THE WILLIAM MARGRABE GROUP, INC., CONSULTING, PRESENTS
THE DERIVATIVES 'ZINETM     November 2001


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ÖThe Devil's Derivatives DictionaryTM  Last revised: 07/30/00

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z #  

- F -

fair value
Futures pricing for those idealists who believe that rose soup should be better than onion soup, in theory, because a rose smells better than an onion.
A theoretical value for a futures price, typically based on a hypothetical cash-and-carry arbitrage operation.
 
fair Value Pricing
In a fast-moving market, the way a mutual fund bleeds those alert, hot-money customers who have the nerve to exercise their right to move their money around in an effort to get fat by bleeding the sleepier customers.

"When a fund company determines the price of a security using information other than the closing market price." (Source: Alison Pederson, "Funds and SEC on Fair Value – Investors, Read the Fine Print", TheStreet.com, 11/6/97.)
 
Ordinarily, mutual funds value their shares on a day as of 4 p.m. However, on the volatile Monday, 10/27/97, two funds used different methods to price their Hong Kong equity funds:
On 10/28 at 9 p.m. in New York, T. Rowe Price used the contemporaneous 10/29 opening prices in Hong Kong.
On 10/28 at 11 p.m. in New York, after Hong Kong markets were open for two hours on 10/29, Fidelity used the stale prices at 4 p.m. in New York. These prices were some 15% higher than the previous close in Hong Kong, so new investors were miffed. Some observers think that Fidelity acted deliberately to favor the old investors over the new ones. (Source: Edward Wyatt, "What's Fair In Setting Fund Value?" NYT, 11/9/97.)
 
faith
Definition: "Belief without evidence in what is told by one who speaks without knowledge, of things without parallel." (Ambrose Bierce, The Devil's Dictionary, New York, Dover, 1958.)
 
faux pas
"a slip, a trip; an act which compromises one’s reputation, esp. a woman’s lapse from virtue." Oxford English Dictionary.
 
Fib
Definition: "A lie that has not cut its teeth. An habitual liar's nearest approach to truth: the perigee of his eccentric orbit." (Ambrose Bierce, The Devil's Dictionary, New York, Dover, 1958.) An utterance of President William Jefferson Clinton.
 
fiddle
Definition: "An instrument to tickle human ears by friction of a horse's tail on the entrails of a cat." (Ambrose Bierce, The Devil's Dictionary, New York, Dover, 1958.)
 
fido
Fidelity Investments, "the world's largest independent investment management organization & second largest discount broker". Contrary to some opinion, the affectionate name does not imply that at least a few of its mutual funds have been dogs.
 
finance
Definition: "The art or science of managing revenues and resources for the best advantage of the manager. The pronunciation of this word with the i long and the accent on the first syllable is one of America's most precious discoveries and possessions." (Ambrose Bierce, The Devil's Dictionary, New York, Dover, 1958.)
 
financial planner
Definition:
1. A professional, schooled in the art of arranging the finances of a high net work individual in a way that best assures that a large part of her money ends up in the planner's pocket. Its professional associations include the Institute for Certified Financial Planners, the International Association for Financial Planning, and the Certified Financial Planner Board of Standards.
2. The official title of NYC welfare caseworkers who screen welfare applicants at one of the city's 30 welfare offices. "The main thing is to get people [on welfare] thinking about financial self management," said Debra Sproles. 
Source: Sana Siwolop, "Financial Planners Fume At the Taking of a Title," NYT, 8/2/98.
 
Flaming Ferraris
Definitions: 
1. A mixed drink, consisting of rum, Chartreuse, and blue curacao.  
2. An index arbitrage team, working for First Boston in London. They are in trouble for allegedly trying to manipulate the Swedish stock market index in December 1998. Details of the case suggest that the incident may have occurred after they drank too many Flaming Ferraris at the office Christmas party.
  CSFB’s global equity-arbitrage team consists of 15-20 persons, including the five Flaming Ferraris in London. Global profit for 1998 was about $150-$200 million, about one-third of that in London. The Flaming Ferraris’ share of the loot was 1998 bonuses of $600,000 to $1 million, per person.
 The three accused are James Archer, 24, son of author and former Conservative M.P., Jeffrey Archer; Adrian Ezra, 31, Harvard man; and David Crisanti, 34, Princeton man. Allegedly, Archer pulled the trigger, trying to push the OMX up by buying $800,000 of shares in the Swedish forestry company, Stora AB. Ezra and Crisanti are in trouble for sleeping on duty, failing to supervise the energetic, young Brit properly.
Source: Jeffrey L. Hiday, “Three Suspensions at First Boston Are Linked To Alleged Tries to Manipulate Swedish Stocks,” Wall Street Journal, 3/1/99.)
flavor of the month
The latest in a long series of fads. For example, an actress of no talent, beyond the plainly visible, during the time until her beauty fades; a person of no lasting significance, who is enjoying his or her 15 minutes of fame; a fraud that neither potential victims, nor the long arm of the law recognizes, yet. The expression originally referred to the newest variety of ice cream for sale.
 
flight to quality
The trip of choice when fear replaces greed as your companion.
 
flipping
Giving a borrower more and more rope, until he hangs himself. Namely, "extend[ing] to borrowers a succession of loans, with each new loan refinancing the terms of its predecessor." Cf. "packing" and "stripping". To the great credit of Sen. Charles Grassley (R. Iowa), chairman of the Senate Special Committee on Aging, he does not plan legislation to infantilize American borrowers by regulating this process, but is only pointing out the abuses by "a few bad apples" who are "con artists" and "immoral and unethical". (Matt Murray, "Ford's Loan Unit Draws Criticism at a Hearing," WSJ, 3/17/98.)
 
forever
A time interval that begins when a Derivative salesman calls you and ends when you can politely hang up on him.
 
friendship
Definition: "A ship big enough to carry two in fair weather, but only one in foul." (Ambrose Bierce, The Devil's Dictionary, New York, Dover, 1958.)
 
front running
Arbitraging the stock market, as dishonest brokers practice it. An unscrupulous stock broker receives a large order from a trusting customer, betrays that trust by filling an identical order first for himself and pushing up the price, then fills the customer's order at an elevated price – ideally, directly from the broker's recently acquired position. Since this is illegal, brokers inclined to cheat their customers this way tend to hide their activities by falsifying their books and records and by conspiring with other dishonest brokers. (Michael Siconolfi, "Big Board Brokers Face 'Front-Running' Probe," WSJ, 3/20/98.)
 
[the] full Monica
The service that Monica Lewinsky performed for the most powerful leader on the face of this planet on about 37 White House visits after she left her job as a White House intern and took a new day job at the Pentagon – when she wasn’t advising him on domestic matters and foreign policy. Her duties earned her more "face time" with the President than senior Democrat Party leadership.
 
A play on the expression, "the full Monte", which means complete nudity in a stage performance. "The Full Monte" is the title of a motion picture about working class British men whose stage performance culminates in "the full Monte." Of course, Monica didn’t have to take off any clothing to perform her act.
 
Monica stopped performing for the President in 1996, due to a bureaucratic SNAFU. Journalist Nina Burleigh volunteered in an interview with Howard Kurtz of The Washington Post to serve President Clinton the same way. No response, yet, from the White House.
 
Future
Definition: "That period of time in which our affairs prosper, our friends are true and our happiness is assured." (Ambrose Bierce, The Devil's Dictionary, New York, Dover, 1958.)
 
Futures Contract
A listed Derivative Product that always promises future profit, despite frequent past losses. A convenient way to lose the entire value of an investment without ever making the investment in the first place.
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- G -

gaffe
When a politician speaks the truth. (Michael Kinsley, according to Christopher Buckley, "Hoof In Mouth," Forbes FYI, Summer 1998.)
gaiatsu
The Western devil that makes Japanese politicians do things that they really want to do, like "stimulate the economy" with a lot of government spending, but can’t openly support, because of domestic opposition. Literally, "foreign pressure." ("Hashimoto’s Riposte," WSJ, 3/25/98.) In Japan's one-party system, foreign devils are the only significant political opposition. This tradition is centuries old.
geek, derivatives
Definition: Anyone more technically adept than you at financial engineering.
Usage: If you are a trader and a Rocket Scientist (q.v.) stumbles onto the trading floor, warn other sales and trading personnel by helpfully calling out, "Geek alert! Geek alert!" .
Comment: If you're a Geek, be proud and wear your "Geek Code" in your email signature.
 
gigabite
A sudden, billion-dollar drop in net worth – ordinarily of a corporation, but potentially of a government or individual. One likely origin of such a hole is the discovery of a trader's fraud on his employer, although sometimes you have to wonder how the boss managed to miss a billion dollars, as it oozed or flooded out the door. Toshihide Iguchi of Daiwa (-$1.1 billion), Nick Leeson of Barings (-$1.4 billion), and Yasuo Hamanaka ("Mr. Copper") of Sumitomo (-$2.6 billion) are the key players in such, recent (thru 7/31/98) gigabites. The Sultan of Brunei may have suffered a gigabyte at the hands of his younger brother. The Justice Department's antitrust suit threatens to take a gigabyte out of Bill Gates's fortune. Cf. gigabyte. (Thanks to Ann Van Mele, Lester Assocates, Inc., for assistance with the facts.)
 
gigabyte
"Abbreviated GB. A unit of memory equal to 1,000 megabytes." ("Jargon Watch," Fortune Technology Buyer's Guide, Winter 1998, p. 10.) Cf. Gigabite.
 
Gold Mine
Definition: "A gold mine is a hole in the ground with a liar at the entrance." Alan Abelson, "Up & Down Wall Street," Barron's, 4/7/97, p. 4, quotes Paul Macrae Montgomery in his newsletter, Universal Economics.
 
good and evil
Abstract, objective concepts that few can distinguish from from the concrete and subjective, "good for me" and "bad for me". If one is self-serving enough, he can combine undisputed, but nearly irrelevant facts with a lack of proportion, common sense, or probability, and argue the "good" of anything. To wit:
1. " ‘The Good I Didn’t Do’ is the title of a recent article in Life Insurance Selling by Jerry Pritchard. It is a personal story about ‘not battering’ family and friends regarding life insurance. If you take this approach, just remember that you will be accountable for the ‘good you didn't do.’ " (Financial E-News - 07/01/98 Edition)
Could this be the heart-wrenching story of an insurance salesman who didn’t sell a big policy to some people for whom money was tight? Then, … sob … someone died and left behind impoverished potential beneficiaries?
2. Soon, we’ll hear about the copy writer for a notorious, national sweepstakes, who didn’t persuade a recipient of the junk mail she crafted to buy a magazine that six months later contained an article that could have saved him the from the personal bankruptcy that led directly to his heavy drinking and eventual suicide, twelve years later.
3. Soon after that, we will read the story of Felipé, the Colombian drug salesman, who failed to close the sale on some uppers to a man who later fell asleep at the wheel of his car on the New York Thruway and killed his entire family.
Conclusion: With this sort of "logic" one can justify almost any action that might at some future time have some utility to someone, regardless of the immediate cost.
 
Grapeshot
An argument which the future is preparing in answer to the demands of American socialism. (Ambrose Bierce, The Devil's Dictionary, New York, Dover, 1958.)
 
Grease
Brokerage commissions – cash, stock, or illicit drugs – that Boiler Rooms (q.v.) pay to successful 20-year-old, uneducated Investment Executives (q.v.). (Source: Eaton, Leslie. "Investment Fraud Is Soaring Along With the Stock Market," New York Times, 11/30/97.)
 
greed
Avarice, avidity, cupidity, covetousness, lust for money, rapacity, ravenousness, voracity, voraciousness. The emotion that is to money what lust is to sex.
 
Grossman's paradox
The contradiction between two key syllogisms of modern financial economics:
(1) If markets are efficient, then no can profit from gathering information on which to base prices and no one will gather it.
(2) If no one gathers information on which to base prices, then markets can't be efficient.
We can resolve this "paradox" by recognizing that in equilibrium only the lowest cost producers of information can by profit from producing it, so only they will produce it, and only until the marginal costs of producing information equals the marginal benefit from having it.
 
Guillotine
A machine which makes a Frenchman shrug his shoulders with good reason. (Ambrose Bierce, The Devil's Dictionary, New York, Dover, 1958.)
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- H -

Habeus Corpus
"A writ by which a man may be taken out of jail when confined for the wrong crime." (Ambrose Bierce, The Devil's Dictionary, New York, Dover, 1958.)
 
Hand
"A singular instrument worn at the end of a human arm and commonly thrust into somebody's pocket." (Ambrose Bierce, The Devil's Dictionary, New York, Dover, 1958.)
heart attack futures
The Chicago Mercantile Exchange’s suite of agricultural and daily futures contracts:
  • Fresh Pork Bellies – 40,000 pounds per contract, skin-on.
  • Boneless Beef – 20,000 pounds, 90% lean – does that mean 10% pure fat?
  • Boneless Beef Trimmings – 20,000 pounds, 50% lean – a euphemism for half fat?
  • Cheddar Cheese Futures – 40,000 pounds
  • Butter Futures – 40,000 pounds of Grade AA butter – English muffin, not included
  • Basic Formula Price Milk – 200,000 pounds of Grade A cow’s milk – not skim!
  • Lean Hog – 40,000 pounds of dressed hogs, 51-52% lean
heat
  1. Gambling fever that starts mildly, but can develop into an uncontrollable urge. Endemic to Atlantic City, bodegas, greyhound race tracks, Indian reservations, casinos, jai lai frontons, Las Vegas, OTB offices, horse race tracks, and riverboats. "The House" has been known to take as much as a million dollars in a day from a high rolling gambler suffering from the "heat".
  2. Speculative fever that starts mildly, but can develop into an uncontrollable urge. Endemic to New York, Chicago, London, Tokyo, main street, Wall Street, stock markets, futures markets, bond markets, FX markets, the O.T.C. markets. "The House" has been known to take as much as $50 million a day from a speculator suffering from the "heat".
 
Heathen
"A benighted creature who has the folly to worship something he can see and feel." (Ambrose Bierce, The Devil's Dictionary, New York, Dover, 1958.) For example, one who worships money.
 
Heavy Hitter List (HH List)
Definition: A financial salesman's "sucker list" of "accredited" investors (q.v.).
Usage: Bewildered prospect: "How did you get my name?" Oleaginous salesman, with deep tones of respect: "Sir, you're on the HH list!"
 
history
"An account mostly false, of events mostly unimportant, which are brought about by rulers mostly knaves, and soldiers mostly fools." (Ambrose Bierce, The Devil's Dictionary, New York, Dover, 1958.) For example, business journalism.
hypster
One who posts positive messages about a stock, to drive its price up. "That stock was flying, mostly because some hypsters were boosting it." (Terri Cullen, "Translation Required," WSJ, 9/8/98.) The opposite of a basher (q.v.).
hypocrite
"One who, professing virtues that he does not respect, secures the advantage of seeming to be what he despises." (Ambrose Bierce, The Devil's Dictionary, New York, Dover, 1958.) Examples, a really, really, really recent President and his First Lady.
 
hypocrisy
The tribute that vice pays to virtue.
 
hurricane bond
The investment of choice for many investors who will soon get "blown away".
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- I -

impotence
A serious problem for many men of all ages, and particularly in husbands over age sixty. In the case of an elderly husbands, the principal cause is a wife over sixty, and – until Viagra – the most successful cure has been a mistress under thirty.
 
Index Arbitrage
The slight of hand, by which nimble program traders pick the pockets of sleepy traders who place limit orders.
 
Index Amortizer
An incantation that at least one financial alchemist uses when transforming a sow's ear into a silk purse. (See Marc Hochstein, " 'Index-Amortizers' Add a New Wrinkle To Market for Asset-Backed Securities," Wall Street Journal, 9/8/97.)
 
index option arbitrage
The gun with which index option arbitrageurs shoot ducks in a barrel.
According to press reports, Nasdaq fined Morgan Stanley $1 million for manipulating the Nasdaq 100 index in 1995. Here's how it worked: Morgan Stanley program trading desk was long call options on the Nasdaq 100 stock index and short the shares in the index. The payoff on in-the-money calls was the excess over the strike price of the average of the opening prices of the 100 index components. Just before the crucial opening, Morgan Stanley's program trading desk moved to covered its shorts by entering trades for the constituent stocks via its equity OTC trading desk. The OTC desk showed the market bids for five shares that crossed the market, i.e., Morgan Stanley's bids were higher than visible offers. The opening OTC trades were at the high bid prices, but Morgan Stanley traded little or nothing at these prices, which went into the index for the payoff. Afterward, prices fell immediately. Morgan Stanley's OTC trading desk then covered its short at the lower prices. In essence, Morgan Stanley was able to sell the shares at a high price in the index option market and buy them at a lower price in the cash market. (Leslie Eaton, "Nasdaq Fines Morgan Stanley $1 Million," New York Times, 4/14/98.)
 
infidel
"In New York, one who does not believe in the Christian religion. In Constantinople, one who does. A kind of scoundrel imperfectly reverent of, and niggardly contributory to, divines, ecclesiastics, popes, parsons, canons, monks, mollahs, voodoos, ..." (Ambrose Bierce, The Devil's Dictionary, New York, Dover, 1958.)

On Wall Street, one who does not worship money. In Washington, one who does not worship power. On television, one who does not worship Nielsen ratings. In print, one who does not worship circulation. Among teenagers, one who does not worship sex.
 
information curtain
A device that managers use to hide bad news from investors, in hope of keeping the stock price up. The natural consequence is that investors fear the worst and keep the stock price down. A pun on "Iron Curtain" and "Bamboo Curtain".
 
The information curtain is always there, except in the financial economist's "perfect markets" assumption. However, in the U.S. it's made of gossamer, while in Asian market's it's made of thick, dark canvas.
 
(Source: Shanthi Kalathil, "Asia Gets a Hard Lesson in Costs of Firms' Murky Bookkeeping," WSJ, 12/15/97.)
initial public offering (IPO)
A tasty investment treat that you either eat on a regular basis or you have to do without or eat spoiled leftovers.

Stock brokers tend to offer the best IPOs to the customers who are putting the broker’s children through college. If you get a cold call from a broker half way across the country, everybody with money between you and the broker has already taken a pass on the deal.
International Monetary Fund (IMF )
A principal character in a Kabuki dance by which the wealthy, politically powerful, and corrupt class that controls a poor nation weasels billions of dollars from the honest, clueless, middle class in wealthy nations. Act one is a financial meltdown. Act two contains beseeching and insincere contrition. Act three sees the beggar laughing behind his mask. Could it be that the playwright for this whole process is a cabal of American commercial and investment banks that get bailed out by IMF loans? Let’s ask the Secretary of the Treasury, Mr. Rubin, formerly of Goldman, Sachs.

James Rodgers, the "Investment Biker", sees the IMF and World Bank as Ponzi schemes. Their loans never default, because new, larger loans pay off the old ones – with interest. (Jim Rodgers, "The Ponzi Pair," Worth Online, http://www.worth.com/articles/Z9805E01.html.)
 
investment executives
In a boiler room, "[Y]oung men with high school educations whose only training is in the hard sell and whose previous jobs may have been at pizza parlors or tire stores. (Source: Eaton, Leslie. "Investment Fraud Is Soaring Along With the Stock Market," New York Times, 11/30/97.)
 
investment manager
A personal shopper for one who gambles with his retirement money.
irrational exuberance
Definition: The excessive fondness that some academics have for their the hot air that they expel when opining about a stock market in which they are neither long, nor short. 
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- J -

January defect
The failure of the January effect (q.v.) to deliver from about 1994 to at least 1998.
jack-in-the-box swap
"You get a better spread, and the swap sits there and doesn't do anything until finally the top springs open and the boxing glove jumps out and hits you in the face" -- Halsey Bullen, Financial Accounting Standards Board.
Source: Jerry Green, http://home.earthlink.net/~green/whatyour.htm
January effect / tax bounce
1. The alleged tendency for stocks that have performed poorly during one calendar year to perform relatively well during the first month or so of the next calendar year. This effect is no longer as pronounced as it was in the past, perhaps because it was a random event, perhaps because so many people know it and exploit it. The theory is, (a) owners of poor performers tend to sell their shares at the end of the year to realize their loss for tax purposes, and all this selling pressure depresses the price and (b) at the beginning of the next year the prices rise to ordinary levels. (David Katz, "Commentary Features: How to Play the January Effect," TheStreet.com, 12/30/97.)
2. The tendence of small cap stocks to outperform big cap stocks during early January of each year. This may be because of a larger tax bounce for stocks with larger big-ask spreads. This apparently stopped working from 1994 to at least 1998.
 
Japan Inc.
A post-World War II Camelot that didn't live up to it's legend any better than did the Kennedy version. In the Japanese case, the knights of the round table were the keiretsu (q.v., affiliated companies) that dominated the Japanese economic and political landscape after World War II, much as the zaibatsu (holding companies) had dominated it before. Before and after the war, imperialism (military, prewar, and economic, postwar) and nationalism were often more important than profit. The common citizen of Japan paid the freight for pursuing this tribalistic dream. (Ron Chernow, "Sayonara to Japan Inc.," The Wall Street Journal, 12/3/97.)
jetiquette
Rules of behavior for jet airline passengers – often ignored, all too rarely punishable by death! The rules include such common sense as no smoking, airing your sweaty socks, clipping your toenails, belching, or breaking wind.
One of the more egregious violation of jetiquette, not involving physical assault, came when a drunken man from Greenwich Connecticut, rose to protest the flight attendants’ refusal to give him another drink. He climbed onto the food service cart and relieved the pressure within his bowels. The passenger’s punishment – if any – is not a matter of public record. One wonders if his actions were a form of protected speech, under the first amendment to the U.S. Constitution.
Bad jetiquette can have worse consequences. In 1998 a passenger on a flight from Bangkok to Budapest on the Hungarian airline, Malév, went berserk. Allegedly, he struck a pilot and tried to strangle a flight attendant. Crew members lashed him to a seat and a doctor injected him with a sedative. When the airplane made an emergency landing in Istanbul, this passenger was dead. (Rudy Maxa, "Jetiquette," Forbes, 2/8/99, p. 169.
jitterati
People who drink too much coffee.
 
Junk Bond
The moral equivalent of preferred stock, with questionable security, but rock-solid, fixed-income tax treatment.
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