Cable: The exchange rate for sterling against the US dollar.
CAD: The European Union’s Capital Adequacy Directive.
Calendar spread: The simultaneous purchase/sale of a futures contract for one date and the sale/purchase of a similar futures contract for a different date. See spread.
Call option: An option to purchase the commodity or instrument underlying the option. See put.
Call price: The price at which the issuer can call in a bond.
Callable bond: A bond which provides the borrower with an option to redeem the issue before the original maturity date. In most cases certain terms are set before the issue, such as the date after which the bond is callable and the price at which the issuer may redeem the bond.
Cancellable swap: Swap in which the payer of the fixed rate has the option, usually exercisable on a specified date, to cancel the deal (see also swaption).
Cap: A series of borrower’s IRGs, designed to protect a borrower against rising interest rates on each of a series of dates.
Capital market: Long term market (generally longer than one year) for financial instruments. See money market.
Capital structure arbitrage: A trade strategy pursued by hedge funds and banks. It involves a play of a company's debt against its equity. Generally this is done using derivatives rather than cash instruments, so it involves putting a on a long/short Credit Default Swap position in a specific reference entity name against a short/long equity option position in the same name. Both are usually OTC although one could trade the latter as an exchange-traded option. The idea is to make money because of either perceived mispricing of the debt against the equity or one expects the relative value of one against the other to change in a particular direction.
Caption: Option on a cap.
Cash: See cash market.
Cash market: The market in instruments that represent actual cash, which is an on-balance sheet asset. For example, an interbank deposit of £10 million represents £10 million by value of funds placed in the deposit institution. Bonds are cash instruments.
Cash-and-carry: The US market term for basis trading, an arbitrage-type trade in which a simultaneous position in cash bond and associated bond futures contract is put on, with a view to exploiting price differentials between the spot price of the bond and the future price implied by the current price of the bond future. A cash-and-carry trade is a long bond/short futures position, while the opposite of short the bond and long the future is known as a reverse cash-and-carry.
CBOT: The Chicago Board of Trade, one of the two futures exchanges in Chicago, USA and one of the largest in the world.
CD: See certificate of deposit.
Cedel: Centrale de Livraison de Valeurs Mobilieres; a clearing system for Euro-currency and international bonds. Cedel is located in Luxembourg and is jointly owned by a number of European banks. Subsequently renamed Clearstream on merger with Deutsche Bourse.
Ceiling: The same as cap.
Central Gilts Office: The office of the Bank of England which runs the computer-based settlement system for gilt-edged securities and certain other securities (mostly bulldogs) for which the Bank acts as Registrar. Subsequently merged with CREST.
Central limit theorem: The assertion that as sample size, n, increases, the distribution of the mean of a random sample taken from almost any population approaches a normal distribution.
Certificate of Deposit (CD): A money market instrument of up to one year’s maturity (although CDs of up to five years have been issued) that pays a bullet interest payment on maturity. After issue, CDs can trade freely in the secondary market, the ease of which is a function of the credit quality of the issuer.
CGBCR: Central Government Net Cash Requirement.
CGBR: Central Government Borrowing Requirement.
CGO reference prices: Daily prices of gilt-edged and other securities held in CGO which are used by CGO in various processes, including revaluing stock loan transactions, calculating total consideration in a repo transaction, and DBV assembly. Also known as CREST prices or DMO prices.
Cheapest to deliver (CTD): In a bond futures contract, the one underlying bond among all those that are deliverable, which is the most price-efficient for the seller to deliver.
Cherry-picking: See bilateral netting.
Classic repo: Repo is short for "sale and repurchase agreement" – a simultaneous spot sale and forward purchase of a security, equivalent to borrowing money against a loan of collateral. A reverse repo is the opposite. The terminology is usually applied from the perspective of the repo dealer. For example, when a central bank undertakes repos, it is lending cash (the repo dealer is borrowing cash from the central bank).
Clean deposit: The same as time deposit.
Clean price: The price of a bond excluding accrued coupon. The price quoted in the market for a bond is generally a clean price rather than a dirty price.
Clearing house: The body that settles trades on a futures exchange, and which acts as the counterparty to every transaction. The clearing house is able to guarantee settlement by charging margin to all exchange participants, which is used to establish a default fund.
Clearstream: The international bond market clearing system, resulting from a merger between CEDEL and Deutsche Bank.
Close-out netting: The ability to net a portfolio of contracts with a given counterparty in the event of default. See also bilateral netting.
Closing leg: In a repo transaction, the termination of the trade when the bonds (or other assets) are returned against receipt of borrowed funds and repo interest.
CMO: Central Moneymarkets Office which settles transactions in Treasury bills and other money markets instruments, and provides a depository (in the UK). Now merged with CREST.
CMTM: Current mark-to-market value. See current exposure and replacement cost.
Collar: The simultaneous sale of a put (or call) option and purchase of a call (or put) at different strikes – typically both out-of-the-money.
Collateral: Something of value, often of good creditworthiness such as a government bond, given temporarily to a counterparty to enhance a party’s creditworthiness. In a repo, the collateral is actually sold temporarily by one party to the other rather than merely lodged with it.
Commercial paper: A short-term security issued by a company or bank, generally with a zero coupon.
Commodity swap: Swap where one of the cash flows is based on a fixed value for the underlying commodity and the other is based on a floating index value. The commodity is often oil or natural gas, although copper, gold, other metals and agricultural commodities are also commonly used. The end-users are consumers, who pay a fixed-rate, and producers.
Competitive bid: A bid for the stock at a price stated by a bidder in an auction. Non-competitive bid is a bid where no price is specified; such bids are allotted at the weighted average price of successful competitive bid prices.
Compound interest: When some interest on an investment is paid before maturity and the investor can reinvest it to earn interest on interest, the interest is said to be compounded. Compounding generally assumes that the reinvestment rate is the same as the original rate. See simple interest.
Compound option: Option on an option, the first giving the buyer the right, but not the obligation, to buy the second on a specific date at a pre-determined price. There are two kinds. One, on currencies, is useful for companies tendering for overseas contracts in a foreign currency. The interest rate version comprises captions and floortions.
Consideration: The total price paid in a transaction, including taxes, commissions and (for bonds) accrued interest.
Contango: The situation when a forward or futures price for something is higher than the spot price (the same as forward premium in foreign exchange). See backwardation.
Contingent option: Option where the premium is higher than usual but is only payable if the value of the underlying reaches a specified level. Also known as a contingent premium option.
Continuous compounding: A mathematical, rather than practical, concept of compound interest where the period of compounding is infinitesimally small.
Contract date: The date on which a transaction is negotiated. See value date.
Contract for differences: A deal such as an FRA and some futures contracts, where the instrument or commodity effectively bought or sold cannot be delivered; instead, a cash gain or loss is taken by comparing the price dealt with the market price, or an index, at maturity.
Conventional gilts (included double-dated): Gilts on which interest payments and principal repayments are fixed.
Conversion factor: In a bond futures contract, a factor to make each deliverable bond comparable with the contract’s notional bond specification. Defined as the price of one unit of the deliverable bond required to make its yield equal the notional coupon. The price paid for a bond on delivery is the futures settlement price times the conversion factor.
Convertible currency: A currency that may be freely exchanged for other currencies.
Convexity: A measure of the curvature of a bond’s price/yield curve (mathematically).
Corporate bond: A cash debt instrument that has been issued by a corporate, and is therefore an IOU issued by the company and which it is obliged to redeem in accordance with its contractual terms.
Correlation matrices: Statistical constructs used in the value-at-risk methodology to measure the degree of relatedness of various market forces.
Corridor: The same as collar.
Cost of carry: The net running cost of holding a position (which may be negative) – for example, the cost of borrowing cash to buy a bond less the coupon earned on the bond while holding it.
Counterparty risk weighting: See risk weighting.
Country risk: The risks, when business is conducted in a particular country, of adverse economic or political conditions arising in that country. More specifically, the credit risk of a financial transaction or instrument arising from such conditions.
Coupon: The interest payment(s) made by the issuer of security to the holders, based on the coupon rate and the face value.
Coupon swap: An interest rate swap in which one leg is fixed-rate and the other floating-rate. See basis rate.
Covariance: A statistical measure of how much two ransom variables are related to each other.
Cover: To cover an exposure is to deal in such a way as to remove the risk – either reversing the position, or hedging it by dealing in an instrument with a similar but opposite risk profile. Also the amount by how much a bond auction is subscribed.
Covered call/put: The sale of a covered call option is when the option writer also owns the underlying. If the underlying rises in value so that the option is exercised, the writer is protected by his position in the underlying. Covered puts are defined analogously. See naked.
Covered interest arbitrage: Creating a loan/deposit in one currency by combining a loan/deposit in another with a forward foreign exchange swap.
CP: See commercial paper.
Credit (or default) risk: The risk that a loss will be incurred if a counterparty to a derivatives transaction does not fulfil its financial obligations in a timely manner.
Credit derivatives: Financial contracts that involve a potential exchange of payments in which at least one of the cash flows is linked to the performance of a specified underlying credit-sensitive asset or liability. Payment is made by the seller of credit protection, to the buyer, in the event of a specified credit event.
Credit risk (or default risk) exposure: The value of the contract exposed to default. If all transactions are marked to market each day, such positive market value is the amount of previously recorded profit that might have to be reversed and recorded as a loss in the event of counterparty default.
Credit spread: The interest rate spread between two debt issues of similar duration and maturity, reflecting the relative creditworthiness of the issuers.
Credit value-at-risk (CVAR): See value-at-risk (VAR).
Credit-equivalent amount: As part of the calculation of the risk-weighted amount of capital the Bank for International Settlements (BIS) advises each bank to set aside against derivative credit risk; banks must compute a credit-equivalent amount for each derivative transaction. The amount is calculated by summing the current replacement cost, or market value, of the instrument and an add-on factor.
CREST: The paperless share settlement system through which trades conducted on the London Stock Exchange can be settled. The system is operated by CRESTCo and was introduced in 1996.
CRND: Commissioners for the Reduction of the National Debt, formally responsible for investment of funds held within the public sector e.g., National Insurance Fund.
Cross: See cross-rate.
Cross-rate: Generally an exchange rate between two currencies, neither of which is the US dollar. In the American market, spot cross is the exchange rate for US dollars against Canadian dollars in its direct form.
CTD: See cheapest to deliver.
Cum-dividend: literally "with dividend", stock that is traded with interest or dividend accrued included in the price.
Cumulative default rate: See probability of default.
Currency option: The option to buy or sell a specified amount of a given currency at a specified rate at or during a specified time in the future.
Currency swap: An agreement to exchange a series of cash flows determined in one currency, possibly with reference to a particular fixed or floating interest payment schedule, for a series of cash flows based in a different currency. See interest rate swap.
Current assets: Assets which are expected to be used or converted to cash within one year or one operating cycle.
Current exposure: The risk exposure, whether this is market, credit or operational risk, to liabilities that are ongoing.
Current liabilities: Obligations which the firm is expected to settle within one year or one operating cycle.
Current yield: Bond coupon as a proportion of clean price per 100; does not take principal gain/loss or time value of money into account. See yield to maturity, simple yield to maturity.
Cylinder: The same as collar.