Glossary

A special case of forward contract where the initial contract value to the LONG and SHORT is not zero. The LONG or SHORT party will have to make a payment to the counterparty to offset the initial price difference. A swap contract can be decomposed into a series of off-market forward contracts.

The most important characteristic of an oligopoly market is that there are only a few firms competing. Barriers to entry are high, often because economies of scale in production or marketing lead to very large firms. While products are typically good substitutes for each other, they may be either quite similar or differentiated through features, branding, marketing, and quality.  One ...

The most recently issued and most actively traded sovereign bonds.

A test in which the null hypothesis is rejected only if the evidence indicates that the population parameter is greater (or smaller) than θ0 . The alternative hypothesis also has one side. Compare: Two-tailed hypothesis test

Total number of outstanding futures contracts that are held by market participants in a clearinghouse at the end of the day. Open interest increases when traders enter new long and short positions, and decreases when traders exit existing positions. Open interest is therefore a measure of the flow of money into the futures market.

A type of mutual fund where new shares (units) are issued when an investor buys in, and redeemed when an investor sells, usually on a daily basis. The price at which a fund redeems and sells the shares is based on the net asset value of the fund’s portfolio expressed on a per share basis. Investors generally buy and sell ...

Open-end funds issue new shares when an investor buys in, and redeem existing shares when an investor sells, usually on a daily basis. The price at which a fund redeems and sells the shares is based on the net asset value of the fund’s portfolio expressed on a per share basis. Investors generally buy and sell open-end mutual funds by ...

Activities that generally involve producing and delivering goods, providing services, and include all transactions and other events that are not defined as investing or financing activities.

A company’s day-to-day activities that create revenues, such as selling inventory and providing services. Cash inflows result from cash sales and from collection of accounts receivable. Cash flows are recorded as CFO. Compare: Investing activities, Financing activities

The number of units produced and sold at which the company’s operating profit is zero (revenues = operating costs). See also: Breakeven point

A company’s profit after operating expenses, depreciation, and amortisation. Somewhat synonymous to Earnings Before Interest and Taxes (EBIT). There are slight differences between operating income and EBIT.

Income statement items that result from a firm’s operating activities.

Like a rental arrangement, the leased asset remains on the lessor’s balance sheet. However, at inception of the lease, the lessee still has to report a “right-of-use” asset and lease liability of the same amount. The lessee recognises a single lease expense in its income statement, which is a straight-line allocation of the cost of the lease over its term. ...

Operating Profit Margin = Operating Profit / Revenue EBIT Margin = EBIT / Revenue

Uncertainty in operating income caused by fixed operating costs. Lhe greater the degree of leverage, the greater is a firm’s operating risk. Compare: Business risk, Sales ris See also: Degree of Operating Leverage

Operating ROA = Operating profit / Avg total assets

A financial instrument that gives one party the right, but not the obligation, to buy/sell an underlying asset from/to another party at a fixed price. American option – may be exercised at any time up to the expiration date. European option – can only be exercised on the expiration date. See also: Call option, Put option

The amount of money an option contract buyer pays to the seller to engage in an option transaction. At initiation, Option premium = Time value At time t, Option premium = Time value + Intrinsic value At expiration, Option premium = Intrinsic value

The value of the embedded option plus the flat price of the bond. Since the value of an option can never be negative, the option adjusted price for a callable bond will always be greater or equal to its flat price. See also: Option-adjusted yield

In the context of bonds with embedded options, the OAS is an estimate of the yield spread of the bond without any embedded options (i.e. straight bond). OAS = Z-spread – Option value

The required market discount rate calculated from the option-adjusted price of a bond with embedded option. The option-adjusted yield is less than or equal to the yield-to-maturity. This is consistent with reasoning as callable bonds should have higher yields to compensate bondholders for the issuer’s call option.  The option-adjusted yield can be used to compare the yields of bonds with various ...

A type of secondary market that uses rules to match buy and sell orders. There are typically no dealers involved. Compare: Quote-driven Market, Brokered Market

A measurement scale that sorts data into categories that are ranked with respect to some characteristic.

An annuity where the cash flows are paid at the end of each period.

Not to be confused with other income, OCI are gains and losses that are excluded from the income statement.  Such items can include unrealised gains or losses on investments that are classified as available for sale, foreign currency translation gains or losses, and pension plan gains or losses.

Other gains that a firm makes outside of its core operations/business. (e.g. rental income)

A dealer market with no central location. Forwards and swaps are traded in OTC markets. The dealer marries the interested parties into a custom, negotiated contract.  Hence, the contract is with a counterparty, which exposes both parties to default risk.  Over-the-counter markets tend to be unregulated and decentralised. Secondary bond market trading often take place in OTC markets. Compare: Central ...

A method of credit enhancement in which the collateral pledged has a value greater than the par value of the debt issued.

An emotional bias where an individual tends to overestimate his/her own intuitive ability, or reasoning.   Overconfidence may be intensified when combined with self-attribution bias, in which people take too much credit for successes, and assign blame to others for failures. While overconfidence is both cognitive and emotional, it is more emotional in nature because the bias primarily results from ...

LEVEL II Overfitting is a common problem in machine learning when a model is trained to fit the training data too closely and therefore, it performs poorly on unseen data. This occurs when a model has too many parameters and is able to memorize the training data instead of generalizing to new data. As a result, the model has high ...

Overfitting occurs when the machine learns the input and output data too exactly, treats noise as true parameters, and identifies false or unsubstantiated patterns and relationships.  Compare: Underfitting

The percentage change in quantity demanded for a percentage change in good’s own price, holding all other things constant. See also: Demand function, Cross-price Elasticity of Demand, Income Elasticity of Demand

Owner’s residual claim on the company’s assets after deducting its liabilities. Includes contributed capital, treasury stock, preferred stock, retained earnings, accumulated other comprehensive income, and non-controlling interest.