DAC-RAP: Delivery against collateral – receipt against payment. Same as DVP.
Daily range: The difference between the high and low points of a single trading day.
Day count: The convention used to calculate accrued interest on bonds and interest on cash. For UK gilts the convention changed to actual/actual from actual/365 on 1 November 1998. For cash the convention in sterling markets is actual/365.
DBV (delivery by value): A mechanism whereby a CREST/CGO member may borrow from or lend money to another CREST/CGO member against overnight gilt collateral. The CREST/CGO system automatically selects and delivers securities to a specified aggregate value on the basis of the previous night’s CREST/CGO reference prices; equivalent securities are returned the following day. The DBV functionality allows the giver and taker of collateral to specify the classes of security to included within the DBV. The options are: all classes of security held within CREST/CGO, including strips and bulldogs; coupon bearing gilts and bulldogs; coupon bearing gilts and strips; only coupon bearing gilts.
DEaR: Daily earnings at risk.
Debenture: In the US market, an unsecured domestic bond, backed by the general credit quality of the issuer. Debentures are issued under a trust deed or indenture. In the UK market, a bond that is secured against the general assets of the issuer.
Debt capital: Capital raised by governments and corporate institutions that is raised through issuance of bonds.
Debt Management Office (DMO): An executive arm of the UK Treasury, responsible for cash management of the government’s borrowing requirement. This includes responsibility for issuing government bonds (gilts), a function previously carried out by the Bank of England. The DMO began operations in April 1998.
Default correlation: The degree of covariance between the probabilities of default of a given set of counterparties. For example, in a set of counterparties with positive default correlation, a default by one counterparty suggests an increased probability of a default by another counterparty.
Default probability: See probability of default.
Default risk: See credit risk.
Default risk exposure: See credit risk exposure.
Default start options: Options purchased before their "lives" actually commence. A corporation might, for example, decide to pay for a deferred start option to lock into what it perceives as current advantageous pricing for an option that it knows it will need in the future.
Deferred strike option: Option where the strike price is established at a future date on the basis of the spot foreign exchange price prevailing at that future date.
Deliverable bond: One of the bonds which is eligible to be delivered by the seller of a bond futures contract at the contract’s maturity, according to the specifications of that particular contract.
Delivery: Transfer of bonds (in settlements) from seller to buyer.
Delivery versus payment (DVP): The simultaneous exchange of securities and cash. The assured payment mechanism of the CGO achieves the same protection.
Delta: The change in an option’s value relative to a change in the underlying’s value.
Depreciation: A decrease in the market value of a currency in terms of other currencies. See appreciation, devaluation.
Derivative: Strictly, any financial instrument whose value is derived from another, such as a forward foreign exchange rate, a futures contract, an option, an interest rate swap, and so on. Forward deals to be settled in full are not always called derivatives, however.
Devaluation: An official one-off decrease in the value of a currency in terms of other currencies. See depreciation, revaluation.
Digital option: Unlike simple European and American options, a digital option has fixed payouts and, rather like binary digital circuits, which are either on or off, pays out either this amount or nothing. Digital options can be added together to create assets that exactly mirror index price movements anticipated by investors. See one touch all-or-nothing.
Direct: An exchange rate quotation against the US dollar in which the dollar is the variable currency and the other currency is the base currency.
Dirty price: The price of a bond including accrued interest. Also known as the "all-in" price.
Discount: The amount by which a bond is trading below par. In FX markets, amount by which a currency is cheaper, in terms of another currency, for future delivery than for spot.
Discount house: In the UK money market, originally securities houses that dealt directly with the Bank of England in T-bills and bank bills, or discount instruments, hence the name. Most discount houses were taken over by banking groups and the term is not now generally used, as the BoE now also deals directly with clearing banks and securities houses. Following closure of Gerard & King in 2000, the only remaining discount house is Cater Allen (part of Abbey National group).
Discount rate: The method of market quotation for certain securities (US and UK treasury bills, for example), expressing the return on the security as a proportion of the face value of the security received at maturity – as opposed to a yield which expresses the yield as a proportion of the original investment.
Discount swap: Swap in which the fixed-rate payments are less than the internal rate of return on the swap, the difference being made up at maturity by a balloon payment.
Dividend discount model: Theoretical estimate of market value that computes the economic or the net present value of future cash flows due to an equity investor.
DMO: The UK Debt Management Office.
DMR: The Debt Management Report, published annually by HM Treasury.
Down-and-in option: Barrier option where the holder’s ability to exercise is activated if the value of the underlying drops below a specified level. See also up-and-in option.
Down-and-out option: Barrier option where the holder’s ability to exercise expires if the value of the underlying drops below a specified level.
Dual currency option: Option allowing the holder to buy either of two currencies.
Dual currency swap: Currency swap where both the interest rates are fixed rates.
Dual strike option: Interest rate option, usually a cap or a floor, with one floor or ceiling rate for part of the option’s life and another for the rest.
Duration: A measure of the weighted average life of a bond or other series of cash flows, using the present values of the cash flows as the weights. See modified duration.
Duration gap: Measurement of the interest rate exposure of an institution.
Duration weighting: The process of using the modified duration value for bonds to calculate the exact nominal holdings in a spread position. This is necessary because £1 million nominal of a two-year bond is not equivalent to £1 million of say, a five-year bond. The modified duration value of the five-year bond will be higher, indicating that its "basis point value" (bpv) will be greater, and that therefore £1 million worth of this bond represents greater sensitivity to a move in interest rates (risk). As another example consider a fund manager holding £10 million of five-year bonds. The fund manager wishes to switch into a holding of two-year bonds with the same overall risk position. The basis point values of the bonds are 0.041583 and 0.022898 respectively. The ratio of the bpvs are 0.041583/0.022898 = 1.816. The fund manager therefore needs to switch into £10m * 1.816 = £18.160 million of the two-year bond.
DVP: Delivery versus payment, in which the settlement mechanics of a sale or loan of securities against cash is such that the securities and cash are exchanged against each other simultaneously through the same clearing mechanism and neither can be transferred unless the other is.