Risk Management and Financial Institutions, 4th Edition

Glossary

ABS

See Asset-Backed Security.

ABS CDO

Security created from the tranches of different ABSs.

Accrued Interest

The interest earned on a bond since the last coupon payment date.

Additional Tier 1 Capital

Items such as non-cumulative preferred stock that do not qualify as Tier 1 equity capital.

Add-On Factor

When the credit equivalent amount for a derivatives transaction is being calculated, this is the percentage of principal added to the current exposure to allow for possible future changes in the value of the derivative.

Adjoint Differentiation

A way of modifying a computer program so that Greek letters are calculated in a computationally efficient way.

Advanced Measurement Approach

The way in which the most sophisticated banks will be allowed to calculate regulatory capital for operational risk under Basel II.

Adverse Selection

The phenomenon that, if an insurance company offers the same premiums to everyone, it tends to end up providing coverage for the worst risks.

Agency Costs

Costs in a business relationship where the interests of the two parties are not perfectly aligned.

Alpha

Return earned on a portfolio in excess of that predicted by the capital asset pricing model.

Alternative Investments

See Hedge Funds.

American Option

An option that can be exercised at any time during its life.

Analytic Result

Result where the answer is in the form of an equation.

Arbitrage

A trading strategy that takes advantage of two or more securities being mispriced relative to each ...