Counterparty Credit Risk: The new challenge for global financial markets

Glossary

Accrued interest

Interest that is due on a bond or other fixed income security since the last interest payment was made.

Additional termination event (ATE)

Pre-defined event (such as a ratings downgrade) that allows a transaction to be terminated at (mid-) market rates.

Annuity

A series of payments of fixed size and frequency.

Arbitrage

A transaction that generates a profit without any associated financial risk.

Asset swap

A swap contract used to convert one type of investment into another. Usually, a fixed investment such as a bond with guaranteed coupon payments is swapped into floating payments.

At the money

An option is at the money if the strike price of the option equals the current (spot) market price of the underlying security. At-the-money forward refers to the forward value of the underlying security and not the spot price.

Backwardation

The situation where spot prices exceed futures prices. Backwardation implies a downward-sloping (or inverted) forward curve and can imply an immediate shortage of the underlying asset (such as an oil shortage due to political reasons).

Bankruptcy

A legally declared inability of an individual or entity to pay its creditors. The bankruptcy may be voluntary and filed by the individual or organisation concerned or it may be involuntary and filed by the creditors. Creditors may file a bankruptcy petition in an effort to recoup a portion of what they are owed or initiate a restructuring.

Basis

The difference in price or yield between ...