Derivatives Demystified: A Step-by-Step Guide to Forwards, Futures, Swaps and Options

Appendix B. Glossary of Terms

Accreting swap A swap in which the principal increases in each time period.

Accrued interest Interest on a bond that has accrued since the last coupon date.

American option An option that can be exercised on any business day during its life.

Amortization Repayment of the principal on a loan or bond in instalments over a period of time.

Amortizing swap A swap in which the principal is reduced in each time period.

Arbitrage A set of transactions in which risk-free profits are achieved because assets are mispriced in the market. More loosely, a strategy that is not entirely risk-free but generates profits in most circumstances.

Arbitrageur Someone who takes advantage of arbitrage opportunities.

Asian or Asiatic option Another name for an average price option.

Ask The offer or sale price of an asset or derivatives contract.

Asset A physical commodity or a financial asset such as a share or a bond.

Asset-backed securities Bonds backed by a pool of assets created or 'originated' by a bank or other institution, such as mortgages and credit card loans. The cash flows from the assets are used to repay the bondholders.

Asset-or-nothing option An option that pays out an amount equal to the price of the underlying if it expires in-the-money, otherwise nothing.

Assignment Formal notification from an exchange that the writer of a call (put) option must deliver (take delivery of) the underlying asset at the exercise price.

As-you-like option See: Chooser option.

At-best order