H0

Niveau: Universiteit Leerjaar: N.v.t.
Keyword (page) Definition (page)
1 attachment point (p. 705) The first percentage loss in the collateral pool that begins to cause reduction in a tranche is known as the lower attachment point, or simply the attachment point. (p. 705)
2 bull call spread (p. 706) A bull call spread has two calls that differ only by strike price, in which the long position is in the lower strike price and the short position is in the higher strike price. (p. 706)
3 bull put spread (p. 706) A bull put spread has two puts that differ only by strike price, in which the long position is in the lower strike price and the short position is in the higher strike price. (p. 706)
4 call option view of capital structure (p. 698) The call option view of capital structure views the equity of a levered firm as a call option on the assets of the firm. (p. 698)
5 collateralized debt obligation (CDO) (p. 703) A collateralized debt obligation (CDO) applies the concept of structuring to cash flows from a portfolio of debt securities into multiple claims; these claims are securities and are referred to as tranches. (p. 703)
6 complete market (p. 687) A complete market is a financial market in which enough different types of distinct securities exist to meet the needs and preferences of all participants. (p. 687)
7 contraction risk (p. 691) Contraction risk is dispersion in economic outcomes caused by uncertainty in the longevity—especially decreased longevity—of cash flow streams. (p. 691)
8 detachment point (p. 705) The higher percentage loss point at which the given tranche is completely wiped out is known as the upper attachment point, or the detachment point. (p. 705)
9 equity tranche (p. 704) The equity tranche has lowest priority and serves as the residual claimant. (p. 704)
10 extension risk (p. 691) Extension risk is dispersion in economic outcomes caused by uncertainty in the longevity—especially increased longevity—of cash flow streams. (p. 691)
11 floating-rate tranches (p. 694) Floating-rate tranches earn interest rates that are linked to an interest rate index, such as the London Interbank Offered Rate (LIBOR), and are usually used to finance collateral pools of adjustable-rate mortgages. (p. 694)
12 interest-only (IO) (p. 693) Interest-only (IO) tranches receive only interest payments from the collateral pool. (p. 693)
13 inverse floater tranche (p. 694) An inverse floater tranche offers a coupon that increases when interest rates fall and decreases when interest rates rise. (p. 694)
14 lower attachment point (p. 705) The first percentage loss in the collateral pool that begins to cause reduction in a tranche is known as the lower attachment point, or simply the attachment point. (p. 705)
15 mezzanine tranche (p. 704) A mezzanine tranche is a tranche with a moderate priority to cash flows in the structured product and with lower priority than the senior tranche. (p. 704)
16 planned amortization class (PAC) tranches (p. 693) Planned amortization class (PAC) tranches receive principal payments in a more complex manner than do sequential pay CMOs. (p. 693)
17 principal-only (PO) (p. 693) Principal-only (PO) tranches receive only principal payments from the collateral pool. (p. 693)
18 put option view of capital structure (p. 698) The put option view of capital structure views the equity holders of a levered firm as owning the firm’s assets through riskless financing and having a put option to deliver those assets to the debt holders. (p. 698)
19 senior tranche (p. 704) The senior tranche is a tranche with the first or highest priority to cash flows in the structured product. (p. 704)
20 sequential-pay collateralized mortgage obligation (p. 691) The sequential-pay collateralized mortgage obligation is the simplest form of CMO. (p. 691)
21 state of the world (p. 688) A state of the world, or state of nature (or state), is a precisely defined and comprehensive description of an outcome of the economy that specifies the realized values of all economically important variables. (p. 688)
22 structural credit risk models (p. 697) Structural credit risk models use option theory to explicitly take into account credit risk and the various underlying factors that drive the default process, such as (1) the behavior of the underlying assets, and (2) the structuring of the cash flows (i.e., debt levels). (p. 697)
23 structuring (p. 685) In the context of alternative investments, structuring is the process of engineering unique financial opportunities from existing asset exposures. (p. 685)
24 targeted amortization class (TAC) tranches (p. 693) Targeted amortization class (TAC) tranches receive principal payments in a manner similar to PAC tranches but generally with an even narrower and more complex set of ranges. (p. 693)
25 tranche (p. 690) A tranche is a distinct claim on assets that differs substantially from other claims in such aspects as seniority, risk, and maturity. (p. 690)
26 upper attachment point (p. 705) The higher percentage loss point at which the given tranche is completely wiped out is known as the upper attachment point, or the detachment point. (p. 705)
27 American credit options (p. 729) American credit options are credit options that can be exercised prior to or at expiration. (p. 729)
28 assignment (p. 725) A novation or an assignment is when one party to a contract reaches an agreement with a third party to take over all rights and obligations to a contract. (p. 725)
29 binary options (p. 729) Binary options (sometimes termed digital options) offer only two possible payouts, usually zero and some other fixed value. (p. 729)
30 calibrate a model (p. 715) To calibrate a model means to establish values for the key parameters in a model, such as a default probability or an asset volatility, typically using an analysis of market prices of highly liquid assets. (p. 715)
31 cash settlement (p. 723) In a cash settlement, the credit protection seller makes the credit protection buyer whole by transferring to the buyer an amount of cash based on the contract. (p. 723)
32 CDS indices (p. 731) CDS indices are indices or portfolios of single-name CDSs. (p. 731)
33 CDS premium (p. 722) The CDS spread or CDS premium is paid by the credit protection buyer to the credit protection seller and is quoted in basis points per annum on the notional value of the CDS. (p. 722)
34 CDS spread (p. 722) The CDS spread or CDS premium is paid by the credit protection buyer to the credit protection seller and is quoted in basis points per annum on the notional value of the CDS. (p. 722)
35 credit default swap (CDS) (p. 720) A credit default swap (CDS) is an insurance-like bilateral contract in which the buyer pays a periodic fee (analogous to an insurance premium) to the seller in exchange for a contingent payment from the seller if a credit event occurs with respect to an underlying credit-risky asset. (p. 720)
36 credit derivatives (p. 717) Credit derivatives transfer credit risk from one party to another such that both parties view themselves as having an improved position as a result of the derivative. (p. 717)
37 credit protection buyer (p. 720) In a CDS, the credit protection buyer pays a periodic premium on a predetermined amount (the notional amount) in exchange for a contingent payment from the credit protection seller if a specified credit event occurs. (p. 720)
38 credit protection seller (p. 720) The credit protection seller receives a periodic premium in exchange for delivering a contingent payment to the credit protection buyer if a specified credit event occurs. (p. 720)
39 credit risk (p. 709) Credit risk is dispersion in financial outcomes associated with the failure or potential failure of a counterparty to fulfill its financial obligations. (p. 709)
40 credit-linked notes (CLNs) (p. 730) Credit-linked notes (CLNs) are bonds issued by one entity with an embedded credit option on one or more other entities. (p. 730)
41 default risk (p. 709) Default risk is the risk that the issuer of a bond or the debtor on a loan will not repay the interest and principal payments of the outstanding debt in full. (p. 709)
42 derivatives (p. 717) Derivatives are cost-effective vehicles for the transfer of risk, with values driven by an underlying asset. (p. 717)
43 European credit options (p. 729) European credit options are credit options exercisable only at expiration. (p. 729)
44 exposure at default (p. 711) Exposure at default (EAD) specifies the nominal value of the position that is exposed to default at the time of default. (p. 711)
45 funded credit derivatives (p. 719) Funded credit derivatives require cash outlays and create exposures similar to those gained from traditional investing in corporate bonds through the cash market. (p. 719)
46 hazard rate (p. 717) Hazard rate is a term often used in the context of reduced- form models to denote the default rate. (p. 717)
47 loss given default (p. 711) Loss given default (LGD) specifies the economic loss in case of default. (p. 711)
48 mark-to-market adjustment (p. 725) The process of altering the value of a CDS in the accounting and financial systems of the CDS parties is known as a mark- to-market adjustment. (p. 725)
49 multiname instruments (p. 718) Multiname instruments, in contrast to single-name instruments, make payoffs that are contingent on one or more credit events (e.g., defaults) affecting two or more reference entities. (p. 718)
50 novation (p. 725) A novation or an assignment is when one party to a contract reaches an agreement with a third party to take over all rights and obligations to a contract. (p. 725)
51 physical settlement (p. 723) Under physical settlement, the credit protection seller purchases the impaired loan or bond from the credit protection buyer at par value. (p. 723)
52 price revelation (p. 718) Price revelation, or price discovery, is the process of providing observable prices being used or offered by informed buyers and sellers. (p. 718)
53 probability of default (p. 711) Probability of default (PD) specifies the probability that the counterparty fails to meet its obligations. (p. 711)
54 recovery rate (p. 711) The recovery rate is the percentage of the credit exposure that the lender ultimately receives through the bankruptcy process and all available remedies. (p. 711)
55 reduced-form credit models (p. 710) Reduced-form credit models focus on default probabilities based on observations of market data of similar-risk securities. (p. 710)
56 referenced asset (p. 724) The referenced asset (also called the referenced bond, referenced obligation, or referenced credit) is the underlying security on which the credit protection is provided. (p. 724)
57 risk-neutral approach (p. 712) A risk-neutral approach models financial characteristics, such as asset prices, within a framework that assumes that investors are risk neutral. (p. 712)
58 risk-neutral investor (p. 712) A risk-neutral investor is an investor that requires the same rate of return on all investments, regardless of levels and types of risk, because the investor is indifferent with regard to how much risk is borne. (p. 712)
59 single-name credit derivatives (p. 718) Single-name credit derivatives transfer the credit risk associated with a single entity. This is the most common type of credit derivative and can be used to build more complex credit derivatives. (p. 718)
60 standard ISDA agreement (p. 722) The standard ISDA agreement serves as a template to negotiated credit agreements that contains commonly used provisions used by market participants. (p. 722)
61 total return swap (p. 720) In a total return swap, the credit protection buyer, typically the owner of the credit risky asset, passes on the total return of the asset to the credit protection seller in return for a certain payment. (p. 720)
62 unfunded credit derivatives (p. 718) Unfunded credit derivatives involve exchanges of payments that are tied to a notional amount, but the notional amount does not change hands until a default occurs. (p. 718)
63 arbitrage CDOs (p. 740) Arbitrage CDOs are created to attempt to exploit perceived opportunities to earn superior profits through money management. (p. 740)
64 balance sheet CDOs (p. 740) Balance sheet CDOs are created to assist a financial institution in divesting assets from its balance sheet. (p. 740)
65 bankruptcy remote (p. 739) Bankruptcy remote means that if the sponsoring bank or money manager goes bankrupt, the CDO trust is not affected. (p. 739)
66 cash flow CDO (p. 748) In a cash flow CDO, the proceeds of the issuance and sale of securities (tranches) are used to purchase a portfolio of underlying credit-risky assets, with attention paid to matching the maturities of the assets and liabilities. (p. 748)
67 cash-funded CDO (p. 745) A cash-funded CDO involves the actual purchase of the portfolio of securities serving as the collateral for the trust and to be held in the trust. (p. 745)
68 collateralized fund obligation (CFO) (p. 752) A collateralized fund obligation (CFO) applies the CDO structure concept to the ownership of hedge funds as the collateral pool. (p. 752)
69 copula approach (p. 756) A copula approach to analyzing the credit risk of a CDO may be viewed like a simulation analysis of the effects of possible default rates on the cash flows to the CDO’s tranches and the values of the CDO’s tranches. (p. 756)
70 distressed debt CDO (p. 751) A distressed debt CDO uses the CDO structure to securitize and structure the risks and returns of a portfolio of distressed debt securities, in which the primary collateral component is distressed debt. (p. 751)
71 diversity score (p. 740) A diversity score is a numerical estimation of the extent to which a portfolio is diversified. (p. 740)
72 external credit enhancement (p. 751) An external credit enhancement is a protection to tranche investors that is provided by an outside third party, such as a form of insurance against defaults in the loan portfolio. (p. 751)
73 financial engineering risk (p. 753) Financial engineering risk is potential loss attributable to securitization, structuring of cash flows, option exposures, and other applications of innovative financing devices. (p. 753)
74 internal credit enhancement (p. 749) An internal credit enhancement is a mechanism that protects tranche investors and is made or exists within the CDO structure, such as a large cash position. (p. 749)
75 market value CDO (p. 748) In a market value CDO, the underlying portfolio is actively traded without a focus on cash flow matching of assets and liabilities. (p. 748)
76 overcollateralization (p. 750) Overcollateralization refers to the excess of assets over a given liability or group of liabilities. (p. 750)
77 ramp-up period (p. 739) The ramp-up period, is the first period in a CDO life cycle, during which the CDO trust issues securities (tranches) and uses the proceeds from the CDO note sale to acquire the initial collateral pool (the assets). (p. 739)
78 reference portfolio (p. 739) The underlying portfolio or pool of assets (and/or derivatives) held in the SPV within the CDO structure is also known as the collateral or reference portfolio. (p. 739)
79 reserve account (p. 750) A reserve account holds excess cash in highly rated instruments, such as U.S. Treasury securities or high-grade commercial paper, to provide security to the debt holders of the CDO trust. (p. 750)
80 revolving period (p. 739) The second phase in the CDO life cycle is normally called the revolving period, during which the manager of the CDO trust may actively manage the collateral pool for the CDO, potentially buying and selling securities and reinvesting the excess cash flows received from the CDO collateral pool. (p. 739)
81 risk shifting (p. 754) Risk shifting is the process of altering the risk of an asset or a portfolio in a manner that differentially affects the risks and values of related securities and the investors who own those securities. (p. 754)
82 single-tranche CDO (p. 752) In a single-tranche CDO, the CDO may have multiple tranches, but the sponsor issues (sells) only one tranche from the capital structure to an outside investor. (p. 752)
83 special purpose vehicle (SPV) (p. 739) A special purpose vehicle (SPV) is a legal entity at the heart of a CDO structure that is established to accomplish a specific transaction, such as holding the collateral portfolio. (p. 739)
84 sponsor of the trust (p. 739) The sponsor of the trust establishes the trust and bears the associated administrative and legal costs. (p. 739)
85 subordination (p. 749) Subordination is the most common form of credit enhancement in a CDO transaction, and it flows from the structure of the CDO trust. (p. 749)
86 synthetic CDO (p. 746) In a synthetic CDO, the CDO obtains risk exposure for the collateral pool through the use of a credit derivative, such as a total return swap or a CDS. (p. 746)
87 tranche width (p. 740) The tranche width is the percentage of the CDO’s capital structure that is attributable to a particular tranche. (p. 740)
88 weighted average rating factor (WARF) (p. 740) The weighted average rating factor (WARF), as described by Moody's Investors Service, is a numerical scale ranging from 1 (for AAA-rated credit risks) to 10,000 (for the worst credit risks) that reflects the estimated probability of default. (p. 740)
89 weighted average spread (WAS) (p. 740) The weighted average spread (WAS) of a portfolio is a weighted average of the return spreads of the portfolio’s securities in which the weights are based on market values. (p. 740)
90 absolute return structured product (p. 773) An absolute return structured product offers payouts over some or all underlying asset returns that are equal to the absolute value of the underlying asset’s returns. (p. 773)
91 active option (p. 767) An active option in a barrier option is an option for which the underlying asset has reached the barrier. (p. 767)
92 analytical (p. 776) The solution is analytical because the model can be exactly solved using a finite set of common mathematical operations. (p. 776)
93 Asian option (p. 766) An Asian option is an option with a payoff that depends on the average price of an underlying asset through time. (p. 766)
94 barrier option (p. 767) A barrier option is an option in which a change in the payoff is triggered if the underlying asset reaches a prespecified level during a prespecified time period. (p. 767)
95 boundary condition (p. 775) A boundary condition of a derivative is a known relationship regarding the value of that derivative at some future point in time that can be used to generate a solution to the derivative’s current price. (p. 775)
96 building blocks approach (p. 776) The building blocks approach (i.e., portfolio approach) models a structured product or other derivative by replicating the investment as the sum of two or more simplified assets, such as underlying cash-market securities and simple options. (p. 776)
97 cash-and-call strategy (p. 765) A cash-and-call strategy is a long position in cash, or a zero- coupon bond, combined with a long position in a call option. (p. 765)
98 dynamic hedging (p. 777) Dynamic hedging is when the portfolio weights must be altered through time to maintain a desired risk exposure, such as zero risk. (p. 777)
99 equity-linked structured products (p. 759) Equity-linked structured products are distinguished from structured products by one or more of the following three aspects: (1) They are tailored to meet the preferences of the investors and to generate fee revenue for the issuer; (2) they are not usually collateralized with risky assets; and (3) they rarely serve as a pass-through or simple tranching of the risks of a long-only exposure to an asset, such as a risky bond or a loan portfolio. (p. 759)
100 exotic option (p. 764) Although there is no universally accepted definition of an exotic option, a useful definition is that an exotic option is an option that has one or more features that prevent it from being classified as a simple option, including payoffs based on values prior to the expiration date, and/or payoffs that are nonlinear or discontinuous functions of the underlying asset. (p. 764)
101 knock-in option (p. 767) A knock-in option is an option that becomes active if and only if the underlying asset reaches a prespecified barrier. (p. 767)
102 knock-out option (p. 768) A knock-out option is an option that becomes inactive (i.e., terminates) if and only if the underlying asset reaches a prespecified barrier. (p. 768)
103 numerical methods (p. 776) Numerical methods for derivative pricing are potentially complex sets of procedures to approximate derivative values when analytical solutions are unavailable. (p. 776)
104 overconfidence bias (p. 778) An overconfidence bias is a tendency to overestimate the true accuracy of one’s beliefs and predictions. (p. 778)
105 partial differential equation approach (PDE approach) (p. 775) The partial differential equation approach (PDE approach) finds the value to a financial derivative based on the assumption that the underlying asset follows a specified stochastic process and that a hedged portfolio can be constructed using a combination of the derivative and its underlying asset(s). (p. 775)
106 participation rate (p. 764) The participation rate indicates the ratio of the product’s payout to the value of the underlying asset. (p. 764)
107 path-dependent option (p. 766) A path-dependent option is any option with a payoff that depends on the value of the underlying asset at points prior to the option’s expiration date. (p. 766)
108 payoff diagram level (p. 777) The payoff diagram level determines the amount of money or the percentage return that an investor can anticipate in exchange for paying the price of the product. (p. 777)
109 payoff diagram shape (p. 777) The payoff diagram shape indicates the risk exposure of a product relative to an underlier. (p. 777)
110 power reverse dual-currency note (p. 774) At its core, in a power reverse dual-currency note (PRDC), an investor pays a fixed interest rate in one currency in exchange for receiving a payment based on a fixed interest rate in another currency. (p. 774)
111 principal protected absolute return barrier note (p. 773) A principal protected absolute return barrier note offers to pay absolute returns to the investor if the underlying asset stays within both an upper barrier and a lower barrier over the life of the product. (p. 773)
112 principal-protected structured product (p. 764) A principal-protected structured product is an investment that is engineered to provide a minimum payout guaranteed by the product’s issuer (counterparty). (p. 764)
113 quanto option (p. 770) A quanto option is an option with a payoff based in one currency using the numerical value of the underlying asset expressed in a different currency. (p. 770)
114 simple option (p. 764) A simple option has (1) payoffs based only on the value of a single underlying asset observed at the expiration date, and (2) linear payoffs to the long position of the calls and puts based on the distance between the option’s strike price and the value of the underlying asset. (p. 764)
115 spread option (p. 769) A spread option has a payoff that depends on the difference between two prices or two rates. (p. 769)
116 static hedge (p. 777) A static hedge is when the positions in the portfolio do not need to be adjusted through time in response to stochastic price changes to maintain a hedge. (p. 777)
117 tax deduction (p. 762) Tax deduction of an item is the ability of a taxpayer to reduce taxable income by the value of the item. (p. 762)
118 tax deferral (p. 762) Tax deferral refers to the delay between when income or gains on an investment occur and when they are taxed. (p. 762)
119 wrapper (p. 760) A wrapper is the legal vehicle or construct within which an investment product is offered. (p. 760)
120 circuit breaker (p. 791) A circuit breaker is a decision rule and procedure wherein exchange authorities invoke trading restrictions (even exchange closures) in an attempt to mute market fluctuations and to give market participants time to digest information and formulate their trading responses. (p. 791)
121 spoofing (p. 791) Spoofing is the placing of large orders to influence market prices with no intention of honoring the orders if executed. (p. 791)