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Financial Glossary

R

Random variable A function that assigns a real number to each and every possible outcome of a random experiment. Random walk Theory that stock price changes from day to day are at random; the changes are independent of each other and have the same probability distribution. Many believers of the ...

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Q

Quality option Also called the swap option, the seller’s choice of deliverables in Treasury Bond and Treasury note futures contract. Quanto A currency-protected derivative product that is, one denominated in a currency other than that of the underlying to which exposure is sought. The name refers to the variable notional ...

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P

Pack A Forward Strip, each corresponding to a particular year, of four consecutive, quarterly Eurodollar or Euroyen futures contracts. Markets, such as Simex offer a Pack as a convenient package of futures contracts, without the execution risk inherent in building up the Strip, contract by contract. A trader can use ...

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Put – Call Ratio

The Put-Call Ratio is the number of put options traded divided by the number of call options traded in a given period. While typically the trading volume is used to compute the Put-Call Ratio, it is sometimes calculated using open interest volume or total dollar value instead. Weekly or monthly ...

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O

Objective (mutual funds) The fund’s investment strategy category as stated in the prospectus. There are more than 20 standardized categories. Odd lot A trading order for less than 100 shares of stock. Odd lot dealer A broker who combines odd lots of securities from multiple buy or sell orders into ...

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Options contract

A contract that, in exchange for the option price, gives the option buyer the right, but not the obligation, to buy (or sell) a financial asset at the exercise price from (or to) the option seller within a specified time period, or on a specified date (expiration date). Options education ...

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N

Naive diversification A strategy whereby an investor simply invests in a number of different assets and hopes that the variance of the expected return on the portfolio is lowered. Related: Markowitz diversification. Naked The opposite of covered. A long or short derivatives position initiated without any corresponding position existing in ...

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M

Macaulay Duration 1. A measure of the sensitivity of a financial instrument’s value to a change in its yield. Macaulay Duration is an overestimate, and Modified Duration (q.v.) is a more precise measure. 2. The weighted average of time until a financial instrument pays its cash flows. Each weight is ...

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L

Ladder Option An option somewhere between a Lookback (q.v.) and a European Option. A Ladder Call Option has one or more “Rungs” (price levels) above the initial spot level. The Call’s payoff equals the greater of a European Call’s payoff or the excess over Strike of the highest Rung that ...

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K

Kappa The ratio of the dollar price change in the price of an option to a 1% change in the expected price volatility. Knockin Option An option that “comes to life” when a trigger event occurs. Typically when a price crosses a particular barrier it pulls the trigger. Knockout Option ...

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