Derivatives Dictionary^TM (N-P) 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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Naked Dog Basket: The "Basket" is a portfolio of Brady Bonds that someone issued in exchange for rescheduled debt of certain developing countries. One might suppose that some people consider such a bond to be a "Dog". The "Dog Basket" is "Naked", because the terms of the contract call for stripping the yield on U.S. long bond from the gross return on the portfolio. So the coupon on the "dogs" depends on the "stripped spread" between the long bond rate the the Brady Bond yield. (Described in the Financial Times, 11/16/94, p. V.)

Nondeliverable Forward: A cash-settled, forward contract, typically on a nonconvertible or thinly traded foreign currency (probably from an emerging or submerging (q.v.) market) or two such currencies, that settles into a convertible currency (typically the USD). The cash value is a function of the contract's reference rate(s) on the fixing date, typically, two business days before the value date. Its main atraction is avoiding currency controls. (Source: William Rhode, "Learning Curve: Nondeliverable Swaps, Derivatives Week, 5/5/97.)

Nondeliverable Swaps: A Swap (q.v.) that would be equivalent ideally to a Cross-Currency Swap (q.v.), except that it settles instead in USD. Typically, the NDS omits delivery of the underlying currency at maturity. In simpler cases, the parties offset this omission with the appropriate Nondeliverable Forward (q.v.). In more complicated cases, the parties don't offset it, and pricing is more difficult. "One player at a U.S. bank uses a combination of risk tolerance, onshore interest rate levels and her own currency forecast to price NSDs." The NDS's appeal stems largely from its ability to circumvent prohibitions against converting currencies at market prices. (Source: William Rhode, "Learning Curve: Nondeliverable Swaps, Derivatives Week, 5/5/97.)

Notional Amount: A stated amount in a Derivatives Contract, on which the Derivative's payments depend. The Notional Amount is most analogous to the principal amount of a bond.

[le] Notionnel: "Notional bonds", the long-term, French bond futures contract on the MATIF (q.v.).

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OATS

Order Audit Trail System. The NASD’s new (as of 1998), SEC-approved system for keeping detailed, *time-stamped records of every trade. (http://investor.nasd.com/notices/9833ntm.txt)
Obligations assimilables du trésor. French government bonds, with either fixed and floating coupons, available in book-entry form. Not traded overseas, but available as ADRs in the U.S. (http://www.rcmfinancial.com/o.htm)

Obligations Assimilables du Trésor (OATs): French government bonds with original maturities of 5-30 years, the underlying assets for French bond futures and option contracts. (http://www.cean.caisse-epargne.fr:5281/html/obligassi.html)

Off-the-Run Treasury: A former On-the-Run Issues (q.v.), after the Treasury issues the new On-the-Run.

OIS: Overnight Indexed Swaps (q.v.).

One-Touch Option: An Option that pays off as soon as the trigger price touches the barrier. Often, it is a Binary Option (q.v.).

One Way Collared Note: A One Way Floating Rate Note (q.v.).

One Way Floater: A One Way Floating Rate Note (q.v.).

One Way Floating Rate Note: Definition: A Floating Rate Note whose rates can only ratchet up (usually) or down. Also known as One Way Collared Note, One Way Floater, Ratchet Floater, and Sticky Floater. (Source: Peng, Scott, and Dattatreya, Ravi, The Structured Note Market.); Example: A Floating Rate Note that pays a quarterly coupon that is at least the previous period’s LIBOR, at most 50 bips (q.v.) above the previous LIBOR, and equals LIBOR if LIBOR falls between these bounds.; Application: This is mainly a vehicle for speculation, because it is difficult to name something that it hedges.; Pricing: The payoff is path dependent, and the most obvious way to price it is with Monte Carlo simulation. (See Peter Fink’s discussion at http://www.sbcm.com/hot/current.htm)

On-the-run Treasury: Definition: The most recently issued U.S. Treasury note or bond of a given initial Maturity. Also known as the Current Coupon issue.; Example: For example, when the Treasury auctions a new two-year note it becomes the new On-the-Run two-year note.; Risk Management: The On-the-Run issues tend to be the most liquid – i.e., they have the smallest bid-ask spreads. That makes them most attractive as hedging instruments.; Comment: After the Treasury announces that it will auction a specific security (defined by maturity and coupon), but before the auction, the bond may trade in the When Issued Market (). After the auction, this security becomes the new On-the-Run Issue for its maturity. The previous On-the-Run becomes an Off-the-Run issue.

option: The right but not the obligation to buy (call, q.v.) or sell (put, q.v.) an underlying asset at a predetermined and fixed price, enter into a long or short futures position, or receive a payoff that simulates a purchase or a sale.
OTM: Out-of-the-Money. Having an Intrinsic Value of zero.
Outperformance Option: An option on the performance of one asset in excess of the performance of another. Typically, one measures the outperformance by the excess of the one return or rate of retun over the other. One might also measure the outperformance as the excess of the ratio of the two final price over a benchmark ratio.
overnight (o/n): From today to "tomorrow" (i.e., the next business day).
Overnight Indexed Swaps: Swaps with a floating rate based on Sonia (q.v.).
overnight rate: The interest rate from today to tomorrow (i.e., the next business day). Rates for overnight (q.v.), tom/next (q.v.), and spot date (q.v.) satisfy the following equation:
(1 + r_o/n × t_o/n ) (1 + r_t/n × t_t/n ) = (1 + r_spot × t_spot ).

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Pack: A Forward (q.v.) Strip (q.v.,#2), each corresponding to a particular year, of four consecutive, quarterly Eurodollar or Euroyen futures contracts. Markets, such as Simex offer a Pack as a convenient package of futures contracts, without the execution risk inherent in building up the Strip, contract by contract. A trader can use Packs and Bundles (q.v.) to implement bets on the change in shape of the Forward Curve.

paper: Customer buy and sell orders coming to a trading pit.

PCS Options: The CBOT's option contracts with the underlying Property Claims Service (PCS) index. Apparently, they operate more or less as a call option on the underlying index, which could be any one of nine indexes. (Source: Robert Clow, "Coping with catastrophe," Institutional Investor, December 1996, pp. 138.)
PEEQS: Protected Exchangeable EQuity-linked Securities (q.v.).
PERCS: Preference Equity Redemption Cumulative Stock. Preferred stock in Corporation A that behaves on the downside like common stock in Corporation A, but contains an embedded short Call Option on that stock. The PERCS is a descendant of the Prime of the early 1980s, which was itself a descendant of the hoary Buy-Write (q.v.) strategy. (See Pratt, Tom. "You can't keep a lid on public derivatives." IDD, Oct. 24, 1994, pp. 12-18.) The PERCS is like a ELKS (q.v.), except that the company that the company that issues the stock issues the PERCS, and another company issues the ELKS. Morgan Stanley issued the first PERCS in 1991.3.375

Periodic Cap: An Interest Rate Cap (q.v.) for which the strike for each Caplet (q.v.) can differ from strikes on other Caplets. Typically, the strike depends on LIBOR, as in a Ladder Periodic Cap (q.v.) or Lookback Periodic Cap (q.v.).

PERQS: Performance Equity-Linked Redemption Quarterly-Pay Securities (sm). Morgan Stanley's proprietary Equity Linked Debt Security (q.v.).

Pfandbriefe: German asset backed bonds, backed by private mortgages or public sector loans. The Association of German Mortgage Banks claims that for at least 100 years, through 1998, no investor who has held a Pfandbriefe issue to maturity has ever failed to receive full principal and interest. This claim suggests that some of the payments may not have been timely. Better late than never!

Pfandbriefe, Jumbo: Straight bonds with face value of at least DEM 1 billion, which at least three market makers have pledged to quote continuous, two-way markets during normal market hours, for size up to DEM 25 million. Cf. Pfandbriefe.

Pfandbriefe, Public: Bonds backed by loans to the public sector. Cf. Pfandbriefe.

Pibor: Paris Interbank Offered Rate. The French counterpart of LIBOR.

Planned Amortization Class: An indexed amortizing structure with an amortizing rate that is nearly flat over a large range of values for the underlying rate of interest.

pooling of interests: Accounting for a merger by simply adding up the financial statements for the merging firms. To a first approximation, the financial statements of the merged firm show the same numbers as the sum of the financial statements of the merging firms.

purchase method: Accounting for a merger by designating one firm the acquirer, computing "goodwill" as the excess of the acquired firm's purchase price over its book value, and amortizing the goodwill over a period, which depresses income.

price

Clean Price = Quoted Price. What the broker or dealer tells you is the price of a bond = Dirty Price - Accrued Interest.

Dirty Price = Invoice Price = Full Price. The size of the check you write to buy a bond = Clean Price + Accrued Interest

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

Preferred Share: A share that pays a fixed dividend and has preferences over Common Stock (q.v.) with regard to dividends and in case of bankruptcy.

probability measure: A measure (q.v.) that maps a set of points in a probability space into a point in the interval [0,1]. Example: If the probability space corresponding to two flips of a fair coin is W = {HH, HT, TH, TT}, and we have the set of all outcomes with tails once out of two flips, A = {HT, TH}, then the probability of that outcome is P(A) = 1/2 and P(.) is the probability measure that assigns a probability of 1/4 to each of the points in the probability space.
project finance: Raising money via a loan or bond issue to build a specific project (such as a power plant, hydroelectric dam, or airport) and having only that project as security for the loan or bond. Thus, a project loan is typically "without recourse" or "non recourse" and a project bond is typically a revenue bond.
Protected Exchangeable EQuity-linked Securities: The Morgan Stanley Group, Inc.'s proprietary, listed (American Stock Exchange) equity index derivative product, which pays off at maturity (4/20/01) the greater of issue price ($69.55) or 10% of the S&P 500 Index value on that date. The owner may from 11/17/97 to seven trading days before 4/20/01) exchange 100 PEEQS for ten times the S&P 500 Index level. Thus, at each dividend date, the owner has the option to forgo the dividend in return for a compound option that ultimately pays off as mentioned. (Cf. SPINs.)

Putable Bond: Definition: A Bullet Bond (q.v.) that the bondholder can force the issuer to buy back at a scheduled price. The Put Price as a function of calendar time is the Put Schedule. A Bullet Bond plus a Put Option (q.v.) on the Bond. AKA Retractable Bond.; Example: A corporation might issue a ten-year Note (q.v.) with a five-year Put Option.; Application: A Putable Bond is a bet on the cost of refinancing at the Put Date. The issuer is betting that the Put Option will expire worthless – i.e., that interest rates will be low at the Put Date. The bondholder is betting that interest rates will rise, the bond price will fall, he will be able to sell the bond back to the issuer at a profit, and he will be able to reinvest the proceeds of that sale in a bond with a higher coupon.; Pricing: You can price it as a bond, plus a put option on the bond. For it to sell near par requires a low coupon.; Risk Management: For example, suppose that a corporation issues a ten-year bond with an embedded five-year European Put Option. It is exposed to the danger of rising interest rates, in which case the bondholder will put the bond back to the issuer. However, if the issuer also buys a Payer Swaption, struck at the same coupon as the bond, then it will be able to issue floating rate debt to repay the principal on the bond and exercise the Swaption to continue paying the same fixed rate. The floating rate receipts from the Swaption will roughly cover the new floating rate debt interest.; Comment: Cf. Callable Bond, Extendible Bond.
Put Option: The right, but not not the obligation, to sell the underlying asset at the strike price. Cf. Call Option.

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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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Derivatives DictionaryTM (N-P) Last revised: August 03, 2001

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Derivatives Dictionary^TM (N-P) Last revised: August 03, 2001