Futures and Options Serving Intelligent Investors
Back-end loan fund
A mutual fund that charges investors a fee to sell (redeem) shares, often ranging from 4% to 6%. Some back-end load funds impose a full commission if the shares are redeemed within a designated time period after purchase, such as one year, reducing the commission the longer the investor holds the shares. The formal name for the back-end load is the contingent deferred sales charge, or CDSC.
Back months
The futures or options on futures months being traded that are furthest from expiration.
Back office
Brokerage house clerical operations that support, but do not include, the trading of stocks and other securities. All written confirmation and settlement of trades, record keeping, and regulatory compliance happen in the back office.
Backwardation
A market condition in which futures prices are lower in the distant delivery months than in the nearest delivery month.
Balance of payments
A statistical compilation formulated by a sovereign nation of all economic transactions between residents of that nation and residents of all other nations during a stipulated period of time, usually a calendar year.
Balance of trade
Net flow of goods (exports minus imports) between two countries.
Balanced fund
An investment company that invests in both stocks and bonds.
Balance sheet
Also called the statement of financial condition, a summary of the assets, liabilities, and owners’ equity.
Balloon maturity
Any principal due at maturity for a bond with a sinking fund requirement.
Bank anticipation notes (BAN)
Notes issued by states and municipalities to obtain interim financing for projects that will eventually be funded longterm through the sale of a bond issue.
Bank for International Settlements (BIS)
An international bank headquartered in Basel, Switzerland, which serves as a forum for monetary cooperation among several European central banks, the Bank of Japan, and the US Federal Reserve System. Founded in 1930 to handle the German payment of World War I reparations, it now monitors and collects data on international banking activity and promulgates rules concerning international bank regulation.
Bank discount basis
A convention used for quoting bids and offers for Treasury bills in terms of annualized yield based on a 360-day year.
Bankers acceptance
A security representing a bank’s promise to repay a loan created in a commercial transaction in case the debtor fails to perform. Commonly used in international transactions.
Barbell strategy
A strategy in which the maturities of the securities included in the portfolio are concentrated at two extremes.
BARRA’s performance analysis (PERFAN) factor model
A method developed by BARRA, a consulting firm in Berkeley, California, which is commonly used by institutional investors applying performance attribution analysis to evaluate their money managers’ performances.
Base probability of loss
The probability of not achieving a portfolio expected return.
Basis
Regarding a futures contract, the difference between the cash price and the futures price observed in the market.
Basis risk
The uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for price risk.
Basket trades
Program trades.
Bearish
An adjective describing an opinion or outlook that expects a decline in price, either by the general market or by an underlying stock, or both. See also Bullish.
Bear market
Any market in which prices are in a declining trend.
Bear trap
The predicament facing short sellers when a bear market reverses its trend and becomes bullish. The assets continue to sell in anticipation of further declines in price, and short sellers then are forced to cover at higher prices.
Before-tax profit margin
The ratio of net income before taxes to net sales.
Benchmark
The performance of a predetermined set of securities, for comparison purposes. Such sets may be based on published indexes or may be customized to suit an investment strategy.
Benchmark interest rate
Also called the base interest rate, the minimum interest rate that investors will demand for investing in a non-Treasury security. The yield to maturity offered on a comparable-maturity Treasury security that was most recently issued (“on-the-run”).
Bid Price
The price at which a buyer is willing to buy an option or stock.
Bitcoin
Bitcoin is an experimental, decentralized digital currency that enables instant payments to anyone, anywhere in the world.
Black Friday
A precipitous drop in a financial market . The original Black Friday occurred on September 24, 1869, when prospectors attempted to corner the gold market.
Black-Scholes option-pricing model
A model for pricing call options based on arbitrage arguments that uses the stock price, the exercise price, the risk-free interest rate, the time to expiration, and the standard deviation of the stock return.
Block trade
A large trading order, defined on the New York Stock Exchange as an order that consists of 10,000 shares of a given stock or that has a total market value of $200,000 or more.
Blue chip stocks
Common stock of well-known companies with a history of growth and dividend payments.
Bollinger Bands
Bollinger Bands Plus or minus two standard deviations where the standard deviations are calculated historically in a moving window estimation. Hence, the bands will widen if the most recent data is more volatile. If the prices break out of the band, this is considered a significant move.
Bond
An instrument in which the issuer (debtor/borrower) promises to repay to the lender/investor the amount borrowed plus interest over some specified period of time.
Bond-equivalent basis
The method uses for computing the bond-equivalent yield.
Bond-equivalent yield
The annualized yield to maturity computed by doubling the semiannual yield.
Bond indenture
The contract that sets forth the promises of a corporate bond issuer and the rights of investors.
Bond ratio
The percentage of a company’scapitalization represented by bonds. The ratio is calculated by dividing the total bonds due after one year by that same figure plus all other equity.
Bond indexing
Designing a portfolio so that its performance will match the performance of some bond index.
Book value
The total owners’ equity shown in the balance sheet.
Book value per share
The ratio of stockholder’s equity to the average number of common shares. Book value per share should not be thought of as an indicator of economic worth, since it reflects accounting valuation (and not necessarily market valuation).
Bootstrapping
A process of creating a theoretical spot rate curve, using one yield projection as the basis for the yield of the next maturity.
Bottom-up equity management style
A management style that de-emphasizes the significance of economic and market cycles and focuses instead on the analysis of individual stocks.
Box Spread
A type of option arbitrage in which both a bull spread and a bear spread are established for a near-riskless position. One spread is established using put options and the other is established using calls. The spread may both be debit spreads (call bull spread vs. put bear spread) or both credit spreads ( call bear spread vs. put bull spread). Break-Even Point—the stock price (or prices) at which a particular strategy neither makes nor loses money. It generally pertains to the result at the expiration date of the options involved in the strategy. A “dynamic” break-even point is one that changes as time passes.
Break
A rapid and sharp price decline.
Break-even analysis
An analysis of the level of sales at which a project would make zero profit.
Bretton Woods Agreement
An agreement signed by the original United Nations members in 1944 that established the International Monetary Fund (IMF) and the post-World War II international monetary system of fixed exchange rates.
Broker
An individual who is paid a commission for executing customer orders. Either a Floor Broker who executes orders on the floor of the Exchange, or an Upstairs Broker who handles retail customers and their orders.
Bullish
Describing an opinion or outlook in which one expects a rise in price, either by the general market or by an individual security.
Bulldog market
The foreign market in the United Kingdom.
Bullet contract
A guaranteed investment contract purchased with a single (one-shot) premium.
Bull market
Any market in which prices are in an upward trend.
Butterfly shift
A non-parallel shift in the yield curve involving the humpedness of the curve.
Butterfly Spread
An option strategy that has both limited risk and limited profit potential, constructed by combining a bull spread and a bear spread. Three striking prices are involved, with the lower two being utilized in one spread and the higher two in the opposite spread. The strategy can be established with either puts or calls; there are four different ways of combining options to construct the same basic position.
Buy-and-hold strategy
A passive investment strategy with no active buying and selling of stocks once the portfolio is created until the end of the investment horizon.
Buy in
To cover, offset or close out a short position.
Buy limit order
A conditional trading order that indicates that a security may be purchased only at the designated price or lower. Related: Sell limit order
Buy on close
To buy at the end of the trading session at a price within the closing range.
Buy on margin
A transaction in which an investor borrows to buy additional shares using the shares themselves as collateral.
Buy on opening
To buy at the beginning of a trading session at a price within the opening range.
Buy-side analyst
A financial analyst employed by a non-brokerage firm, typically one of the larger money management firms that purchase securities on their own accounts.
Buyout
Purchase of a controllinginterest (or percent of shares) of a company’sstock. A leveraged buy out is effected with borrowedmoney.
Bylaws
Rules and practices that govern management of an organization.
