Derivatives

Glossary

A

Abnormal profits

The extra return over and above that which is compensation for the riskiness of an investment.

ABS (asset-backed security)

Cash flows from assets (e.g. bonds, loans) which are bundled together and then sold as an ABS.

ABS-CDO

Cash flows from several ABSs are combined, into tranches, which determine the order of payment.

Accrued interest

Interest earned on a bond since the last coupon payment.

Active portfolio management

Investment strategies which aim to achieve abnormal returns.

Agency costs

Costs associated with monitoring contracts.

American option

Option which may be exercised at any time up to the expiry date.

Anomaly

Returns which cannot be explained by known asset pricing models.

Arbitrage (arbitrageur)

An investment strategy that enables a risk-free profit to be made by an arbitrageur. Usually involves trading in two (or more) securities.

ARCH / GARCH model

A model of time varying conditional volatility estimated using historical data.

Asian option

Option whose payoff depends on the average price of the underlying asset over the life of the option.

Ask (offer) price

The price at which a market maker/dealer offers to sell a security.

Asset

General term for anything with economic value.

Asset allocation

Decision on how to split your wealth into different asset classes, for instance stocks, bonds, and cash.

Asymmetric information

Situation where one party has more information than another party.

At-the-money ...