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 Packs and Bundles (q.v.) to implement bets on the change in shape of the Forward Curve.

P/E ratio
Assume XYZ Co. sells for $25.50 per share and has earned $2.55 per share this year;
$25. 50 = 10 times $2. 55
XYZ stock sells for 10 times earnings. P/E = Current stock price divided by trailing annual earnings per share or expected annual earnings per share.

P/E effect
That portfolios with low P/E stocks have exhibited higher average risk-adjusted returns than high P/E stocks.

Paper
Money market instruments, commercial paper and other.

Paper gain (loss)
Unrealized capital gain (loss) on securities held in portfolio, based on a comparison of current market price to original cost.

Par value
Also called the maturity value or face value, the amount that the issuer agrees to pay at the maturity date.

Parallel shift in the yield curve
A shift in the yield curve in which the change in the yield on all maturities is the same number of basis points. In other words, if the 3 month T-bill increases 100 basis points (one percent), then the 6 month, 1 year, 5 year, 10 year, 20 year, and 30 year rates increase by 100 basis points as well. Related: Non-parallel shift in the yield curve.

Participating derivative
Derivatives that allow the holder to buy participation in the upside of the instrument either by giving up protection on the downside or by limiting the upside of products that in their vanilla form have unlimited profit potential. See participating forward, participating swap.

Participating fees
The portion of total fees in a syndicated credit that go to the participating banks.

Passive portfolio strategy
A strategy that involves minimal expectational input, and instead relies on diversification to match the performance of some market index. A passive strategy assumes that the marketplace will reflect all available information in the price paid for securities, and therefore, does not attempt to find mispriced securities. Related: active portfolio strategy

Pass-through securities
A pool of fixed-income securities backed by a package of assets (i.e. mortgages) where the holder receives the principal and interest payments. Related: mortgage pass-through security

Pass-through coupon rate
The interest rate paid on a securitized pool of assets, which is less than the rate paid on the underlying loans by an amount equal to the servicing and guaranteeing fees.

Passive investment management
Buying a well-diversified portfolio to represent a broad-based market index without attempting to search out mispriced securities.

Passive portfolio
A market index portfolio.

Path dependent option
An option whose value depends on the sequence of prices of the underlying asset rather than just the final price of the asset.

Payback
The length of time it takes to recover the initial cost of a project, without regard to the time value of money.

Paydown
In a Treasury refunding, the amount by which the par value of the securities maturing exceeds that of those sold.

Payment date
The date on which each shareholder of record will be sent a check for the declared dividend.

Payment float
Company-written checks that have not yet cleared.

Payments netting
Reducing fund transfers between affiliates to only a netted amount. Netting can be done on a bilateral basis (between pairs of affiliates), or on a multi-lateral basis (taking all affiliates together).

Payments pattern
Describes the lagged collection pattern of receivables, for instance the probability that a 72-day-old account will still be unpaid when it is 73-days-old.

Payout ratio
Generally, the proportion of earnings paid out to the common stockholders as cash dividends. More specifically, the firm’s cash dividend divided by the firm’s earnings in the same reporting period.

Pay-up
The loss of cash resulting from a swap into higher price bonds or the need/willingness of a bank or other borrower to pay a higher rate of interest to get funds.

Pension plan
A fund that is established for the payment of retirement benefits.

Perfect capital market
A market in which there are never any arbitrage opportunities.

Perfect competition
An idealized market environment in which every market participant is too small to affect the market price by acting on its own.

Perfect hedge
A financial result in which the profit and loss from the underlying asset and the hedge position are equal.

Performance attribution analysis
The decomposition of a money manager’s performance results to explain the reasons why those results were achieved. This analysis seeks to answer the following questions: (1) What were the major sources of added value? (2) Was short-term factor timing statistically significant? (3) Was market timing statistically significant? And (4), Was security selection statistically significant?

Performance measurement
The calculation of the return realized by a money manager over some time interval.

Performance shares
Shares of stock given to managers on the basis of performance as measured by earnings per share and similar criteria. A control device used by shareholders to tie management to the self-interest of shareholders.

Perpetual warrants
Warrants that have no expiration date.

Perpetuity
A constant stream of identical cash flows without end, such as a British consol.

Personal trust
An interest in an asset held by a trustee for the benefit of another person.

Philadelphia Stock Exchange (PHLX)
A securities exchange where American and European foreign currency options on spot exchange rates are traded.

PIBOR (Paris Interbank Offer Rate)
The deposit rate on interbank transactions in the Eurocurrency market quoted in Paris.

Pit
A specific area of the trading floor that is designed for the trading of commodities, individual futures, or option contracts.

Pit committee
A committee of the exchange that determines the daily settlement price of futures contracts.

Pivot
Price level established as being significant by market’s failure to penetrate or as being significant when a sudden increase in volume accompanies the move through the price level.

Placement
A bank depositing Eurodollars with (selling Eurodollars to) another bank is often said to be making a placement.

Plain vanilla
A term that refers to a relatively simple derivative financial instrument, usually a swap or other derivative that is issued with standard features.

Purchasing Managers Index (PMI)

The Purchasing Managers Index (PMI) is an indicator for economic activity. Roughly speaking it reflects the percentage of purchasing managers in a certain economic sector that reported better business conditions than in the previous month.

A PMI index over 50 indicates that the economy is expanding while anything below 50 means that the economy is contracting.

Poison pill
Anit-takeover device that gives a prospective acquiree’s shareholders the right to buy shares of the firm or shares of anyone who acquires the firm at a deep discount to their fair market value. Named after the cyanide pill that secret agents are instructed to swallow if capture is imminent.

Poison put
A covenant allowing the bondholder to demand repayment in the event of a hostile merger.

Policy asset allocation
A long-term asset allocation method, in which the investor seeks to assess an appropriate long-term “normal” asset mix that represents an ideal blend of controlled risk and enhanced return.

Portfolio
A collection of investments, real and/or financial.

Portfolio insurance
A strategy using a leveraged portfolio in the underlying stock to create a synthetic put option. The strategy’s goal is to ensure that the value of the portfolio does not fall below a certain level.

Portfolio internal rate of return
The rate of return computed by first determining the cash flows for all the bonds in the portfolio and then finding the interest rate that will make the present value of the cash flows equal to the market value of the portfolio.

Portfolio opportunity set
The expected return/standard deviation pairs of all portfolios that can be constructed from a given set of assets.

Portfolio turnover rate
For an investment company, an annualized rate found by dividing the lesser of purchases and sales by the average of portfolio assets.

Portfolio variance
Weighted sum of the covariance and variances of the assets in a portfolio.

Position
A market commitment; the number of contracts bought or sold for which no offsetting transaction has been entered into. The buyer of a commodity is said to have a long position and the seller of a commodity is said to have a short position . Related: open contracts

Positive carry
Related:net financing cost

Positive convexity
A property of option-free bonds whereby the price appreciation for a large upward change in interest rates will be greater (in absolute terms) than the price depreciation for the same downward change in interest rates.

Positive covenant (of a bond)
A bond covenant that specifies certain actions the firm must take. Also called and affirmative covenant.

Postponement option
The option of postponing a project without eliminating the possibility of undertaking it.

Posttrade benchmarks
Prices after the decision to trade.

Preferred shares
Preferred shares give investors a fixed dividend from the company’s earnings. And more importantly: preferred shareholders get paid before common shareholders. See: preferred stock.

Preferred stock
A security that shows ownership in a corporation and gives the holder a claim, prior to the claim of common stockholders, on earnings and also generally on assets in the event of liquidation. Most preferred stock pays a fixed dividend that is paid prior to the common stock dividend, stated in a dollar amount or as a percentage of par value. This stock does not usually carry voting rights. The stock shares characteristics of both common stock and debt.

Preferred stock agreement
A contract for preferred stock.

Premium
(1) Amount paid for a bond above the par value. (2) The price of an option contract; also, in futures trading, the amount the futures price exceeds the price of the spot commodity. Related: inverted market premium payback period. Also called break-even time, the time it takes to recover the premium per share of a convertible security.

Premium bond
A bond that is selling for more than its par value.

Prepackaged bankruptcy
A bankruptcy in which a debtor and its creditors pre-negotiate a plan or reorganization and then file it along with the bankruptcy petition.

Present value
The amount of cash today that is equivalent in value to a payment, or to a stream of payments, to be received in the future.

Present value factor
Factor used to calculate an estimate of the present value of an amount to be received in a future period.

Presold issue
An issue that is sold out before the coupon announcement.

Pre-trade benchmarks
Prices occurring before or at the decision to trade.

Price/book ratio
Compares a stock’s market value to the value of total assets less total liabilities (book value). Determined by dividing current stock price by common stockholder equity per share (book value), adjusted for stock splits. Also called Market-to-Book.

Price/earnings ratio
Shows the “multiple” of earnings at which a stock sells. Determined by dividing current stock price by current earnings per share (adjusted for stock splits). Earnings per share for the P/E ratio is determined by dividing earnings for past 12 months by the number of common shares outstanding. Higher “multiple” means investors have higher expectations for future growth, and have bid up the stock’s price.

Price/sales ratio
Determined by dividing current stock price by revenue per share (adjusted for stock splits). Revenue per share for the P/S ratio is determined by dividing revenue for past 12 months by number of shares outstanding.

Price compression
The limitation of the price appreciation potential for a callable bond in a declining interest rate environment, based on the expectation that the bond will be redeemed at the call price.

Price risk
The risk that the value of a security (or a portfolio) will decline in the future. Or, a type of mortgage-pipeline risk created in the production segment when loan terms are set for the borrower in advance of terms being set for secondary market sale. If the general level of rates rises during the production cycle, the lender may have to sell his originated loans at a discount.

Price-volume relationship
A relationship espoused by some technical analysts that signals continuing rises and falls in security prices based on accompanying changes in volume traded.

Pricing efficiency
Also called external efficiency, a market characteristic where prices at all times fully reflect all available information that is relevant to the valuation of securities.

Primary market
The first buyer of a newly issued security buys that security in the primary market. All subsequent trading of those securities is done in the secondary market.

Primary offering
A firm selling some of its own newly issued shares to investors.

Primitive security
An instrument such as a stock or bond for which payments depend only on the financial status of the issuer.

Prime rate
The interest rate at which banks lend to their best (prime) customers. Much more often than not, a bank’s most creditworthy customers borrow at rates below the prime rate.

Principal amount
The face amount of debt; the amount borrowed or lent. Often called principal.

Private placement
The sale of a bond or other security directly to a limited number of investors.

Pro forma capital structure analysis
A method of analyzing the impact of alternative capital structure choices on a firm’s credit statistics and reported financial results, especially to determine whether the firm will be able to use projected tax shield benefits fully.

Profitability index
The present value of the future cash flows divided by the initial investment. Also called the benefit-cost ratio.

Profitability ratios
Ratios that focus on the profitability of the firm. Profit margins measure performance with relation to sales. Rate of return ratios measure performance relative to some measure of size of the investment.

Pro forma financial statements
Financial statements as adjusted to reflect a projected or planned transaction.

Program trades
Also called basket trades, orders requiring the execution of trades in a large number of different stocks at as near the same time as possible. Related: block trade

Program trading
Trades based on signals from computer programs, usually entered directly from the trader’s computer to the market’s computer system and executed automatically.

Protective covenant
A part of the indenture or loan agreement that limits certain actions a company takes during the term of the loan to protect the lender’s interests.

Protective put buying strategy
A strategy that involves buying a put option on the underlying security that is held in a portfolio. Related: Hedge option strategies

Provisional call feature
A feature in a convertible issue that allows the issuer to call the issue during the non-call period if the price of the stock reaches a certain level.

Public offering
The sale of registered securities by the issuer (or the underwriters acting in the interests of the issuer) in the public market. Also called public issue.

Puke
Slang for a trader selling a position, usually a losing position, as in, “When in doubt, puke it out.”

Purchase agreement
As used in connection with project financing, an agreement to purchase a specific amount of project output per period.

Purchasing power parity
The notion that the ratio between domestic and foreign price levels should equal the equilibrium exchange rate between domestic and foreign currencies.

Pure yield pickup swap
Moving to higher yield bonds.

Put
An option granting the right to sell the underlying futures contract. Opposite of a call.

Put an option
To exercise a put option.

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 figures can also be calculated and moving averages are often used to smooth out the short term daily figures.

How to interpret the put call ratio

The average value for the put-call ratio is not 1.00 due to the fact that equity options traders and investors almost always buy more calls than puts. Hence, the average ratio is often far less than 1.00 (usually around 0.70) for stock options.

When the ratio is close to 1.00 or greater, it indicates a bearish sentiment. The higher than average number indicates more puts being bought relative to calls. This means that more traders are betting against the underlying and hence the general outlook is bearish. Conversely, when the ratio is near 0.50 or lesser, it implies a bullish sentiment.

The put call ratio as a contrarian indicator.

To the contrarian investor, the put call ratio can be used to determine when the investing crowd may be getting either too bullish or too bearish. A high put call ratio is a bullish sign as the it points to an over-bearish crowd – and vice versa.

Equity put call ratio vs. Index put call ratio

A popular strategy used by fund managers involves the buying of index put options to protect their portfolios. As a result, the put call ratio for index options is generally higher than that for equity options. Hence, for a better indicator of the sentiment of the speculative crowd, the equity put call ratio is used instead.

Put bond
A bond that the holder may choose either to exchange for par value at some date or to extend for a given number of years.

Put option
This security gives investors the right to sell (or put) fixed number of shares at a fixed price within a given time frame. An investor, for example, might wish to have the right to sell shares of a stock at a certain price by a certain time in order to protect, or hedge, an existing investment.

Put price
The price at which the asset will be sold if a put option is exercised. Also called the strike or exercise price of a put option.

Put provision
Gives the holder of a floating-rate bond the right to redeem his note at par on the coupon payment date.

Put swaption
A financial tool in which the buyer has the right, or option, to enter into a swap as a floating-rate payer. The writer of the swaption therefore becomes the floating-rate receiver/fixed-rate payer.

Put-call parity relationship
The relationship between the price of a put and the price of a call on the same underlying security with the same expiration date, which prevents arbitrage opportunities. Holding the stock and buying a put will deliver the exact payoff as buying one call and investing the present value (PV) of the exercise price. The call value equals C=S+P-PV(k).

Pyramid scheme
An illegal, fraudulent scheme in which a con artist contrives victims to invest by promising an extraordinary return but simply uses newly invested funds to pay off any investors who insist on terminating their investment.