| A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

A

Accurate - Correct, on average.

Actuarial risk - A type of risk, typically associated with insurance.

American option - An option which can be exercised prior to its expiration date.

Antiselection - A tendency of consumers, on average, to act in their best interest when making financial decisions.

Arbitrage - A transaction which generates a risk-free profit.

Arbitrage free model - A type of financial model which generates market scenarios which entail no arbitrage opportunities.

ARCH - A technique for projecting future implied volatilities.

Asian option An option whose pay-off depends on the average value of an underlier over a specified period.

Asset-backed security - A securitized interest in a pool of assets.

Asset/liability management - A risk management technique for protecting an institution's capital.

At-the-money - A condition where the value of an option's underlier matches the option's strike price.

Average option - An option whose pay-off depends on the average value of an underlier over a specified period.

B

Backwardation - A condition where spot prices exceed forward prices.

Barrier option - A type of path-dependent option.

Base currency - The currency in which a risk is quantified.

Basis point - One-one-hundredth of a percent.

Basis risk - Risk from changes in spreads.

Beta - A measure of systematic risk.

Bilateral netting - Netting between two parties.

Binary option - A type of option which features a discontinuous pay-off.

Black-Scholes Theory - The first successful theory for pricing financial options.

C

Call option - An option to purchase an asset.

Callable bond - A bond which may be terminated prior to maturity by its issuer.

Cap - A derivative instrument which is linked to interest rates.

Capital Asset Pricing Model - A model for valuing financial assets based upon their systematic risk.

Capital at risk - A measure of market risk.

Capital market line - A line which describes the optimal relationship between risk and reward for an investment portfolio.

Capitalize - To set capital aside to fund a risk.

CAPM - Capital Asset Pricing Model.

Closed form value at risk - A technique for estimating value at risk.

Closeout netting - A type of netting frequently used with OTC derivative instruments.

CMT - Constant Maturity Treasury.

COFI - Cost of Funds Index.

Collar - A type of derivatives position.

Collateral - Assets held to secure an obligation.

Collateralised mortgage obligation - A type of mortgage-backed security.

Compounding - A process whereby the value of an investment appreciates exponentially over time as interest is earned on interest.

Confidence interval - A notion from statistics.

Confirmation - A written notice confirming the details of a transaction.

Constant Maturity Treasury - A type of yield index.

Contango - A condition where forward prices exceed spot prices.

Contingency - An event that may or may not occur.

Convexity - A measure of second-order exposure to interest rates.

Correlated exposure - Exposure to a risk factor, taking into account the impact of correlated risk factors.

Correlation - A notion from probability.

Cost of Funds Index - A yield index.

Counterparty - A party with whom one transacts business.

Credit default swap - A type of credit derivative.

Credit derivative - A derivative instrument designed to transfer credit risk from one party to another.

Credit enhancement - Any methodology that reduces the credit exposure of a transaction with a counterparty.

Credit exposure - Exposure to possible default by a counterparty.

Credit linked note - A debt instrument with an imbedded credit derivative.

Credit risk - The risk that a counterparty may fail to perform on its obligations.

Credit spread - A spread in prices or interest rates resulting from credit risk.

Custodian - A bank which holds securities on behalf of investors.

Cylinder - A type of derivatives hedge.

D

Delta - A measure of exposure to an underlier.

Delta-gamma value at risk - A method for estimating value at risk.

Delta hedge - A hedging position which causes a portfolio to be delta neutral.

Delta neutral - Having no delta exposure.

Derivative instrument - A type of financial instrument which derives its value from the value of other financial instruments.

Diversification - A technique for managing risk where risk is divided among multiple, uncorrelated exposures.

Dollars at risk - A measure of market risk.

Duration - A measure of exposure to interest rates.

E

Earnings at risk - A measure of market risk.

ECE - Expected Credit Exposure.

Efficient frontier - A theoretical set of portfolios offering optimal risk-reward tradeoffs.

Enterprise risk management - The process whereby an organization optimizes the manner in which it takes risks.

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

Euribor - Euro Interbank Offered Rate.

Eurodollar future - A type of futures contract.

European option - An option which can only be exercised on its expiration date.

Exact - Both accurate and precise.

Exchange traded - Traded on an exchange, as opposed to being traded over the counter.

Expected credit exposure - A measure of potential credit exposure.

Expected return - The average possible return for an investment.

Expected value - The mean or average of a random variable.

Exposure - Sensitivity to a source of risk.

F

Factor sensitivity - A measure of exposure to a single risk factor.

Financial engineering - The design of financial portfolios to achieve specified goals.

Financial risk - Financial exposure to uncertainty.

Financial risk management - The process whereby an organization optimizes the manner in which it takes risks.

Floater - A type of fixed income instrument.

Floor - A type of derivative instrument which is linked to interest rates.

Forward - An agreement to execute a transaction at some time in the future.

Forward rate agreement - A type of forward contract which is linked to interest rates.

FRA - Forward Rate Agreement

Future - An agreement to execute a transaction at some time in the future.

G

Gamma - A measure of second-order exposure to an underlier.

GARCH - A technique for projecting future implied volatilities.

Greeks - A set of factor sensitivities frequently used for measuring the exposures of derivative portfolios.

H

Hedge - To take offsetting risks.

Heteroscedasticity - Non-constant volatility.

High-yield bond - A bond which pays a high yield due to significant credit risk.

Historical value at risk - A method for estimating value at risk.

Historical volatility - An estimate of volatility based upon historical data.

Homoscedasticity - Constant volatility.

Hypothecation - The posting of collateral.

I

Implied volatility - An estimate of volatility based upon option prices.

Interest rate cap - A derivative instrument which is linked to interest rates.

Interest rate floor - A derivative instrument which is linked to interest rates.

Interest rate parity - A relationship which must hold between the interest rates of two countries.

In-the-money - A condition where an option has a positive intrinsic value.

Intrinsic value - A component of the market value of an option.

Inverse floater - A type of fixed income instrument.

IO - A type of mortgage-backed security.

J

Junk bond - A bond which pays a high yield due to significant credit risk.

K

Key factor - A risk factor which is used in estimating value at risk.

Knock-in option - A type of path-dependent option.

Knockout option - A type of path-dependent option.

Kurtosis - A notion from statistics.

L

Legal risk - Risk relating to legal uncertainties

Leptokurtosis - A notion from statistics.

Leverage - The compounding of risks.

LIBOR - London Interbank Offered Rate.

Liquidity - The ability to easily raise needed cash.

Liquidity risk - Risk from a lack of liquidity.

Lognormal distribution - A type of probability distribution.

Long position - A position which entails ownership or effective ownership of an asset.

M

Macaulay duration - A technique for calculating duration.

Margin Collateral.

Market portfolio - A theoretical portfolio which comprises all risky assets available to investors.

Market risk - Risk from changes in market prices.

Market value - The value at which an asset trades, or would trade in the market.

Mark-to-market credit exposure - Credit exposure based upon the current market values of a counterpary's obligations.

Maximum credit exposure - A measure of potential credit exposures.

MCE - Maximum Credit Exposure.

Mean - The average or expected value of a random variable.

Mean reversion - A tendency for a stochastic variable to drift toward a long-term mean level.

MM - Short-hand notation for "millions."

Model risk - Risk from the misuse of financial models.

Modern Portfolio Theory - A body of theory relating to how investors optimize portfolio selections.

Monte Carlo simulation - A technique of simulation which uses many randomly or "pseudo-randomly" generated scenarios.

Monte Carlo value at risk - A technique for estimating value at risk.

Morbidity - The rate at which people become sick.

Mortality - The rate at which people die.

Mortgage backed security - A security interest in a pool of mortgages.

MPT - Modern Portfolio Theory.

Multilateral netting - Netting between multiple counterparties.

N

Netting - The reduction of offsetting obligations to a single "net" obligation.

Non-parallel shifts - A type of yield curve shift.

Normal distribution - A type of probability distribution.

Notional amount - The quantity of an underlier to which a derivative contract applies.

O

OAS - Option-adjusted spread.

Operational risk - Risk from mistakes or failures in operations.

Option - A type of derivative instrument.

Option-adjusted spread - A component of a fixed income instrument's yield.

OTC - Over the Counter.

Out-of-the-money - A condition where an option has no intrinsic value.

Outright position - An actual, as opposed to effective, long or short position in an asset.

Over the counter - Not traded on an exchange.

Overlay strategy - A type of derivatives strategy.

P

Par - A notion relating to fixed income instruments.

Parallel shift - A type of yield curve shift.

Path dependence - Dependence on the actual path taken by an underlier over a specified period.

Payment netting - Netting of cash flows.

PIBOR - Paris Interbank Offered Rate.

Platykurtosis - A notion from statistics.

PO - A type of mortgage-backed security.

Policy surrender - The early termination of an insurance product by the policyholder.

Portfolio Theory - A body of theory relating to how investors optimize portfolio selections.

Potential credit exposure - Possible future credit exposure to a counterparty.

Precise - Consistent.

Prepayment - The payment of a debt prior to its being due.

Pre-settlement risk - The risk of counterparty default prior to the settlement date of an obligation.

Primary instrument - A financial instrument whose value is not derived from that of another instrument, but instead is determined by the market.

Probability distribution - A notion from probability.

Put-call parity - A formula that relates the price of a put to the price of a corresponding call.

Put option - An option to sell an asset.

Q

Quanto - A type of derivative instrument.

R

Range forward - A type of derivatives hedge.

Rate of return - A measure of investment performance.

Rehypothecation - Reuse of collateral received as security for an obligation.

Reinvestment risk - Risk from uncertainty in the interest rate at which future cash flows may be invested.

Replacement cost - A measure of credit exposure.

Repo - Repurchase agreement.

Repurchase agreement - An agreement to sell and repurchase an asset.

Reverse repo - An agreement to purchase and resell an asset.

Rho - A measure of exposure to interest rates.

Risk - Exposure to uncertainty.

Risk factor - A random variable whose uncertainty represents a source of risk.

Risk-free rate - A theoretical interest rate at which an investment may earn interest without incurring any risk.

Risk limit - A procedural tool for managing risk.

RiskMetrics - A free service offered by JP Morgan.

Risk neutrality - A theoretical condition where investors require no compensation for taking risk.

S

Scenario - A possible set of future events.

Securities lending - The lending of securities in exchange for a fee.

Securitization - The creation of security interests in an asset.

Sensitivity - Exposure to a risk factor.

Settlement risk - Risk from possible default by a counterparty at the time an obligation is to be settled.

Simulation - Analysis based on determining the consequences of possible scenarios.

Ssingle premium deferred annuity - A type of insurance product.

Single-scenario risk measure - A risk measure which is based on projecting the consequences of one or a handful of possible scenarios.

Skewness - A notion from statistics.

SPDA - Single Premium Deferred Annuity.

Specific risk - Risk which is unique to a particular asset or liability.

Spot - For immediate delivery.

Spread risk - Risk from changes in spreads.

Standard deviation - A notion from probability.

Statistical risk - measure A risk measure which is based upon a probability distribution relating to a risk.

Stochastic process - A random process which evolves over time.

Stop-loss limit - A market risk limit which curtails losses as they occur.

Straddle - A type of derivatives position.

Stress test - A type of single-scenario risk measure.

Strike price - One of the contractual specifications of an options contract.

Structured note - A type of security.

Swap - A type of derivative instrument.

Swaption - An option on a swap.

Systematic risk - Risk which is common to an entire class of assets or liabilities.

Systemic risk - Risk which threatens an entire financial system.

T

Tax risk - Risk from uncertainty in taxes.

Theta - A measure of how a portfolio's value changes as a consequence of the passage of time.

TIBOR - Tokyo Interbank Offered Rate.

Time value - A component of the market value of an option.

Total return swap - A type of credit derivative.

Transaction costs - The costs of transacting trades.

Tunnel - A type of derivatives hedge.

U

Uncorrelated exposure - Exposure to a risk factor, assuming that all other risk factors will remain constant.

Underlier - A primary instrument or variable upon which the value of a derivative instrument depends.

V

Value at Risk - A measure of market risk.

VAR - Value at Risk

Vega - A measure of exposure to changes in volatility.

Volatility - The variability of a random quantity.

W

Warrant - A long-term option.

Workers' compensation - A type of insurance.

Worst-case credit exposure - A measure of potential credit exposure.

X Y Z

Yield - A measure of a bond's potential return.

Yield curve - A description of yields for multiple horizons.

Zero coupon bond - A bond which pays no coupons.

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