ERM terms




ERM terms


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Glossary ERM


ERM terms



Absolute Swap Yield: The fixed rate in an interest rate swap expressed as a percentage rate. Also called Absolute Rate.


‘Act of God’ Bond: Bond issued by an insurance company with principal or interest or both linked to the company's losses from disasters.

Adjusted Present Value: A modified form of Net Present Value in which different discount rates are used for different cash flows based on their risk.

American option: An option contract that can be exercised on any date prior to maturity.

American Window: A modified American-style option, which permits exercise at any time within the exercise period or 'window.' It is one of many variants that falls between European and American options.

Analysis of variance: A statistical technique to test the equality of three or more sample means and thus make inferences whether the samples have come from populations having the same mean.

Arbitrage: A financial transaction to make a profit by taking advantage of the difference in prices of the same asset in two different markets.

Asian option: An option whose pay-off depends on the average value of the underlying asset over a specified period.

Asset-backed security: A security that is issued by a financial institution and backed by assets that are on the institutions’ balance sheet.

Asset/Liability Risk: This is the risk of not being able to meet the current obligations/liabilities with current assets. If not properly handled, it may result in a liquidity crunch.

Asset Stripping: The practice of taking over a company, splitting it into parts and selling them for a profit.

At-the-money: An option is at-the-money if the strike price of the option is equal to the market price of the underlying security.

Back Office: Clerical operations of a brokerage house that support, but do not include, the trading of stocks and other securities. Includes all written confirmations, settlement of trades, record keeping and regulatory compliances.

Back Testing: The practice of applying a valuation or forecasting model to historical data to appraise the model's possible usefulness when future data are used.

Backup Facility: A standby underwriting or lending agreement that provides necessary financing if an issuer is unable to obtain prompt financing on reasonable terms in its traditional borrowing markets.

Backwardation: A market condition where the forward rates exceed the spot rates.

Balloon: The final payment on a bond or note that is substantially larger than the preceding amortization payments. The term is also used to describe an over-valued financial instrument or other asset.

Base Currency: A base currency is the currency in which an institution quantifies its risks. Most institutions estimate risk in the currency that they use for accounting.

Basis Point: Refers to yield on bonds. Each percentage point of yield equals 100 basis points. If a bond yield changes from 8.25% to 8.39%, that’s a rise of 14 basis points.

Basis Risk: This is the risk arising from the fact that change in value of the hedge may not exactly offset the change in value of the underlying position.

Bayes' Theorem: A technique for estimating the conditional probability of a cause given that a particular event has occurred. The theorem is named after Thomas Bayes, a 18th century English clergyman who was interested in mathematics.


Beachhead market: A market similar to a targeted strategic market but which provides a low-risk learning opportunity.


Bear hug: A takeover bid so attractive that the takeover target's directors have little choice but to approve it.


Bear Spread:A combination of options whose value increases (within limits) when the price of the underlying asset increases.


Bed and Breakfast: The functional (but not necessarily the economic) equivalent of an overnight repurchase agreement (repo). A security or a portfolio is sold to register a tax gain or loss, and repurchased the following day. A bed and breakfast trade also might be used to avoid showing a position at the end of a reporting period.


Behavioral Finance: The study and development of descriptive models of behavior in markets and organizations. These models set aside the traditional assumption of rationality and emphasize the observed psychological factors that influence decision-making under uncertainty.


Belgian Option: An option, originally struck slightly out of the money, that pays off like a standard option if the underlying is in the money at expiration, and pays off on a variable but growing fraction of the notional value of the underlying as the underlying moves from the initial spot price to the strike price.


Bells and Whistles: Unusual or unique features of a financial instrument designed to appeal to a specific issuer or investor. Often refer to the features of an offering that seem to be added solely to attract attention.


Bermuda Option: Like the location of Bermuda, this option is located somewhere between a European-style option which can be exercised only at maturity and an American-style option which can be exercised any time the option holder chooses. The Bermuda option typically can be exercised on a number of predetermined occasions as stated in the option contract. Also called Atlantic Option, Limited Exercise Option, Modified American Option, Quasi-American Option, Semi-American Option.


Bernoulli Trial: It is a random event that has three properties: (a) Its result must be characterized by a success or a failure; (b) The probability of a success must be the same for all trials; and, (c) The outcome of each trial must be independent of the outcomes of the other trials.


Beta: A measurement of stock price volatility relative to a broad market index. If a stock moves up and down twice as much as the market, it has a beta of 2. If it moves half as much as the market, its beta is 0.5.

Binomial distribution: A discrete distribution describing the results of an experiment known as Bernoulli’s Trial.

Binomial option model: A model in which the underlying price or rate can rise or fall by a limited amount at each node. The weighted present values of the terminal node values are added to determine option value.


Boiler Room: A crowded, high pressure securities or commodities sales operation often characterized by a high noise level designed to communicate excitement and urgency to customers at the other end of a telephone line.


Boilerplate: Standard, non-controversial legal clauses, often required by regulatory agencies or state or federal law.

Bond Over Bill Spread: The yield differential between a specific bond and a given maturity Treasury bill.


Bootstrapping: An iterative calculation technique, often used in the construction of specialized time series. For example, the calculation of forward rates from traditional yield curves uses an iterative process to extract the implied rate for each forward period.


Bucketizing: The process of dividing contractual or expected cash flows from diverse financial instruments into categories or 'buckets' for the analysis and measurement of risk.


Building-Block Approach: A generic term for risk management techniques which separate a financial instrument into simpler components, reaggregates the components into portfolios, and manage specific types of risk in the separate portfolios.

Bull Spread:An option trading strategy which is profitable if the price of underlying instrument rises.


Bullet Maturity Bond: A coupon paying debt instrument with no repayment of principal until maturity.


Buy Back: Purchase of a position to cover or offset a previously established short position.

Callable bond: A bond which may be redeemed prior to maturity by its issuer.

Callable Swap: A swap contract which permits the fixed rate payer to terminate the contract when interest rates decline to a specified level, or when a bond on which the fixed rate payment is based is called.


Call Option: An option contract that gives the holder of the option the right (but not the obligation) to purchase, and obligates the writer to sell, a specified quantity of the underlying asset at the given strike price, on or before the expiry of the contract.

Call risk: The uncertainty regarding whether a callable security (e.g., callable bond) will be purchased from the investor by the issuer. Call risk is a reinvestment risk, because it will usually be impossible to reinvest the funds in a similar instrument with the same yield.

Cap: A contract between a borrower and a lender where the borrower is assured that he will not have to pay more than a prespecified maximum interest rate on borrowed funds.

Capital Adequacy: A risk management concept, which requires that the capital of a financial organization be sufficient to protect its counterparties and depositors from on- and off-balance sheet market risks, credit risks, etc.


Capital at Risk: Usually a measure of credit risk. The predominant approach is to measure capital at risk as a function of the probability distribution of economic loss, which in turn is a function of the distributions and correlations of potential replacement cost, default and recovery.

Capped Swap: An interest rate swap with an embedded cap on the floating rate payment.


Caption:An option to buy a cap. At the expiration of a caption, the holder has the right to purchase a cap with a contractual strike rate for a prespecified premium.


Carrot-and-Stick Bond: A variant of the traditional convertible bond with a low conversion premium to encourage early conversion (the carrot) and a provision, which allows the issuer to call the bond at a specified premium if the common stock is trading at a relatively modest percentage above the conversion price (the stick).


Carrying Charge Market: A forward or futures market in which the forward price is higher than the spot price by approximately the net cost of purchasing the spot commodity or security and storing and/or financing it until the settlement date of the futures contract.


Cash Cow: A business that generates cash in excess of the amounts required to maintain its facilities or earning power and that is expected to continue to generate cash without providing significant opportunities for growth through reinvestment of profits.


Central Limit Theorem: The proposition that the distribution of a sum of independent, random variables that are not themselves normally distributed, will approach a normal distribution if the number of observations in the sum is large enough.

Certainty Equivalent: The value of a certain outcome that yields the same level of utility as the expected utility of a set of uncertain outcomes.


Channel Conflict: Clashes among channel members on account of differences between individual and organizational goals.

Chebyshev’s Theorem: No matter what the shape of the distribution, at least 75% of the values will fall within plus and minus two standard deviations from the mean of the distribution and at least 89% of the values will lie within plus and minus three standard deviations from the mean.

Chi-square Test: A statistical measure of goodness of fit, independence, or homogeneity of a population. The Chi-square test can be used to determine whether a sample of data was drawn from a normally distributed population by comparing the sample's frequency distribution with the normal distribution. It can also be used to determine whether two variables are independent by comparing their observed joint occurrence with their expected joint occurrence, assuming independence. Finally, it can be used to determine whether or not categories of a single variable are represented in the same proportions in two or more populations.


Circuit Breakers: A complex series of rules adopted by securities and futures exchanges, in the aftermath of the 1987 Dow Jones crash, in an attempt to slow down market activity during periods of high volatility.


Classical risk controllers: Companies which look at risk management as primarily a tool to minimise losses.

Collateralization: A means of reducing credit exposure in which the party which has an obligation to another party posts collateral, typically consisting of cash or securities. If the party defaults on the obligation, the secured party may seize the collateral.

Commoditisation: The phenomenon of lowering of the premium that a brand commands.

Confidence interval: An interval such that a specified random variable will fall within it for a given confidence level.
Confidence level: The probability used to describe the degree of certainty, e.g., a 95% confidence level.

Contango: A condition in a futures market where the more distant delivery month contracts trade at a premium to the near-term delivery month contracts.

Convergence: The narrowing of price differentials between two traded instruments. One of the tests of the quality of a derivative instrument is how closely the derivative’s forward price converges to the cash market spot price at expiration.

Convexity Risk: The risk of adverse changes in the price of a position due to changes in the yield.

Corporate governance: The branch of management, which deals with the relationships among a company’s top management, board of directors and shareholders.

Corporate purpose: The organization’s fundamental reasons for existence, which go beyond just making money – a perpetual guiding star on the horizon; not to be confused with specific goals or business strategies.

Correlation: A measure of the degree to which two variables move in tandem. A positive correlation means they move together.

Correlation coefficient: A statistical measure of the association between two variables that is bounded by -1 (perfect negative correlation) and +1 (perfect positive correlation); the ratio of the covariance between two variables to the product of the standard deviations of the two variables.

Cost Leadership: A business strategy, which lays great emphasis on generating efficiencies and cutting costs.

Cost of capital: The cost of funds to a business enterprise. It is calculated as the weighted average cost of debt and equity used by the firm. More generally, it is the rate of return expected by the company’s equity investors.

Covered Call: A trading strategy in which a call option writer owns the quantity of assets underlying the option.

Covered Put: A put option position in which the option writer shorts the corresponding stock or has deposited, in a cash account, cash or cash equivalents equal to the underlying asset. This limits the option writer’s risk because money or stock is already set aside.

Credit Risk: This is the uncertainty about the counterparty not performing as agreed.

Culture: Beliefs and values on the basis of which people interpret experiences and behave individually and in groups.

Currency risk: The uncertainty associated with changes in exchange rates.
Currency Swap: An exchange of two currencies at the spot exchange rate. Over the term of the agreement, the counterparties exchange fixed or floating rate interest payments in their swapped currencies. At maturity, the principal amount is reswapped at a predetermined exchange rate so that the parties end up with their original currencies.

Data Mining: A technique, which allows queries to be addressed to computerised databases, to understand past behavioral patterns of customers, suppliers and competitors.

Data warehousing: A technique, which enables past data to be stored in a computerised database in an easily retrievable form.

Deconstruction: The current trend of smaller value chains, with companies specialising in niche areas. It can be considered the reverse of vertical integration.

Deferred premium option: An option without an upfront premium.

Deferred strike price option: An option that permits the buyer to set the strike price as a percentage of the spot price over a specified time after the trade date.

Delivery risk: In many currency transactions, purchase and sale cannot be settled simultaneously. This puts the principal at risk for a short period.

Delta: The ratio of the change in the price of the option with respect to the change in the price of the underlying asset.

Derivative: An instrument, whose value is derived from the value and characteristics of the underlying asset.

Differentiation: A business strategy, which attaches more importance to providing value in an unique way, which competitors cannot easily imitate.

Discovery driven planning: A term coined by McGrath and MacMillan that refers to planning in the case of highly uncertain ventures, where new data and assumptions are incorporated on an ongoing basis.

Discriminant analysis: A type of regression analysis that classifies the dependent variable into discrete groups based on two or more continuous independent variables.


Disruptive technology: A technology quite different from the ones existing currently and which offers a totally new price-value proposition. The PC was a disruptive technology compared to the mainframe and mini computers, which existed at the time of its emergence.

Diversifiable risk: Risk that can be eliminated by combining assets whose returns are not perfectly and positively correlated with one another. Also called unsystematic risk.

Dominant Design: A standard, which becomes generally accepted after a period of rapid technological change.

Double option: An option to buy or sell but not both. Exercise of the call causes the put to expire and exercise of the put causes the call to expire.

Due diligence: The thorough investigation of a business, done either by the potential manager of a new issue of the company’s securities or by a company intending to take over the business.

Duration: A measure of the sensitivity of the price of an interest rate instrument to a change in interest rates.

Efficiency enhancers: Companies, which look at risk management as a way to operate their business more efficiently and effectively.

Efficient frontier: The line on a chart, which marks out the best combination of risk and return available to investors in a particular market. The theory is that all rational investors would buy assets, which lie on the efficient frontier.


Embedded Options: Securities which contain call or put features. For example, a ‘callable bond’ contains provisions that allow the issuer to buy back the bond at a predetermined price at specified times in the future. A ‘puttable bond’ contains provisions that allow the holder to demand early redemption at a predetermined price at specified times in the future.

Enterprise Risk Management: An approach to managing risks by taking an integrated view of the various uncertainties involved across the organization. It is the process whereby an organization optimises the manner in which it manages risks.

Equity options: Securities that give the holder the right to buy or sell a specified number of shares, at a specified price for a certain (pre-specified) time period. Typically one option equals 100 shares.

Equity risk: The risk of owning stock or having some other form of ownership interest.

Equity Swap: A contract between two counter parties to exchange two different cash flows over time. During the life of the swap, one party agrees to pay the rate of return on an equity or equity index, while the other party agrees to pay a floating or fixed rate of interest.

Escrow Account: A bank account kept by a third party on behalf of two other parties when a dispute about its rightful ownership exists or may crop up in future.

European-style Option: An option contract that can only be exercised on the expiration date.

Exercise: The right of the holder of an option to buy (in the case of a call) or sell (in the case of a put) the underlying security. The price at which the option is exercised by the buyer is called the Exercise Price or Strike Price.

Exotic Derivatives: Generic term for more sophisticated derivatives instruments which have features over and above the standard instruments.

Financial engineering: The process by which a portfolio is designed and maintained in such a manner as to achieve specified goals. Financial institutions use financial engineering to create complex derivative instruments.

Financial Risks: They refer to the uncertainties associated with fluctuations in interest rates, exchange rates, loan defaults, asset-liability mismatch, etc.

Floating Rate Note: A bond which pays variable interest rates that are linked to rates in the wholesale money markets, usually the London inter bank market.

Forward Contract: It is an agreement to purchase or sell an underlying asset at an agreed price on a specified future date. The specified price is called the forward price. It is an OTC instrument.

Futures contract: Like a forward contract, it is also an agreement to purchase or sell an underlying asset at an agreed price on a specified future date. But it is an exchange-traded derivative instrument.

Gamma: It is the rate of change of delta with respect to the price of the underlying asset.

Glass-Steagall Act: A law put forward by Senator Glass and Representative Steagall in 1933, which prevented any commercial bank in the US from underwriting or dealing in securities.

Haircuts: In determining the amount of collateral that must be posted, haircuts are applied to the market value of various types of collateral. For example, if a 1% haircut is applied, treasuries are valued at 99% of their market value.

Hazard Risks: Risks such as fire, earthquakes, cyclones, accidents, etc., which are usually managed by taking an insurance policy.

Hedge: An offsetting position that compensates for the loss due to an exposure.

Hostile bid: A takeover bid, which is resisted by the company being acquired.

Hybrid Security: A complex security consisting of a combination of two or more risk management building blocks - bond or note, forward, future, option or swap.

Immunisation: The process of eliminating interest rate risk by adjusting the duration of the assets and liabilities.

Intrinsic value: This is the value that an option would have if it is exercised today.
In-the-money: A call option is in-the-money if the strike price is less than the market price of the underlying security. A put option is in-the-money if the strike price is greater than the market price of the underlying security.

Job sculpting: The art of matching people to jobs based on their embedded life interests. A process of aligning life goals with career objectives.

Joint Venture: It is a business owned jointly by two or more independent firms, who continue to function separately in all other respects, but pool together their resources in a particular line of activity.

Judo strategy: A strategy that avoids competing head-on with powerful opponents and instead emphasises speed, agility and creative thinking.

Junk bond: A bond which fetches a high yield but involves significant credit risk.

Kappa: It measures the change in option price due to a change in volatility of the underlying asset.

Knock-in Option: An option which pays nothing at expiry unless it is first activated as a result of the underlying rate or index reaching a pre-determined level.

Knock-out Option: Begins life as a standard option but is “killed off” if an underlying reference rate or index touches a pre-determined level.

Leverage: Leverage is any process that compounds a risk. More specifically, it is any process that increases exposure to a source of risk. Derivative instruments are effective tools for leveraging a portfolio because they provide exposure for little or no capital investment.

Liquidity: Liquidity is typically defined as the ability to convert an asset into cash equal to its current market value. A firm is liquid if it can easily meet its needs for cash - either because it has cash on hand or can easily convert assets into cash. A market is said to be liquid if the instruments, which are traded in that market, can easily be sold at approximately current market prices.

Liquidity risk: The possibility of not being able to meet the obligations. Specific liquidity risk arises if a company’s credit rating falls or something else happens, which might cause counterparties to avoid trading with or lending to the company. Systematic liquidity risk affects all participants in a market. This might happen during periods of crisis or high volatility.

Market Risk: The uncertainty about the value of a position owing to changes in market conditions, such as interest rates, exchange rates, commodity prices, etc.

Mark to Market: A procedure to adjust the value of a security or derivative contract to its current market value.

Merger: A combination of two or more firms into one firm. A merger may involve an acquisition (absorption) or consolidation. In an acquisition, one firm acquires one or more other firms. In a consolidation, two or more firms combine to form a new entity. We use the term merger and amalgamation interchangeably.

Multicollinearity: A statistical problem in multiple regression analysis in which the reliability of the regression coefficients is reduced, owing to a high level of correlation among the independent variables.

Net Asset Value: The value of a mutual fund scheme applicable to one unit. This is calculated as total assets less all prior charges and divided by the number of total outstanding units. The NAV of any fund can be calculated as follows:



 ERM                Market value of the fund’s investments + receivables + accrued income – liabilities - accrued expenses              

Number of shares or units outstanding

Noise: Price and volume fluctuations that can confuse people about the market’s direction.

Non parametric tests: Statistical techniques that do not make restrictive assumptions about the shape of a population distribution, when performing a hypothesis test.

Normal distribution: One of the most important distributions, it is useful for describing a variety of random processes such as students' test scores or the heights of trees. In finance, investment returns from primary instruments are often assumed to be normally distributed. The distribution is bell-shaped with a single peak.

Null Hypothesis: The hypothesis, or assumption about a population parameter we want to test; usually an assumption of the status quo.

Occasionalisation: A method of online market segmentation that takes into account the mood of the user and how he or she is using the web at different moments.

Open Interest: The number of outstanding long or short positions for a given exchange-traded futures or option contract. A measure of the liquidity of the contract.

Operational Risks: Risks associated with systems, processes and people and which come up in the context of issues such as succession planning, compliance with regulations and control systems.

Out-of-the-money: A call option is ‘out-of-the-money’ if the strike price is greater than the market price of the underlying security. A put option is out-of-the-money if the strike price is less than the market price of the underlying security.

Path-Dependent Options: These options become effective only if the value of the underlying asset moves above or below specified trigger points.

Poison pill: One of the techniques used to fend off a hostile bid or unwanted takeover, which includes a large financial penalty that is written into the company’s articles and is activated by an unwelcome takeover.

Poisson distribution: A discrete distribution applicable when the probability of an event happening within a very small time period, is a very small number, the probability that two or more such events will occur within the same time interval is almost zero and the probability of the occurrence of the event within one time period is independent of where that time period is.

Presettlement Risk: The possibility of non-performance by the counterparty before the trade is actually settled.

Pricing indifference band: The price range in which price changes do not have much impact on the willingness of customers to buy.

Probability distribution: A list of the outcomes of an experiment with the probabilities we would expect to see associated with these outcomes.

Put option: An option that gives the holder the right to sell (or “put”), and places upon the writer the obligation to purchase, a specified quantity of the underlying asset at the given strike price on or before the expiration date of the contract.

Quick Ratio: Indicator of a company’s financial strength (or weakness). Calculated by taking current assets less inventories, divided by current liabilities. Also called Acid Test. It is a measure of the liquidity of the company.

Real options: A technique, which looks at strategic decisions in terms of the options they create and values these options using information from the financial markets, to the extent possible.

Regression:The general process of predicting one variable from another by statistical means, using previous data.

Reinsurance: The practice among insurance companies of sharing risk among themselves. If one company takes on a large risk, it sells some of the risk to a reinsurance company, which receives some of the premium and bears some of the cost, in case there is a loss.

Reinvestment risk: Risk due to the uncertainty in the interest rate at which future cash flows may be invested.

Repurchase agreement: Repurchase agreement (also called a repo) is an agreement between two parties whereby one party sells the other a security at a specified price with a commitment to repurchase the security at a later date at another specified price. Most repos are overnight transactions, with the sale taking place one day and being reversed the next day. Longer repos, also called term repos, however, can extend for a month or more.

Rho: It measures the change in option value with respect to the interest rate.

Risk: It describes a situation where a range of outcomes is possible and it is not known in advance what the actual outcome will be.

Risk transformers: Companies, which view risk management as a business opportunity rather than as a defensive tool.

Scenario planning: A technique which involves visualising different ways in which the external environment may develop in the future and accordingly formulate strategies.

Settlement date: The date on which payment is made to settle a trade.

Settlement Risk: This is the risk due to non performance of the counterparty at the time of settlement of the trade.

Sinking Fund: A fund set aside for the repayment of a debt, most likely a marketable bond.


Skewness: Lack of symmetry in a probability distribution. A normal distribution has zero skewness because it is symmetric about its mean.

Standard Normal Distribution: A normal probability distribution with mean equal to 0 and standard deviation equal to 1.

Stop-loss limit: A market risk limit designed to curtail losses as they occur.

Stop (-Loss) Order: An order to sell a stock, when the price falls to a specified level.

Strategic Architecture: A top management action plan, which indicates the new competencies needed in the coming years, how existing competencies have to be strengthened, how business processes have to be reoriented and relationships with external entities, especially customers, have to be reconfigured.

Strategic flexibility: The ability to shift resources from one activity to another to maximise competitive advantage.

Strategic intent: The leveraging of a firm’s internal resources, capabilities and core competencies to accomplish the firm’s goals in the competitive environment. An animating dream that energises a company by setting stretch targets, providing a sense of direction and conveying a sense of destiny to the company’s employees.

Strategic market: A market which scores high on market potential or learning potential or both.

Strategic Risks: Risks which arise due to factors such as changes in customers’ priorities, competitive conditions and geopolitical developments.

Stress testing: A method of measuring risk by computing losses in worst case scenarios. Usually used to supplement Value-at-Risk.

Strike Price: The stated price at which the underlying stock may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract. Also called Exercise Price.
Structured Notes: Debt securities in which the repayment of interest, and sometimes principal, is tied to movements in an underlying index.

Supply chain management: An emerging school of thought, which lays emphasis on taking an integrated view of the entire value addition process stretching from suppliers’ suppliers to customers’ customers.

Swap: An OTC derivative instrument with which two parties periodically exchange payments based upon the value of one or more market indices. The most common form of swap is a ‘vanilla’ interest rate swap. With that structure, one party pays interest at a fixed rate while the other pays according to a floating rate such as LIBOR.

Swaption: An option to enter into an interest-rate swap at some future date and at a price which is in some way related to current prices.

Syndicate: A group of financial institutions that come together to carry out some project that each would not be willing to undertake on its own due to the huge risks involved.

t distribution: A distribution, which is used in estimation when the sample size is less than 30 and the population standard deviation is not known. It is lower at the mean and higher at the tails than in a normal distribution.

Tacit Knowledge: Knowledge which is subconsciously understood and applied. It is difficult to express and document. So it is typically shared through face to face contacts or by jointly experiencing the situation.

Theta: The rate of change of the option value with respect to time.

Time Series: Information accumulated at different points of time. Statistical methods are applied to time series to determine patterns.

Time Value of an option: The portion of the premium that is based on the amount of time remaining until the expiration date of option contract. Time value is equal to the difference between the premium and the intrinsic value.

Transaction exposure: The impact on a foreign currency transaction in domestic currency terms due to changes in exchange rates.

Translation exposure: The impact due to exchange rate fluctuations, while accounting for transactions, which have taken place in the past.

Type I Error: Rejecting a null hypothesis when it is true.

Type II Error: Accepting a null hypothesis when it is false.

Uncovered Call: A short call option position in which the writer does not own the underlying asset represented by his option contracts. If the buyer of a call exercises the option to call, the writer would be forced to buy the asset at market price.
Uncovered Put: A short put option position in which the writer does not have a corresponding short asset position or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the put.

Underlying Asset: The asset which is purchased or sold upon exercise of an option contract. For example, IBM stock is the underlying security to IBM options.

Utility: This principle states that the intensity of our desire for something decreases as we consume more and more of that thing. So, for a wealthy person, additional wealth may not have high utility.

Value at Risk: The potential loss to a position, that will result within a given period with no more than a given probability. It indicates the maximum loss for a given confidence level.

Vega: It measures the change in option price due to a change in volatility of the underlying asset.

Warrant: An option to purchase or sell an underlying instrument at a given price and time or series of prices and times. Its maturity is usually longer than a year.

Window dressing: The practice of manipulating a company’s accounts in order to make them look as attractive as possible.

Writer: The seller of an option contract.

Yield curve: A graph that describes the relationship between the yield of a given type of debt and the maturity of that debt.

Yield to call: This is the rate of return which the bond will realise, based on its current market price, if it is redeemed on the next call date, but otherwise makes all its principal and interest payments as scheduled.

Yield to maturity: This is the rate of return which the bond will realise, based on its current market price, if it is held to maturity and makes all its principal and interest payments as scheduled.



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