Basic financial dictionary

Pubblicato il 4 Maggio 2011 da Veronica Baker

Basic financial dictionary

Here are some terms I use in my articles (even when I write in italian, the slang is international, so I explain it in english).

American (option) : An option that may be exercised on any trading day on or before expiry.

Bank for International Settlements (BIS) : An international organization which fosters monetary and financial cooperation and serves as a bank for central banks.
The BIS often acts as an agent in the forex market, allowing central banks to mask their identity in an attempt to dampen market impact.

Barrier option : A type of “exotic” option that comes into existence or ceases to exist once a certain price is reached.
They are often added to a “vanilla” or typical option to make the premium less expensive.
For example, a 1.4000 EUR/USD call purchased when spot is at 1.3500 would be cheaper if there were a “knockout” embedded in the option, for example at 1.3300.
If 1.3300 trades before the expiration of the options, the whole structure would be “knocked out” and the seller of the option would be able to pocket the entire premium.

Bid : A buy order placed at or below the market.

BOC : Bank of Canada

BOE : Bank of England

BOJ : Bank of Japan

Buba : The market nickname for the Bundesbank, Germany’s inflation-obsessed central bank

Cable : Nickname for GBP/USD.
Originates from the use of transatlantic cables to transact currency deals years ago.
Anyone who uses terms like “Cable-yen” or “euro-cable” is to be dismissed as an amateur.

Call Option : An option which conveys the right to buy something at a specific price .

Clearer : One of the big four UK banks (Barclays, Lloyds, HSBC, RBS). Historically, they were the main clearers of paper checks.

Corporates : The treasury departments of large multinational corporations.
They are responsible for hedging the forex exposures of their firms, which can have dramatic impacts on earnings for firms with large overseas sales. For example, a company like Airbus has massive revenues in dollars but has most of its cost base in euros.
They must hedge their currency exposures to try and offset this mis-match.

Custody bank : A bank which holds securities in custody for other financial institutions, does their bookkeeping and settles their trading activity. Examples include Bank of New York Mellon, State Street and Northern Trust Co. Also know as custodians

Delta : The ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative. Sometimes referred to as the “hedge ratio”.

Double-no-touch (DNT) : An options strategy which pays the owner of the structure if prices stay within a pre-defined range during the length of the contract. For instance a 1.30/.35 DNT would pay off if prices do not trade outside that range while the option is in force.

Dovish : A statement related to monetary policy which implies looser policy (lower rates).

Ecofin : A council consisting of the economy and finance ministers of the European Union. They meet once a month.

Eurogroup : A group of finance ministers of countries who are members of the euro. It’s spokesman is Jean-Claude Junckers, the finance minister of Luxembourg.

European Financial Stability Facility (ESFS) : A legal instrument agreed by the 27 member states of the European Union on 9 May 2010, aiming at preserving financial stability in Europe by providing financial assistance to eurozone states in difficulty.
Colloquially known as ‘euro SPV’ or ‘euro TARP’

European (option) : An option that may only be exercised on expiration .

Expiration date (option) : If the option is not exercised by the expiration date, it becomes void and worthless.

Fade : To trade counter to. For instance, to “fade a trend” is to counter the trend. To fade a rumor is to believe it to be untrue and do the opposite of what the rumor would suggest.

Fibonacci retracements : A useful tool for traders as markets correct during trends. Technicians look for support on pullbacks at 38.2% of the uptrend or rebounds in an downtrend, 50% and 61.8%. Derived from the “golden ratio” of Italian mathematician Fibonacci.

Fixing : A preset time of day when bids and offers are aggregated and cleared at a published price.
Popular fixings are the “ECB fix” at 12:15 GMT and the London fixing at 16:00 GMT.
Fixings are used primarily by asset managers.
They have a fiduciary responsibility to get their clients the best possible execution and the thinking is the fixing price is the most transparent of the day. The benchmark price is published by the WM Company.

Funds : Market nickname for the USD/CAD currency pair.

Gamma : Concepts in the options markets are expressed in terms of the Greek alphabet.
Gamma refers to the rate of change in an option’s delta relative to the price of the underlying asset.
A short gamma position will become shorter as the price of the underlying asset increases.
As the market rallies, you are effectively selling more and more of the underlying asset as the delta becomes more negative.

Haircut : In lending, the difference between the value of a loan and the value of the collateral pledged to secure the loan

Hawkish : A statement regarding monetary policy which implies tighter policy (higher rates)

IMM : The International Monetary Market division of the Chicago Mercantile Exchange.
This is the exchange where the bulk of the currency futures trading takes place worldwide.
Net positions on the exchange are compiled each week and reported in the Commitments of Traders report on Friday afternoons.

JGB : Japanese government bonds

Kampo : An arm of the Japanese postal savings system.
They are institutional investors who funnel large amounts of Japanese savings into foreign investments.
They are sometimes thought to act in forex markets at the behest of the government, to influence exchange rates to advantage the Japanese economy. Some times referred to as a “semi-official” or “quasi-official” market participant.

Loonie : Nickname for the Canadian dollar. Derives from the picture of a Loon on the $1 coin.
What is a $2 coin called ? A twonie, of course.

Model fund : Hedge fund which uses some form of quantitative model to initiate and liquidate trades.
The most familiar type of funds are trend-followers like J.W. Henry and Co. Many of these funds trade at set times during the day, often at 10 am New York time.

Offer : A sell order places at or above the market price.

“Old Lady” : A nickname for the Bank of England. “The Old Lady of Threadneedle St.”

Operation Twist : A monetary policy operation last used in the early 1960s in which the Fed sold shorter-dated Treasuries from their portfolio and purchased longer-dated maturities in order to drive down long-term interest rates.
The overall size of the Fed’s balance sheet is not impacted by the move.

Option : A derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price.
The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the corresponding obligation to fulfill the transaction.
The price of an option derives from the difference between the reference price and the value of the asset (commonly a stock, a bond, a currency or a future contract) plus a premium based on the time remaining until the expiration of the option.

Outside day key reversal : Key reversals are outside days either at trend highs or lows.
A key reversal down occurs when a market makes a new high, then reverses down takes out the previous day’s low, and closes lower than the previous day’s close.

Over-the-counter (OTC) : A trade between two private parties not listed on an exchange.
The terms of an OTC option are unrestricted and may be individually tailored to meet any business need.
In general, at least one of the counterparties to an OTC option is a well-capitalized institution.

Plain vanilla option : The most basic option type with a simple expiration date and strike price with no additional features.

Price keeping operations (PKO) : Usually refers to Japanese authorities intervening in equity (and sometimes forex) markets to defend a particular price level.

Prime broker s: Firms which allow clients like hedge funds to use their credit facilities to access financial markets.
For example, a hedge fund client of Bank X can trade in the interbank FX market using Bank X’s name in return for a fee.

Put (0ption) : an option which conveys the right to sell something at a specific price.

Quantitative ease : A strategy used by central banks once targeting short-term interest rates becomes ineffective because rates have reached zero (or close to it).
The central bank buys assets, typically government bonds, in an effort to inject money into the economy.

RBA : Reserve Bank of Australia (central bank)

Real money : Nickname for “end users” of foreign exchange, who trade to pay for transactions or liquidate proceeds from transactions in other markets like equities, fixed income and commodities.
We typically use real money as shorthand for institutional asset managers like pension funds, mutual funds and endowments.
Some include corporations in their definition.
We do not.

Reflation trade : The purchase of asset classes that investors expect to do well in an economic recovery.
Commodities, equities and emerging markets are examples.
Asset classes to be avoided in a reflationary atmosphere include bonds and low-yielding currencies.

SNB : Swiss National Bank, the Swiss central bank.

Sovereign names : Used interchangeably for sovereign wealth funds or central banks.

Sovereign wealth fund (SWF) : A fund set up by a country with large foreign exchange reserves to help manage those reserves.
Typically SWFs purchase long-term securities to try and enhance investment returns beyond what central banks typically earn holding government debt. Examples include the Government of Singapore Investment Company and the Abu Dhabi Investment Authority.

Spin-out (also known as spin-off or starburst) : A type of  corporate action where a company “splits off” sections of itself as a separate business, becoming an independent business.
Shareholders of the parent company receive equivalent shares in the new company in order to compensate for the loss of equity in the original stocks ; this potentially makes investment in the companies more attractive, as potential share purchasers can invest in only the portion of the business they think will have the most growth.

Stop-loss : An order which closes out a market position once a certain price level trades in the market.
For example, a sell order placed below the market price to protect against accelerating losses.

Strike Price (option) : The reference price at which the underlying asset may be traded.
The process of activating an option and thereby trading the underlying at the agreed-upon price is referred to as  exercing it.
Options have an expiration date.
If the option is not exercised by the expiration date, it becomes void and worthless.

Toshin : Japanese investment trusts which invest in non-JPY denominated assets.

Yard : Market slang for billion.

Writing (or selling) an option : In return for assuming the obligation, called writing the option, the originator of the option collects a payment, the premium, from the buyer.
The writer of an option must make good on delivering (or receiving) the underlying asset or its cash equivalent, if the option is exercised.

Sources : thx to

Basic financial dictionary


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