risk-averse
Describes an investor who, when faced with two investments with a similar expected return (but different risks), will prefer the one with the lower risk.
diversification
A risk management technique that mixes a wide variety of investments within a portfolio. It is designed to minimize the impact of any one security on overall portfolio performance.
hedging
Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.
insurance
A contract (policy) in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients' risks to make payments more affordable for the insured.
correlation
In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used in advanced portfolio management.
systematic risk
The risk inherent to the entire market or entire market segment. Also known as "un-diversifiable risk" or "market risk
beta
A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
unsystematic risk
Risk that affects a very small number of assets. Sometimes referred to as specific risk.
future contracts
A contractual agreement, generally made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a pre-determined price in the future. Futures contracts detail the quality and quantity of the underlying
forward contract
A cash market transaction in which delivery of the commodity is deferred until after the contract has been made. Although the delivery is made in the future, the price is determined on the initial trade date.
swap
Traditionally, the exchange of one security for another to change the maturity (bonds), quality of issues (stocks or bonds), or because investment objectives have changed. Recently, swaps have grown to include currency swaps and interest rate swaps.
notional amount
The total value of a leveraged position's assets. This term is commonly used in the options, futures, and currency markets because in them a very little amount of invested money can control a large position (have a large consequence for the trader).
hedgers
A person making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.
speculators
A person who trades (i.e. derivatives, commodities, bonds, equities, or currencies) with a higher-than-average risk, in return for a higher-than-average profit potential. Speculators take large risks, especially with respect to anticipating future price m
delivery date
The action by which an underlying commodity, security, cash value, or delivery instrument covering a contract is tendered and received by the contract holder.
forward price
The predetermined delivery price for an underlying commodity, currency or financial asset decided upon by the long (the buyer) and the short (the seller) to be paid at a predetermined date in the future.
spot price
The current price at which a particular commodity can be bought or sold at a specified time and place.
size of contract
The amount of the commodity that will be delivered.
long
The buying of a security such as a stock, commodity or currency, with the expectation that the asset will rise in value. In the context of options, the buying of an options contract.
short
The sale of a borrowed security, commodity or currency with the expectation that the asset will fall in value. In the context of options, it is the sale (also known as "writing") of an options contract.
cost of carry
Costs incurred because of an investment position.
cap
A limit on the amount of money that can be paid under a claim.
deductibles
An amount subtracted from an individual's adjusted gross income to reduce the amount of taxable income.
options
A privilege sold by one party to another that offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security at an agreed-upon price during a certain period of time or on a specific date.
european option
An option that can only be exercised at the end of its life.
american option
An option that can be exercised anytime during its life. The majority of exchange-traded options are American.
strike price or exercise price
The stated price per share for which underlying stock may be purchased (for a call) or sold (for a put) by the option holder upon exercise of the option contract.
expiration date
The day on which an options or futures contract is no longer valid, and, therefore, ceases to exist
call option
An option contract giving the owner the right (but not the obligation) to buy a specified amout of an underlying security at a specified time. The buyer of a put option estimates that the underlying asset will drop below the exercise price before the expi
put option
An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time. The buyer of a put option estimates that the underlying asset will drop below the exercise pri
size of option contract
The amount of the asset that will be delivered.
call or put owner
The investor expects the underlying stock price to rise or fall respectively, they own the option.
call or put write
The writer owns the underlying asset and sells an option contract on the underlying security. The writer of a call has a bearish outlook while the writer of a put has a bullish outlook.
premium
The total cost of an option
in the money
For a call option, when the option's strike price is below the market price of the underlying asset. For a put option, when the strike price is above the market price for the underlying asset.
intrinsic value of option
The amount the option is in the money and the difference between the current asset price and the strike price.
time value of option
Reflects expectations of an option's profitability associated with exercising it at some future point in time.
derivative security
In finance, a security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common un
spot or cash markets
A commodities or securities market in which goods are sold for cash and delivered immediately. Contracts bought and sold on these markets are immediately effective.
equity components
Stock-like instruments
debt components
bond-like instruments
option components
Interest rate caps and floors, and stock calls and puts.
arbitrage
The simultaneous purchase and sale of an asset in order to profit from a difference in the price. This usually takes place on different exchanges or marketplaces. Also known as a "riskless profit
law of one price
Equivalent combinations of securities that results in identical cash flows must have the same cost or price