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DictionaryTM (U-Z,#) Lasted
updated: 08/03/01
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 #
- U -
- U.K. Mips
- Goldman, Sachs's variation on its Mips (q.v.)
structure, tailored to maximize its advantages for the UK
market in ways that the U.S. government wouldn't allow.
Grand Metropolitan Delaware (limited partnership) issued
20 million "preferred securities" paying
quarterly dividends at $25, lending the proceeds to Grand
Metropolitan plc via a perpetual, subordinated loan with
the seniority of preferred stock. (Source: Pratt, Tom.
"Goldman modifies 'Mips' to land Grant Met
deal." IDD, Nov. 7, 1994, p. 11.)
-
- Up-and-in Option
- An option that pays off nothing, unless the underlying
price rises to an upper barrier. Cf. Up-and-out Option.
-
- Up-and-out Option
- An option that pays off as the corresponding ordinary
option, unless the underlying price rises to an upper
barrier. Cf. Up-and-in Option.
- V -
- value date
- 1. In the Eurodeposit and FX markets, the delivery date for funds
traded. For the spot market it would be the spot date, ordinarily two
business days after the transaction. For the forward market it would be a
future delivery date. In the bond market (usually), the date on which the
buyer begins to earn interest.
2. The date on which a bond buyer begins accruing interest
on the bond. This may be the same as the settlement date
(q.v.). (J.P.
Morgan Glossary of terms for global sovereign
bond markets.
- vanna
- The sensitivity of vega (also known as kappa) to a change in the
underlying price. Hence, (a) the first derivative of vega (kappa)
with respect to a change in the underlying, (b) the first derivative of
delta with respect to a change in volatility, and (c) the second
derivative of option value with respect to a changes in volatility and
underlying.
-
- Variable Common Right
- Viacom issued VCRs in connection with its takeover of
Blockbuster. (Source: Falloon, William. "The $48 and
$52 Questons." Risk 8 (April 1995), pp. 48
ff.)
-
- Such a VCR is basically equivalent to a bearish Put
Spread (long a Put struck at 52, short a Put struck at
48). The underlying price is the highest of four 30-day
Arithmetic Averages for the price of Viacom Class B
shares. The four 30-day averaging periods are distinct
periods during the pricing period, May 23 - Sep. 28,
1995. To make manipulation more difficult, Viacom agreed
not to buy its Class B shares during the pricing period.
(Source: Bary, Andrew. "Drama at Viacom." Barron's,
August 21, 1995, p. MW10.)
-
- 4/28/00 variance
swap
-
- Definition:
A contract that pays off an amount proportional to the difference between
the realized variance over a specific period of time and the contractual
variance.
Example: If the realized, annualized
standard deviation of the rate of return on the S&P 500 is 40% and the
contractual variance is 9%, then the net payoff on the side receiving the
realized variance on $100 million notional value for half a year is
$3,500,000 = $100,000,000 x (0.42-0.09) x 0.5.
Application: The variance
swap is a potential tool for managing the sensitivity of an option book to
volatility risk.
-
- VDAXâ
- The DAXâ (q.v.)
volatility index, which measures the Black-Scholes
implied volatility of a basket of DAXâ options. The Deutsche Börse has
published it since 7/97. (Source: http://www.exchange.de/fwb/indices.html#volind).
-
- VIX
- The ticker symbol for the Chicago Board Options Exchange
Volatility Index.
- Vol-Vol
- The volatility of volatility. This presupposes that
volatility is a random market risk factor, which is a lot
more reasonable than the original assumption of the
incredibly robust Black-Scholes model, that it is known
and constant.
-
- Volatility
- The annualized standard deviation of the percentage
change in a risk factor.
-
- 4/28/00 volatility
convexity
-
- Definition:
The sensitivity of vega
= dvalue/dvol (a.k.a. kappa) as a function of volatility to a change in
volatility, also known as "dvega/dvol", where dvega/dvol
= d2value/dvol2. Volatility convexity
is to vega (kappa) as gamma is to delta and convexity is to
duration. Also known as "vomma" (q.v.).
Application: The volatility
convexity shows the deviation from a vega (kappa) neutral hedge when the
volatility moves, just as the gamma or convexity shows the deviation from
a delta or duration neutral hedge when the underlying price or yield
moves.
Source: Howard Savery, "Quantifying Volatility
Convexity," Derivatives Strategy, 2/2000, pp. 54-55.
-
-
- VOLAXâ
Future
- A futures contract based on the VDAXâ (q.v.) volatility index
for the DAXâ stock
index.
-
- vomma
- The sensitivity of vega (also known as kappa) to a change in volatility.
Hence, the second derivative of option value with respect to a change in
volatility.
-
- vulnerable option
- 1. "[An option] on a defaultable instrument, subject
also to their issuer's default risk. Ex: A put issued by
a shaky bank on a corporate bond issued by a third
party."
- (Giovanni Barone-Adesi, private email correspondence,
9/10/98.)
2. An option "subject to the additional risk that
the writer of the [option] might default."
(Robert J. Jarrow and Stuart Turnbull, Derivative
Securities, Cincinnatti, South-Western, 1996, p.
575.)
- W -
- Warrant
- An option that a corporation issues, with its own shares
as the underlying asset. The crucial implication is that
exercise of the option changes the number of claims
against the corporation's assets. Thus, the pricing
equations for Call (Put) Warrants and ordinary Call (Put)
Options differ by the dilution (antidilution) effect.
Empirically, warrants are options with a long time to
expiration, which may be several or many years, or even
decades or an infinite time. An option on asset A that
party B issues and lists on an exchange. Party B might a
corporation, a government, etc. Endowment Warrants (q.v.).
Installment Warrants (q.v.).
-
- 4/28/00 weather
derivatives
-
- Definition:
Derivative products whose values depend on risky weather variables,
such as temperature, precipitation, or dollar damage from extreme weather.
Example: Options on heating or cooling degree
days, hurricane-based catastrophe bonds.
Application: An insurer or reinsurer who wanted to lay of f some risk
in the capital markets might issue a bond that repaid principal as a
function of the loss rate for Florida East Gulf Coast property casualty
rates.
Pricing: The pricing models are sensitive to assumptions, as usual.
Historical results depend on the historical period. With global warming
and El Nino, pricing isn't simple.
Risk
Management:
Catastrophe contracts are simple ways of laying off
weather risk.
-
- WEBS
- World Equity Benchmark Shares (q.v.).
-
- When Issued Market
- The market for forthcoming On-the-Run (q.v.)
securities.
-
- widget
- A brand of listed security representing a claim against a
share or basket of shares. A widget with an underlying
index or basket is comparable to SPDRS (q.v.) or
WEBS (q.v.) listed on the American Stock Exchange,
but can have a different underlying portfolio. A widget
with an underlying share is comparable to an ADR (q.v.).
W.I. Carr Indosuez of Hong Kong created and listed
widgets on the Luxembourg Stock Exchange. (Rachel
Horsewood, "What's in a Name – Introducing the
Widget," AsiaRisk, August 1997.) The main
advantage is reducing the transaction cost for investing
in a basket of shares.
-
- World Equity Benchmark Shares
- Each WEBS share is a claim on a portfolio of publicly
traded shares in a particular country. That portfolio
corresponds more or less to the MSCI portfolio for that
country. All WEBS shares are listed on the American Stock
Exchange and trade in dollars. Roughly speaking, each
WEBS is to an MSCI Indexes of foreign stocks what Spiders
(q.v.) are to the S&P 500 Index of U.S.
stocks.
-
- Foreign Fund, Inc. issues all WEBS shares. Any investor
can create (redeem) a "Creation Unit" –
i.e., a fixed number – of WEBS shares by depositing
the appropriate underlying shares, plus cash expenses
(WEBS shares) with an "Authorized Participant"
in exchange for WEBS shares (underlying shares, less cash
expenses). That makes a WEBS share like a share in an
open end investment company (mutual fund).
-
- WEBS are listed and trade exactly like shares in a closed
end fund and other ordinary shares. A trader can sell
them whenever the American Exchange is open, and can sell
them short. However, it is possible to create or redeem
shares continuously, as with mutual fund shares.
-
- Any of the underlying shares may pay a dividend. The
country that is the source of dividends for the
underlying shares of WEBS may withhhold dividend income.
Foreign Fund, Inc. retains dividend income temporarily,
deducts expenses, and distributes the remainder at least
each year.
-
- The I.R.S. treats dividends and capital gains in a manner
similar to the way it treats them for a mutual fund
holding foreign shares.
-
- (Funds Distributor, Inc. World Equity Benchmark
Shares; Questions and Answsers. 1996.)
-
- WEBS and a competitive family of international mutual
funds, CountryBaskets hit the market in the first half of
March, 1996. (Peter C. Du Boi, "Deutsche Bank,
Morgan Stanley Offer Ways to Play Foreign Indexes on U.S.
Exchanges," Barron's, 3/11/96.) Apparently,
WEBS won the battle in the marketplace, and Deutsche
Morgan Grenfell plans to dissolve the CountryBasket funds
in March, 1997. (Maureen Nevin Duffy, "Deutsche MG
Dumps Baskets," Financial Trader, 3/97.)
-
- Worst-of-Two Option
- A payoff which equals the minimum of two option payoffs,
such as the minimum of a call on asset 1 and a put on
asset two. Cf. Best-of-Two Option.
- X -
- Xerxes
- The sensitivity of Convexity (q.v.) to a change in
yield.
- The "Convexity" of Modified Duration (q.v.).
- The third derivative of a financial instrument's value
with respect to its yield.
- (Source: "Derivative Mortgage Securities
Glossary," Dean Witter, Mortgage Backed Securities
Department, Derivative Products Group, January 1995.)
-
- Hedging so that Xerxes equals zero is one step beyond
Convexity hedging, which is itself one step beyond
matching durations of one's investment and (short) hedge
portfolio. In theory, such a hedge would require
relatively little rebalancing.
- Y -
-
- Yankee market
- The U.S. foreign market (q.v.). The market in
the U.S. for securities that non U.S . companies and
governments issue. Example: Some shares of Nomura
Securities trade in New York in the U.S. foreign market.
- yard
- Definition: One billion units of a
currency.
Usage: "I’ve got a customer who wants to
buy a yard of Mexican pesos. Price, please." The
customer wants to buy a billion pesos.
- YEELDS
- Yield Enhanced Equity Linked Debt
Securities (sm). Lehman Brothers' proprietary
synthetic Equity Linked Debt Security (q.v.).
Lehman issues the security, which pays a high coupon
until maturity, then pays the value of the underlying
common stock (not Lehman's) – up to a cap, such as
150% of the issue price. (Pratt, Tom. "Lehman's new
'Yeelds' trade on the Amex – or do they?" IDD,
Aug. 22, 1994, p. 10.)
-
- Yield Burning
- Definition: The IRS's name for the dealer's crime
of overcharging state and local governments and
authorities for Treasury securities that they use in
"advanced refunding" of old,
high-yielding municipal bond issues with new,
low-yielding ones.
- Application: After interest rates decline, the
tax-exempt entities issue new bonds with low coupons and
use the proceeds to buy just enough Treasury bonds to
cover the higher coupons on the old bonds. If the entity is able to use
less than the full proceeds of the new bond issue to buy the Treasuries,
thus, turning a profit, the IRS taxes this profit. If the bond dealer
marks up the Treasuries above market to reduce the profit, this reduces
the IRS take. "Michael Lissack, a former managing director of Smith Barney who identified the arcane and complex
practice [of yield burning], originally filed the suit [against various
bond dealers].
...
"As recently as 1996, the Department of Justice had not definitively decided that yield burning falls under the federal False Claims Act.
...
"The government's had difficulty pursuing allegations of yield burning because the bond issuers are often unaware of the price gouging, as it can be done without affecting the issuer's savings on the refunding."
(Michael Brick, "Deutsche Bank Alex. Brown to Pay Over $15 Million to Settle Yield-Burning Suit,"
NYTimes.com/TheStreet.com, http://www.nytimes.com/yr/mo/day/news/financial/17alex.html,
11/17/99.)
- Example: "For example, the lawsuit alleges that Alex. Brown secretly charged the state of Pennsylvania a markup of 4.5 basis points instead of 0.45 basis points in a $494 million bond offering in March 1994. The federal government was defrauded, according to the I.R.S., because it could have collected taxes on the profits if the lower amount was charged."
(Brick, op.cit.)
- Comment: While charging what the market will bear
may come naturally to a competent dealer, it is against
the law in many cases. Woe be to the dealer who charges
an excessive markup in the OTC stock market or to
municipal refunders in the market for Treasury
securities.
- Z -
- Z-Bond
- A CMO (q.v.) tranche (q.v.) that resembles
a Zero Coupon Bond (q.v.) and ordinarily has
neither the first, nor the last claim on the CMO’s
underlying cash flows and asset value. Hence, the Z-Bond
has significant Credit Risk (q.v.) and Market Risk
(q.v.).
-
- ZENS
- Zero-coupon exchangeable notes. Equity-linked notes that pay at maturity
the greater of 100% of the appreciated value of original principal
invested in stock or the original principal amount. Any time before
maturity, the bondholders can exchange the bonds for 95% of the
appreciated value of the corresponding stock. The bondholders pay for
their embedded options by accepting a lower coupon plus quarterly dividend
payments. ("RELIANT ISSUES $1b IN EQUITY-LINKED NOTES," Power
Finance & Risk, 9/27/99.)
-
- ZEPO
- A Zero Exercise Price Option (q.v.).
-
- Zero Cost Collar
- Aka "Costless Collar". A howlingly funny
misnomer. "Hidden-cost Collar" would be more
accurate. Think about it. A dealer won't do a transaction
for you if it doesn't cost you something, because his
revenue is your transaction cost. The purchase of a put
option financed by the sale of a call.
-
- Zero Coupon Bond
- A bond that pays no coupon, just par at maturity.
-
- Zero Exercise Price Option
- A European Call Option with strike price of zero. The
owner will certainly exercise it, so it is equivalent to
owning the underlying asset without receiving the cash
flow (dividends or interest) through expiration. (Source:
Australian
Financial Review Dictionary of Investment Terms.)
-
- Zero Gain Collar
- A Costless Collar (q.v.) consisting of a short
Call (q.v.) and long Put (q.v.), where the
short Call's strike is ATM (q.v.). Hence, when
owned in combination with a long position in the
underlying, the Zero Gain Collar gives up all the
underlying's upside gain, and the combined position can
never show a profit.
- 4/28/00 zeta
- Definition:
The market value of an option, less its model value, using the ATM implied
vol for the same expiration.
Application: Zeta is a measure
of the importance of using the volatility smile, rather than only the ATM
volatility.
Source: Howard Savery, "Quantifying Volatility
Convexity," Derivatives Strategy, 2/2000, pp. 54-55.
-
- # -
- 1M, 2M, 3M, 6M, 12M
- Refers to a loan or swap with initial cash flows on spot date
(ordinarily, two business days) and cash flows in the opposite direction
one, two, three, six, or twelve months later. In the Eurodeposit and FX
markets, the delivery date for funds traded. For the spot market it would
be the spot date, ordinarily two business days after the transaction. For
the forward market it would be a future delivery date. In the bond market
(usually), the date on which the buyer begins to earn interest.
-
- 1978
International Banking Act
- The U.S. law that instructs the Fed to delete any regulations that put
U.S. banks at a disadvantage, relative to U.S. branches of foreign banks.
- 7/28/00 3-1
ARM
- An adjustable-rate mortgage loan that has a fixed
rate for three years, then adjusts to market conditions each year.
- 50
at 7
- Floor trader language meaning that the trader is offering 50 contracts
at 7 (or 7/32nds, etc.) per contract. (Source: Charles di Francesca, as
quoted by William D. Falloon in "God Doesn't Trade Bonds," Derivatives
Quarterly, Fall 1999.)
-
- 6
bid at 7
- Floor trader language meaning that the trader is making a market,
bidding 6 and offering at 7 or 6/32nds and 7/32nds, etc. (Source: Charles
di Francesca, as quoted by William D. Falloon in "God Doesn't Trade
Bonds," Derivatives Quarterly, Fall 1999.)
-
- 6
for 50
- Floor trader language meaning that the trader is bidding 6 (or 6/32nds,
etc.) per contract on 50 contracts. (Source: Charles di Francesca, as
quoted by William D. Falloon in "God Doesn't Trade Bonds," Derivatives
Quarterly, Fall 1999.)
-
- 88888
- The number of the account that Nick Leeson of Barings
allegedly opened in July 1992 and used to hide trading
losses that accumulated to GBP 830 million by February,
1995.
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