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 proportional to the present value of the associated cash flow.

3. Modified Duration (q.v.), times 1 + y/n , where y is the yield and n is the number of coupon payments per year.

Making delivery

Refers to the seller’s actually turning over to the buyer the asset agreed upon in a forward contract.

Management buyout (MBO)

Leveraged buyout whereby the acquiring group is led by the firm’s management.

Management fee

An investment advisory fee charged by the financial advisor to a fund based on the fund’s average assets, but sometimes determined on a sliding scale that declines as the dollar amount of the fund increases

Margin account (Stocks)

A leverageable account in which stocks can be purchased for a combination of cash and a loan. The loan in the margin account is collateralized by the stock and, if the value of the stock drops sufficiently, the owner will be asked to either put in more cash, or sell a portion of the stock. Margin rules are federally regulated, but margin requirements and interest may vary among broker/dealers.

Margin call

A demand for additional funds because of adverse price movement. Maintenance margin requirement, security deposit maintenance

Margin requirement (Options)

The amount of cash an uncovered (naked) option writer is required to deposit and maintain to cover his daily position valuation and reasonably foreseeable intra-day price changes.

Mark-to-market

The process whereby the book value or collateral value of a security is adjusted to reflect current market value.

Marked-to-market

An arrangement whereby the profits or losses on a futures contract are settled each day.

Market capitalization

The total dollar value of all outstanding shares. Computed as shares times current market price. It is a measure of corporate size.

Market maker

A trader who will at that moment is willing and able to either buy or sell at stated bid and ask prices. Also known as scalper or scalp-beggar.

Market order

This is an order to immediately buy or sell a security at the current trading price.

Market-if-touched (MIT)

A price order, below market if a buy or above market if a sell, that automatically becomes a market order if the specified price is reached.

Marketability

A negotiable security is said to have good marketability if there is an active secondary market in which it can easily be resold.

Market Risk

The risk of loss from being on the wrong side of a bet about a market move.

Markowitz efficient frontier

The graphical depiction of the Markowitz efficient set of portfolios representing the boundary of the set of feasible portfolios that have the maximum return for a given level of risk. Any portfolios above the frontier cannot be achieved. Any below the frontier are dominated by Markowitz efficient portfolios.

Markowitz efficient portfolio

Also called a mean-variance efficient portfolio, a portfolio that has the highest expected return at a given level of risk.

Margrabe Option

The option to exchange one asset for another. Margrabe (1978) showed several applications for this sort of option (margin account, corporate exchange offer, and standby commitment) and derived a model for pricing this option. Other people discovered numerous additional examples of this option. The Cross Currency Option (q.v.) is a prime example.

Marché à Terme Internationale de France (MATIF)

The French derivatives exchange, which dominates trading in contracts based on instruments denominated in the French Franc.

Martingale

1. A device that keeps a horse’s head in position with its rows of teeth more or less horizontal.

2. A gambling strategy that involves betting one unit, then doubling the bet, until the gambler wins. The strategy appears to assure the gambler a profit of one unit at the end of each string of bets. The problem is that the gambler’s – and house’s – resources are finite. Consequently, the strategy isn’t operational.

3. A stochastic process for which the expected change equals zero, e.g., equivalent martingale measure.

Application: During the 1960s the martingale stochastic process was a standard model for a fair game, hence for stock price movements in an efficient market.

Martingale measure

Any probability measure under which a stochastic variable is a martingale, i.e., its expected change equals zero.

Example: Consider the probability measure that assigns a probability of 1/2 to a head or a tail, and for which successive coin tosses are independent. Then let X(n) be the random variable that starts at zero and increases by one with each “heads” outcome and decreases by one with each “tails” outcome. Then E[X(n)-X(n-1)|X(n-1)] = 1/2 (1) + 1/2 (-1) = 0, and X(n) is a martingale.

Matador market

Spain’s foreign market (q.v.). Example: Some Exxon debt trades in the Matador market.

MBS

Mortgage Backed Security

Mid-Curve Option

A short-term American option on a CME-listed Eurodollar Futures Contract with delivery in one or two years. The crucial innovation here is that an ordinary CME Futures Option on the ED contract with delivery in one year (two years) expires in one year (two years), while the Mid-Curve Option initially expires in six months. Thus, the Mid-Curve provides a more focused (and less expensive) way to express a view on the news that develops in the next six months about the level of short-term interest rates that we will observe one or two years into the future. (Sources: Aaron Lucchetti, “Exotic Option Wins Followers on Wall Street,” Wall Street Journal, 5/6/97. http://www.cme.com/market/interest/serialmc.html)

MIPS

Monthly Income Preferred Shares.

MITTS

Market Index Target-Term Securities.

Model Risk

The risk of loss due to weakness of the financial model(s) that a business uses for pricing inventory and managing risk.

Modified Duration

a. A measure of the sensitivity of a financial instrument’s value to a change in its yield.

b. The first derivative of a financial instrument’s value with respect to a change in its yield.

c. Macaulay Duration (q.v.), divided by 1 + y/n , where y is the bond yield and n is the number of coupon payments per year.

Money market

Money markets are for borrowing and lending money for three years or less. The securities in a money market can be U.S.government bonds, treasury bills and commercial paper from banks and companies

Money market rates

Interest rates on short-term instruments, including bankers’ acceptances, commercial paper, LIBOR, and U.S. Treasury bills. The accrual rate to maturity equals the quoted rate times a day count fraction that has 360 in the denominator. The days in the numerator might be actual days or days according to a 30/360 calendar.

Money supply

M1-A: Currency plus demand deposits

M1-B: M1-A plus other checkable deposits.

M2: M1-B plus overnight repos, money market funds, savings, and small (less than $100M) time deposits.

M3: M-2 plus large time deposits and term repos.

L: M-3 plus other liquid assets

Monte Carlo Simulation

A technique for approximating a probability distribution by generating uniformly distributed pseudo random numbers and transforming them into the required sort of random numbers. In option pricing one ordinarily works with lognormal random interest rates, prices, and indexes. If one constructs the probability distributions correctly, then a Derivative Product’s value equals the expected discounted value of its payoff (in the limit as the number of random paths approaches infinity).

Morgan Stanley – Capital International

The Morgan Stanley unit that maintains a wide range of global stock market indexes for approximately 20 countries and a variety of regions.

Mortgage Backed Security

A security, such as a bond, pass-through, CMO, or REMIC that derives its cash flows and market value from underlying Mortgage Backed Securities and/or Mortgage Bonds, Loans, and/or Notes.

Mortgage Bond, Loan, or Note

A Bond, Loan, or Note plus a security interest in a piece of property, commonly real property (land and/or buildings). A residential mortgage loan typically contains a prepayment option, which is the borrower’s call option on the loan and which becomes valuable when interest rates decline. Also, in practice, the lender sells the homeowner a put option on the pledged home, struck at the loan’s balance.

M-squared

A way of measuring the performance of an investment portfolio, namely the average rate of return on a portfolio that (a) consists of investment in T-bills and the investment portfolio and (b) has the same standard deviation as the relevant benchmark portfolio. Thus, if an investment portfolio’s M-squared is greater (less) than the return on the benchmark portfolio, then the investment portfolio’s risk-adjusted return is better (worse) than that of the benchmark. (Noelle Knox, “Slice, Dice and Scrutinize: Risk Measurements Draw a Crowd,” NYT, 4/5/98, p. 45.)

Municipal bond

State or local governments offer muni bonds or municipals, as they are called, to pay for special projects such as highways or sewers. The interest that investors receive is exempt from some income taxes.

Municipal notes

Short-term notes issued by municipalities in anticipation of tax receipts, proceeds from a bond issue, or other revenues.