An active market is characterized by frequent and high-volume transactions of assets within a particular class, providing readily available and up-to-date pricing information.
Basic financial instruments are the underlying tools used in financial operations, including currencies, bonds, stocks, and derivatives. These instruments serve as the backbone of financial transactions and investment strategies.
Black-Box Accounting refers to financial statements based on complex accounting methodologies that, while accurate and legal, obfuscate rather than clarify financial data. Techniques such as restatements of revenues, inventory, earnings, and the use of derivatives and off-the-books partnerships can be involved.
A call option is a financial contract that gives the holder the right, but not the obligation, to buy a specified amount of an underlying asset at a predetermined price within a fixed timeframe.
The Chicago Mercantile Exchange (CME) is one of the largest and most diverse financial exchanges in the world, allowing for the trading of futures and options across a wide array of asset classes, including agriculture, energy, metals, and financial instruments.
A commodity contract is a binding agreement involving the receipt or delivery of a commodity at a future date, often used in trading and risk management.
A financial derivative that allows traders to speculate on the price movement of underlying assets without owning them.
A financial instrument that derives its value from the performance of an underlying asset, commodity, currency, economic variable, or financial instrument. Derivatives can be used for hedging, speculation, or arbitrage purposes.
Fair value, often referred to as fair market value, is the estimated amount for which an asset or liability could be exchanged in an arm's length transaction between informed, willing parties. It plays an essential role in acquisition accounting, and is significant in accounting for derivatives and other complex financial instruments.
A form of accounting in which assets are measured at their current market price, recognizing all changes in value within the profit and loss account, differing from traditional historical-cost accounting by recording unrealized gains.
A contract involving a financial obligation that represents a monetary asset to one party and a financial liability or equity instrument to another party. Examples include stocks, bonds, loans, and derivatives.
Financial instruments are monetary contracts between parties. They can be created, traded, modified, and settled. They may be cash (currency), a contractual right to deliver or receive cash (as expressed by a bond), or another type of instrument that conveys ownership (equity).
An in-depth analysis of the 2003 Freddie Mac accounting scandal where the US Federal Home Loan Mortgage Corporation fraudulently misstated billions of dollars in earnings to meet Wall Street's expectations.
A futures contract is a standardized legal agreement to buy or sell a particular commodity, currency, or financial instrument at a predetermined price at a specified time in the future. Unlike options, futures contracts entail a mandatory obligation to execute the transaction.
A futures market is a financial exchange where futures contracts, which are agreements to buy or sell specific commodities or financial instruments at a predetermined future date and price, are traded.
A futures option is a derivatives contract that grants the holder the right, but not the obligation, to buy or sell a futures contract at a predetermined price before the option expires.
A futures transaction refers to the buying and selling of futures contracts on commodities or financial instruments, which obligate the buyer to purchase or the seller to sell an asset at a predetermined future date and price.
A hedge is a financial transaction designed to mitigate the risk of other financial exposures by balancing potential losses with gains in other financial instruments.
An action taken to reduce or eliminate the risk involved in having an open position in a financial, commodity, or currency market.
This term is used in options trading to describe an option that would result in a gain if exercised at the current market price. It's the opposite of 'out of the money' where the option would result in a loss.
LCH.Clearnet, now known simply as LCH, is a leading global clearing house that provides clearing and risk management services for various asset classes including equities, bonds, exchange-traded derivatives, commodities, and over-the-counter (OTC) derivatives.
LIBOR, or the London InterBank Offered Rate, is the rate at which banks offer to lend to each other on the London interbank market. It serves as a global benchmark for interest rates on loans and financial instruments, with terms ranging from overnight to five years.
An exchange in London where financial futures and options products are traded. Known for its influential role in the global financial markets.
The London Stock Exchange (LSE) is the primary stock exchange in the United Kingdom, offering equity, derivative, and information services. It has a rich history dating back to the seventeenth century and has undergone significant reforms to become one of the world's leading exchanges.
A long position is a financial strategy where an investor purchases a security or a derivative expecting that its price will rise over time, allowing for a profitable sale in the future.
A Monte Carlo simulation is a technique used to understand the impact of risk and uncertainty in prediction and forecasting models. In finance, it is extensively applied to price complex derivatives, manage financial risk, and facilitate decision-making processes.
A naked option refers to an options contract where the buyer or seller does not hold the underlying asset associated with the option. This type of position can expose the writer to unlimited losses or substantial gains.
A naked position, also known as an uncovered or open position, refers to the practice of entering into a derivatives contract—such as options or futures—without holding the underlying asset involved in the contract.
Open interest represents the total number of outstanding contracts in a commodity or options market, which have not yet been exercised, closed out, or allowed to expire.
An option holder is someone who has bought a call or put option but has not yet exercised or sold it. Call option holders want the price of the underlying security to rise, while put option holders want it to fall.
An optionee is an individual or entity that receives or purchases an option, which grants them the right, but not the obligation, to buy or sell an asset at a predetermined price within a specified time period.
An optionor is a party who grants or sells an option, allowing another party, known as the optionee, the right but not the obligation to execute a transaction, typically involving the purchase or sale of an asset, under specified terms within a defined timeframe.
The OTC Market (Over-the-Counter Market) is a decentralized market where trading of financial instruments such as stocks, bonds, commodities, and derivatives occurs directly between two parties without a central exchange or broker.
Out of the Money (OTM) is a term used to describe an options contract that currently holds no intrinsic value. Specifically, a call option is OTM if the strike price is higher than the current market value of the underlying asset, whereas a put option is OTM if the strike price is lower than the current market value of the underlying asset.
The over-the-counter market (OTC market) facilitates the trading of financial instruments that occur directly between two parties, outside of formal exchanges.
Premium income refers to the income received by an investor who sells a put option or a call option. This income serves as compensation for the risk taken by writing the options.
Risk management is a process that aims to help organizations understand, evaluate, and take action on all their risks to maximize their value. This can include taking out insurance or hedging through derivatives.
The SIX Swiss Exchange is Switzerland's primary stock exchange, facilitating trade in a variety of securities including stocks, bonds, and derivatives. It is renowned for its efficiency and innovative trading technology.
Stock index futures are financial derivatives that blend traditional commodity futures trading characteristics with those of securities trading. They utilize composite stock indexes to enable investors to speculate on general market performance or to hedge long or short positions.
The strike price, also known as the exercise price, is the predetermined price at which the owner of an option can buy or sell the underlying asset before or at the expiration date.
Structured finance refers to the creation of complex debt instruments through methods such as securitization or the incorporation of derivatives to existing instruments. It involves asset pooling, tranching of liabilities, and the creation of special purpose vehicles to mitigate risk.
Toxic assets are financial instruments for which there is no longer a functioning market, making their value highly uncertain and leading to difficulties in selling them at reasonable prices. The term gained prominence during the financial crisis following the 2008 subprime lending debacle.
An uncovered option, also known as a naked option, refers to an option contract where the writer of the option does not hold the underlying security or the sufficient cash to cover the position, making it a high-risk strategy.
In finance, an underlying asset is the security, index, or other financial instrument that the value of a derivative is based on. Understanding the nature of the underlying asset is crucial for evaluating and managing the risk associated with derivatives.
An underlying security refers to the financial instrument (like stocks, bonds, commodities, or indexes) on which derivatives such as options, futures, or other securities are based. It is the asset that must be delivered when specific financial contracts, like put options or call options, are exercised.
