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FAQ's Treasury
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A Accrual Swap An interest rate swap where interest on one side accrues only when a certain condition is met. Alternative Trading System (ATS) Systems that offer additional means of trading compared to estabilshed exchanges. They operate electronically (lowering transaction costs) and focus on services that established exchanges do not always provide (e.g. central limit order book, after hours trading or direct access for institutional owners). AMEX American Stock Exchange Arbitrage Profiting from differences in price when the same security, currency or commodity is traded in two or more markets.
B Basis point 1/100 of 1 percent, i.e. 0.01% used to express a yield spread or differential; 25 basis points is 0.25 percent. Benchmark Value used as a reference or means of comparison for measuring the performance of an investment. Beta A measure of the systematic risks of an asset. Bid/Offer A bid indicates a desire to buy a commodity at a given price, whereas an offer indicates a desire to sell a commodity at a given price. Bond A bond is a debt instrument and includes the promise of the debtor to repay a sum of money at a certain interest rate over a certain period of time. Most bonds pay a fixed rate of interest for a fixed period of time. Broker Intermediary who negotiates deals between banks. In most money centres brokers do not act as intermediaries between banks and commercial users of the market. Brokerage is the commission charged by broker for this service. Bull/Bear Market A bull market is market where prices are rising, opposite to a bear market, where prices are declining.
C CEE Central and Eastern Europe Central Counterparty An intermediary which takes over the obligation of either side in respect of a trade. After clearing with a central counterparty, the two trading parties no longer have an obligation towards each other, but rather towards the central counterparty, which thereby assumes any replacement cost risk resulting from market moves between time of trade and the time of settlement. Clearing The process of transmitting, reconciling and in some cases, confirming payment order and the securities transfer prior to settlement. In the context of repos, this can have three separate aspects: confirmation/matching, netting and clearing with the central counterparty. Collateral Assets held to secure an obligation. Compliance Policing by financial institutions to ensure that applicable regulators rules are obeyed. Credit risk The risk of loss from a counterparty who is unwilling or unable to settle its side of a transaction. Counterparty The opposite side in a financial transaction. Coupon Interest payment made on a bond. Cross Rate An exchange rate for two inactively traded currencies to be determined through relationship to a widely traded third currency. Customers of Treasury Financial Institutions, Central Banks, local corporates, multinational corporates, insurance companies.
D Day Trade A trade that is entered into and closed out on the same day. Delta The rate of change of the price of a derivative with the price of the underlying asset. Delta Hedging A hedging scheme that is designed to make the price of a portfolio of derivatives insensitive to small changes in the price of the underlying asset. Derivatives A financial instrument, whose value depends on or is derived from the value of an underlying commodity, security or other derivative instruments.
E EONIA EONIA stands for Euro Overnight Index Average and is an effective overnight rate computed as a weighted average of all overnight unsecured lending transactions in the interbank market, initiated within the euro area by the contributing panel banks. EURIBOR EURIBOR stands for Euro Interbank Offered Rate and is the rate at which Euro interbank term deposits within the euro zone are offered by one prime bank to another prime bank. Eurosystem The European Central Banks and the national banks of the EU member States which have adopted the EURO. Exposure Sensitivity to a source of risk.
F Financial Markets Markets that deal with cashflows over time, where the savings of lenders are allocated to the financing needs of borrowers. Fixing The settling of the price of a commodity (e.g. gold, foreign exchange rate )at a certain time. Fixed rate Calculation of interest as a constant specifies percentage of the principal amount payable over an agreed term. Floating Rate Interest rate is periodically determined according to the terms of the transaction (e.g. 3 or 6 month basis). FTSE 100 Stock index of the 100 largest companies listed at the London Stock Exchange. It is calculated and maintained by FTSE International Ltd. FTSE International Ltd. Index provider co-owned by the Financial Times (FT) and the London Stock Exchange (LSE) Future An agreement to buy or sell a standard quantity of a specific commodity on a future date at an agreed price.
G Gamma The rate of change of delta with respect to the asset price. Greeks Hedge parameters such as delta, gamma, vega, theta and rho.
H Hedging A transaction that reduces the price risk of a commodity position (e.g. Foreign Exchange,- or Interest Rate position) by making the appropriate offsetting derivative transaction. Historical volatility A volatility estimated on historical data.
I IPO Initial public offering. A company's first offering of stock to the public. Insider trading Use of privileged information that, once it becomes public, will move the price of the share by someone to profit from this knowledge, having generally acquired the information through their job. This practice is illegal in most markets. Intermediary An institution or person (e.g. a broker) that channels funds from surplus spending organisations to deficit spending organisations. Interbank Trading Trading between highly experienced traders in various financial instruments like: Interest Rates, Foreign Exchange, Derivatives etc. Interest rate risk This is the exposure due to changes in the levels of interest rates. Changes in the interest rates have an impact on interest bearing on-, and off balance sheet assets and liabilities. IRS Stands for Interest Rate Swap and implies the exchange between counterparties of a fixed interest rate and a floating interest rate in a single currency. ISDA The International Swaps and Derivatives Association (ISDA) is the global trade association representing leading participants in the privately negotiated derivatives industry, a business which includes interest rate, currency, commodity, credit and equity swaps, as well as related products such as caps, collars, floors and swaptions. J Junk bond A bond which pays a high yield due to significant credit risk.
Kappa See vega.
L Leverage Company debt expressed as a percentage of equity capital. High leverage means that debts are high in relation to assets. The equivalent UK term is gearing. LIBOR LIBOR stands for the London Interbank Offered Rate and is the rate of interest at which banks borrow funds from other banks, in marketable size, in the London interbank market. LIFFE London International Financial Futures and Options Exchange. Liquidity risk The risk of a company‘s working capital becoming insufficient to meet near term financial demands. Listing Acceptance of a share for trading by one of the organised and recognised stock exchanges. Listing increases the liquidity of a share and therefore increases demand from investors. Listing increases the price investors are willing to pay for a share. Long position A position which entails ownership or effective ownership of an asset.
M Market capitalisation Value of a corporation as determined by the market price of its issued and outstanding common stock. Market maker An institution/dealer who supplies prices and is prepared to buy or sell at those stated bid and ask prices. Market makers are generally large financial institutions. Market User Parties which are using various markets to trade commodities or hedging their exposure. Mark-to-market credit exposure Credit exposure based upon the current market values of a counterpary's obligations. Mine Expression sometimes used to indicate that the contracting party is willing to buy at the rate offered by the quoting bank. Minimum Reserve All credit institutes and banks must deposit a certain amount of money with their local Central Bank. The amount of this minimum reserve of a credit institute is determined in relation to elements of its balance sheet. The minimum reserve system is intended to pursue the aims of stabilising money market interest rates, creating or enlarging a structural liquidity shortage and possibly contributing to the control of monetary expansion. Compliance with the reserve requirement is determined on the basis of the institutions average daily reserve holdings over a one month maintenance period.
N Netting The reduction of offsetting obligations to a single "net" obligation. NYSE New York Stock Exchange
O Option A financial contract that provides the holder the right but not the obligation to buy or sell a financial asset at a specified price. Order book A centralised market where prices are determined by an order executi9on algorithm from participants sending firm buy and sell orders. OTC Stands for over-the-counter. Bilateral transactions not conducted on a formal exchange.
P Panel bank The contributors to EURIBOR are the banks with the highest volume of business in the euro zone money markets. The panel of banks contributing to EURIBOR consists of:
Plain Vanilla A term used to describe a standard deal. Portfolio management Professional Management of a pool of assets, mainly bonds or/and stocks, for an individual or institutional investor. Performance is measured in comparison with Benchmark Indices. Primary dealer Selected credit institution authorised to buy and sell original issuance of government securities in direct dealing with the Treasury. Primary market Market for new issues of securities.
Q Quanto swap A Quanto Swap is an instrument for taking advantage of the interest differential between two currencies without running an exchange rate risk - similar to a basis swap this transaction has LIBOR/EURIBOR fixings on both legs - but all payments are due in the same currency and there is no payment of the notional amount - the spread on LIBOR remains the same for the total agreed period. Quotation The actual price or the bid or ask price of either commodities or futures or options contracts at a particular time.
R Reference Credit The embedded credit risk in a credit derivative transactions like credit default swaps or credit linked notes. Repo A repurchasement agreement is a procedure for borrowing money by selling securities to a counterparty and agreeing to buy them back later at a slightly higher price. Return on equity Amount, expressed as a percentage, earned on a company's common stock investment for a given period. Rho The rate of change of the price of a derivative with the interest rate. Risk Exposure to uncertainty. Risk factor A random variable whose uncertainty represents a source of risk.
SS&P 500 (Standard & Poor's) Stock index of 500 leading American companies. Settlement The completion of a payment or the discharge of an obligation between two or more parties. Frequently used to refer to the payment or discharge of interbank transactions or a series of prior existing transactions. Settlement Risk This risk occurs when a payment is required by a counterparty and it is unable or unwilling to effect it. Therefore banks have to establish settlement limits for their counterparties. Sigma See vega. Sovereign Risk The risk in lending directly to a government of a foreign country i.e. that the government will either be unable or unwilling to meet its obligations in the future. Spot For immediate delivery. Spread The difference between the bid and offer price or rate of a commodity. Stop-Loss Limit A market risk limit which curtails losses as they occur. Swap An agreement for an exchange fo payments between two counterparties at some point(s) in the future and according to a specified formula. SWIFT A method of conveying interbank instructions and information world-wide.
T TARGET Trans-European Automated Real-time Gross settlement Express Transfer system. The payment system that will link high value payment systems operated by Central Banks of countries participating in the Euro. Theta The rate of change of the price of an option or other derivative with the passage of time. Tier one assets Marketable assets fulfilling certain uniform EURO area-wide eligibility criteria specified by the ECB. Among these criteria are the requirements that they must be denominated in EURO, be issued (or guaranteed) by entities located in EEA countries, and be located in a national central bank of SSS of the EURO area. Tier two assets Marketable or non-marketable assets for which specific eligibility criteria are established by the national central banks, subject to ECB approval. Transfer Risk The risk in lending directly to a government of a foreign country i.e. whether the government will the freely available foreign currency to repay its debt. Treasury Treasury is involved in the trading of certain products like Money Market,- Foreign Exchange,- Banknotes,- Derivatives etc. in various currencies and has to monitor, control, and make evident of risks involved. Furthermore Treasury has to ensure the solvency of the bank at all times. Treasury Bond A long-term coupon-bearing instrument issued by the government to finance its debt. Triple A/Double B (AAA/BB) Credit Rating by companies like Standard & Poors or Moodys of the creditworthiness of an obligor with respect to a specific financial obligation. Obligors can be rated from AAA (best quality) to D.
U Underlier A primary instrument or variable upon which the value of a derivative instrument depends. Uptick An increase in price.
V Vega The rate of change in the price of an option or other derivative with volatility. Volatility A measurement of the change in price over a given period.
W Wholesale financial market The financial market which deals with large corporations and institutions.
XYZ Yield A return provided by an instrument. Yours Expression sometimes used to indicate that the quoting bank is willing to sell to the contracting bank at quoted rate. Zero coupon bond A security issued at discount or one which delivers a single coupon at maturity. |
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