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 the underlying. So, naked positions ...


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.

The opposite of covered. A long or short derivatives position initiated without any corresponding position existing in the underlying. So, naked positions would include being long puts without an underlying position to hedge or being long a swap with no underlying liability or a smaller liability portfolio than the notional principal of the swap.

National Association of Securities Dealers Automatic Quotation System. An electronic quotation system that provides price quotations to market participants about the more actively traded common stock issues in the OTC market. About 4,000 common stock issues are included in the NASDAQ system.

National Futures Association (NFA)
The futures industry self regulatory organization established in 1982.

Nearby futures contract
When several futures contracts are considered, the contract with the closest settlement date is called the nearby futures contract. The next futures contract is the one that settles just after the nearby futures contract. The contract farthest away in time from settlement is called the most distant futures contract.

Negative amortization
A loan repayment schedule in which the outstanding principal balance of the loan increases, rather than amortizing, because the scheduled monthly payments do not cover the full amount required to amortize the loan. The unpaid interest is added to the outstanding principal, to be repaid later.

Negative convexity
A bond characteristic such that the price appreciation will be less than the price depreciation for a large change in yield of a given number of basis points.

Negative covenant
A bond covenant that limits or prohibits altogether certain actions unless the bondholders agree.

Negative duration
A situation in which the price of the MBS moves in the same direction as interest rates.

Negotiated certificate of deposit
A large-denomination CD, generally $1MM or more, that can be sold but cannot be cashed in before maturity.

Negotiated markets
Markets in which each transaction is separately negotiated between buyer and seller (i.e. an investor and a dealer).

Negotiated offering
An offering of securities for which the terms, including underwriters’ compensation, have been negotiated between the issuer and the underwriters.

Net adjusted present value
The adjusted present value minus the initial cost of an investment.

Net asset value (NAV)
The value of a fund’s investments. For a mutual fund, the net asset value per share usually represents the fund’s market price, subject to a possible sales or redemption charge. For a closed end fund, the market price may vary significantly from the net asset value.

Net assets
The difference between total assets on the one hand and current liabilities and noncapitalized long-term liabilities on the other hand.

Net book value
The current book value of an asset or liability; that is, its original book value net of any accounting adjustments such as depreciation.

Net cash balance
Beginning cash balance plus cash receipts minus cash disbursements.

Net income
The company’s total earnings, reflecting revenues adjusted for costs of doing business, depreciation, interest, taxes and other expenses.

Net investment
Gross, or total, investment minus depreciation.

Net operating losses
Losses that a firm can take advantage of to reduce taxes.

Net operating margin
The ratio of net operating income to net sales.

Net period
The period of time between the end of the discount period and the date payment is due.

Net present value (NPV)
The present value of the expected future cash flows minus the cost.

Net present value of future investments
The present value of the total sum of NPVs expected to result from all of the firm’s future investments.

Net present value rule
An investment is worth making if it has a positive NPV. Projects with negative NPVs should be rejected.

Net profit margin
Net income divided by sales; the amount of each sales dollar left over after all expenses have been paid.

Net worth
Common stockholders’ equity which consists of common stock, surplus, and retained earnings.

Reducing transfers of funds between subsidiaries or separate companies to a net amount.

Netting out
To get or bring in as a net; to clear as profit.

New York Stock Exchange (NYSE)
Also known as the Big Board or The Exhange. More than 2,00 common and preferred stocks are traded. The exchange is the older in the United States, founded in 1792, and the largest. It is lcoated on Wall Street in New York City

Next futures contract
The contract settling immediately after the nearby futures contract.

No load mutual fund
An open-end investment company, shares of which are sold without a sales charge. There can be other distribution charges, however, such as Article 12B-1 fees. A true “no load” fund will have neither a sales charge nor a distribution fee.

Price and volume fluctuations that can confuse interpretation of market direction.

In name only. Differences in compounding cause the nominal rate to differ from the effective interest rate. Inflation causes the purchasing power of money to differ from one time to another.

Nominal interest rate
The interest rate unadjusted for inflation.

Nominal price
Price quotations on futures for a period in which no actual trading took place.

Noncompetitive bid
In a Treasury auction, bidding for a specific amount of securities at the price, whatever it may turn out to be, equal to the average price of the accepted competitive bids.

Nondeliverable Forward
A cash-settled, forward contract, typically on a nonconvertible or thinly traded foreign currency or two such currencies, that settles into a convertible currency (typically the USD). The cash value is a function of the contract’s reference rate(s) on the fixing date, typically, two business days before the value date. Its main atraction is avoiding currency controls.

Nondeliverable Swaps
A Swap that would be equivalent ideally to a Cross-Currency Swap , except that it settles instead in USD. Typically, the NDS omits delivery of the underlying currency at maturity.

Nondiversifiable risk
Risk that cannot be eliminated by diversification.

Nonmarketed claims
Claims that cannot be easily bought and sold in the financial markets, such as those of the government and litigants in lawsuits.

Nonsystematic risk
Nonmarket or firm-specific risk factors that can be eliminated by diversification. Also called unique risk or diversifiable risk. Systematic risk refers to risk factors common to the entire economy.

Normal annuity form
The manner in which retirement benefits are paid out.

Normal backwardation theory
Holds that the futures price will be bid down to a level below the expected spot price.

Normal probability distribution
A probability distribution for a continuous random variable that is forms a symmetrical bell-shaped curve around the mean.

Normal portfolio
A customized benchmark that includes all the securities from which a manager normally chooses, weighted as the manager would weight them in a portfolio.

Note agreement
A contract for privately placed debt.

Notice day
A day on which notices of intent to deliver pertaining to a specified delivery month may be issued. Related: delivery notice.

Notional principal amount
In an interest rate swap, the predetermined dollar principal on which the exchanged interest payments are based.

The replacement of one or more derivative contracts with new ones, often also with one of the counterparties replaced by a new one. One common use of novation is in the creation of chains of swaps which, having been cancelled and reassigned, can be used to provide loans in circumstances where straightforward lending would be expensive or not permitted.

NPV profile
A graph of NPV as a function of the discount rate.

Check Also


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 ...