CAC 40 index A broad-basedindex of common stocks composed of 40 of the 100 largest companies listed on the forward segment of the official list of the Paris Bourse. Cage A section of a brokerage firm used for receiving and disbursing funds. Calendar List of new issues scheduled to come to market shortly. Calendar effect ...

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CAC 40 index
A broad-basedindex of common stocks composed of 40 of the 100 largest companies listed on the forward segment of the official list of the Paris Bourse.

Cage
A section of a brokerage firm used for receiving and disbursing funds.

Calendar
List of new issues scheduled to come to market shortly.

Calendar effect
Describes the tendency of stocks to perform differently at different times. For example, a number of researchers have documented that historically, returns tend to be higher in January compared to other months (especially February). Others have documented returns patterns across days of the week and within the day. Some of these patterns are found in volume and volatility as well as returns.

Calendar spread
Applies to derivative products. A strategy in which there is a simultaneous purchase and sale of options of the same class at the same strike prices, but with different expiration date.

Call date
A date before maturity, specified at issuance, when the issuer of a bond may retire part of the bond for a specified call price.

Call loan
A loan repayable on demand. Sometimes used as a synonym for broker loan or broker overnight loan.

Call money rate
Also called the broker loan rate , the interest rate that banks charge brokers to financemarginloans to investors. The broker charges the investor the call money rate plus a service charge.



Call option
An option contract that gives its holder the right (but not the obligation) to purchase a specified number of shares of the underlyingstock at the given strike price, on or before the expiration date of the contract.

Call an option
To exercise a call option.

Call premium
Premium in price above the par value of a bond or share of preferred stock that must be paid to holders to redeem the bond or share of preferred stock before its scheduled maturity date.

Call price
The price, specified at issuance, at which the issuer of a bond may retire part of the bond at a specified call date.

Call protection
A feature of some callablebonds that establishes an initial period when the bonds may not be called.

Call provision
An embedded option granting a bondissuer the right to buy back all or part of an issue prior to maturity.

Call risk
The combination of cash flow uncertainty and reinvestment risk introduced by a call provision.

Call swaption
A swaption in which the buyer has the right to enter into a swap as a fixed-rate payer. The writer therefore becomes the fixed-rate receiver/floating-rate payer.

Callability
Feature of a security that allows the issuer to redeem the security prior to maturity by calling it in, or forcing the holder to sell it back.

Callable
Applies mainly to convertible securities. Redeemable by the issuer before the scheduled maturity under specific conditions and at a stated price, which usually begins at a premium to par and declines annually. Bonds are usually called when interest rates fall so significantly that the issuer can save money by issuing new bonds at lower rates.

Canceled Certificates
Before the issuance of a new certificate, the old certificate is presented to the Transfer Agent and is canceled.

Cap
An upper limit on the interest rate on a floating-rate note (FRN) or an adjustable-rate mortgage (ARM). Also, an OTC derivatives contract consisting of a series of European interest rate call options; used to protect an issuer of floating-rate debt from interest rate increases. Each individual call option within the cap is called a caplet. Opposite of a floor.

Capacity utilization rate
The percentage of the economy’s total plant and equipment that is currently in production. Usually, a decrease in this percentage signals an economic slowdown, while an increase signals economic expansion.

Capital
Moneyinvested in a firm.

Capital account
Net result of public and private international investment and lending activities.

Capital allocation decision
Allocation of invested funds between risk-free assets and the riskyportfolio.

Capital asset
A long-termasset, such as land or a building, not purchased or sold in the normal course of business.

Capital asset pricing model (CAPM)
An economic theory that describes the relationship between risk and expected return, and serves as a model for the pricing of riskysecurities. The CAPM asserts that the only risk that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification. The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security plus a risk premium multiplied by the asset’s systematic risk. Theory was invented by William Sharpe (1964) and John Lintner (1965). The early work of Jack Treynor is was also instrumental in the development of this model.

Capital budget
A firm’s planned capital expenditures.

Capital budgeting
The process of choosing the firm’slong-termassets.

Capital expenditures
Amount used during a particular period to acquire or improve long-termassets such as property, plant, or equipment.

Capital flight
The transfer of capital abroad in response to fears of political risk.

Capital gain
When a stock is sold for a profit, the capital gain is the difference between the net sales price of the securities and their netcost, or original basis. If a stock is sold below cost, the difference is a capital loss.

Capital gains distribution
A distribution to the shareholders of a mutual fund out of profits from selling stocks or bonds, that is subject to capital gains taxes for the shareholders.

Capital gains tax
The tax levied on profits from the sale of capital assets. A long-termcapital gain, which is achieved once an asset is held for at least 12 months, is taxed at a maximum rate of 20% (taxpayers in 28% tax bracket) and 10% (taxpayers in 15% tax bracket). Assets held for less than 12 months are taxed at regular income tax levels, and, since January 1, 2000, assets held for at least five years are taxed at 18% and 8%.

Capital goods
Goods used by firms to produce other goods, e.g., office buildings, machinery, equipment.

Capital-intensive
Used to describe industries that require large investments in capital assets to produce their goods, such as the automobile industry. These firms require large profit margins and/or low costs of borrowing to survive.

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Capital International Indexes
Market indexes maintained by Morgan Stanley that track major stock markets worldwide.

Capital loss
The difference between the netcost of a security and the sales price, if the security is sold at a loss. Also used in a more general context to refer to the market for stocks, bonds, derivatives and other investments.

Capital market
Traditionally, this has referred to the market for trading long-termdebt instruments (those that mature in more than one year). That is, the market where capital is raised. More recently, capital markets is used in a more general context to refer to the market for stocks, bonds, derivatives and other investments.

Capital market efficiency
The degree to which the present asset price accurately reflects current information in the market place. See: Efficient market hypothesis.

Capital market imperfections view
The view that issuingdebt is generally valuable, but that the firm’s optimal choice of capital structure involves various other views of capital structure ( net corporate/personal tax, agencycost, bankruptcy cost, and pecking order), that result from considerations of asymmetric information, asymmetric taxes, and transaction costs.

Capital market line (CML)
The line defined by every combination of the risk-free asset and the market portfolio. The line represents the risk premium you earn for taking on extra risk. Defined by the capital asset pricing model.

Capital rationing
Placing limits on the amount of new investment undertaken by a firm, either by using a higher cost of capital, or by setting a maximum on the entire capital budget or parts of it.

Capital requirements
Financing required for the operation of a business, composed of long-term and working capital plus fixed assets.

Capital shares
One of two types of shares in a dual-purpose investmentcompany, which entitle the holder to the appreciation or depreciation in the value of a portfolio, as well as the gains from trading in the portfolio. Antithesis of income shares.

Capital stock
Stock authorized by a firm’scharter and having par value, stated value, or no par value. The number and the value of issued shares are usually shown, together with the number of shares authorized, in the capital accounts section of the balance sheet.

Capital structure
The makeup of the liabilities and stockholders’equity side of the balance sheet, especially the ratio of debt to equity and the mixture of short and longmaturities.

Capital surplus
Amounts of directly contributed equitycapital in excess of the par value.

Capital turnover
Calculated by dividing annual sales by average stockholderequity (net worth). The ratio indicates how much a company could grow its current capital investment level. Low capital turnover generally corresponds to high profit margins.

Capitalization
The debt and/or equity mix that funds a firm’sassets.

Capitalization method
A method of constructing a replicating portfolio in which the manager purchases a number of the most highly capitalized names in the stockindex in proportion to their capitalization.

Capitalization ratios
Also called financial leverage ratios, these ratios compare debt to total capitalization and thus reflect the extent to which a corporation is trading on its equity. Capitalization ratios can be interpreted only in the context of the stability of industry and company earnings and cash flow.

Capitalization-Weighted Index
A stock index which is computed by adding the capitalization (float times price) of each individual stock in the index, and then dividing by the divisor. The stocks with the largest market values have the heaviest weighting in the index.

Capped-Style Option
A capped option is an option with an established profit cap or cap price. The cap price is equal to the option’s strike price plus a cap interval for a call option or the strike price minus a cap interval for a put option. A capped option is automatically exercised when the underlying security closes at or above (for a call) or at or below (for a put) the Option’s cap price.

Caput
An exotic option. It represents a call option on a put option. That is, you purchase the option to buy a put option at a particular price on or before the expiration date.

Car
A loose quantity term sometimes used to describe the amount of a commodityunderlying one commoditycontract; e.g., “a car of bellies.” Derived from the fact that quantities of the product specified in a contract once corresponded closely to the capacity of a railroad car.

Caracas Stock Exchange
Originally established in 1947 and merged with a competitor in 1974 to become the only securities exchange of Venezuela.

Carrot equity
British slang for an equityinvestment with the added benefit of an opportunity to purchase more equity if the company reaches certain financial goals.

Carry Trade
A trade where you borrow and pay interest in order to buy something else that has higher interest. For example, with a positively sloped term structure (short rates lower than long rates), one might borrow at low short term rates and finance the purchase of long-term bonds. The carry return is the coupon on the bonds minus the interest costs of the short-term borrowing. Of course, if long-term interest rates unexpectedly rose(and long-term bond prices fell as a result), the carry trade could become unprofitable. Indeed, if this occured, there could be a number of investors trying to unwind the carry trade, which would involve selling the long-term bonds. It is possible that this could exacerbate the increase in long-term interest rates, i.e. push the rates even higher.

Carryforwards
Tax losses allowed to be applied to offset future income in some specified number of future years.

Carrying charge
The fee a broker charges for carryingsecurities on credit, such as on a margin account. Also, any component of a futures basis, such as storage costs, interest charges or insurance costs on the underlying interest.

Carrying costs
Costs that increase with increases in the level of investment in current assets.

Cartel
A group of businesses or nations that act together as a single producer to obtain marketcontrol and to influence prices in their favor by limiting production of a product. The United States has laws prohibiting cartels.
Carve out
Usually occurs when a company decides to IPO one of their subsidiaries or divisions. The company usually only offers a minority share to the equity market. Also known as equity carve out.

Cash account
A brokerage account that settles transactions on a cash-rather than credit-basis.

Cash asset ratio
Cash and marketable securities divided by current liabilities. See: Liquidity ratios.

Cash basis
Refers to the accounting method that recognizes revenues and expenses when cash is actually received or paid out.

Cash and equivalents
The value of assets that can be converted into cash immediately, as reported by a company. Usually includes bank accounts and marketable securities, such as bonds and Banker’s Acceptances. Cash equivalents on balance sheets include securities (e.g., notes) that mature within 90 days.

Cash & carry
Applies to derivative products. Combination of a long position in a stock/index/commodity and short position in the underlyingfutures, which entails a cost of carry on the long position. Also known as cash and carry arbitrage.

Cash commodity
The actual physical commodity, as distinguished from a futures contract.

Cash conversion cycle
The length of time between a firm’spurchase of inventory and the receipt of cash from accounts receivable.

Cash cow
A company that pays out most of its earnings per share to stockholders as dividends. Or, a company or division of a company that generates a steady and significant amount of free cash flow.

Cash cycle
In general, the time between cash disbursement and cash collection. In networking capital management, it can be thought of as the operating cycle less the accounts payable payment period.

Cash deficiency agreement
An agreement to investcash in a project to the extent required to cover any cash deficiency the project may experience.

Cash delivery
The provision of some futures contracts that requires not delivery of underlying assets but settlement according to the cash value of the asset.

Cash discount
An incentive offered to purchasers of a firm’s product for payment within a specified time period, such as ten days.

Cash dividend
A dividend paid in cash to a company’sshareholders. The amount is normally based on profitability and is taxable as income. A cashdistribution may include capital gains and return of capital in addition to the dividend.

Cash earnings
A firm’scash revenues less cash expenses, which excludes the costs of depreciation.
Cash-equivalent items
Examples include Treasury bills and Banker’s Acceptances.

Cash flow
In investments, cash flow represents earnings before depreciation, amortization, and non-cash charges. Sometimes called cash earnings. Cash flow from operations (called funds from operations by real estate and other investment trusts) is important because it indicates the ability to pay dividends.

Cash flow break-even point
The point below which the firm will need either to obtain additional financing or to liquidate some of its assets to meet its fixed costs.

Cash flow coverage ratio
The number of times that financial obligations (for interest, principal payments, preferred stockdividends, and rental payments) are covered by earnings before interest, taxes, rental payments, and depreciation.

Cash flow from operations
A firm’snetcash inflow resulting directly from its regular operations (disregarding extraordinary items such as the sale of fixed assets or transaction costs associated with issuingsecurities), calculated as the sum of net income plus noncash expenses that are deducted in calculating net income.

Cash in Advance
A payment term meaning the buyer pays the seller before shipment is effected.

Cash In Lieu (CIL)
In a typical exchange offer, “old” shares of the target company are exchanged for “new shares”.

Cash markets
Also called spot markets, these are markets that involve the immediate delivery of a security or instrument. Related: Derivative markets.

Cash offer
Often used in risk arbitrage. Proposal, either hostile or friendly, to acquire a target company through the payment of cash for the stock of the target. Compare to exchange offer.

Cash-on-cash return
A method used to find the return on investments when there is no activesecondary market. The yield is determined by dividing the annual cash income by the total investment. See: Current yield or yield to maturity.

Cash on delivery (COD)
In the context of securities, this refers to the practice of institutional investors paying the full purchase price for securities in cash.

Cash-out Laws
These laws enable shareholders to sell their stakes to a “controlling” shareholder at a price based on the highest price of recently acquired shares. This works something like Fair-Price provisions extended to nontakeover situations. A few states have these laws.

Cash plus convertible
Convertible bond that requires cash payment upon conversion.

Cash position
The percentage of a mutual fund’sassetsinvested in short-term reserves, such as US Treasury bills or other money marketinstruments.

Cash ratio
The proportion of a firm’sassets held as cash.

Cash sale/settlement
Transaction in which a contract is settled on the same day as the trade date, or the next day if the trade occurs after 2:30 p.m. EST and the parties agree to this procedure. Often occurs because a party is strapped for cash and cannot wait until the regular three-business daysettlement. See: Settlement date.

Cash Settlement
The process by which the terms of an option contract are fulfilled through the payment or receipt in dollars of the amount by which the option is in-the-money as opposed to delivering or receiving the underlying stock.

Cash settlement contracts
Futures contracts such as stock index futures that settle for cash and do not involve delivery of the underlying.

Cashier’s check
A check drawn directly on a customer’s account, making the bank the primary obligor, and assuring firm that the amount will be paid.

Cashout
Occurs when a firm runs out of cash and cannot readily sell marketable securities.

Casualty-insurance
Insurance protecting a firm or homeowner against loss of property, damage, and other liabilities.

Casualty loss
A financial loss caused by damage, destruction, or loss of property as a result of an unexpected or unusual event.

Cats and dogs
Speculative stocks with short histories of sales, earnings, and dividend payments.

Cease-and-desist order
An order issued after notice and opportunity for hearing, requiring a depository institution, a holding company or a depository institution official to terminate unlawful, unsafe or unsound banking practices. Cease-and-desist orders are issued by the appropriate federal regulatory agencies under the Financial Institutions Supervisory Act and can be enforced directly by the courts.

CEDEL
A centralized clearing system for Eurobonds.

Ceiling
The highest price, interest rate, or other numerical factor allowable in a financial transaction.

Central bank
A country’s main bank whose responsibilities include the issue of currency, the administration of monetary policy, open market operations, and engaging in transactions designed to facilitate healthy business interactions. See: Federal Reserve System.

Central bank intervention
The buying or selling of currency, foreign or domestic, by central banks in order to influence market conditions or exchange rate movements.

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Central Limit Theorem
The Law of Large Numbers states that as a sample of independent, identically distributed random numbers approaches infinity, its probability density function approaches the normal distribution.
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Certainty equivalent
An amount that would be accepted today (risk free) in lieu of a chance to receive a possibly higher, but uncertain, amount.

Certainty Equivalent Return
The certain (zero risk) return an investor would trade for a given (larger) return with an associated risk. For example, a particular investor might trade an uncertain expected 4% activereturn with 6% risk, for a certain active return of 1.5%. Used as a way to incorporate individual investor risk tolerances into financial decisions.

Certificate of deposit (CD)
Also called a time deposit this is a certificateissued by a bank or thrift that indicates a specified sum of money has been deposited. A CD has a maturity date and a specified interest rate, and can be issued in any denomination. The duration can be up to five years.

Certified Financial Planner (CFP)
A person who has passed examinations accredited by the Certified Financial Planner Board of Standards, showing that the person is able to manage a client’s banking, estate, insurance, investment, and tax affairs.

Certified financial statements
Financial statements that include an accountant’s opinion.

Certified Public Accountant (CPA)
An accountant who has met certain standards, including experience, age, and licensing, and passed exams in a particular state.

Chair of the board
Highest-ranking member of a Board of Directors, who presides over its meetings and who is often the most powerful officer of a corporation.

Chaos
A deterministic non-linear dynamic system that can produce random looking results. A chaotic system must have a fractal dimension, and exhibit sensitive dependence on initial conditions.

Chapter 11 Proceedings
Provisions of the Bankruptcy Reform Act under which the debtorfirm is reorganized by a court because the estimated value of the reorganized firm exceeds the expected proceeds from its liquidation.

Characteristic line
The market model applied to a single security; a regression of security returns on the benchmark return. The slope of the regression line is a security’s beta.

Characteristic portfolio
A portfolio which efficiently represents a particular asset characteristic. For a given characteristic, it is the minimum risk portfolio, with portfolio characteristic equal to 1. For example, the characteristic portfolio of assetbetas is the benchmark. It is the minimum risk beta = 1 portfolio.

Charter Amendment Limitations
These provisions limit shareholders’ ability to amend the governing documents of the corporation. This might take the form of a supermajority vote requirement for charter or bylaw amendments, total elimination of the ability of shareholders to amend the bylaws, or the ability of directors beyond the provisions of state law to amend the bylaws without shareholder approval.

Chartered Financial Analyst (CFA)
An experienced financial analyst who has passed examinations in economics, financial accounting, portfolio management, security analysis, and standards of conduct given by the Institute of Chartered Financial Analysts.

Chartists
A technical analyst who charts the patterns of stocks, bonds, and commodities to find trends in patterns of trading used to advise clients. Related: Technical analysts.

Chicago Board Options Exchange (CBOE)
A securities exchange created in the early 1970s for the public trading of standardized optioncontracts. Primary place for the trading of stockoptions,foreign currency options, and index options (S&P 100, 500, and OTC 250 index)

Chicago Board of Trade (CBOT)
The second largest futures exchange in the US, and a pioneer in the development of financial futures and options.

Chicago Mercantile Exchange (CME)
Chicago Mercantile Exchange (CME) is the largest futures exchange in the United States and the second largest exchange in the world for the trading of futures and options on futures. Founded in 1898 as a not-for-profitcorporation, in November 2000 CME became the first U.S. financial exchange to demutualize and become a shareholder-owned corporation. Its futures and options on futurestrade on CME’s trading floors, on its GLOBEX electronic trading platform and through privately negotiated transactions. CME has four major product areas based on interest rates (including Eurodollar futures, the world’s most actively traded futures contract), stock indexes (such as the (S&P 500 and Nasdaq-100 futures), foreign exchange and commodities.

Chinese hedge
Applies mainly to convertible securities. Trading hedge in which one is short the convertible and long the underlying common, in the hope that the convertible’s premium will fall. Antithesis of set-up.

Chinese wall
Communication barrier between financiers at a firm (investment bankers) and traders. This barrier is erected to prevent the sharing of inside information that bankers are likely to have.

Churning
Excessive trading of a client’s account in order to increase the broker’scommissions.

Circuit breakers
Measures instituted by exchanges to stop trading temporarily when the market has fallen by a certain percentage in a specified period. They are intended to prevent a market free fall by permitting buy and sell orders to rebalance.

Circus swap
A fixed-rate currency swap against floating US dollar LIBOR payments. An acronym that stands for Combined Interest Rate and CUrrency Swap.

Class
In the case of derivative products, options of the same type-put or call-with the same underlying security. See: Series. In general, refers to a category of assets such as: domestic equity, fixed income, etc.

Class of Options
Option contracts of the same type (call or put) and Style (American, European or Capped) that cover the same underlying security.

Clear
To settle a trade by the seller delivering securities and the buyer delivering funds in the proper form. A trade that does not clear is said to fail. Comparison of the details of a transaction between broker/dealers prior to settlement; final exchange of securities for cash on delivery.

Clear a position
To eliminate a long or short position, leaving no ownership or obligation.

Clearing House Electronic Subregister System (CHESS)
CHESS is the automatic transfer and settlement system for the majority of Australian Stock Exchange (ASX) listed securities.

Clearinghouse
An adjunct to a futures exchange through which transactionsexecuted on its floor where trades are settled by a process of matching purchases and sales. A clearing organization is also charged with the proper conduct of delivery procedures and the adequate financing of the entire operation.

Clearing member
A member firm of a clearing house. Each clearing member must also be a member of the exchange. Not all members of the exchange, however, are members of the clearing organization. All trades of a non-clearing member must be registered with, and eventually settled through, a clearing member.

Clearing Member Trade Agreement (CMTA)
An agreement that allows a client to executederivativetrades through different brokers yet consolidate positions for clearing purposes at one brokerage firm.

Clientele effect
Describes the tendency of funds or investments to be followed by groups of investors who have similar preferences for a firm which follows a particular financing policy, such as the amount of leverage it uses.

Clone fund
A new fund set up in a fund family to emulate another successful fund.

Close a position
In the context of general equities, eliminate an investment from one’s portfolio, by either selling a long position or covering a short position.

Close-end credit
An agreement in which advancedcredit plus any finance charges are expected to be repaid in full over a definite time. Most real estate and automobile loans are closed-end agreements.

Closed-end management company
An investment company that issues a fixed number of shares of the mutual fund that it manages, and does not create new shares if demand increases. Antithesis of an open-end management company.

Closed-end fund
An investment company that issues shares like any other corporation and usually does not redeem its shares. A publicly traded fund sold on stock exchanges or over the counter that may trade above or below its net asset value. Related: Open-end fund.

Closed out
Position that is liquidated when the client does not meet a margin call or cover a short sale.

Closely held company
A company who has a small group of controllingshareholders. In contrast, a widely-held firm has many shareholders. It is difficult or impossible to wage a proxy battle for any closely-held firm.

Closing price
Price of the last transaction of a particular stock completed during a day’s trading session on an exchange.

Closing tick
The net of the number of stocks whose closing prices are higher than their previous trades ( uptick) against the number of stocks whose closing prices were lower than their previous trades (downtick). A positive closing tick indicates “buying at the close”, or a bullishmarket; a negative closing tick indicates “selling at the close,” or a bearishmarket.

Cloud on title
Any claim or encumbrance, usually discovered in a title search, that may impair the title to a property, and make its validity questionable. See: bad title.

Cluster analysis
A statistical technique that identifies clusters of stocks whose returns are highly correlated within each cluster and relatively uncorrelated across clusters. Cluster analysis has identified groupings such as growth, cyclical, stable, and energy stocks.

Coattail investing
A riskytrading practice of making trades similar to those of other successful investors, usually institutional investors.

Coefficient of determination
A measure of the goodness of fit of the relationship between the dependent and independent variables in a regression analysis; for instance, the percentage of variation in the return of an asset explained by the market portfolio return. Also known as R-square.

Coefficient of Variation
A measure of investment risk that defines risk as the standard deviation per unit of expected return.

Coffee, Sugar & Cocoa Exchange (CS&CE)
The New York-based commodity exchange trading futures and options. The CS&CE shares the trading floor at the Commodities Exchange Center.

Coherent Market Hypothesis
A hypothesis that the probability density function of the market may be determined by a combination of group sentiment and fundamental bias. Depending on combinations of these two factors, the market can be in one of four states: random walk, unstable transition, chaos, or coherence.

Coincident indicators
Economic indicators that give an indication of the current status of the economy.

Collar
Refers to the ceiling and floor of the price fluctuation of an underlying asset. A collar is usually set up with options, swaps, or by other agreements. In corporate finance, the collar strategy of buying puts and selling calls is often used to mitigate the risk of a concentrated position in (sometimes) restricted stock. When the restricted owner can’t sell the stock, but needs to diversify the risk, a collar transaction is one of the few tools available. Many corporate executives who receive chunks of their compensation in restricted stock need to employ this strategy to mitigate the diversification risk in their overall portfolio.

Collateral
In the context of project financing, additional security pledged to support the project financing.

Collateralized Bond Obligation (CBO)
Investment-grade bonds backed by a collection of junk bonds with different levels of risk, called tiers, that are determined by the quality of junk bond involved. CBOs backed by highly riskyjunk bonds receive higher interest rates than other CBOs.

Collateralized Debt Obligation (CDO)
A general inclusive term which covers Collateralized Bond Obligations, Collateralized Loan Obligations, and Collateralized Mortgage Obligations,

Collection ratio
The ratio of a company’saccounts receivable to its average daily sales, which gives the average number of days it takes the company to convert receivables into cash.

Combination bond
A bond backed by the government unit issuing it as well as by revenue from the project that is to be financed by the bond.

COMEX
A division of the New York Mercantile Exchange (NYMEX). Formerly known as the Commodity Exchange, COMEX is the leading US market for metals futures and options trading.

Commercial hedgers
Companies that take futurespositions in commodities so that they can guarantee prices at which they will buy raw materials or sell their products.

Commercial Mortgage Backed Securities
Similar to MBS but backed by loans secured with commercial rather than residential property. Commercial property includes multi-family, retail, office, etc., They are not standardized so there are a lot of details associated with structure, credit enhancement, diversification, etc., that need to be understood when valuing these instruments.

Commercial paper
Short-term promissory notes either unsecured or backed by assets such as loans or mortgages issued by a corporation. The maturity of commercial paper is typically less than 270 days; the most common maturity range is 30 to 50 days or less. They are usually sold, like Treasury bills, at a discount.
Commercial property
Real estate that produces some sort of income-producing property.

Commingling
In the context of securities, this involves mixing customer-owned securities with brokerage firm-owned securities. This process is referred to as rehypothecation, which is the use of customers’ collateral to secure their loans. This is legal with customer consent, although some securities and collateral must be kept separately.

Commission
The fee paid to a broker to execute a trade, based on number of shares, bonds, options, and/or their dollar value. In 1975, deregulation led to the establishment of discount brokers, who charge lower commissions than full service brokers. Full service brokers offer advice and usually have a staff of analysts who follow specific industries. Discount brokers simply execute a client’s order and usually do not offer an opinion on a stock. Also known as a round-turn. Commissions are known as round-turn only in futures trading, since the commission is assessed only after liquidation of the position.

Commodities Exchange Center (CEC)
The location of five New York futures exchanges: Commodity Exchange, Inc. (COMEX); the New York Mercantile Exchange (NYMEX); New York Cotton Exchange, Coffee, Sugar & Cocoa Exchange (CS&CE), and New York Futures Exchange (NYFE).

Commodity
A commodity is food, metal, or another fixed physical substance that investorsbuy or sell, usually via futures contracts.

Commodity-backed bond
A bond with interest payments tied to the price of an underlyingcommodity.

Commodity Channel Index
An index used in technical analysis. High values mean a potential future correction (downward movement in underlying asset) and low values potentially forecast a rally. Details in Donald Lambert’s October 1980 article in Commodities Magazine.

Commodity futures contract
An agreement to buy a specific amount of a commodity at a specified price on a particular date in the future, allowing a producer to guarantee the price of a product or raw material used in production.

Commodity Futures Trading Commission (CFTC)
An agency created by the US Congress in 1974 to regulate exchange trading in futures.

Commodity indices
Indices measuring the price and performance of physical commodities, often by the price of futures contracts for the commodities that are listed on commodityexchanges.

Commodity paper
A loan or advance secured by commodities.

Commodity Research Bureau
Produces a popular price index of 17 commodities which is often used to track inflationarytrends in the economy.

Commodity Trading Advisor
An investment manager that focuses on long and short trading in the futures markets. The trades are often intraday trades. Sometimes referred to as Managed Futures.

Common-base-year analysis
The representing of accounting information over multiple years as percentages of amounts in an initial year.

Common shares
In general, a publiccorporation has two types of shares, common and preferred. The common shares usually entitle the shareholders to vote at shareholders meetings. The common shares have a discretionary dividend.

Common stock fund
A mutual fundinvesting only in common stock.

Companion bonds
A class of a Collateralized Mortgage Obligation (CMO) whose principal is paid off first when the underlyingmortgages are prepaid due to falling interest rates. When interest rates rise, there will be lower prepayments of the principal; companion bonds therefore absorb most of the prepayment risk of a CMO.

Comparative advantage
Theory suggesting that specialization by countries can increase worldwide production.

Comparative credit analysis
Comparing a firm to others that have a desired target debt rating in order to deduce an appropriate financial ratio target.

Complete capital market
A market in which there is a distinctive marketable security for each and every possible outcome.

Completion risk
The risk that a project will not be brought into operation successfully or be able to pass its completion test.

Complexity Theory
The theory that processes with a large number of seemingly independent agents can spontaneously organize themselves into a coherent system.

Compound Annual Growth Rate
Annual return calculated based on each year’s previous balances where each previous balance includes both the original principal and all interest accrued from prior years. Best defined by example. If you invest $100 today and make 5% in the first year and reinvest ($105) and make 8% in the second year, the compound annualgrowth rate is 6.489%. The calculation is $100×1.05×1.08=$113.4 which is what you end up with at the end of year two. The average return is [square root(113.4/100) -1]= 0.06489 or 6.489%. Note 1. If we had three compounding periods we would take the cubic root (power of 1/3). Note 2. If we had invested at exactly 6.489 in both periods, we get $100×1.06489×1.06489=$113.4. Note 3. The example is directed to a return – but CAGR could be applied to earnings growth, GDP growth, etc.

Compound interest
Interest paid on previously earned interest as well as on the principal.

Compound option
Option on an option.

Compounding
The process of accumulating the time value of money forward in time. For example, interest earned in one period earns additional interest during each subsequent time period.

Comptroller
The corporate manager responsible for the firm’s accounting activities. Sometimes referred to as the contoller (which means the same thing).

Concave
Property that a curve is below a straight line connecting two end points. If the curve falls above the straight line, it is called convex.
Concentration account

Concession
The per-share or per- bondcompensation of a selling group for participating in a corporate underwriting.

Conditional call
Applies mainly to convertible securities. Circumstances under which a company can effect an earlier call, usually stated as percentage of a stock’strading price during a particular period, such as 140% of the exercise price during a 40-day trading span.

Conditional call options
A protective guarantee that, in the event a high yield bond is called, the issuingcorporation will replace the bond with a non callable bond of the same life and terms as the bond that is being called.

Conditional sales contracts
Similar to equipment trust certificates, except that the lender is either the equipment manufacturer or a bank or finance company to which the manufacturer has sold the conditional sales contract.

Condor

Conduit theory
A theory that because investmentcompanies are merely conduits for capital gains, dividends, and interest, which are in fact passed through to shareholders, the investmentcompany should not be taxed at the corporate level.

Confidence indicator
A measure of investors’ faith in the economy and the securities market. A low or deteriorating level of confidence is considered by many technical analysts as a bearish sign.

Confidence level
In risk analysis, the degree of assurance that a specified failure rate is not exceeded.

Conforming loans
Mortgageloans that meet the qualifications of Freddie Mac or Fannie Mae, which are bought from lenders and issued as pass-through securities.

Conglomerate
A firm engaged in two or more unrelated businesses.

Consensus forecast
The mean of all financial analysts’ forecasts for a company.

Consignee
The party named in the bill of lading to whom delivery is promised and/or title is passed.

Consignment
Transfer of goods to a seller while title to the merchandise is retained by the owner.

Constant ratio plan
Maintaining a predetermined ratio between stock and fixed income investments through regular adjustments of distribution of funds into different investments. See: formula investing.

Consular Invoice
A document prepared by the shipper and certified in the country of origin by a consul of the country of importation. It shows the transaction details and origin of the goods.

Consumer Advisory Council (CAC)
A statutory body established by Congress in 1976. The Council, with 30 members who represent a broad range of consumer and creditor interests, advises the Federal Reserve Board on the exercise of its responsibilities under the Consumer Credit Protection Act and on other matters on which the Board seeks its advice.

Consumer credit
Credit a firm grants to consumers for the purchase of goods or services. Also called retail credit.

Consumer debenture
An investmentnoteissued directly to the public by a financial institution.

Consumer durables
Consumer products that are expected to last three years or more, such as an automobile or a home appliance.

Consumer interest
Interest paid on consumer loans; e.g., interest on credit cards and retailpurchases.

Consumer Price Index (CPI)
The CPI, as it is called, measures the prices of consumer goods and services and is a measure of the pace of US inflation. The US Department of Labor publishes the CPI every month.

Contagion
Excess correlation of delivering or bondreturns. For example, under usual conditions we might observe a certain level of correlation of market returns. A period of contagion would be associated with much higher-than-expected correlation. Some examples are the conjectured contagion in East Asian markets beginning in July 1997 when the Thai currency devalued and the impact across many emerging markets of the Russian default. Contagion is difficult to identify because you need some sort of measure of the expected correlation. It is complicated because correlations are known to change through time, for example, see Erb, Harvey and Viskanta’s article in the 1994 Financial Analysts Journal. In periods of negative returns, correlations (and volatility) are known to increase, so what might appear to be excessive may not be contagion.

Contango
A market condition in which futures prices are higher in the distant delivery months.

Contingency
An additional amount or percentage added to any cash flow item (ie. Capex). Care is needed to ensure it is either to be spent or to remain as a cushion.

Contingency graph
A plot of the net profit to a speculator in currency options under various exchange rate scenarios.

Contingency order
In the context of general equities, order to buy one security, if the trader can sell another, usually given that certain price limits or conditions reach a certain level.

Contingent
In context of liabilities, those liabilities that do not yet appear on the balance sheet (ie. guarantees, supports, lawsuit settlements). For support or recourse, the trigger may occur at any time in the future.

Contingent claim
A claim that can be made only if one or more specified outcomes occur.

Contingent immunization
An arrangement in which the money manager pursues an activebondportfoliostrategy until an adverse investment experience drives the then-available potential return down to the safety net level. When that point is reached, the money manager is obligated to pursue an immunization strategy to lock in the safety-net level return.

Contingent order
An order which can be executed only if another event occurs; i.e. “sell Oct 45 call 7-1/4 with stock 52 or lower”.

Contra broker
The broker on the buy side of a sell order or the sell side of a buy order.

Contrarian
An investment style that leads one to buyassets that have performed poorly and sell assets that have performed well. There are two possible reasons this strategy might work. The first is a mean-reversion argument; that is, if the asset has deviated from its usual level, it should eventually return to that usual level. The second reason has to do with overreaction. Investors might have overreacted to bad news sending the asset price lower than it should be.

Contrarian investing
Ignoring markettrends by buyingsecurities that the investor considers undervalued and out of favor with other investors.

Controlled commodities
Commodities regulated by the Commodities Exchange Act of 1936 in order to prevent fraud and manipulation in commoditiesfuturesmarkets.

Controller
The corporate manager responsible for the firm’s accounting activities. Sometimes referred to as the comptroller (which means the same thing).

Convenience yield
The extra advantage that firms derive from holding the commodity rather than a futureposition.

Convertible
A financialinstrument that can be exchanged for another security or equity interest at a pre-agreed time and exchange ratio.

Convertible Arbitrage
In the context of hedge funds, a style of management that involves the simultaneous purchase of a convertible bond and the short sale of shares of the underlying stock. Interest rate risk may or may not be hedged.

Convergence
The movement of the price of a futures contract toward the price of the underlying cash commodity. At the start, the contract price is usually higher because of time value. But as the contract nears expiration, and time value decreases, the futures price and the cash price converge.

Conversion
In the context of securities, refers to the exchange of a convertible security such as a bond into stock.
In the context of mutual funds, refers to the free exchange of mutual fundshares from one fund to another in a single family.

Conversion factors
Rules set by the Chicago Board of Trade for determining the invoice price of each acceptable deliverable Treasuryissue against the Treasury Bondfutures contract.

Conversion feature
Specification of the right to transform a particular investment to another form of investment, such as switching between mutual funds or converting preferred stock or bonds to common stock.

Conversion parity/value
Applies mainly to convertible securities. Common stock price at which a convertible bond can become exchangeable for common shares of equal value; value of a convertible bond based solely on the market value of the underlyingequity. Par value plus conversion ratio.

Conversion premium
The extent by which the conversion price of a convertible security exceeds the prevailing common stock price at the time the convertible security is issued. In general usage, the conversion premium is the amount by which the convertible security trades above its conversted value. For example, if a $1,000 par bond is trading at $1,100, it is convertible into 50 shares, and the shares are trading at $21, the converted value is 50 X 20.50 = $1,025, and the conversion premium is $75.

Conversion ratio
Applies mainly to convertible securities. Relationship that determines how many shares of common stock will be received in exchange for each convertible bond or preferred stock when a conversion takes place. It is determined at the time of issue and is expressed either as a ratio or as a conversion price from which the ratio can be figured by dividing the par value of the convertible by the conversion price.

Convertibility
The ability to exchange a currency without government restrictions or controls.

Convertible adjustable preferred stock (Caps)
The interest rate on caps is adjustable and is pegged to Treasurysecurity rates. They can be exchanged at par value for common stock or cash after the next period’s dividend rates are revealed.

Convertible arbitrage
A practice, usually of buying a convertible bond and shorting a percentage of the equivalent underlyingcommon shares, to create a positive cash flowposition (with expected returns above the riskless rate) in a static environment and benefit from capital appreciation should the convertible’s premium rise. This form of investing is far from riskless and requires constant monitoring.

Convertible bond
General debtobligation of a corporation that can be exchanged for a set number of common shares of the issuing corporation at a prestatedconversion price.

Convertible eurobond
A eurobond that can be converted into another asset, often through exercise of attached warrants.

Convertible exchangeable preferred stock
Convertible preferred stock that may be exchanged, at the issuer’s option, into convertible bonds that have the same conversion features as the convertible preferred stock.

Convertible security
A security that can be converted into common stock at the option of the securityholder; includes convertible bonds and convertible preferred stock.

Convex
Curved, as in the shape of the outside of a circle. Usually referring to the price/required yield relationship for option-free bonds.

Convexity
Property that a curve is above a straight line connecting two end points. If the curve falls below the straight line, it is called concave.

Core capital
The capital required of a thrift institution, which must be at least 2% of assets to meet the rules of the Federal Home Loan Bank.

Cornering the market
Purchasing a security or commodity in such volume as to achieve control over its price. An illegal practice.

C Corporation
A corporation that elects to be taxed as a corporation. The C corporation pays federal and state income taxes on earnings. When the earnings are distributed to the shareholders as dividends, this income is subject to another round of taxation (shareholder’s income). Essentially, the C corporations’ earnings are taxed twice. In contrast, the S corporation’s earnings are taxed only once.

Corporate processing float
The time that elapses between receipt of payment from a customer and the deposit of the customer’s check in the firm’s bank account; the time required to process customer payments.

Corporate repurchase
Activebuying by a corporation of its own stock in the marketplace. Reasons for repurchase include putting idle cash to use, raising EPS, creating support for a stock price, increasing internal control (shark repellant), or stock for ESOP or pension plans. Repurchase is subject to rules, such as that buying must be on a zero minus or a minus tick, after the opening and before 3:30 p.m.

Corporate Trust
The function of servicing and maintaining records for debt securities issued by a corporation.

Corporation
A legal entity that is separate and distinct from its owners. A corporation is allowed to own assets, incur liabilities, and sell securities, among other things.

Correction
Reverse movement, usually downward, in the price of an individual stock, bond, commodity, or index. If prices have been rising on the market as a whole, and then fall dramatically, this is known as a correction within an upward trend. Antithesis of a technical rally.

Correlation
Statistical measure of the degree to which the movements of two variables (stock/option/convertible prices or returns) are related.

Correlation coefficient
A standardized statistical measure of the dependence of two random variables, defined as the covariance divided by the product of the standard deviations of two variables.

Correlation Dimension
An estimate of the Fractal Dimension which measures the probability that two points chosen at random will be within a certain distance of each other, and examines how this probability changes as the distance is increased. White noise will fill its space since its components are uncorrelated, and its correlation dimension is equal to whatever dimension it is placed in. A dependent system will be held together by its correlations and retain its dimension whatever embedding dimension it is placed in, as long as it is greater than its fractal dimension.

Cosigner
A term referring to a person, other than the principal borrower, who signs for a loan. The cosigner(s) assumes equal liability for the loan.

Cost
The opposite of revenue. An expense that reflects the price of purchasing goods, services and financial instruments. A cash cost means that cash is given up today to the purchase. Also, the purchase price of an investment, which is compared to the sale proceeds to determine capital gain or loss.

Cost basis
The original price of an asset, used to determine capital gains.

Cost-benefit ratio
The net present value of an investment divided by the investment’s initial cost. Also called the profitability index.

Cost of capital
The required return for a capital budgeting project.

Cost of carry
Out-of-pocket costs incurred while an investor has an investment position. Examples include interest on long positions in margin account, dividend lost on short margin positions, and incidental expenses. Related: Net financing cost.

Cost of equity
The required rate of return for an investment of 100% equity.

Cost of goods sold
The total cost of buyingraw materials, and paying for all the factors that go into producing finished goods.

Cost Recovery Period
The number of years it takes to fully depreciate a capital asset. This time period is based on classification of the depreciable life of an asset.

Countercyclical stocks
Stocks whose price tends to rise when the economy is in recession or the market is bearish, and vice versa.

Counterpart items
In the balance of payments, counterpart items are analogous to unrequited transfers in the current account. They arise through the double-entry system in balance of payments accounting and refer to adjustments in reserves owing to monetization or demonetization of gold, allocation or cancellation of SDRs, and revaluation of the various components of total reserves.

Counterparty risk
The risk that the other party to an agreement will default. In an options contract, the risk to the optionbuyer that the option writer will not buy or sell the underlying as agreed.

Country allocations
The percentages of a fund’s net assetsdistributed to securities of various countries. These percentages serve as an indicator of a fund’s diversification and its vulnerability to fluctuations in foreign financial markets or currencyexchange rates.

Country beta
Covariance of a national economy’s rate of return and the rate of return of the world economy divided by the variance of the world economy.

Country diversification
Investment of a global or international portfolio’sassets in securities of various countries.

Country economic risk
Developments in a national economy that can affect the outcome of an international financial transaction.

Country risk
The general level of political, financial, and economic uncertainty in a country which impacts the value of the country’s bonds and equities. See:Sovereign risk.

Coupon
The contractual interest obligation a bond or debenture issuer covenants to pay to its debtholders.

Coupon bond
A bond featuring coupons that must be presented to the issuer in order to receive interest payments.

Coupon equivalent yield
True interestcost expressed on the basis of a 365-day year.

Coupon pass
Canvassing by the desk of primary dealers to determine the inventory and maturities of their Treasury securities. The desk then decides whether to buy or sell certain issues (coupons) in order to add or withdraw reserves.

Coupon payments
A bond’s interest payments.

Coupon rate
In bonds, notes, or other fixed income securities, the stated percentage rate of interest, usually paid twice a year.

Covariance
A statistical measure of the degree to which random variables move together. A positive covariance implies that one variable is above (below) its mean value when the other variable is above (below) its mean value.

Covenant
An agreed action to be undertaken (Positive) or not done (Negative). A breach of a covenant is a default.

Coverage ratios
Ratios used to test the adequacy of cash flows generated through earnings for purposes of meeting debt and leaseobligations, including the interest coverage ratio and the fixed-charge coverage ratio.

Covered
A written option is considered to be covered if the writer also has an opposing market position on a share-for-share basis in the underlying security. That is, a short call is covered if the underlying stock is owned, and a short put is covered (for margin purposes) if the underlying stock is also short in the account. In addition, a short call is covered if the account is also long another call on the same security, with a striking price equal to or less than the striking price of the short call. A short put is covered if there is also a long put in the account with a striking price equal to or greater than the striking price of the short put.

Covered call
A shortcall optionposition in which the writer owns the number of shares of the underlying stock represented by the option contracts. Covered calls generally limit the risk the writer takes because the stock does not have to be bought at the market price, if the holder of that option decides to exercise it.

Covered call writing strategy
A strategy that involves writing a call option on securities that the investor owns. See: Covered or hedge option strategies.

Covered foreign currency loan
A loandenominated in a currency other than that of the borrower’s home country, for which repayment terms are prearranged through the use of a forward currency contract.

Covered interest arbitrage
Occurs when a portfolio managerinvests dollars in an instrumentdenominated in a foreign currency and hedges the resulting foreign exchange risk by selling the proceeds of the investment forward for dollars.

Covered Interest Rate Parity
The principle that the yields from interest-bearing foreign and domestic investments should be equal when the currencymarket is used to predetermine the domestic currency payoff from a foreign investment.

Covered or hedge option strategies
Strategies that involve a position in an option as well as a position in the underlying stock, designed so that one position will help offset any unfavorable price movement in the other, including covered call writing and protective putbuying.

Covered option
Optionposition that is offset by an equal and opposite position in the underlying security. Antithesis of naked option.

Covered position
Use of an option in a tradingstrategy in the underlyingasset which is already owned.

Covered put
A put optionposition in which the option writer also is short the corresponding stock or has deposited, in a cash account, cash or cash equivalents equal to the exercise price of the option. This limits the option writer’srisk because money or stock is already set aside. In the event that the holder of the put option decides to exercise the option, the writer’s risk is more limited than it would be on an uncovered or naked put option.

Covered straddle
An option strategy in which one call and one put with the same strike price and expiration are written against 100 shares of the underlying stock. In actually, this is not a “covered” strategy because assignment on the short put would require purchase of stock on margin. This method is also known as a covered combination.

Covered straddle write
The term used to describe the strategy in which an investor owns the underlying security and also writes a straddle on that security. This is not really a covered position.

Covered writer
An investor who writes options only on stock that he or she owns, so that option premiums may be collected.

Covering
Using forward currency contracts to predetermine the domestic currency amount of an expected future foreign receipt or payment. Also, the buying back (‘covering’) of a short position.

CPI
A measure of inflation.

Cramdown
The ability of the bankruptcy court to confirm a plan of reorganization over the objections of some classes of creditors.

Crash
Dramatic loss in market value. The last great crash was in 1929. Some refer to October 1987 as a crash but the market return for the entire year of 1987 was positive.

Crawling peg
An automatic system for revising the exchange rate. It involves establishing a par value around which the rate can vary up to a given percent. The par value is revised regularly according to a formula determined by the authorities.

Credit analysis
Evaluating information on companies and bondissues in order to estimate the ability of the issuer to live up to its future contractualobligations. Related: Default risk.

Credit balance
The surplus in a cashaccount with a broker after purchases have been paid for, plus the extra cash from the sale of securities.

Credit bureau
An agency that researches the credit history of consumers so that creditors can make decisions about granting of loans.

Credit card
Any card, plate or coupon book that may be used repeatedly to borrowmoney or buy goods and services on credit.

Credit enhancement
The purchase of the financialguarantee of a large insurance company to raise funds. In the context of project financing, the issuance of a guarantee or additional collateral to reinforce the credit strength of a project financing. Also, the reduction of counterparty risk on a swap transaction through such measures as bilateral netting.

Credit history
A record of how a person has borrowed and repaid debt.

Credit insurance
Insurance against abnormal losses due to unpaid accounts receivable.

Credit linked security
A note whose cash flow depends upon a credit event or credit measure of a referenced entity or asset such as default, credit spread, or rating change. The manager would purchase such a note to hedge against possible down grades, or loandefaults that would guarantee payment into the portfolio of the manager even if moneys on referenced assets are reduced.

Credit period
The length of time for which a firm’s customer is granted credit.

Credit Rating Agencies
Firms that compile information on and issuepubliccredit ratings for a large number of companies.

Credit quality
A measure of a bondissuer’s ability to repay interest and principal in a timely manner. Rating agencies assign letter designations such as AAA, AA, and so forth. The lower the rating, the higher the probability of default.

Credit rating
An evaluation of an individual’s or company’s ability to repay obligations or its likelihood of not defaulting See: Creditworthiness.

Credit risk
The risk that an issuer of debt securities or a borrower may default on its obligations, or that the payment may not be made on a negotiable instrument. Related: Default risk.

Credit spread
Applies to derivative products. Difference in the value of two options, when the value of the one sold exceeds the value of the one bought. One sells a “credit spread.” Antithesis of a debit spread Related: Quality spread.

Credit union
A not-for-profit institution that is operated as a cooperative and offers financial services such as low-interestloans to its members.

Credit watch
A warning by a bond ratingfirm indicating that a company’scredit rating may change after the current review is concluded.

Creeping expropriation
The act of a government squeezing a project by taxes, regulation, access, or changes in law.

Crisp Sets
The fuzzy set term for traditional set theory. That is, an object either belongs to a set, or does not.

Critical Levels
Values of control parameters where the nature of a nonlinear dynamic system changes. The system can bifurcate, or make the transition from stable to turbulent behavior. An example is the straw that breaks the camel’s back.

Cross
Securitiestransaction in which the same broker acts as agent for both sides of the trade; a legal practice only if the broker first offers the securities publicly at a price higher than the bid.

Cross-border risk
Describes the volatility of returns on international investments caused by events associated with a particular country as opposed to events associated solely with a particular economic or financial agent.

Cross hedging
Applies to derivative products. Hedging with a futures contract that is different from the underlying being hedged. Use of a hedging instrument different from the security being hedged. Hedging instruments are usually selected to have the highest price correlation to the underlying.

Cross rates
The exchange rate between two currencies expressed as the ratio of two foreign exchange rates that are both expressed in terms of a third currency. Foreign exchange rate between two currencies other than the US dollar, the currency in which most exchanges are usually quoted.

Crossed market
In the context of general equities, happens when the inside market consists of a highest bidprice that is higher than the lowest offer price.

Crossed trade
The prohibited practice of offsettingbuy and sell orders without recording the trade on the exchange, thus not allowing other traders to take advantage of a more favorable price.

Crossover rate
The return at which two alternative projects have the same net present value.

Crowd trading
Used for listed equity securities. Group of exchange members with a defined area of function tending to congregate around a trading post pending execution of orders. Includes specialists, floor traders, odd-lotdealers, and other brokers as well as smaller groups with specialized functions. See: Priority.

Crown jewel
A particularly profitable or otherwise particularly valuable corporate unit or asset of a firm. Often used in risk arbitrage. The most desirable entities within a diversified corporation as measured by asset value, earning power, and business prospects; in takeover attempts, these entities typically are the main objective of the acquirer and may be sold by a takeover target to make the rest of the company less attractive. See: Scorched earth policy.

Cumulative abnormal return (CAR)
Sum of the differences between the expected return on a stock (systematic risk multiplied by the realized market return) and the actual return often used to evaluate the impact of news on a stock price.

Cumulative dividend feature
A requirement that any missed preferred or preference stockdividends be paid in full before any dividend payment on common shares is made.

Cumulative preferred stock
Preferred stock whose dividendsaccrue, should the issuer not make timely dividend payments. Related: Non-cumulative preferred stock.

Cumulative probability distribution
A function that shows the probability that the random variable will attain a value less than or equal to each value that the random variable can take on.

Cumulative total return
The actual performance of a fund over a particular period.

Currency arbitrage
Taking advantage of divergences in exchange rates in different money markets by buying a currency in one market and selling it in another market.

Currency basket
The value of a portfolio of specific amounts of individual currencies, used as the basis for setting the market value of another currency. It is also referred to as a currency cocktail.

Currency call option
Contract that gives the holder the right to purchase a specific currency at a specified price (exchange rate) within a specific period of time.

Currency Carry Trade
A carry trade where you borrow and pay interest in order to buy something else that has higher interest. For currencies, it might be that you borrow in Yen (where the interest rate might be low) and use the proceeds to purchase U.S. dollar long term debt. While the trade might produce a positive return, it is risky in two dimensions. First, U.S. rates could increase diminishing the value of the bond you purchased. Second, the exchange rate could take an unfavorable move effectively increasing your borrowing costs.

Currency devaluation
A deliberate downward adjustment in the official exchange rates established, or pegged, by a government against a specified standard, such as another currency or gold.

Currency diversification
Using more than one currency as an investing or financingstrategy. Exposure to a diversified currency portfolio typically entails less exchange rate risk than if all the portfolio exposure were in a single foreign currency.

Currency Exchange Risk
Uncertainty about the rate at which revenues or costs denominated in one currency can be converted into another currency.

Currency futures contract
Contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date.

Currency hedge
Applies mainly to international equities. Hedging technique to guard against foreign exchange fluctuations (i.e., short Euro l00 mm when holding a long position of Euro l00 mm in stocks).

Currency put option
Contract that gives the holder the right to sell a particular currency at a specified price (exchange rate) within a specified period of time.

Currency option
An option to buy or sell a foreign currency.

Currency overvaluation
Applies mainly to international equities: (1) consideration that a currency is overvalued if private demand for the currency at the going exchange rate is less than total private supply (i.e., central banks are buying up the difference, supporting the value of the currency through foreign exchange intervention); (2) currency value exceeding purchasing power parity.

Currency revaluation
A deliberate upward adjustment in the official exchange rate established, or pegged, by government against a specified standard, such as another currency or gold.

Currency selection
Asset allocation in which the investor chooses among investmentsdenominated in different currencies.

Currency swap
An agreement to swap a series of specified payment obligationsdenominated in one currency for a series of specified payment obligations denominated in a different currency. Usually fixed for fixed.

Current account
Net flow of goods, services, and unilateral transactions (gifts) between countries.

Current account balance
The difference between the nation’s total exports of goods, services and transfers and its total imports of them. Current account balance calculations exclude transactions in financial assets and liabilities.

Current assets
Value of cash, accounts receivable, inventories, marketable securities and other assets that could be converted to cash in less than 1 year.

Current coupon
A bond selling at or close to par, that is, a bond with a coupon close to the yields currently offered on new bonds of a similar maturity and credit risk.

Current ratio
Indicator of short-term debt-paying ability. Determined by dividing current assets by current liabilities. The higher the ratio, the more liquid the company.

Currency risk sharing
An agreement by the parties to a transaction to share the currency risk associated with the transaction. The arrangement involves a customized hedgecontract embedded in the underlying transaction.

Current yield
For bonds or notes, the coupon rate divided by the market price of the bond.

Cushion bonds
High-coupon bonds trading at a premium that tend to fall in price much less than comparable bonds when interest rates rise (hence the cushion effect), because of their high coupons.

Cushion theory
The theory that a stock with many short positions taken in it will rise, because these positions must be covered by the stock.

Custodian
Either (1) a bank, agent, trust company, or other organization responsible for safeguarding financial assets, or (2) the individual who oversees the mutual fundassets of a minor’s custodial account.

Custodian bank
Applies mainly to international equities. Bank or other financial institution that keeps custody of stock certificates and other assets of a mutual fund, individual, or corporate client. See: Depository Trust Company (DTC)

Cyclical stock
Stock that tends to rise quickly when the economy turns up and fall quickly when the economy turns down. Examples are housing, automobiles, and paper.

Check Also

W

Warrant An option that a corporation issues, with its own shares as the underlying asset. The crucial implication is that exercise of the option changes the number of claims against the corporation’s assets. Thus, the pricing equations for Call (Put) Warrants and ordinary Call (Put) Options differ by the dilution (antidilution) effect. Empirically, warrants are ...