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Seasonal swap
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An Interest rate Swap in which the principal alternates between zero and the notional amount (which can change or stay constant). The principal amount of the Swap is designed to Hedge the seasonal borrowing needs of a company.
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Semi-fixed swap
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An Interest rate Swap with two possible fixed rates, which can be tailored to suit bullish or bearish market views. The rate paid by the fixed-rate payer depends on whether current Libor (or another reference rate or asset) is above or below a predetermined...
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Shout option
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A type of path-dependent Option that allows the investor to lock in profits if he thinks the market has reached a High (for a call) or Low (for a put). The investor benefits further if the market finishes higher or lower than the shout level. The shout Option...
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Skew
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A skewed Distribution is one that is asymmetric. Skew is a measure of this asymmetry. A perfectly symmetrical Distribution has zero skew, whereas a Distribution with positive (negative) skew is one where outliers above (below) the mean are more probable. An...
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Specific risk
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Specific Risk, also known as non-systematic Risk, represents the price variability of a Security that is due to factors unique to that Security, as opposed to that portion that is due to systematic Risk, the generalised price variability of the related Interest...
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Squeeze
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Pressure on a particular Delivery date resulting in making the price of that date higher relative to other Delivery dates.
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Statistical arbitrage
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In the mid-1980s it was discovered that certain stock prices did to an extent exhibit autocorrelations – implying that earlier price changes could be used to forecast Future changes. Statistical arbitrageurs seek to exploit these patterns in their trading...
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Step-up/down range forward
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A self-adjusting Range Forward structure, which is particularly suitable for Hedging purposes. If the strike level of the Long put Option is breached, the strike automatically adjusts up or down (according to exposure) to a new, more favourable, level.
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Stochastic optimisation model
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A model or description of a system in which the choice of action that can be taken is dependent on the values of some random variables. For example, the value of an American-style Option is such that the best choice of Exercise is always made.
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Stochastic process
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Formally, a process that can be described by the evolution of some random variable over some parameter, which may be either discrete or continuous. Geometric Brownian motion is an example of a stochastic process parameterised by time. Stochastic processes...
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Stock index future
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A Futures Contract on a stock index. Most are Cash-settled. The theoretical price of a stock index Future equals the cost of carrying the Underlying stock for that period: the opportunity cost of the funds invested minus any dividends. If the cost of buying...
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Stress-testing
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To perform a stress test on a derivatives Position is to stimulate an extreme market event and examine its behaviour under the ‘stress’ of that event.
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Structured product
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A structured product is an investment that bundles up a Portfolio of securities and other derivatives to create a single product. For example, a structured note can be a five-year Bond that has an embedded Equity or Currency Option in order to enhance its...
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Substitution option
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A bilateral financial contract in which one party buys the right to substitute a specified asset or one of a specified group of assets for another asset at a point in time or contingent upon a Credit event.
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Swap
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See Accreting, Credit default swap, Delayed reset swap, Digital swap, Dual currency swap, Equity (index) Swap, Forward Swap, High-coupon swap, index Amortising Swap, Interest rate swap, Mortgage swap, Municipal swap, Participating swap, periodic resetting...
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Swaption
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An Option to enter an Interest rate Swap. A payer swaption gives the purchaser the right to pay fixed, a receiver swaption gives the purchaser the right to receive fixed (pay floating). Apart from those in the sterling market, many swaptions are capital-market...
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Synthetic asset
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A synthetic asset is a combination of Long and Short positions in financial instruments, which has the same Risk/reward profile as another instrument. For example, it is possible to replicate the payout and exposure of a Short futures Position by going Short...
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Systemic risk
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The Risk that the financial system as a whole may not withstand the effects of a market crisis. Concern on the part of banking regulators has been caused by the concentration of Derivative Risk among a relatively small number of market participants, with the...
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