Derivatives Dictionary^TM (G-J) Last revised: August 03, 2001

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 #

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Gilt Strip: A Zero Coupon Bond that is either a coupon or the principal of a UK government bond, trading separately. The UK counterpart of Strips (q.v.) on U.S. Treasury notes and bonds.
Green Shoe option: Definition: An underwriter's right to issue more than the stated number of shares of an issue. Named after the Green Shoe Company, which was the first issuer to grant an underwriter such an option.
Application: For example, if Underwriter offers 1,000,000 of ABC's shares at $10 and investors oversubscribe the issue, Underwriter can require ABC to issue another 100,000 shares at $10.
Comment: It's good for Underwriter. It's good for the investors in the 100,000 shares. Not so great for the other shareholders, but two out of three ain't bad!
Source: IFCI, http://risk.ifci.ch/00011628.htm.

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Haircut: The excess of an asset's market value over either (a) the regulatory capital value or (b) the loan for which it can serve as adequate capital.

Hamster Option: A form of Range Option that SBC created. I can describe it no better than Professor S. Trautmann explained it to me: "The German noun Hamster has the same meaning as the English noun hamster: it is the name of a small rodent. But HAMSTER is also a acronym standing for Hoffnung Auf MarktSTabilitaet in Einer Range (literally: Hope on market stability in a given range). It really is a pun as in German the verb 'hamstern' has the meaning of 'to hoard'. HAMSTER options hoard the fixed amount one gets for every day the underlying stays in the prespecified range. What is earned cannot be lost anymore."

Hamster-Optionen: Hamster Options (q.v.).

Heavy Hitter List: A list of wealthy individuals who qualify as substantial investors for the purpose of investing in hedge funds, commodity pools, etc.

Hermaphrodite Option: An option that the owner could choose to be either a Call or a Put. Another name for a "AC-DC" option (q.v.).

Herstatt risk: Definition: The risk to Counterparty A in the settlement of a foreign currency transaction with Counterparty B, that A would deliver its payment to B, but B might not pay, as agreed. If A and B deliver their payments in different time zones, then Herstatt risk occurs regularly. However, in 1994 a report indicated that Herstatt risk lasts more than one day in a significant portion of transactions. The eponymous Bankhaus Herstatt defaulted on a number of currency transactions when it failed in 1974.
Example: Bank A might agree to deliver DEM in Frankfurt at 3 p.m., in exchange for Bank B’s delivery of USD in New York at 3 p.m. on the same day. Although the times appear the same, the New York delivery comes later, because of the difference in time zones.
Comment: The potential for Herstatt risk has increased enormously, over the past decades, as daily currency transactions increased from about $10 billion in 1973 and about $1.25 billion in 1995. Actual defaults have been few, but when Barings collapsed, it failed to deposit $47.8 million worth of pesetas in a Deutsche Bank branch in Spain. Efforts to avoid the problem include bilateral "netting" arrangements, extended hours for the FedWire system, and clearing houses.
References: "Ghostbusters," The Economist, 3/16/96. .

HH List: Heavy Hitter List.

Hurricane Bond: A form of Catastrophe Bond (q.v.), where the catastrophe is a hurricane. (Source: Sophie Belcher, "USAA to Try Again with Hurricane Bond, Derivatives Week, 5/5/97.)

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Index Amortizing Swap: A swap whose Notional Amount (q.v.) amortizes (declines) each period by an amount that depends on the level of one or more interest rates. This gives the IAS a superficial resemblance to a mortgage loan or mortgage-backed security, which has optional prepayment. This superficial similarity has been the basis for a sales pitch to institutions with a large prepayment risk to hedge. Alas, the basis risk is large enough to discourage intelligent, experienced – or even merely intelligent – professionals from hedging this way. The IAS – like the legendary House of the Rising Sun, in New Orleans – has been the ruin of many a poor boy.

Inflation-Linked Bonds: Inflation-Linked Bonds have coupons that depend on the rate of inflation or a related index. They have two main structures.; 1. Capital Indexed Bonds. The principal accretes according to the CPI or another price index or deflator. The bond's coupon is a fixed percent of the accreted principal.
2. Floating Rate Bonds. The principal is fixed, but its coupon floats. The floating rate depends on inflation or something related, such as the rate of change in the CPI or on the Treasury Inflation Protected Security (TIPS) variable coupon rate.
A flurry of issues have hit the market in 1997. Issuers include Federal Home Loan Banks, JP Morgan & Co. Inc., Sallie Mae, Salomon Brothers, Toyota Motor Credit Corporation, the U.S. Treasury.
The two main unresolved issues of Inflation-Linked Bonds are how large and variable (1) the coupon and (2) the market price should be.The real yields on Inflation-Linked Treasury Bondsbegan large enough to surprise many observers, and has fallen little in a few months. Some observers believe that these high real rates are sustainable and have historical precedent. Others believe that they are the result of investor uncertainty about the market and will fall over time. (Jonathan Clements, "Second Thoughts: Inflation-Tied Bonds Offer an Intriguing Option for Investors," Wall Street Journal, 3/11/97.)
Advocates for the U.S. market envisioned a bond with a variable coupon and a stable price. However, the experience with Australian Capital Indexed Bonds is that the price varies significantly. (Wesley Phoa, "Inflation-Linked Bonds; are they too safe or too exciting?", Financial Trader 4 (2), p. 30.)

Installment Option: An option on an option on an option ...

Installment Warrant: Aussie for what is simultaneously a Compound Option (q.v.) and a Warrant (q.v.), and which apparently confers some of the benefits of ownership. "They involve two payments: an initial payment followed by a second, which includes fees and interest, paid optionally about 14 months afterwards. In the meantime, depending on the issuer, the instalments confer full dividends, franking credits and voting rights." (Source: Australian Financial Review Dictionary of Investment Terms.)

interest bought/sold date: The "value date" (q.v.). (J.P. Morgan Glossary of terms for global sovereign bond markets.)

Interest-Only (IO) Tranche: A CMO (q.v.) Tranche (q.v.) that receives a portion of only the CMO's underlying principal payments.

internal market: The securities market within the boundaries of a particular country, consisting of the domestic market (q.v.) and the foreign market (q.v.). Example: Most Daimler Chrysler debt trades in the German internal market. Source: http://www.jobs.washingtonpost.com/wp-srv/business/longterm/glossary/a_m/internal_market.htm

International Swaps and Derivatives Association: The principal trade association for Swap and Derivatives dealers, as well as allied organizations.

ISDA: International Swaps and Derivatives Association (q.v.).

Inverse Floater: A Floating Rate Note with a coupon that decreases as the underlying index rate increases (e.g., a simple Inverse Floater's coupon rate might be 11.5% minus LIBOR). The Replicating Portfolio (q.v.) for a simple Inverse Floater is long a pair of Fixed Rate Notes and short a Floating Rate Note. Commonly, an Inverse Floater's coupon has a ceiling and a floor, (e.g., no more than ten percent, never negative). Thus, its replicating portfolio is the same as for a simple Inverse Floater, plus long a Cap and short a Floor.

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Jamming

Definition: Executing a large sell (buy) order in stages by asking for a market on a small size, hitting the bid (offer), then repeating the process with a different market maker, ultimately driving the price considerably lower (higher).
Application: "It is entirely against proper market etiquette in foreign exchange and gold, but somewhat permissible in fixed income trading. You never jam a friend." (Nassim Taleb)

Jelly Roll

A roll that a trader does using synthetic Forward Contracts (q.v.). Each synthetic Forward Contract consists of a long call and a short put, on the same underlying instrument, with the same strike and expiration.

Jump Z

A last-pay "companion" (sort of residual) tranche of a REMIC (q.v.) that "jumps" into first-pay status if interest rates fall or prepayments are rapid. The desired effect of the jump provision is to promote positive convexity (like a bond), rather than negative convexity (like a mortgage) in another tranche.

(Source: "Derivative Mortgage Securities Glossary," Dean Witter, Mortgage Backed

Securities Department, Derivative Products Group, January 1995.)

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Derivatives DictionaryTM (G-J) Last revised: August 03, 2001

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Derivatives Dictionary^TM (G-J) Last revised: August 03, 2001