T

Tailed calendar spread

A calendar spread trade involving one long position and one short position of different sizes (in contracts).

Tandem spread

A spread consisting of calendar spreads in two commodities.

Tanker Freight Swap

A Swap with payoffs that depend on an average of tanker shipping rates.

TED Spread

Definition: The U.S. T-Bill futures price minus the Eurodollar futures price, the premium that lenders require hold Eurodollar deposits, rather than Treasury bills.

Example: For example, if the T-bill futures price is 93.60 (corresponding to a T-bill yield of 6.40%) and the Eurodollar futures price is 92.80 (corresponding to a Eurodollar deposit rate of 7.20%), then the TED Spread is 93.60 – 92.80 = 0.80. One would say that the TED Spread is 80.

Application: If you think the Eurodollar credit quality will improve, hence the TED Spread will narrow, then you would sell the spread, going short T-Bill futures and long ED futures.

Termination structure

A design for a DPC that liquidates when the related name defaults. Cf. continuation structure.

Tom/next (t/n)

From tomorrow to the following business day.

Tom/next rate

The interest rate from tomorrow to the following business day. When the spot date is two business days hence, rates for overnight, tom/next, and spot date satisfy the following equation:

(1 + ro/n Χ to/n ) (1 + rt/n Χ tt/n ) = (1 + rspot Χ tspot ).

Total Return Swap

Definition: The synthetic purchase of risky debt with 100% leverage. One of the counterparties receives (and the other pays) the excess of the risky debt’s total rate of return (interest plus capital gain) over LIBOR. A swap that has a floating payment that depends on the value of the remaining payments, hence depends on how likely it appears that the payer will make good its promise to pay.

Examples:

A counterparty in a junk bond swap receives the total rate of return on a portfolio of junk bonds and pay LIBOR.

A bank loan swap might pay the total rate of return on a risky bank loan and receive LIBOR. In particular, Bankers Trust has offered swaps that pay the return on loans that fund the merger of Ralph’s Supermarkets and Yucaipa Companies’ Food 4 Less (Derivatives Week, 11/7/94).

A counterparty might receive the total return on some risky corporate bond and pay LIBOR minus a fixed spread.

Application: See Credit Derivatives.

Pricing and Risk Management: The replicating portfolio for Total Return Swap is the levered purchase or sale. Consequently, its value is the value of the replicating portfolio, and its hedge is the sale of the replicating portfolio. Thus, the dealer providing this swap could hedge his position by buying the risky corporate bond and financing the purchase with a floating-rate loan.

Comment: Why doesn’t the customer just do this, directly? The customer may not be able to deal with counterparties with low credit ratings. The dealer might have a higher credit rating. Of course, this looks like a way around regulations.

Total Return Option

Definition: A Put Option on debt with credit risk.

Example: A customer fearing a default on his debt could pay a premium for a put option that allows him to sell a risky corporate bond at par if the corporation defaults on any of its debt.

Application: See Credit Derivatives.

Pricing: A standard model for pricing equity options would be a good starting place for pricing a Total Return Option.

Risk Management: One might try to hedge this dynamically with the underlying risky debt.

Comment: Pricing and hedging might be difficult, and market manipulation may be an issue for a thinly traded underlying instrument.

Trading post

A location on the floor of a stock exchange where market makers (such as “specialists”) and traders come together to determine value for shares in a number of corporations.

Tranche

One of the classes of claims making up a CMO.

Trend Line

Triple Witching

Triple Witching Friday happens on the third Friday of every third month (March, June, September, and December), and is the simultaneous expiration (or rollover) of various futures and options contracts. These contracts include some of the stock index futures, some of the stock index options, and the individual stock options. The simultaneous expiration of the three types of markets is the reason that the event is known as triple witching. However, with the addition of some single stock futures contracts, triple witching is sometimes referred to as quadruple witching.

Triple or quadruple witching can cause erratic behaviour in the affected (and some non affected) markets, both during the week preceeding, and on the expiration day. Some traders take no notice of this, some recommend caution, and others recommend not trading at all. Which reaction you choose will depend upon your trading style (scalping, day trading, etc.), your trading system, and primarily your level of trading experience (i.e. new traders will probably be more cautious than experienced traders).

Note that triple witching does not include all of the stock index futures and options contracts, and none of the currency futures and options markets (which already expired on the previous Monday). So, even though the triple witching days are the most talked about expiration days, they are not the only expiration days to be aware of. The exact expiration dates for each market are available via the futures and options contract specifications for each market.

Also Known As: Quadruple Witching, Freaky Friday

TruPS Units

Trust Preferred Stock Units.

Trust Preferred Stock Units

Each unit of Salomon’s TruPS issue of 7/3/96 consists of a 9.25%, mandatorily redeemable preferred security of the SI Financing Trust I (“the Trust”) and a contract requiring the holder to purchase in 2021 (or earlier, at Salomon’s option) 1/20 of a share of Salomon’s 9.5% Series F Preferred Stock.

Salomon set up the Trust to issues the TruPS and common shares and invest the proceeds in Salomon’s 9.25% secured debt. Also, Salomon contributes 0.25% each year under the terms of the purchase contract. This structure allows Salomon to deduct interest coupon payments to the trust, which pays preferred dividends to investors who would prefer dividends to coupons.

Turtle trade

A tailed spread in a commodity, plus a position in interest rate futures.

T+1

Next day, the business day after trade date. The SEC wants firms involved directly in securities trades – shares, bonds, and futures – to settle by T+1. This is supposed to happen by 2002. The current system (since 1995) calls for settlement by T+3, three business days after trade date. T+5 was the old method of settling trades in five business days, typically a calendar week. T+0 means same-day settlement.

The Futures and Options Financial Glossary