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Nyse Euronext - Travel glossary Category: Travel and Transportation > Trains Date & country: 02/03/2011, UK Words: 110

Agency crosses
Agency Cross Trade. Involves an agency broker - one who acts solely as an agent - buying shares from one party and passing them on to one or more buyers at the same price. The brokers make their profit from commission.

American option
An option which is exercisable at any time during its life.

Arbitrage
Instruments that have identical characteristics and so are perfect substitutes should trade at the same price. If they do not, a risk-free profit can be generated by simultaneously selling the higher-priced asset and buying the lower priced asset. Arbitrage is the identification and exploitation of such price anomalies.

Ask / Offer price
The price at which a trader or market maker is willing to sell a contract.

Assignment
Notice sent by the clearing house to the option writer informing him that the option has been exercised.

At-the-money option (ATM option)
The option with the exercise price closest to the current price of the underlying instrument.

Automated trading system
Screen-based trading system, facilitating a market in which participants can come together to buy and sell securities.

Autoquote
A computer system which continuously calculates theoretical option prices using models developed jointly by LIFFE and market participants. LIFFE disseminates Autoquote prices for most financial, equity and index option series.

Average daily volume (ADV)
See Volume.

Back months
The futures or options on futures months being traded that are furthest from expiration.

Basis
The difference between the underlying product price and the futures price.

Basis point (bp)
A change in the interest rate of 1/100 of 1%. Therefore, one basis point (1 bp) is equivalent to 0.01%.

Basis Trading Facility (BTF)
The BTF enables the futures leg of a basis trade to be transacted without execution risk. See Basis trading.

Bear strategies
Strategies based on the belief that prices will fall.

Benchmark bond
The most recently issued and most liquid government bond.

Bid price
The price at which a trader or market maker is willing to buy an instrument.

Black-Scholes model
Developed by Fischer Black & Myron Scholes in 1973, it is the classic modern options pricing model for the valuation of European-style options.

Bond
A certificate of debt, generally long term, under the terms of which an issuer contracts, amongst other things, to pay the holder a fixed principal amount on a stated future date and, usually, a series of interest payments during its life.

Bond 'stripping'
Separate Trading of Registered Interest and Principal of Securities, i.e. securities which are split and divided into interest only securities and principal only securities to suit the differing need of investors.

Broker
A person or firm that acts on another's behalf.

Bucketing
Interest rate risk management which matches interest rate exposure of future inflows and outflows, with offsetting interest rate exposure at pre-determined future dates.

Bull strategies
A strategy based on the belief that prices will rise.

Bundesanleihen (Bund) future
Futures contract based on notional German Government bond with a 4% coupon and eight and a half to ten and a half year maturity.

Butterfly
An option strategy involving the purchase of one put (or call), the sale of two puts (or calls) at a higher exercise price, and purchasing one put (or call) at an equally higher price.

Call option
An option that provides the right but not the obligation to buy the underlying security.

Cap
An option strategy that sets a ceiling on the holder's interest rate exposure.

Cash market
The market in the underlying financial instrument on which a futures or options contract is based.

Central Gilts Office (CGO)
The computerised book entry settlement system for gilt transactions operated by the Bank of England.

Change
The difference between the last settlement price and the last reported ask, bid or trade.

Cheapest to deliver
The cash security that provides the lowest cost (largest profit) to the arbitrage trader. The futures price tracks the CTD instrument.

Clearing
The process of registration, settlement, margin and the provision of a guarantee.

Clearing Members
LIFFE members who ensure the process of registration, position maintenance, settlement and provision of the guarantee of the exchange-traded transaction.

Clearing Processing System (CPS)
LIFFE electronic system which supplies all members with their real-time positions and margin calculations, as well as maintaining accounts and informing members of all account developments.

Combo trade
Option strategy where transaction requires going short a call and long a put at a lower exercise price.

Commodity Trading Advisors (CTAs)
A CTA is anyone who, for compensation or for profit, exercises trading authority over a customers account or gives advice on the advisability of buying or selling futures and/or options, whether it be directly or through written publications or other media.

Contract month
The month in which a futures contract is fulfilled. See Delivery month.

Convergence
The movement of the cash asset price toward the futures price as the expiration date of the futures contract approaches.

Counterparty
The opposing side(s) of a transaction undertaken.

Counterparty risk
Exposure to a loss resulting from a default on a payment due. Also known as credit risk.

Coupon
Generally, the nominal annual rate of interest of a fixed income security expressed as a percentage of the principal value. This interest is paid to the holder of the security by the borrower. The coupon is generally paid annually, semi-annually or, in some cases quarterly depending on the type of security.

Covered call
The sale of call options while long the underlying instrument. The covered call writer gives up any potential upside beyond the strike of the calls in exchange for the premium income.

Covered put
The sale of put options while long cash.

Cross currency spreads
Transactions where futures contracts relating to different interest rate markets are bought and sold.

Delivery
The seller of the futures contract sends the appropriate cash instrument to the buyer during the futures expiration period or on the specified date(s). The buyer pays the futures price (subject to a price factor adjustment). Some futures contracts, such as stock index futures, are settled by a cash payment rather than by the physical delivery of th...

Delivery month (contract month)
The specified month to which trading a particular futures or options contract relates. On LIFFE these are March, June, September, December. Options may also be traded on a 1-2-3 month cycle e.g. January, February, March, in addition to the quarterly cycle.

Delta
The measure of change in the value of an option compared with a change in the price of the underlying.

Delta neutral hedging
An option is delta hedged if an offsetting position has been taken in the underlying asset in proportion to the option's delta, creating, at that moment in time, a position that is immune to small changes in market direction.

Derivative
A security whose value is dependent on, or derived from, the value of some underlying asset.

Discount factor
The rate used to derive net present value of a sum of money to be paid at a future date. See Present value.

Duration (modified)
A measure of the relative volatility of a bond; i.e. the price change of a bond for a given change in the interest rate. Duration is measured in units of time. It includes the effects of time until maturity, cash flows and the yield to maturity.

Equity derivatives
Futures or options based on underlying equity instruments, whether individual stocks, or stock market indices.

Equity options
The right but not the obligation to buy (call) or sell (put) an underlying equity instrument. Standard equity options are available on individual UK stocks, FTSE 100 and FTSE 250 equity indices, and FLEX

European option
An option which is only exercisable at expiry.

Exchange Access System (EASy)
EASy network is a high band-width fault-tolerant channel between LIFFE and its Membership. A simple communication path is provided to members through which any LIFFE service can be accessed. Data feeds and services currently available through a variety of different channels can be consolidated onto this new network. New services can quickly be made...

Execution risk
The risk inherent in completing the final stages of an exchange-traded transaction.

Exercise
The process by which an option holder has the right to buy or sell.

Exercise price
The price at which the option holder has the right to buy or sell.

Expiry
The last date an option can be traded or exercised.

Fair pricing (fair value)
A term used in the futures market which would represent the cash price plus the net cost of carry. In the options market, it is the value derived from the mathematical equation used (e.g. Black-Scholes model).

Financial Services Authority (FSA)
Regulatory authority given statutory powers by the Financial Services and Markets Act 2000. Responsible for overseeing and authorizing Recognised Clearing Houses (RCHs) and Recognised Investment Exchanges (RIEs) and also firms who carry out investment business. The FSA's four statuatory objectives are: maintaining market confidence; promoting publi...

FLEX
Exchange-traded options that allow the buyer to specify the style (American or European), strike, maturity, and notional principal of an option. This enables hedgers to eliminate the timing mismatch between hedge and underlying position that can occur with standardised exchange-traded products. They also avoid the gamma and vega mismatches which oc...

Forward yield curve
The forward yield curve is often derived from the zero coupon yield curve and indicates each point as the implied forward interest rate.

Futures contract
An agreement (obligation) to buy or sell a given quantity of a particular asset, at a specified future date, at a pre-agreed price. Futures contracts have standard delivery dates, trading units, terms and conditions.

Lifetime high and lows
Highest and lowest traded prices of a futures or options contract, for the full period of its trading life to date.

LIFFE Market Feed (LMF2)
An integrated data feed which provides direct access to LIFFE's real time price data. It contains a comprehensive range of data on all LIFFE products; including quotes, trades, volumes, closing/settlement prices, contract details, introduction of new series and open interest.

Limit order
An order given to a broker by a customer that specifies a price; the order can be executed only if the market reaches or betters that price.

Liquidity
The ability to buy or sell a large number of units of a financial asset in a short period without significantly affecting the price of the instrument.

Local
A 'local' is a trader registered to a member of LIFFE. The local trades for his or her own account.

London Clearing House (LCH)
The LCH is a Recognised Clearing House under the Financial Services and Markets Act (2000). Its primary role is to act, in relation to its members, as central counterparty for contracts traded on LIFFE, the IPE and the LME. When LCH has registered a trade, it becomes the buyer to every LCH member who sells and the seller to every LCH member who buy...

London Traded Options Market (LTOM)
Formerly exchange-traded options only; merged with LIFFE in 1992 to form a physical exchange for open outcry and automated trading of financial futures and options.

Long Gilt future
Futures contract based on a notional UK Gilt of

Lots per side
Number of contract lots (standardised contract sizes) traded by the purchaser or the seller in a transaction.

Offset
Counter-balancing of exposure through establishing exposure on the opposite side.

Open interest
The net (i.e. either long or short) open positions in a particular future or option contract which needs to be either traded out before expiry, or delivered at expiry.

Opening range
Represents the two extremes of price for two minutes after the first trade.

Option conversions
An arbitrage trade is so called because it can be used by the holder of a put to alter his position to a call or vice versa. Converting a put to a call involves the purchase of the put, purchase of the underlying instrument or future, and sale of the call.

Option expiry
The last date on which an option may be exercised. For European options, this is the only date on which options may be exercised.

Option reversals
A type of arbitrage which maintains (and relies on) put-call parity. If a put is overvalued (or if the put is fairly valued but the call is undervalued), a riskless profit can be made by selling the put, buying the call, and selling the underlying instrument or the future. The actual arbitrage return depends on the additional borrowing costs/invest...

Option sensitivities
Tendency of option price (premium) to change as a result of changes in key factors; changing prices in the underlying instrument for example (see delta, vega and theta).

Options contract
A contract giving the holder the right, but not the obligation, to buy (call), or sell (put), a specified underlying asset at a pre-agreed price, at either a fixed point in the future (European-style), or at a time chosen by the holder up to maturity (American-style). Options are available in exchange-traded, and over-the-counter (OTC) markets.

OTC (Over-the-counter)
The market for securities or derivatives created outside organised exchanges by dealers trading directly with one another, or their counterparties, by telephone or screen.

Out-of-the-money
An option that has no intrinsic value because the price of the underlying is below the strike price of a call or above the strike price of a put.

Ratio backspread
Option strategy which involves two short calls (puts) and one long call (put).

Ratio spread
An option strategy whereby the amount of futures or options contracts purchased is not equal to the amount of contracts sold.

Real-time prices
Up-to-date market prices for traded contracts.

Recognised Clearing Houses (RCH)
Authorised by the SIB to carry out clearing functions. See SIB.

Recognised LIFFE Option Strategies
A listing of recognised option strategies developed by LIFFE for use on its exchange, primarily for charging purposes. All the components of the strategy must be executed by one transaction between counterparties in the options pit. All components of the strategy must be for one account only.

Repurchase agreement
Borrowing funds by providing a government security for collateral and promising to 'repurchase' the security at the end of the agreed upon time period. The associated interest rate is the 'repo rate'.

Rollover
The transfer of a futures or options position from one delivery month to a later month.

Round trip
A futures or options position plus its offsetting position. (Commissions are usually quoted per round trip.)

Scalp
To trade for small gains. Scalping normally involves establishing and liquidating a position quickly, usually within the same day, hour or even just a few minutes.

Self-Regulating Organisation (SRO)
Organisations which are authorised and supervised to an extent by the SIB, to carry out particular finance functions e.g. SFA.

Serial options
Options which permit trading in specified months, other than, the existing four principal quarterly delivery months, namely March, June, September, and December.

Settlement/closing price
The price used for daily revaluation (Mark-to-market) of open positions.

Spread trade
The purchase of one futures contract and the simultaneous sale of another in order to take advantage of relative price changes. Examples include buying one futures contract and selling another futures contract of the same underlying asset but different delivery month; buying a given delivery month of one futures contract and selling the same delive...

Stop order (or stop)
An order to buy or sell at the market when and if a specified price is reached.

Straddles
An option strategy involving one call and one put with the same strike and same expiry date.

Strangle
An option strategy involving one call and one put with different strike levels but with the same expiry date.

Swap
See Interest rate swap.

Synthetic positions
A position constructed in order that its cashflows and sometimes its risk / reward characteristics replicate those of another asset or liability. Such instruments are created either because certain users cannot buy the components separately or because an arbitrage opportunity allows the synthetic to be purchased (sold) more cheaply (expensively) th...