANOMALY: Reporting counterbalancing changes in the fair
values of items designated as related in income in different periods because
some assets and liabilities are recognized in the statement of financial
position, while others are not. (FASB Report, June 1993)
RECORDING STATUTES: Statutes that allow deeds, mortgages, and other
real property transactions to be recorded so as to provide notice to
future purchasers or creditors of an existing claim on the property.
REDEMPTION PRICE: for the price at which a PERCS may be called for
redemption by the issuing corporation; the term is used to distinguish it
from "call price," which may be confusing when discussing the imbedded call
option that exists in PERCS.
REDEMPTION: pay off debt.
REFERENCE RATE: A designated rate such as six-month LIBOR or
three-month T-bill on any cash settled interest rate option such as a cap or
floor. It is the rate observed on the fixing date for purposes of determining
the amount of any cash settlement.
REFORMATION: A court-ordered correction of a written contract so
that it reflects the true intentions of the parties.
REFUNDING ESCROW DEPOSIT (RED): agreement between the issuer of and
the investor in a tax-exempt debt for the investor to purchase such debt at a
given rate at a future date. Tax law changes in 1984 limited the ability of
tax-exempt borrowers to issue refunding bonds to retire high-yielding debt
when interest rates fell. REDs allow issuers to gain the economic benefit of
refunding while remaining within the confines of the tax law.
REG. 1.1221-2T HEDGING TRANSACTION: A transaction that a taxpayer
enters into in the normal course of its trade or business primarily (i) to
reduce risk of price changes or currency fluctuations with respect to
ordinary property that is held or to be held by the taxpayer; or (ii) to
reduce risk of interest rate or price changes or currency fluctuations with
respect to borrowings made or to be made, or ordinary obligations incurred or
to be incurred, by the taxpayer. Property is ordinary property if a sale or
exchange of the property by the taxpayer would not produce capital gain or
loss. (Internal Revenue Code and Regulations)
REGRESSION: A data analysis technique which optimally fits a model
based on the squared differences between data points and model fitted
points. Typically, regression chooses model coefficients to minimize the sum
of these squared differences.
REGULATION CC: A regulation of the Board of Governors of the Federal
Reserve System that covers return item processing, and implements the
Expedited Funds Availability Act, which places limits on the length of
time a bank can hold funds that were deposited by check into an
account.
REGULATION D: A regulation of the Board of Governors of the Federal
Reserve System that sets reserve requirements.
REGULATION DD: Truth in Savings Act. TISA. A regulation of the Board
of Governors of the Federal Reserve System that specifies how compound
interest rates on savings accounts are to be computed, sets standards
as to what constitutes a free account, etc.
REGULATION EE: A regulation of the Board of Governors of the Federal
Reserve System that permits banks to offset (net) their obligations to
each other, so that one bank only owes the difference to the other.
REGULATION K: A regulation of the Board of Governors of the Federal
Reserve System that governs the overseas activities of US banks, and
the US activities of foreign banks.
REGULATION Q: A regulation of the Board of Governors of the Federal
Reserve System that, until March, 1986, set the maximum interest rate
that banks could pay on deposits. That part of Regulation Q has been
phased out, although Reg Q still prohibits the payment of interest on
demand deposits.
REGULATION Y: Called the laundry list. A regulation of the Board of
Governors of the Federal Reserve System that specifies the permissible
activities for bank holding companies.
REGULATION Z: Truth in Lending Act. A regulation of the Board of
Governors of the Federal Reserve System that requires banks to reveal
the APR of a loan.
REHYPOTHECATION: Reuse of collateral received as security for an
obligation.
REINSURANCE: agreement by which one insurance company transfers to
another carrier part or all of its risk of loss under its policies by
means of a separate contract or treaty with another insurance company.
The company providing reinsurance protection is the "reinsuring
company" or "reinsurer." The one receiving reinsurance protection is
the "ceding company." Under the common form of reinsurance known as
excess reinsurance, the reinsurer covers losses exceeding a certain
limit specified in advance, and then only for the excess of the amount
of the loss over the fixed limit. There are also quota share (pro
rata) and stop loss (excess) types as well as facultative, which is
specific for a given risk and may be of anytype. The liability
retained by the ceding company is known as its "retention."
REINVESTMENT RISK: the risk that an investor will not be able to
reinvest coupon payments at as favorable a yield as the original investment
yields.
REJOINDER: The defendant's answer to the plaintiff's rebuttal.
RELATIVE STRENGTH: A comparison of an individual stock's performance
to that of a market index. Most times the S&P 500 or the Dow Jones Industrial
Index are used for comparison purposes. It is calculated by dividing the
stock price by the index price.
REMAINDER: A future interest in property held by a person other
than the original owner.
REMAINDERMAN: The person who receives an estate after the termination
of a life estate.
REMANDED: Sent back. If an appellate court disagrees with a lower
court's judgment, the case may be remanded to the lower court for
further proceedings in which the lower court's decision should be
consistent with the appellate court's opinion on the matter.
RENEGOTIABLE RATE: A type of variable rate involving a renewable
short-term balloon note. The interest rate on the loan is fixed during the
term of the note. However, when the balloon comes due, the lender may
refinance it at a higher rate. Periodic refinancing may be necessary in order
for the loan to be fully amortized.
REPLACEMENT COST: a balance sheet concept for a ceiling for
valuation of a company; equal to the replacement cost of its assets minus its
liabilities. It is an upper limit on value to the extent that if the market
price of the common stock was too far above its replacement costs,
competitors would try to replicate the company.
REPLEVIN: An action to recover specific goods in the hands of a party
who is wrongfully withholding them from the other party.
REPLICATING: precisely hedging & self financing
REPO (REPURCHASE AGREEMENT): An agreement to sell and repurchase an
asset. When the Federal Reserve makes a repurchase agreement with a
government securities dealer, it buys a security for immediate delivery with
an agreement to sell the security back at the same price by a specific date
(usually within 15 days) and receives interest at a specific rate. This
arrangement allows the Federal Reserve to inject reserves into the banking
system on a temporary basis to meet a temporary need and to withdraw these
reserves as soon as that need has passed.
REPURCHASE AGREEMENT: Also called a repo, this is a transaction
between a dealer and an investor whereby the investor sells a security
to the dealer with an agreement to repurchase the security on a future
date at a lower price that will result in a predetermined interest
cost to the dealer. This is considered to be a collateralized loan of
money, the securities representing the collateral.
RES IPSA LOQUITUR: doctrine under which negligence may be inferred
simply because an event occurred, if it is the type of event that
would not occur in the absence of negligence. Literally, the term
means "the facts speak for themselves."
RESCALED RANGE(R/S) ANALYSIS: The analysis developed by H.E. Hurst to
determine long-memory effects and fractional Brownian motion. Rescaled range
analysis measures how the distance covered by a particle increases as we look
at longer and longer time scales. For Brownian motion, the distance covered
increases with the square root of time. A series which increases at a
different rate is not random.
RESCISSION: A remedy whereby a contract is canceled and the parties
are returned to the positions they occupied before the contract was
made; may be effected through the mutual consent of the parties, by
their conduct, or by court decree.
RESERVE REQUIREMENT: Regulation D requires banks to set aside a
percentage of certain types of deposits in a non-earning account at a
Federal Reserve bank, reducing the amount of loans or investments they
can make, and therefore the potential profit of the bank. Vault cash
also counts towards reserves. Other countries have similar
requirements, and some central banks do pay interest on reserves.
RESERVE REQUIREMENTS: Reserves that must be held against customer
deposits of banks and other depository institutions. The reserve requirement
ratio affects the expansion of deposits that can be supported by each
additional dollar of reserves.
RESIDUAL ANALYSIS: The examination of asset returns to determine if a
particular event has caused the return to deviate from a normal or predicted
return which would have resulted if the event had not taken place. The
difference between the actual return and the predicted return is the
residual.
RESIDUAL BENEFIT: In disability insurance, a benefit paid when
you suffer a loss of income due to a covered disability or if loss of
income persists. This benefit is based on a formula specified in your
policy and it is generally a percentage of the full benefit. It may be
paid up to the maximum benefit period.
RESIDUAL CLAIMS: The right of owners of an organization to cash flows
not otherwise committed.
RESIDUAL RETURN: Return independent of the benchmark. The residual
return is the return relative to beta times the benchmark return. To be
exact, an asset's residual return equals its excess return minus beta times
the benchmark excess return.
RESIDUAL RISK: The risk (annualized standard deviation) of the
residual return.
RESIDUAL: the last tranche in an asset-backed pay-through bond - in
effect, the equity in the deal. Residuals pay an extremely high return if
interest rates remain stable, but little or none if rates move outside of a
narrow band. Also known as the tail tranche.
RESIDUARY: The surplus of a testator's estate remaining after all of
the debts and particular legacies have been discharged.
RESISTANCE: A price level at which rising prices have stopped rising
and either moved sideways or reversed direction; usually seen as a price
chart pattern.
RESOURCE CONVERSION: redeployment of assets to higher uses, other
ownership, or control; financing of asset acquisitions, refinancing of
liabilities, or both. Includes mergers and acquisitions, hostile takeovers,
goings-public, goings-private, leveraged buyouts, management buyouts, and
restructuring troubled companies.
RESTRICTED VOTE STOCK: In dual-class stock firms, the stock with
inferior voting rights.
RETENTION RATIO: The percentage of free cash flows retained in the
firm.
REVENUE ANTICIPATION NOTE (RAN): short-term debt issue of a
municipality that is to be repaid out of anticipated revenues such as sales
taxes, typically from the federal or state governments.
REVENUE BOND: municipal bond paid with revenues from a project that
is built with the proceeds of the issue, such as a toll bridge, highway,
hospital, or other structure that serves a public need and generates revenue.
REVERSAL ARBITRAGE: a riskless arbitrage that involves selling the
stock short, writing a put, and buying a call. The options have the same
terms.
REVERSAL GAP: A chart formation where the low of the last day is
completely above the previous day's range with the close above midrange and
above the open.
REVERSAL STOP: A stop that, when hit, is a signal to reverse the
current trading position, i.e., from long to short. Also known as stop and
reverse.
REVERSE HEDGE: a strategy in which one sells the underlying stock
short and buys calls on more shares than he has sold short. This is also
called a synthetic straddle and is an outmoded strategy for stocks that have
listed puts trading.
REVERSIONARY INTEREST: A future interest in property retained by
the original owner.
RHO: d V / d r (also rho sub f for r sub f) the measure of how much
an option changes in price for an incremental move (generally 1%) in
short-term interest rates; more significant for longer-term or in-the-money
options.
RIEGLE-NEAL ACT: The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994. This law essentially permits nationwide
banking in the US. It generally does away with the restrictions on
interstate banking contained in the Bank Holding Company Act, the
Douglas Amendment and the McFadden Act. There are a few exceptions.
RIPARIAN RIGHTS: Rights of a landowner to use waters of an
adjacent stream or lake.
RISK ADJUSTED RETURN: Maximize Z = E(Rp) - A Var(Rp) where A =
investor's aversion to risk as measured by the variance of the portfolio
return. To maximize the function assuming the investor's assets are only in
the market portfolio and the riskfree asset, first let wm = the fraction of
assets in the market portfolio. Then E(Rp) = rF + wm (Rm - rF) and Var(Rp) =
w2m s2m. Then Z = rF + wm [E(Rm) - rF] - 0.5 A w2m s2m and dZ/dwm = E(Rm) -
rF - A wm s2m = 0 Solving for A, A = [E(Rm) - rF] / ( wm s2m)
RISK ARBITRAGE: arbitrage involving takeovers. Unlike in classical
arbitrage, risk arbitrageurs attempt to profit from takeovers by cashing in
on the expected rise in the price of a target company's shares. If the
takeover falls through, the arbitrageur loses. (Of course, if the arbitrageur
expects the deal to fall through, he will execute the reverse of the above
transaction.)
RISK FREE RETURN: The return achievable with absolute certainty. In
the U.S. market, short maturity treasury bills exhibit effectively risk free
returns. The risk free return is sometimes called the time premium, as
distinct from the risk premium.
RISK INDEX: A common factor typically defined by some continuous
measure, as opposed to a common industry membership factor defined as zero or
one. Risk index factors include size, volatility, value, and momentum.
RISK PREMIUM: The expected excess return to the benchmark.
RISK RETENTION GROUPS: Liability insurance companies owned by
their policyholders. Membership is limited to people in the same
business or activity, which exposes them to similar liability
risks. The purpose is to assume and spread liability exposure to group
members and to provide an alternative risk financing mechanism for
liability. These entities are formed under the Liability Risk
Retention Act of 1986. Under law risk retention groups are precluded
from writing certain coverages, most notably property lines and
workers' compensation. They predominately write medical malpractice,
general liability, professional liability, products liability and
excess liability coverages. They can be formed as a mutual or stock
company, or a reciprocal.
RISK-BASED CAPITAL: A concept relating the amount of capital a bank
has or needs after adjusting for the riskiness of its assets. A bank
with a high percentage of US treasury securities will require lower
risk-based capital than one with fewer of those securities and a
higher proportion of commercial loans. Risk-based capital requirements
went into effect on December 31, 1990. See Capital Adequacy, Risk
Assets, Risk Weighting, Total Risk-Based Capital.
RISK-FREE RATE: The return on an asset with no risk of default. In
theory, the return on short-term government securities.
RISKMETRICS: A free VaR service offered by JP Morgan.
ROBBERY: The act of forcefully and unlawfully taking personal
property of any value from another; force or intimidation is usually
necessary for an act of theft to be considered a robbery.
ROLL DOWN: close out options at one strike and simultaneously open
other options at a lower strike.
ROLL FORWARD: close out options at a near-term expiration date and
open options at a longer-term expiration date. OR move from one option
position to another with a later expiration date. The term assumes that the
earlier position is closed out before the later one is established. If the
new position involves a higher exercise price, it is called a roll-up; if a
lower exercise price, it is called a roll-down.
ROLL UP: close out options at a lower strike and open options at a
higher strike.
ROLL-OUT MLP: Also called spin-off MLP. A corporation transfers some
of its assets to an MLP to avoid double taxation, for example. MLP units are
initially distributed to corporate shareholders, and corporate management
serves as the general partner.
ROLL-UP MLP: The combination of several ordinary limited partnerships
into a master limited partnership.
ROLL: Substituting a far option for a near option on the same
underlying instrument at the same strike price; also to roll forward or roll
over.
ROLLING OF FUTURES: As financial futures have short-term maturities,
often 3-9 months, before or at maturity, the future must be sold and a new
future (for the same asset but with a new maturity) must be repurchased.
ROLLING: a follow-up action in which the strategist closes options
currently in the position and opens other options with different terms, on
the same underlying stock.
ROTATION: Changing variables orthogonally, using eigenvalue analysis
as in "factor analysis" aka "principal components".
ROUND-TURN: (futures) Procedure by which a long or short position is
offset by an opposite transaction or by accepting or making delivery
of the actual financial instrument or physical commodity.
ROYALTY TRUST: An organizational form used by firms which would
otherwise be taxed heavily (due to declining depreciation and increasing
pretax cash flows) to transfer ownership to investors in low tax brackets.
RULE 144a: An exception to the restriction that privately placed
securities may not be resold. They may be resold or traded between
Qualified Investors
S CORPORATION: A corporation whose shareholders have elected to be taxed
like a partnership (rather than a regular, "C", corporation), with
profits/losses passing directly through to shareholders, rather than at
the corporate level.
SAFETY MARGIN: the difference between price and value for a common
stock.
SALE OR RETURN: A type of conditional sale in which title and
possession pass from the seller to the buyer; however, the buyer
retains the option to return the goods during a specified period even
though the goods conform to the contract.
SALLIE MAE: nickname for the Student Loan Marketing Association,
which borrows in the open market and lends to banks and other financial
institutions that provide student loans.
SAMPLE SELECTION BIAS: Criteria for sample may exclude some relevant
categories. Examples: Completed spin-offs will not include spin-offs
announced, but not completed. Measures of industry profitability will not
include firms that have failed. Studies of leveraged buy-outs that have a
subsequent public offering will represent the most successful and exclude the
failures or less successful.
SAMURAI BOND: yen-denominated bond issued by non-Japanese companies
in Japan.
SATURDAY NIGHT SPECIAL: A hostile tender offer with a short time for
response.
SCALING: How the characteristics of an object change as you change
the size of your measuring device. For a three dimensional object, it could
be the volume of an object covered as you increase the radius of a covering
sphere. In a times series, it could be the change in the amplitude of the
time series as you increase the increment of time.
SCALP: In commodities, purchasing and selling in equal amounts so
there is no net position at the end of the trading day; a speculative attempt
to make a quick sliver of a profit by buying at the initial offering price in
the hope the issue will increase and can be sold.
SCHEDULE 13D: The form which must be filed with the SEC within ten
days of acquiring 5 percent or more of a firm's stock; discloses the
acquirer's identity and business intentions toward the target. Applies to all
large stock acquisitions.
SCHEDULE 14D: The form which must be filed with the SEC by any group
or individual making solicitations or recommendations which would result in
its owning more than 5 percent of the target's stock. Applies to public
tender offers only.
SCIENTER: Knowledge by the misrepresenting party that material facts
have been falsely represented or omitted with an intent to deceive.
SCORCHED EARTH DEFENSES: Actions to make the target less attractive
to the acquiring firm and which may also leave the target in weakened
condition. Examples are sale of best segments (crown jewels) and incurring
high levels of debt to pay a large dividend or to engage in substantial share
repurchase.
SCREEN: also known as filter; a criterion used to reduce the
universe of securities to a short list for deeper investigation. For
example, a no-load screen for mutual funds, a minimum $5.00 per share price
screen for common stocks, or a socially responsible investing screen for
stocks or mutual funds. Screening can be done with one or more criteria and
is sometimes combined with sorting in some rank order. Note that screening
and sorting are not valuation. For example, no-load mutual funds ordered by
annual operating costs from lowest (best) to highest (worst), dividend-paying
stocks ordered by dividend yield from highest (best) to lowest (worst), or
profitable companies ordered by return on equity from highest (best) to
lowest (worst).
SEC Rule lOb-5: A rule of the Securities and Exchange Commission that
makes it unlawful, in connection with the purchase or sale of any
security, to make any untrue statement of a material fact or to omit a
material fact if such omission causes the statement to be misleading.
SECOND-STEP TRANSACTION: Typically the merger of an acquired firm
into the acquirer after control has been obtained.
SECONDARY DATE: The first day that the bond is available for trading
in the secondary market.
SECONDARY INITIAL PUBLIC OFFERING (SIPO): The reoffering to the
public of common stock in a company which had initially been public, but had
then been taken private (e.g., in an LBO).
SECONDARY MARKET: A market that provides for the purchase or sale of
previously sold or bought options through closing transactions. Stock
exchanges and the Over The Counter market are examples of the secondary
market.
SECTION 1035 EXCHANGE: This refers to a part of the Internal
Revenue Code that allows owners to replace a life insurance or annuity
policy without creating a taxable event.
SECTION 125 (OF INT REV CODE): Used in a cafeteria plan to determine
qualifications for a qualified retirement plan.
SECTION 1256 CONTRACT: Any regulated futures contract, foreign
currency contract, nonequity option and dealer equity option. (Internal
Revenue Code and Regulations)
SECTION 1256 HEDGING TRANSACTION: Any transaction entered into in
the normal course of trade or business primarily to reduce risk of currency
fluctuations with respect to property or borrowings or obligations, if the
gain or loss on the transaction is treated as ordinary income or loss and the
transaction is identified as a hedge before the close of the day on which it
was entered into. (Internal Revenue Code and Regulations)
SECTION 20: The part of the Glass-Steagall Act that prevented bank
holding companies from being "engaged principally" in underwriting
securities.
SECTION 401(A)(26) (OF INT REV CODE): Establishes the minimum coverage
requirements for a participant in a qualified retirement plan.
SECTION 404(C) (OF ERISA): Permits participants to make independent
choices from investment alternatives as to how they wish funds to be
invested in a self-directed plan.
SECTION 414 (COMPENSATION): Provides rules for defining compensation for
purposes of applying any provisions that specifically refer to section
414.
SECTION 415: Sets out the maximum contribution and benefit limitations
of the Internal Revenue Code for qualified plans.
Sector Used to characterize a group of securities that are similar with
respect to particular industry (e.g. technology) maturity, type, or
rating.
SECTION 475 SECURITY: For purposes of Ss 475, the term "security"
means any - (A) share of stock in a corporation; (B) partnership or
beneficial ownership interest in a widely held or publicly traded partnership
or trust; (C) note, bond, debenture or other evidence of indebtedness; (D)
interest rate, currency, or equity notional principal contract; (E)
derivative financial instrument; and (F) position which - i) is not a
security described in (A), (B), (C), (D), or (E), ii) is a hedge with respect
to such security, and iii) is clearly identified before the close of the day
on which it was acquired or entered into. Subparagraph (E) does not include
any contract which is subject to the mark-to-market provisions of g
1256(a). (Internal Revenue Code and Regulations)
SECTION 7702: Part of the Internal Revenue Code that defines
the conditions a life policy must satisfy to qualify as a life
insurance contract, which has tax advantages.
SECTION 988 HEDGING TRANSACTION: Any transaction entered into
primarily to reduce risk of currency fluctuations with respect to property or
borrowings or obligations, if identified by the taxpayer as a
hedge. (Internal Revenue Code and Regulations)
SECTION 988 TRANSACTION: Any transaction where the amount that the
taxpayer is entitled to receive (or is required to pay) is denominated in
terms of a nonfunctional currency or by reference to the value of one or more
nonfunctional currencies. (Internal Revenue Code and Regulations)
SECURITIES ACT OF 1933: Requires disclosure of information and
registration of securities which are to be publicly sold.
SECURITIES ACT of 1933 (SA): First of the federal securities laws of
the 1930s. Provides for federal regulation of the sale of securities to the
public and registration of public offerings of securities.
SECURITIES EXCHANGE ACT OF 1934: Created the SEC to ensure that the
requirements of the Securities Act of 1933 were carried out.
SECURITIES EXCHANGE ACT of 1934 (SEA): Federal legislation which
established the Securities and Exchange Commission (SEC) to administer
securities laws and to regulate practices in the purchase and sale of
securities.
SECURITIES INVESTORS PROTECTION ACT of 1970 (SIPA): Federal
legislation which established the Securities Investor Protection Corporation
empowered to supervise the liquidation of bankrupt securities firms and to
arrange for payments to their customers.
SECURITIZATION: The creation of security interests in an asset.
SECURITY INTEREST: The right right of the creditor to take property
or a portion of property offered as security.
SECURITY MARKET LINE: The linear relationship between asset returns
and betas posited by the Capital Asset Pricing Model.
SELF-AFFINE TRANSFORMATION: A rescaling procedure used in fractal
geometry and performed on a two-variable system. For example, in a system
utilizing an x-axis and y-axis representing time and price, the x-axis could
be rescaled by one ratio and/or procedure while the y-axis is rescaled by a
different ratio and/or procedure.
SELF-FINANCING: a portfolio which pays for itself, such that the
hedging coefficients specifying the bond and stock fractions provide the
total value d V = phi dS + psi dB, V(0)=EQ(b^-1 X), V(T)=X. Replication of
this would allow integral[0,T] sigma^2 phi^2 dt < 0 and V[T]=phi[T] S[T] +
psi[T] B[T]. The Black-Scholes solution can be expressed phi=N(d+), B Psi=
-Xexp(-rdT) N(d-).
SELF-REGULATORY ORGANIZATIONS (SRO): Nongovernment organizations
that have statutory responsibility to regulate their own members such as the
NYSE, AMEX, and NASD.
SELF-SIMILAR: When small parts of an object are qualitatively the
same, or similar to the whole object. In certain deterministic fractals, like
the Sierpinski Triangle, small pieces look the same as the entire object. In
random fractals, small increments of time will be statistically similar to
larger increments of time.
SELLER'S POINTS: A lump sum paid by the seller to the buyer's
creditor to reduce the cost of the loan to the buyer. This payment is either
required by the creditor or volunteered by the seller, usually in a loan to
buy real estate. Generally, one point equals one percent of the loan amount.
SEMIMARTINGALE: decomposable into local martingale end drift term of
finite variation
SENIOR: Describes the order of priority of a claim. Instruments
which are senior to other instruments receive priority in re-paying debt in
the case of a default.
SERIAL BOND: sinking fund bond whose time to be redeemed has been
prescheduled.
SERIAL OPTION: a futures option for which there is no corresponding
futures contract expiring in the same month. The underlying futures contract
is the next futures contract out in time. Example: there is no March gold
futures contract, but there is an April gold futures contract, so March gold
options - which are serial options - are options on April gold futures.
SERIES 63: An exam, administered by the NASD/FINRA, that must be taken
and passed in order for an individual to be licensed to sell
securities in certain states. Called uniform state law or blue sky
exam.
SERIES 6: An exam, administered by the NASD/FINRA, that must be taken
and passed in order for an individual to be licensed to sell mutual
funds and variable annuities.
SERIES 7: An exam, administered by the NASD/FINRA, that must be taken
and passed in order for an individual to become a registered
representative (licensed to sell stocks, bonds, mutual funds, and
other securities).
SERIES: all option contracts on the same underlying stock having the
same striking price, expiration date, and unit of trading.
SERVIENT TENANT: Land encumbered by an easement.
SETTLEMENT DATE: The day on which settlement is scheduled to take
place. In the Eurobond market, this is referred to as "value date."
SETTLEMENT PRICE: (futures) A figure determined by the closing range
that is used to calculate gains and losses in futures market
accounts. Settlement prices are used to determine gains, losses, margin
calls, and invoice prices for deliveries.
SETTLEMENT RISK: Risk from possible default by a counterparty at
the time an obligation is to be settled.
SETTLOR: One creating a trust.
SHAPIRO-WILKES TEST: A statistical test indicating the likelihood
that the sample of simulated net returns was drawn from a normal
distribution. A small value of this statistic leads to nonacceptance of the
null hypothesis that the sample is drawn from a normal distribution.
SHARE REPURCHASE: A public corporation buys its own shares, by tender
offer, on the open market, or in a negotiated buy-back from a large block
holder.
SHARED APPRECIATION MORTGAGE: mortgage in which the lender shares in
appreciation of the mortgaged property when the property is sold. As a
result, the lender usually accepts a lower interest rate.
SHAREHOLDER INTEREST HYPOTHESIS: The theory that shareholder benefits
of antitakeover defenses outweigh management entrenchment motives and
effects.
SHARK REPELLENT: Any of a number of takeover defenses designed to
make a firm less attractive and less vulnerable to unwanted acquirers.
SHARK WATCHER: A firm (usually a proxy solicitation firm) which
monitors trading activity in its clients' stock to detect early accumulations
by an unwanted acquirer before the 5 percent disclosure threshold.
SHARPE MEASURE: (performance) [E(Rp)-E(RF)]/sp
SHARPE RATIO: The ratio of annualized excess returns to total risk.
Invented by Prof. Bill Sharpe of Stanford.
SHELF REGISTRATION: The federal securities law provision in Rule 415
which allows firms to register at one time the total amount of debt or equity
they plan to sell over a two-year period. Securities can then be sold with no
further delays whenever market conditions are most favorable.
SHERIFF'S DEED: The deed given to the purchaser of property at a
sheriff's sale as part of the foreclosure process against the owner of
the property
SHERMAN ACT of 1890: Early antitrust legislation. Section 1 prohibits
contracts, combinations, conspiracies in restraint of trade. Section 2 is
directed against actual or attempted monopolization.
SHIBOSAI BOND: privately placed samurai bond.
SHOGUN (GEISHA) BOND: dollar-denominated bond issued by non-Japanese
companies in Japan.
SHORT AGAINST THE BOX: a short sale of securities that are identical
to securities owned but leaves the owned securities untouched. The purpose is
to defer taxes.
SHORT HEDGE: The sale of a futures contract in anticipation of a
later cash market sale. Used to eliminate or lessen the possible decline in
value of ownership of an approximately equal amount of the cash financial
instrument or physical commodity.
SHORT INTEREST RATIO: A ratio which tells how many days it would
take to buy back all the share which have been sold short. A short interest
ratio of 2 would indicate that it would take 2 trading days to buy back all
the shares which have been sold short. This is based on the current volume.
SHORT INTEREST: Shares that have been sold short and not yet
repurchased.
SHORT POSITION: An investors position where the number of contracts
sold exceeds the number of contracts bought. The person is a net seller.
SHORT-FORM MERGER: A merger between a subsidiary corporation and a
parent corporation that owns at least 90 percent of the outstanding
shares of each class of stock issued by the subsidiary
corporation. Short-form mergers can be accomplished without the
approval of the shareholders of either corporation.
SHORT-SWING TRADING RULE: Federal regulation under Section 16 of the
Securities Exchange Act which prohibits designated corporate insiders from
retaining the profits on any purchase and sale of their own firms' securities
within a six-month period.
SINGLE INDEX MODEL: Measures portfolio risk by measuring the
sensitivity of a portfolio of securities to changes in a market index. The
measure of sensitivity is called the "beta" of the security, or
portfolio. Related, but not identical, to the Capital Asset Pricing Model.
SINKING FUND: A bond with special funds set aside to retire the term
bonds of a revenue issue each year according to a set schedule. Usually
takes effect 15 years from date of issuance. Bonds are retired through either
calls, open market purchases, or tenders.
SLANDER: Defamation in oral form.
SLIPPAGE: The difference between estimated and actual transaction
costs. The difference is usually comprised of commissions and price
differences.
SMALL NUMBERS PROBLEM: When the number of bidders is large, rivalry
among bidders renders opportunistic behavior ineffectual. When the number of
bidders is small, each party seeks terms most favorable to it through
opportunistic representations and haggling.
SMALL ORDER EXECUTION SYSTEM (SOES): Computerized system developed by
Nasdaq for immediate electronic execution of up to 1,000 shares of stock.
SMALL SAVER CERTIFICATE: A certificate of deposit with a minimum
maturity of 2 and 1/2 years offered by banks and thrift institutions to
individuals. The interest rate on these certificates is related to the
average yield on 2 and 1/2 year Treasury securities, in accordance with
regulations issued by the Depository Institutions Deregulation
Committee. There is no minimum denomination required on these certificates.
SPDA: Single Premium Deferred Annuity.
SPDR: Standard & Poor's Depositary Receipt.
SPECIAL DRAWING RIGHTS (SDR's): A type of international money
created by the IMF and allocated to its member nations. SDRs are an
international reserve asset, although they are only accounting entries (not
actual coin or paper, and not backed by precious metal). Subject to certain
conditions of the IMF, a nation that has a balance of payments deficit can
use SDRs to settle debts to another nation or to the IMF.
SPECIAL WARRANTY DEED: A deed in which the grantor only covenants
to warrant and defend the title against claims and demands of the
grantor and all persons claiming by, through, and under the grantor.
SPECIALIST: A trader on the market floor assigned to fill bids/orders
in a specific stock out of his/her own account when the order has no
competing bid/order to ensure a fair and orderly market.
SPECIALIZED ASSET: An asset whose use is complementary to other
assets. For example, a pipeline from producing fields to a cluster of
refineries near large consumption markets.
SPECIFIC PERFORMANCE: Equitable remedy that requires a party to a
contract to perform the contract promise or promises. Squatters's
rights A lay term for adverse possession or prescription.
SPECIFIC RETURN: The part of the excess return not explained by
common factors. The specific return is independent of (uncorrelated with) the
common factors and the specific returns to other assets. It is also called
the idiosyncratic return.
SPECIFIC RISK: The risk (annualized standard deviation) of the
specific return.
SPOT MONTH: The current trading month. Also known as the front month in
commodity trading.
SPOT: For immediate delivery.
SPREAD ORDER: an order to simultaneously transact two or more option
trades. Typically, one option would be bought while another would
simultaneously be sold. Spread orders may be limit orders, not held orders,
or orders with discretion. They cannot be stop orders, however. The spread
order may be either a debit or credit.
SPREAD ROLLS: Using a spread order to bridge the closing of one
position and the establishment of a new one.
SPREAD STRATEGY: any option position having both long options and
short options of the same type on the same underlying security.
SPRING: A two-day pattern in which on the first day, the market
declines below a support point, while the next day sees the market move
strongly back up into the congestion area.
SQUARE ROOT PROCESS: dx = mean*x*dt + stdev*sqrt(x)*dz
a specilaised form of geometric SDE
STABLE PARETIAN, OR FRACTAL HYPOTHESIS: In the characteristic
function of the fractal family of distributions, the characteristic exponent
alpha can range between one and two.
STAGGERED BOARD: Also called a classified 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.
STAKE-OUT INVESTMENT: Preliminary investment for a foothold in
anticipation of the future possibility of a larger investment.
STANDARD ERROR: The standard deviation of the error in an estimate. A
measure of the statistical confidence in the estimate.
STANDBY COMMITMENT: a bank commitment to loan money up to a
specified amount for a specific period, to be used only in a certain
contingency, e.g., a commitment to repay a construction lender if a permanent
mortgage lender cannot be found.
STANDSTILL AGREEMENT: A voluntary contract by a large block
shareholder (or former large block holder bought out in a negotiated
repurchase) not to make further investments in the target company for a
specified period of time.
STARE DECISIS: A common law doctrine under which judges are obligated
to follow the precedents established in prior decisions.
STATUTE OF FRAUDS: Statute dictating what types of contracts must be in
writing to be enforceable.
STEPPED-UP ASSET BASIS: The provision allowing asset purchasers to
use the price paid for an asset as the starting point for future depreciation
rather than the asset's depreciated book value in the hands of the seller.
STEPWISE REGRESSION: A mathematical technique to choose the
independent variables that best describe the behavior of the dependent, in
order of improving description.
STOCK APPRECIATION RIGHT (SAR): Part of executive compensation
programs to align managers' interests with those of shareholders. SARs are
issued to managers giving them the right to purchase stock on favorable
terms; the exercise price can be as low as 50 percent of the stock price at
issuance; maximum life is ten years.
STOCK WITH A MARRIED PUT: also known as super stock, this is a unit
consisting of a share of common stock and a right to sell a share of common
stock (a put option) back to the company at a price equal to or higher than
the offering price of the unit during a period after the initial offering. In
some cases, the company may elect to pay for the common stock, if required to
buy it back, in cash or an equivalent amount of notes.
STOP AND REVERSE (SAR): A stop that, when hit, is a signal to reverse
the current trading position, i.e., from long to short. Also known as
reversal stop
STOP AND REVERSE: A stop that when hit is a signal to close the current
position and open an opposite position. A trader holding a long position would
sell that position and then go shorton the same security.
STOP LIMIT ORDER: This is similar to a stop order. It is an order
which becomes a limit order once the specified price is touched.
STOP LOSS: The risk management technique in which the trade is
liquidated to halt any further decline in value.
STOP ORDER (STOP): An order placed which is not at the current
market price. It becomes a market order once the security touches the
specified price. Buy stop orders are placed above the present market
price. Sell stop orders are placed below the present market price.
STOP-LOSS LIMIT: A market risk limit which curtails losses as they
occur.
STRADDLE: An offsetting position with respect to personal
property. A taxpayer holds offsetting positions if there is a substantial
diminution of risk of loss from holding any position by means of his holding
one or more other positions with respect to personal property (whether or not
of the same kind.). (Internal Revenue Code and Regulations)
STRANGE ATTRACTOR: An attractor in phase space, where the points
never repeat themselves, and orbits never intersect, but they stay within the
same region of phase space. Unlike limit cycles or point attractors, strange
attractors are non-periodic, and generally have a fractal dimension. They are
a picture of a non-linear, chaotic system.
STRANGLE: An options strategy which is a combination involving a put
and a call with different strike prices with the same expiration. OR Similar
to a straddle except that different strike prices are used. The profit
opportunities are lower than in a short straddle, but the likelihood of a
sizable loss is lower too.
STRATEGIC RISK: An exposure to risk perceived to arise from the
potential interaction of a price change with the strategic or competitive
environment in which an entity operates. Strategic risk can relate to
interest rate, foreign exchange rate, or price risk. Also referred to as
competitive risk. (FASB Report, June 1993)
STRICT LIABILITY: Liability regardless of fault. In tort law, strict
liability may be imposed on defendants in cases involving abnormally
dangerous activities, dangerous animals, or defective products.
STRIKE PRICE: price at which option's terminal transaction is triggered
STRIKING PRICE INTERVAL: the distance between striking prices on a
particular underlying security. Normally, the interval is 5 points for stocks
selling up to $50 per share, 10 points for stocks between $50 and $200 per
share, and 20 points thereafter. There may, however, be exceptions to this
general guideline.
STRIP FINANCING: A type of financing, often used in leveraged
buy-outs in which all claimants hold approximately the same proportion of
each security (except for management incentive shares and the most senior
bank debt).
STRUCTURED NOTE: a directly placed, medium-term note with a payout
linked to the movement in an underlying market or a change in economic
conditions such as interest rates. The structure allows the investor to
comply with any investment guidelines or restrictions and, at the same time,
achieve its desired objective. For example, an investor that wants to
increase its return by gaining exposure to the U.S. stock market but is not
permitted under its guidelines to invest in stocks might buy a structured
note with a payout linked to the Standard & Poor's 500 index.
STRUCTURED OR HYBRID SECURITIES: Debt or credit extension
instruments which incorporate derivative instruments whereby the principal
upon redemption, coupon (interest payment) or both, are indexed to specified
underlying assets, prices or indexes.
STUB: New shares issued in exchange for old shares in a leveraged
recapitalization.
STYLE: calculated by solving for returns weights from minimising the
variance of missing a benchmark for each style. eg small-cap value,
small-cap growth, large-cap value, large-cap growth, and cash.
SUBCHAPTER S CORPORATION: A form of business organization which
provides the limited liability feature of the corporate form while allowing
business income to be taxed at the personal tax rates of the business owners.
SUBROGATION: When the insurer pays the insured for a loss, the insurer
takes over the insured's right to collect damages from the other party
responsible for the loss. Subrogation upholds the principle of
indemnity by preventing the insured from collecting twice for a given
accident.
SUBSCRIPTION OFFERING: Practice of issuing a security(s) by
allotment to distributors or a syndicate who agree to distribute the issue(s)
by procuring subscribers. The terms of the issue(s) are widely publicized in
advance.
SUBSCRIPTION PERIOD: The period during which investors place their
bids for a new issue with a syndicate.
SUPER POISON PUTS: debt covenants that allow an investor to put
bonds to the issuer in a variety of circumstances that would diminish the
creditworthiness of the debt. The circumstances may be hostile to management
or may be initiated by management. Referred to as event-risk protection.
SUPER SINKER BONDS: bonds with coupons paying long-term rates but
with a short-term maturity because of prepayments, e.g., certain housing
bonds.
SUPERIOR-VOTE STOCK: In dual-class stock firms, the class of stock
which has more power to elect directors; usually concentrated in the hands of
management.
SUPERMAJORITY: A requirement in many antitakeover charter amendments
that a change of control (for example) must be approved by more than a simple
majority of shareholders; at least 67 to 90 percent approval may be required.
SUPERNORMAL GROWTH: Growth due to a profitability rate above the cost
of capital. Swaps. Exchanges of one class of securities for another.
SUPPORT: A price level at which declining prices stop falling and
move sideways or upward. It is a price level where there is sufficient demand
to stop the price from falling. OR a term in technical analysis indicating a
price area lower than the current price of the stock, where demand is thought
to exist. Thus a stock would stop declining when it reached a support
area.
SURETY BOND: A bond guaranteeing the faithful performance of a contract,
or the faithful performance of a duty ortrust.
SURETY: In bonds, this means the company which provides the bond is
guaranteeing the behavior of the principal.
SURETYSHIP: An express contract in which a third party to a
debtor-creditor relationship (the surety) promises to be primarily
responsible for the debtor's obligation.
SURRENDER AND ACCEPTANCE: The cancellation of a lease by mutual consent
of the lessee and lessor.
SWAP ARRANGEMENTS: Short-term reciprocal lines of credit between the
Federal Reserve and 14 foreign central banks as well as the Bank for
International Settlements. Through a swap transaction, the Federal Reserve
can, in effect, borrow foreign currency in order to purchase dollars in the
foreign exchange market. In doing so, the demand for dollars is increased and
the dollar's foreign exchange value is increased. Similarly, the Federal
Reserve can temporarily provide dollars to foreign central banks through swap
arrangements.
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 two specified prices or indexes, applied to a notional
principal amount. The most common swaps specify a fixed price or rate, and a
floating rate that varies with a specified index. Some contracts may require
an exchange of payments rather than payments based on the difference between
the prices or indexes. Common swaps include commodity swaps, foreign currency
swaps, and interest rate swaps. (FASB Report, June 1993)
SWAPTION: An agreement whereby the option purchaser may enter into a
specified swap contract at a future date. OR An option on a swap. The
swaption purchaser has the fight to enter into a specific swap for a defined
period of time.
SWIFT: A message writing system that connects worldwide
participating banks. It is used primarily for the purpose of communicating
payment information. Frequently, the SWIFT message is only part of an
international payment process which might also employ a system such as CHIPS
to fully implement the transaction.
SWINGLINE: arrangement within a note issuance facility enabling the
borrower to draw down funds against the facility on short notice.
SWOT (STRENGTHS WEAKNESSES OPPORTUNITIES THREATS): approach to
formulating firm strategy via assessments of firm capabilities in relation to
the environment.
SYLLOGISM: A form of deductive reasoning consisting of a major
premise, a minor premise, and a conclusion.
SYNTHETIC FORWARD: a combination of a purchased option and a written
option of equal amounts with the same strike price. The economic effects to
the holder of such a combination option are similar to a forward contract.
SYNTHETIC INSTRUMENT: The result of a strategy linking two or more
distinct financial instruments whose collective characteristics resemble
those of a prototype instrument. (FASB Report, June 1993) OR transaction or
combination of instrument. Viewed as a unit where the unit is similar to a
particular financial instrument. For example, a fixed-rate note combined with
an interest-rate swap that entitles the holder to variable interest could be
considered a "synthetic floating-rate note." Similarly, a foreign-currency
debt combined with a currency swap both for interest and principal payments
could be considered a synthetic dollar debt.
SYNTHETIC PUT: a security which some brokerage firms offer to their
customers. The broker sells stock short and buys a call, while the customer
receives the synthetic put. This is not a listed security, but a secondary
market is available as long as there is a secondary market in the calls.
SYNTHETIC STOCK: an option strategy that is equivalent to the
underlying stock. A long call and a short put is synthetic long stock. A
long put and a short call is synthetic short stock.
SYSTEMATIC RETURN: The part of the return dependent on the
benchmark-nark return. We can break excess returns into two components:
systematic and residual. The systematic return is the beta times the
benchmark-nark excess return.
SYSTEMATIC RISK: Risk which is common to an entire class of assets or
liabilities. The risk (annualized standard deviation) of the
systematic return.
SYSTEMIC RISK: Risk which threatens an entire financial system.
Section 412 (of INT REV CODE): Ensures that minimum funding standards have been
established for ERISA plans, and that any party with discretionary
power or authority regarding the plan or plan assets must be bonded.
T-STATISTIC: The ratio of an estimate to its standard error. The
t-statistic can help test the hypothesis that the estimate differs from
zero. With some standard statistical assumptions, the probability that a
variable with a true value of zero would exhibit a t-statistic greater than 2
in magnitude is less than 5%.
T-TEST: A univariate hypothesis test using the t-distribution rather
than the Z-distribution. It is used when the population standard
deviation is unknown and the sample size is small.
TAKE-OUT MERGER: The second-step transaction which merges the
acquired firm into the acquirer and thus "takes out" the remaining target
shares which were not purchased in the initial (partial) tender offer.
TAKING: The taking of private property by the government for public
use. Under the Fifth Amendment to the Constitution, the government may
not take private property for public use without "just compensation."
TAP (REOPENING): A method of reissuing an already existing bond,
also the term use.d to describe such an issue.
TARGETED SHARE REPURCHASE: Refers to repurchasing the stock of a
large block holder (an unwanted acquirer) at a premium over market price
(greenmail).
TAX ANTICIPATION NOTE (TAN): short-term obligation of a state or
municipal government to finance current expenditures pending receipt of
expected tax payments.
TAX CREDIT ESOP (TRASOP, PAYSOP): An employee stock ownership plan
which allowed employers to take a credit against their tax liability for
contributions up to a specified amount, based on qualified investment in
plant and equipment (TRASOP) and/or covered payroll (PAYSOP). Repealed by the
Economic Recovery Tax Act of 1981 and the Tax Reform Act of 1986.
TAX-FREE EXCHANGE: A method of deferring capital gains taxes by
exchanging one property for another.
TAX-FREE REORGANIZATION: A takeover transaction in which the primary
consideration paid to obtain the voting stock or assets of the target must be
the voting stock of the acquiring firm. (In fact, tax is only deferred until
target shareholders sell the stock received. )
TAXABLE EQUIVALENT YIELD: The taxable equivalent yield is equal to
the tax free yield divided by the sum of 100 minus the current tax
bracket. For example the taxable equivalent yield of a 6.50% tax free bond
for someone in the 32% tax bracket would be: 6.5/(100-32) = 0.0955882 or
9.56%
TEAM PRODUCTION: Alchian and Demsetz's distinguishing characteristic
of a firm. Team output is greater than the sum of outputs of individual team
members working independently (synergy); increased output cannot be
unambiguously attributed to any individual team member.
TECHNICAL ANALYSIS: a method of analyzing common stock prices that
uses market-generated data such as share price and share trading volume in
order to time market turns.
TED SPREAD: a strategy that represents the difference between the
prices of the three-month Treasury bill and Eurodollar futures.
TELEGRAPH EQUATION: A variation of the Diffusion Equation that
describes minor differences in the drunkard's walk, in which the random
decision controls the change in direction rather than the direction itself.
TEMPORARY DIFFERENCE: A difference between the tax basis of an asset
or liability and its reported amount in the financial statements that will
result in taxable or deductible amounts in future years when the reported
amount of the asset or liability is recovered or settled, respectively. Some
temporary differences cannot be identified with a particular asset or
liability for financial reporting, but those temporary differences (a) result
from events that have been recognized in the financial statements and (b)
will result in taxable or deductible amounts in future years based on
provisions of the tax law. Some events recognized in financial statements do
not have tax consequences. Certain revenues are exempt from taxation and
certain expenses are not deductible. Events that do not have tax consequences
do not give rise to temporary differences. (SFAS No. 109)
TENANCY IN COMMON: Co-ownership of property in which each
party owns an undivided interest that passes to his or her heirs at
death.
TENDER OFFER: A method of effecting a takeover via a public offer to
target firm shareholders to buy their shares.
TENEMENTS: Term used to describe all types of real estate
property, improvements to the land, and all rights accruing to the
land.
TERM INSURANCE: A type of life insurance policy that provides protection
for a specified time period; most do nothave cash value.
TERM STRUCTURE: change of interest rates as fct of terminal time
(term) of loan (aka YIELD CURVE) The term structure of interest rates is the
yield-to-maturity for different fixed-income securities at different maturity
times. The volatility term structure is the standard deviation of returns of
varying time horizons.
TERM VOLATILITY: var(log(s[t]/s[0]))/dt
TESTATE: A person who dies leaving a will that designates the
distribution of his estate.
THE DESK: The trading desk at the New York Federal Reserve Bank,
through which open market purchases and sales of government and federal
agency securities are made. The desk maintains direct telephone communication
with major government securities dealers. A "foreign desk" at the New York
Federal Reserve Bank conducts transactions in the foreign exchange market.
THETA: d V / d t. A measurement of how much an options price
decays for every one day that passes. Solved for by linearising the
Black-Scholes PDE as theta = sigma^2 S^2 gamma /2 + rS delta -rV.
The Black-Scholes PDE is a geometric SDE d(ln(x))= mean dt + stdev dz.
THIRD MARKET: Trading off the organized securities exchanges by
institutional investors. eg Reuter's "Instinet".
THRUST: A comparison between the price difference of successively
lower pivot bottoms or higher pivot tops. For example, a reduction in the
difference between pivot bottoms shows loss of momentum; an increase in the
difference shows increased momentum.
TIBOR: Tokyo Interbank Offered Rate.
TIER 1 CAPITAL: Core capital. Under the risk-based capital guidelines,
consists primarily of stockholders' equity less goodwill.
TIER 2 CAPITAL: Supplementary capital. Under the risk-based capital
guidelines, consists of the reserve for loss losses (with certain
limitations), certain types of subordinated debt, and certain other
instruments.
TIER 3 CAPITAL: Market risk capital. The additional risk-based capital
banks must have to compensate for market risks.
TIGR: Treasury Income Growth Receipts - a stripped U.S. bond.
TIME PERIOD: A concept that requires accountants to
exercise judgment in unraveling the income effects of
business deals that are only partially completed by the
end of the reporting period.
TIME SPREAD: Calendar Spread.
TIME TRADER: Investors who buy or sell because of events unrelated to
stock price fluctuations, e.g., for portfolio adjustment needs.
TIME VALUE PREMIUM: the amount by which an option's total premium
exceeds its intrinsic value.
TIME VALUE: The portion of the option premium that is attributable
to the amount of time remaining until the expiration of the option
contract. Time value is whatever value the option has in addition to its
intrinsic value. This is often referred to as premium. Time value sensitivity
is measured by Theta
TIMING: a.k.a., market timing; using market-generated data such as
share price and trading volume to predict future stock prices.
TITLE COVENANTS: Covenants ordinarily inserted in conveyances and in
transfers of title to real estate for the purpose of giving protection
to the purchaser against possible insufficiency of the title
received. A group of such covenants known as "common law covenants"
includes: covenants against encumbrances; covenants for further
assurance (in other words, to do whatever is necessary to rectify
title deficiencies); covenants of good right and authority to convey;
covenants of quiet enjoyment; covenants of seisin; covenants of
warranty.
TOTAL CAPITAL REQUIREMENTS: A firm's financing requirements. Two
alternative measures: (1) Total capital = Current Assets minus
Noninterest-Bearing Debt plus Net Fixed Assets; (2) Total Capital =
Interest-Bearing Debt plus Shareholders' Equity.
TOTAL CAPITALIZATION: The sum of total debt, preferred stock, and
equity.
TOTAL RETURN CONCEPT: a covered call writing strategy in which one
views the potential profit of the strategy as the sum of capital gains,
dividends, and option premium income, rather than viewing each one of the
three separately.
TOTAL RETURN: price change (capital appreciation; gain if positive
and loss if negative) plus dividend income measured in the local currency of
the bourse, expressed in average annual percentage. The total return for the
S&P 500 Common Stock Price Index would include reinvested dividends.
TOWER LAW: E(E(X|F[t])) =E(F[s<t])
TRACKING ERROR: the amount of difference between the performance of a
specific portfolio of stocks and a broad-based index with which they are
being compared.
TRADING COSTS: Active portfolio managers attempt to outperform
passive benchmarks, but trading costs reduce any realized advantages. Typical
trading commissions run 0.20% of the transaction amount, and the typical cost
due to bid-ask spread and market impact is 0.55%. The total cost of a trade
then is 0.75% of the trade amount. If a fund has a portfolio turnover rate of
80%, and for every sell transaction the stock is replaced via a buy
transaction, a total of 160% of the portfolio value will be transacted each
year. For trading costs of 0.75% per transaction, the annual trading costs
amount to (1.6)(0.75%) = 1.20% of the portfolio value. If one adds a 0.3%
management fee to this amount, the total becomes 1.50%.
TRADING LIMIT: the exchange-imposed maximum daily price change that a
futures contract or futures option contract can undergo.
TRADITIONAL DEFERRAL HEDGE ACCOUNTING: A hedge accounting approach
in which the recognition of all gains (or losses) on the hedging instrument
is deferred until losses (or gains) on the hedged item are recognized. (The
Research Report on hedge accounting; FASB Report, June 1993)
TRANCHE: a split of the cash flow from a pool of securitized assets
(e.g., mortgages) into securities having different maturities and interest
rates. A form of maturity enhancement.
TRANSACTION ACCOUNT: ("T" account used in bank dual-entry accounting
to balance quantities) - A checking account or similar account from which
transfers can be made to third parties. Demand deposit accounts, negotiable
order of withdrawal (NOW) accounts, automatic transfer service (ATS)
accounts, and credit union share draft accounts are examples of transaction
accounts at banks and other depository institutions.
TRANSACTION DATE: The date at which a transaction (e.g., a sale or
purchase of merchandise or services) is recorded in accounting records in
conformity with generally accepted accounting principles. A long-term
commitment may have more than one transaction date (e.g., the due date of
each progress payment under a construction contract is an anticipated
transaction date). (SFAS No. 52)
TRANSLATION ADJUSTMENTS: Translation adjustments result from the
process of translating financial statements from the entity's functional
currency into the reporting currency. (SFAS No. 52)
TREASURY BILL/OPTION STRATEGY: a method of investment in which one
places approximately 90% of his funds in risk-free, interest-bearing assets
such as Treasury bills, and buys options with the remainder of his assets.
TREASURY BILL: A short-term borrowing (1 year or less) by the US
government. An investor purchases a T-bill at a discount from par, and
is repaid at par by the government. Treasury bills are issued with a 3
month (13 week), 6 month (26 week) or 12 month (52 week) original
issue maturity. Other countries have similar instruments.
TREASURY BILLS: Short-term U.S. Treasury securities issued in
minimum denominations of $10,000 and usually having original maturities of 3,
6, or 12 months. Investors purchase bills at prices lower than the face value
of the bills; the return to the investors is the difference between the price
paid for the bills and the amount received when the bills are sold or when
they mature. Treasury bills are the type of security used most frequently in
open market operations.
TREASURY BOND: Interest-bearing (coupon) obligations issued by the US
government, with an original issue maturity of over 10 years - 30
years.
TREASURY BONDS: Long-term U.S. Treasury securities usually having
initial maturities of more than 10 years and issued in denominations of
$1,000 or more, depending on the specific issue. Bonds pay interest
semiannually, with principal payable at maturity.
TREASURY NOTE: Interest-bearing (coupon) obligations issued by the US
government, with an original issue maturity of 2 - 10 years.
TREASURY NOTES: Intermediate-term coupon-bearing U.S. Treasury
securities having initial maturities from 1 to 10 years and issued in
denominations of $1,000 or more, depending on the maturity of the
issue. Notes pay interest semiannually, and the principal is payable at
maturity.
TREASURY SECURITIES: Interest-bearing obligations of the U.S.
government issued by the Treasury as a means of borrowing money to meet
government expenditures not covered by tax revenues. Marketable Treasury
securities fall into three categories - bills, notes, and bonds. The Federal
Reserve System holds more than $125 billion of these obligations, acquired
through open market operations. Marketable Treasury obligations are currently
issued in book entry form only; that is, the purchaser receives a statement,
rather than an engraved certificate.
TRENDING MARKET: Price moves in a single direction and it usually
closes on an extreme for the day.
TREYNOR MEASURE: (performance) [E(Rp)-E(RF)]/bp
TRUST INDENTURE ACT of 1939 (TIA): Federal securities regulation of
public issues of debt securities of $5 million or more. Specifies
requirements to be included in the indenture (the agreement between the
borrower and lenders) and sets out the responsibilities of the indenture
trustee.
TRUST INDENTURE ACT: A 1939 act of Congress that specifies that most
corporate debt securities sold publicly in the US must be issued under
an indenture and have a trustee to enforce the terms of the indenture,
in order to protect the holders of the security. It also sets minimum
standards for the trustee.
TRUSTEE: One who holds title to property for the use or benefit of
another (the beneficiary).
TWO-TIER TENDER OFFER: Tender offers in which the bidder offers a
superior first-tier price (e.g., higher or all cash) for a specified maximum
number of shares it will accept and simultaneously announces its intentions
to acquire remaining shares at a second-tier price (lower and/or securities
rather than cash).
TYPE A, B, C REORGANIZATION: Forms of tax-free reorganizations. Type
A - statutory mergers (target merged into acquirer) and consolidations (new
entity created). Type B - Stock-for-stock transaction in which target is
liquidated into acquirer or maintained as separate operating entity. Type C -
Stock-for-asset transaction in which at least 80 percent of fair market value
of target's property is acquired; target then dissolves.
TYPE I ERROR: An error caused by rejecting the null hypothesis when it
is true.
TYPE II ERROR: An error caused by failing to
reject the null hypothesis when the alternative hypothesis is true.
UCC 4A: That part of the Uniform Commercial Code that covers the rights and
responsibilities of parties to a funds transfer.
UNCORRELATED EXPOSURE: Exposure to a risk factor, assuming that
all other risk factors will remain constant.
UNCOVERED CALL WRITING: A short call option position in which the
writer does not own an equivalent position in the underlying security
represented by his option contracts.
UNCOVERED OPTION: This is sometimes referred to as a naked
option. It is when a trader writes an option without owning the underlying
security. It is a position with large risk.
UNCOVERED PUT WRITING: A short put option position in which the
writer does not have a corresponding short position in the underlying
security or has not deposited, in a cash account, cash or cash equivalents
equal to the exercise value of the put.
UNDERLIER: Underlying security for a derivative
UNEARNED PREMIUM: That portion of the premium which has not yet been
earned and which is consequently owed to thepolicyholder if the policy
is canceled.
UNILATERAL CONTRACT: A contract that results when an offer can only
be accepted by the offeree's performance.
UNIT PRICE: any measure used in unit pricing; expressed either in
number of units per dollar or other currency or in dollars or other currency
per unit; for common stocks, unit prices for what an investor gets by owning
the stock are commonly expressed as price ratios; for example, the P/E ratio
can be expressed as the dollar market price per unit of earnings, the P/BV
ratio can be expressed as the dollar market price per unit of book value, and
the dividend yield or D/P ratio can be expressed as the number of dividend
units per dollar market price; price is not value, and unit pricing is not
valuation.
UNIVERSAL LIFE: A life policy that has flexible premiums and death
benefits. Premiums are paid into aninterest-bearing account from which
maintenance fees, if any, and costs of insurance are deducted.
variable annuity Similar to a traditional fixed annuity. Retirement
payments will be made periodically to theannuitants, usually over the
remaining years of their lives. Under the variable annuity, there is no
guarantee of thedollar amount of the payments. Payments will fluctuate
up and down in accordance with the value of an account
investedprimarily in common stocks.
UNREALIZED GAINS AND LOSSES: The difference between the fair value
of a financial instrument not yet sold or disposed of and its amortized cost.
USURPATION: In corporate law, the taking advantage of a corporate
opportunity by a corporate officer or director for his or her personal
gain and in violation of his or her fiduciary duties.
VALUATION RESERVE: A reserve against the contingency that the
valuation of assets, particularly investments, might be higher than
what can be actually realized or that a liability may turn out to be
greater than the valuation placed on it.
VALUATION: estimating the worth of an investment by one or more
methods using either economic stocks or economic flows. Stocks and flows are
two sides of the same coin, and each can be expressed equivalently in terms
of the other. The method of appraisal involves an estimation of appraised
economic value as determined from assets which is an economic
stock. Appraised economic value may be either absolute or comparative. The
method of anticipation involves an estimation of intrinsic economic value as
determined from projected cash returns which is an economic flow. Intrinsic
economic value is independent of current market price and is usually
indicated by terms such as future, projected, forecast, predicted, expected,
potential, power and outlook. The future cash flow stream is discounted to a
present equivalent economic stock. A thorough analysis will include both
intrinsic economic value and absolute appraised economic value.
VALUE ADDED: Value added is the risk adjusted return generated by an
investment strategy: the return of the investment strategy minus the return
of the benchmark.
VALUE ADDITIVITY PRINCIPLE (VAP): A quality of the NPV method of
capital budgeting which enables managers to consider each project
independently. The sum of project NPVs represents the value added to the
corporation by taking them on.
VALUE CHAIN: An approach to strategy which analyzes the steps or
chain of activities ih the firm to find opportunities for reducing cost
outlays while adding product characteristics valued by customers.
VALUE DATE: The day the buyer begins to earn interest on his
investment, often referred to as the interest bought/sold date. In many
markets this is the same as the settlement date. Value dates may fall on
non-market days
VALUE INVESTING (APPROACH): also known as intrinsic value investing;
an approach that combines both a unique philosophy and a corresponding method
of valuation. The philosophy emphasizes the valuation of individual companies
as going-concerns and seeks long-term total return on equity investment
subject to preserving the purchasing power of invested capital. The method of
investment valuation is the estimation of absolute intrinsic economic value
based on the discounted cash flow of expected dividends or free cash flow to
equity owners.
VALUE INVESTING (STYLE): an ambiguous term that generally refers to
the use of fundamental analysis with an emphasis on absolute book value and
on comparative market value using price ratios rather than on forecasts of
earnings growth rates. The method is often mechanical screening and sorting
based on price to earnings ratio or P/E, price to book value ratio or P/BV,
and dividend yield or dividend to price ratio or D/P, but not the method of
discounted cash flow. Thus, this style might equally well be referred to as
price investing. Some economic value is associated with growth, but some
economic value is associated with decline, as in bankruptcy liquidations. It
is often contrasted with growth investing, but the two styles are like
Siamese twins joined at the hip.
VALUE: a misleading term when not qualified by a descriptive
adjective. Three concepts of value as applied to common stock must be
distinguished: accounting value, economic value, and market value. (1)
Accounting value is also known as book value or net worth. (2) Economic value
based on discounted cash flow is also known as intrinsic value. (3) So-called
market value is also known as market capitalization of equity and is equal to
market price per share multiplied by the number of shares
outstanding. Related concepts are investment value, book value, and breakup
value. See accounting value, economic value, and market value. A less
ambiguous distinction is between deep value and surface value. Deep value is
investment value based primarily on economic value and buttressed by
accounting value, quality and other aspects of value independent of market
price. Surface value is a misnomer -- it is not really value but rather
market price, usually expressed as a ratio either with accounting items such
as earnings, dividends, net worth, and sales, or with growth rate. Surface
value is analogous to unit pricing of fungible commodities by number, by
volume, and by weight, for comparison shopping without regard to quality.
VARIABLE LIFE: insurance A policy in which the death benefit and cash
surrender values vary according to theinvestment experience of a
separate investment account.
VARIABLE RATIO WRITE: an option strategy in which the investor owns
100 shares of the underlying security and writes two call options against it,
each option having a different striking price.
VEGA (d V/d Sigma): A measurement of how much an options price changes
for a 1% change in volatility.
VELOCITY: The rate at which money balances turn over in a period for
expenditures on goods and services (often measured as the ratio of GNP to the
money stock). A larger velocity means that a given quantity of money is
associated with a greater dollar volume of transactions.
VERTICAL SPREAD: any option spread strategy in which the options have
different striking prices, but the same expiration dates.
VESTING: The creation of an absolute or unconditional right or power.
VICARIOUS LIABILITY: Legal responsibility placed on one person for
the acts of another.
VOLATILITY INDEX: "the options market's gauge of investor fear."
Traders use VIX as a general inverse indicator of market volatility
and sentiment. High numbers mean that there's excess bearishness, and
low numbers indicate excess bullishness.
VOLATILITY: A measure of the fluctuation in the market price of the
underlying security. Volatility is similar to the annualized standard
deviation of returns.
VOLUNTARY ALIENATION: The transfer of title freely by the owner.
VOTING PLAN: A poison pill antitakeover defense plan which issues
voting preferred stock to target firm shareholders. At a trigger point,
preferred stockholders (other than the bidder for the target) become entitled
to supervoting privileges, making it difficult for the bidder to obtain
voting control.
VOTING TRUST: A device by means of which shareholders retain cash
flow rights to their shares while giving the right to vote those shares to
another entity.
WARRANT: a long-term, non-standardized, security that is much like an
option. Warrants on stocks allow one to buy (usually one share of) the common
at a certain price until a certain date. Index warrants are generally
warrants on the price of foreign indices. Warrants have also been listed on
other things such as cross-currency spreads and the future price of a barrel
of oil. Black-Scholes Parameters for Pricing Warrants: S current share price
a V, where V is enterprise value minus debt; X exercise price per share total
warrant exercise amount multiplied by 1 - a; T current time to expiration
average T for warrants; r interest rate interest rate; s standard deviation
of stock return standard deviation for returns on enterprise value, including
warrants.
WARRANTY DEED: The grantor guarantees that the title is good, free, and
clear of all liens and encumbrances.
WHITE NOISE: The audio equivalent of Brownian motion. Sounds that are
unrelated and sound like a hiss. The video equivalent of white noise is
"snow" in television reception.
WHOLE LIFE: A traditional type of life policy (not universal or
variable) which provides coverage for the "wholelife" of the insured,
rather than for a specific term period. The proceeds are paid at the
insured's death or at the agespecified in the policy, usually age 100
or more, when the insured survives that long.
WHOLE LOANS: loans in their original (unsecuritized) form.
WILLIAMS ACT OF 1968: Federal legislation designed to protect target
shareholders from swift and secret takeovers in three ways: (1) Generating
more information during the takeover process; (2) Requiring minimum period
for tender offer to remain open; (3) Authorizing targets to sue bidders.
WRAPAROUND: A financing device that permits an existing loan to be
refinanced and new money to be advanced at an interest rate between the rate
charged on the old loan and the current market interest rate. The creditor
combines or "wraps" the remainder of the old loan with the new loan at the
intermediate rate.
WRIT OF CERTIORARI: A writ from
a higher court asking the lower court for the record of a case.
WRITE: To write an option is to sell an option.
YANKEE BONDS: dollar-denominated bonds issued by non-U.S. companies
in the U.S.
YIELD CURVE: The relationship between the yield to maturity on an
investment and its time to maturity. If a longer time to maturity
gives a greater yield, it is a normal (positive) yield curve, whereas
if the shorter maturities result in a greater yield it is an inverted
(negative) yield curve. In a normal yield curve, yields rise as the
maturities increase. If the yield on shorter maturities is higher than
that of longer maturities, then an inverted yield curve exists. An
inverted yield curve is a sign of tight money and is bearish for
stocks.
ZEBRA: Zero-coupon Eurosterling Bearer or Registered Accruing
certificate - a stripped British pound-denominated bond.
ZERO-COUPON SWAP CURVE: The implied spot yield curve for swaps. This
curve is derived from the conventional yield curve for at-the-market swaps
(swaps with current market rates and terms).
LARCENY: The wrongful taking and carrying away of another person's
personal property with the intent to permanently deprive the owner of
the property. Some states classify larceny as either grand or petit,
depending on the property's value.
MORTGAGE POINTS: Interest Prepayment