InvestingTips360

  • Home
  • Recent Posts
  • Beginner’s Guide
  • Top Brokerage Firms
  • FAQ
  • Privacy Policy

FAQs

a

What is 130/30?

The 130/30 investment strategy means a money manager is fully invested in the stock market with 130% exposure – 100% in long positions and 30% in short positions.
Back to Top
a

What is accrual?

Accrual, in simple terms, is when transactions are recorded in the books of accounts as soon as they occur, even if the payment for that particular product or service has not been received or made.

Back to Top
a

What is accrued interest?

Accrued interest refers to interest yielded on outstanding debt for a time, one which the payment has not yet been made or received by the borrower or lender.

Back to Top
a

Actual/360, Actual/365

This is the normal symposium that is used to calculate interest payments for money market products.

Back to Top
a

What is ALCO?

ALCO means Asset Liability Committee, and it is also known as surplus management. It is a supervisory group that regulates the management of assets and liabilities with the goal of earning adequate returns.

Back to Top
a

What is Algorithmic Trading?

An algorithm is a formula or an elaborate mathematical model used by some traders in financial markets.

Back to Top
a

What is an Alpha?

Alpha (α) is a term used in finance as an estimate of performance that shows when a strategy, trader, or portfolio manager has managed to beat the market return or its edge over some period.

Back to Top
a

What is an American Style Option?

An American style of options is a contract that allows holders to exercise their rights at any time before or on the expiry date.

Back to Top
a

What is Arbitrage?

This is the process of simultaneously purchasing and selling the same product in two different markets for tiny, risk-free profits.

Back to Top
a

What is an Asian option?

An Asian option (or average value option) is a special type of options contract. For Asian options, the payoff is determined by the average underlying price over some pre-set period.

Back to Top
a

What is an Asset?

An asset is something a person owns, i.e., an investment, shares and stocks, and so on.

Back to Top
a

What is Asset Swap?

An asset swap is a derivative contract between two parties that swap fixed and floating assets. The transactions are done over-the-counter based on the amount and terms agreed upon by both sides of the transaction.

Back to Top
a

What is Auction Rate Security (ARS)?

ARS is a long-term bond that usually lasts for a maturity period of ten to thirty years. It also offers a monthly interest rate.

Back to Top
a

What is a Banking Book?

The banking book of a bank is the depository of assets, primarily loans which a bank is expected to hold until maturity when the loan is repaid fully.

Back to Top
a

What is Base Rate?

Base Rate in the UK is the interest rate set by the Bank of England for lending to other banks used as the benchmark for interest rates generally.

Back to Top
a

What are Basis Points?

Basis points are used as a convenient unit of measurement in contexts where percentage differences of less than 1% are discussed.

Back to Top
a

What is Basis Point Value?

Basis point value is also called PV01 and DV01). The price value of a basis point (PVBP) is a measure used to describe how a basis point change in yield affects the price of a bond.

Back to Top
a

What is Basis Risk?

Basis risk is defined as the inherent risk a trader takes when hedging a position by taking a contrary position in a derivative of the asset, such as a futures contract. The risk associated with this change in value is sometimes referred to by dealers as basis risk.

Back to Top
a

What is a Basis Swap?

A basis swap is a type of swap agreement in which two parties agree to swap variable interest rates based on different money market reference rates.

Back to Top
a

What is a Bearer Bond?

A bearer bond is a bond or debt security issued by a business entity such as a corporation or a government.

Back to Top
a

What is a Bermudan Option?

This is a restricted form of the American option, which allows for early exercise but only at set dates before the expiry date.

Back to Top
a

What is a Bid/offer Spread?

A bid/offer spread is simply the difference between the price at which you can buy a financial instrument and the price at which you can sell it.

Back to Top
a

What is a Bond?

A bond is a debt instrument normally redeeming on a known future date at par (100%) of face value. Bond issuers usually are governments, banks, or corporates.

Back to Top
a

What is a Book Entry?

A book entry is simply a method of tracking ownership of securities where no paper certificate is given to investors.

Back to Top
a

What are Capital Markets?

Capital markets are commonly seen as the sector of financial markets concerned with short and long-term borrowing using tradable financial instruments like bonds and shares.

Back to Top
a

What are Caps & Floors?

These are option-like contracts that are customized and negotiated by two parties. They are based on short-term interest rates like LIBOR.  

Back to Top
a

What is a Certificate of Deposit?

A certificate of deposit is a savings account that holds a fixed amount of money for a fixed period, and in exchange, the bank pays interest.

Back to Top
a

What is a Clean Price?

Clean price is simply the price of a bond excluding any interest accrued since issuing the bond coupon.

Back to Top
a

What is a Collar?

A collar, commonly known as a hedge wrapper, is an options strategy put in place to protect against significant losses, but it also limits large gains.

Back to Top
a

What is Collateral?

Collateral is an item of value used to secure a loan. It is used as security to reduce the lending party’s credit risk when it enters into a transaction.

Back to Top
a

What are Collateralized Bond Obligations?

This is a type of collateralized debt obligation that uses bonds as the assets in the special purpose vehicle.

Back to Top
a

What are Collateralized Debt Obligations?

A collateralized debt obligation (CDO) is a complex structured finance product backed by a pool of loans and other assets and sold to institutional investors.

Back to Top
a

What is a Collateralized Loan Obligation?

This is a type of collateralized loan obligation for single security backed by a pool of debt.

Back to Top
a

What is Commercial Paper?

CP is a generally used type of unprotected, short-term debt instrument issued by corporations, typically used to finance payroll, accounts payable and inventories, and meet other short-term liabilities.

Back to Top
a

What is Common Code?

This is a nine-digit authorization code issued jointly by EUROCLEAR and CEDEL.

Back to Top
a

What is a Credit Linked Note?

A credit-linked note (CLN) is a security with an embedded credit default swap permitting the issuer to shift specific credit risk to credit investors.

Back to Top
a

What is a Conduit?

A conduit is mainly used in methodic finance. Usually, it is a company that is specially integrated for a specific transaction.

Back to Top
a

What is a Confirmation?

This is simply a document that provides all the requisite details about a trade that has been confirmed between two dealers.

Back to Top
a

What is a Contingent Premium Option?

A contingent premium option is a European option whose premium is deferred to expiration and is paid only if the option expires in the money.

Back to Top
a

What is the Cost of Carry?

Cost-of-carry refers to the cost associated with carrying value in an investment. It is often defined as a general term used by traders to describe the profits or loss accrued from holding an asset.

Back to Top
a

What is a Coupon?

A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from the issue date until maturity.

Back to Top
a

What is a Covered Bond?

A covered bond is a loan package issued by banks and then sold to a financial institution for resale.

Back to Top
a

What is a Credit Default Swap?

A CDS is a financial derivative or contract that allows an investor to “swap” or offset his or her credit risk with that of another investor.

Back to Top
a

What is Credit Risk?

This refers to the total amount of money you could lose due to a default by a counterparty. When making a loan (or bond purchase), all the principal and accrued interest are at risk. The actual loss following default will depend on the recovery rate.

Back to Top
a

What is a Currency Swap?

A currency swap sometimes referred to as a cross-currency swap, involves the exchange of interest—and sometimes of principal—in one currency for the same in another currency.

Back to Top
a

What is Dirty Price?

The dirty price refers to the cost of a bond that includes accrued interest based on the coupon rate, that is, the last coupon payment date.

Back to Top
a

What is a Discount Factor?

A discount factor generally shows how time and interest rates affect the present value of money.

Back to Top
a

What is Discount Rate?

This refers to the minimum rate of interest set by the Federal Reserve to charge institutions that borrow money.

Back to Top
a

What is Duration?

Duration is a measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates.

Back to Top
a

What is Embedded Risk?

This refers to a term that is sometimes used with methodic bonds. These are bonds that contain risks over and above those you would often expect to find.

Back to Top
a

What is an Euribor?

Euribor is short for Euro Interbank Offered Rate. The Euribor rates are based on the average interest rates at which a large panel of European banks borrows funds from one another.

Back to Top
a

What are Fed Funds?

Federal funds often referred to as fed funds, are excess reserves that commercial banks and other financial institutions deposit at regional Federal Reserve banks. These funds can be then be lent to other market participants with insufficient cash on hand to meet their lending and reserve needs.

Back to Top
a

What is a Floating Rate Note?

This is a bond where the coupons have variable rates, meaning that they are often reset every three or six months using the prevailing Libor rate while interest is paid in arrears.

Back to Top
a

What is FX Swap?

A foreign currency swap, also known as an FX swap, is an agreement to exchange currency between two foreign parties.

Back to Top
a

What is Forward Rate Agreement?

FRA is an OTC instrument that allows you to hedge or trade forward Libor fixings.

Back to Top
a

What is Forward Transaction?

Forward deals are simply OTC bilateral transactions. It is a customized contract between two parties to buy or sell an asset at a specified price on a future date. Forwards are used for both trading and hedging purposes.

Back to Top
a

What are Futures?

Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price. The buyer must purchase, or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date.

Back to Top
a

What is General Collateral?

General collateral trades are a type of repurchase agreement (repo) executed without the designation of specific securities as collateral until the end of the trading day.

Back to Top
a

What are the “Greeks?”

“Greeks” is a term used in the options market to describe the different dimensions of risk involved in taking an options position. These variables are called Greeks because they are typically associated with Greek symbols.

Back to Top
a

What is a Haircut?

Haircut is a term that is used in several different markets. It is commonly used when referencing the percentage difference between an asset’s market value and the amount used as collateral for a loan.

Back to Top
a

What is a Hedge Fund?

Hedge funds are alternative investments using pooled funds that employ different strategies to earn active returns, or alpha, for their investors. They obtain capital from investors who pay a fee that is often linked to the performance of the fund.

Back to Top
a

What is Hedging?

Hedging is basically about reducing risk. Traders can minimize risk by taking offsetting positions using an alternative market or financial instrument.

Back to Top
a

What is an IRS?

An interest rate swap is a forward contract in which one stream of future interest payments is exchanged for another based on a specified principal amount. It is a transaction where one party pays a fixed interest rate in exchange for a floating rate of interest.

Back to Top
a

Internal Rate of Return (IRR)

IRR is used to calculate the return on investment. IRR is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis.

Back to Top
a

What is ISIN?

An International Securities Identification Number (ISIN) is a 12-digit alphanumeric code that uniquely identifies a specific security. The organization that allocates ISINs in any particular country is the country’s respective National Numbering Agency (NNA).

Back to Top
a

What is Leverage?

Leverage results from using borrowed capital as a funding source when investing in expanding the firm’s asset base and generating returns on risk capital. It can be calculated in different ways, and therefore direct comparisons are difficult.

Back to Top
a

What is Liability?

A liability is something a person or company owes, usually a sum of money. Liabilities are settled over time by transferring economic benefits, including cash, goods, or services.

Back to Top
a

What is Liability Driven Investment?

A liability-driven investment, otherwise known as liability-driven investing, is primarily slated toward gaining enough assets to cover all current and future liabilities.

Back to Top
a

What is LIBID?

LIBID, or London Interbank Bid Rate, is the rate of interest a bank wishing to borrow is prepared to pay.

Back to Top
a

What is LIBOR?

LIBOR, an acronym of London Interbank Offer Rate, refers to the interest rate that UK banks charge other financial institutions for short-term loans.

Back to Top
a

What are Limits?

These are the maximum amounts of risk that a dealer is permitted to take.

Back to Top
a

What is Liquidity?

Liquidity can have two meanings.

1. In financial markets, liquidity refers to how quickly an investment can be sold without negatively impacting its price.

2. The amount of short-term liquid assets a bank holds against its liabilities ensures that it will not be insolvent.

Back to Top
a

What is a Long Position?

Investors take a long position in the stock market when they buy stocks and hold on to them, believing prices will increase.

Back to Top
a

What is Margin?

There are two meanings. 

1. In finance, the margin is the collateral that an investor has to deposit with their broker or exchange to cover the credit risk the holder poses for the broker or the exchange.

2. In futures markets, a margin is a sum of money that must be put up to support a trade.

Back to Top
a

What is Market Risk?

Market risk is the risk of losses on financial investments caused by adverse price movements.

Back to Top
a

Mark-to-market (MTM)

This is a method of measuring the fair value of accounts that can fluctuate over time, such as assets and liabilities.

Back to Top
a

Medium-term Note (MTN)

An MTN is a type of bond that offers the issuer the ability to tailor a bond for an investor. It is a note that usually matures in five to 10 years.

Back to Top
a

What are Money Markets?

This is the sector of financial markets that is wholly concerned with financial instruments with maturity shorter than a span of one year, e.g., wholesale deposits.

Back to Top
a

What is a Monoline Insurance Company?

A monoline insurance company is an insurance company that guarantees debt issuers, often in the form of credit wraps that enhance the Credit of the issuer.

Back to Top
a

What is a Minimum Transfer Amount (MTA)?

An MTA refers to the minimum amount of money that a person can ask for when he or she has the right to call for additional collateral. Its purpose is to prevent the calling of nuisance amounts.

Back to Top
a

What is Netting?

This is a method of reducing Credit, settlement, and other risks of financial contracts by combining two or more obligations to achieve a reduced net obligation.

Back to Top
a

Novation

Novation is a legal process of substituting the original contract with a replacement contract, where the original party agrees to forgo any rights afforded to them by the original contract.

Back to Top
a

What is Operational Risk?

Operational risk is the risk that a firm’s internal practices, policies, and systems are inadequate to prevent a loss from being incurred, either because of market conditions or operational difficulties.

Back to Top
a

What are Operations?

This is the area of a bank that generally deals with processing a transaction after it has been agreed by a dealer.

Back to Top
a

What are Options?

There are four basic options trades:

Long call – you have the right but not obligation to buy an asset at an agreed price on a future date.

Short call – if the long call holder exercises the option to buy, you have an obligation to sell the asset at an agreed price.

Long put – you have the right but not obligation to sell an asset at an agreed price on a future date.

Short put – if the long put holder exercises the option to sell, you have an obligation to buy the asset at an agreed price.

Back to Top
a

What is OTC?

Over-the-counter (OTC) or off-exchange trading is done directly between two parties without the supervision of an exchange.

Back to Top
a

What are P.I.K Notes?

Payment in kind notes allows the borrower to opt to pay interest in additional debt rather than in cash.

Back to Top
a

What is Pool Factor?

The pool factor measures how much of the original loan principal remains in asset-backed security (ABS).

Back to Top
a

What is Present Value?

This is the value of a future cash flow expressed in today’s money.

Back to Top
a

What is a Primary Market?

This is when a bond or equity is first distributed and sold to investors.

Back to Top
a

What is Proprietary Trading?

Proprietary trading is a way in which dealers can make money. It involves using your firm’s capital to take a risk, thereby hoping to profit from favorable movements in market prices.

Back to Top
a

What is a Rating?

A rating is an assessment tool assigned by an analyst or rating agency to a stock or bond.

Back to Top
a

What is a Rating Agency?

Rating agencies assess the credit quality of issuers and debt instruments. The most popular rating companies are; Standard & Poors, Moodys, and Fitch.

Back to Top
a

What is Recovery Rate?

The recovery rate is the percentage of your money that you get back.

Back to Top
a

What is Reg-144a?

This is a private placement issued under 144a that allows Non-US companies to access sophisticated domestic US investors.

Back to Top
a

What is Reg-S?

Reg-S is a Securities Exchange Commission filing used for Initial Public Offerings targeted at non-US investors.

Back to Top
a

What is a Registered Bond?

Registered bonds are issued in the owner’s (bond holder’s) name and address.

Back to Top
a

What is Repo Rate?

Repo Rate, or repurchase rate, is the key monetary policy rate of interest at which the central bank or the Reserve Bank of India (RBI) lends short-term money to banks.

Back to Top
a

What is a Repurchase Agreement?

This is often referred to as a repo. A repo transaction involves two parties, the buyer and the seller.

Back to Top
a

Reverse Repo

There are always two counterparties to a repurchase agreement. The party that buys the collateral at the start of the trade and sells it on the maturity date enters a reverse repo.

Back to Top
a

What is a Secondary Market?

A secondary market is a platform wherein the shares of companies are traded among investors.

Back to Top
a

What is Segregation of Duties?

The segregation of duties is the assignment of various steps in a process to different people.

Back to Top
a

What are Settlements?

This is the area of a financial institution responsible for originating confirmations, verifying trades, and arranging payments. It is outside and independent of the treasury.

Back to Top
a

What is Settlement Risk?

Settlement risk refers to the risk or probability that one party will not uphold their contractual obligation in a transaction or deal.

Back to Top
a

What is Sharpe Ratio?

This is a measure of risk and returns often used in fund management.

Back to Top
a

What is a Short Position?

This refers to a situation where you sell a financial asset that you do not own. You hope to benefit from any fall in the price of that asset.

Back to Top
a

What is Special collateral?

When a particular bond is in demand in the repo market, the repo rate can fall much lower than market interest rates. That bond is then referred to as unique collateral (see repurchase agreement).

Back to Top
a

What is a Special Purpose Vehicle (SPV)?

A special purpose vehicle is a company that is usually set up in a tax and business-friendly environment, for example, Delaware, Jersey, or the Netherlands Antilles.

Back to Top
a

What is a Spot?

This is the traditional two-day settlement period where transactions are agreed upon today, but the delivery and payment take place in two days.

Back to Top
a

What is Swap?

Swap is a term that describes a bilateral transaction where two institutions exchange cash flows based on separate indices. A swap has a start date, a maturity date, and a principal amount on which the cash flow payments are calculated. The simplest example is an interest rate swap. There is no principal exchange, only interest payments. One party pays a fixed interest rate to the other party and, in return, receives a variable interest rate, typically LIBOR. Swaps are used for both hedging and trading purposes.

Back to Top
a

What is Swaption ?

A swaption is an option on a swap. There are two types of swaption:

1. A payer’s swaption: if you buy this option, it gives you the right (but not obligation) to enter into a forward starting swap where you pay fixed interest.

2. A receiver’s swaption: if you buy this option, it gives you the right (but not obligation) to enter into a forward starting swap where you receive fixed interest on a swap.

Back to Top
a

What is Synthetic?

This is a general term used in financial markets to describe the framework of a financial instrument or product using unoriginality.

Back to Top
a

What is Synthetic Collateralized Debt Obligation?

This is a type of collateralized debt obligation that uses credit default swaps as the assets in the special purpose vehicle.

Back to Top
a

What is Trading?

Trading is generally known as the process of purchasing and selling financial instruments frequently.

Back to Top
a

What is Trading Book?

The portfolio where trading positions are recorded when financial instruments are purchased and sold regularly by traders is called the trading book.

Back to Top
a

What is Treasury Bill?

This refers to a short-term debt instrument with a maximum maturity of twelve months issued by a government.

Back to Top
a

What is Value-at-risk (VAR)?

VAR is a risk management technique that measures and quantifies the level of financial risk within a firm, portfolio, or position for a given holding period and confidence interval.

Back to Top
a

What is the VIX?

The Cboe Volatility Index (VIX) is a real-time index representing the market’s expectations for the relative strength of near-term price changes of the S&P 500 index (SPX).

Back to Top
a

What is Volatility?

Volatility come in two types, namely:

1. Historic volatility: this is the yearly standard deviation of a product’s price. The more it goes up and down in price, the higher the measure of volatility becomes.

2. Implied volatility: since volatility is a measure of risk, it is used to input models to price options. Therefore if the option pricing formula is reworked, you can calculate the volatility from an option’s market price.

Back to Top
a

What is Yield Curve/term Structure?

If interest rates are plotted on a graph, with time on the x-axis and the rate on the y-axis, the resultant curve is called the yield curve or term structure.

Back to Top
a

What is a Zero-coupon Bond?

A zero-coupon bond, also known as an accrual bond, is a debt security that does not pay interest but instead trades at a deep discount, rendering a profit at maturity when the bond is redeemed for its full face value.

Back to Top
Meet InvestingTips360 I Contact Us I Site Disclaimer

Copyright © 2023 InvestingTips360