Arbitrage
The purchase or sale of an instrument and simultaneous taking of an equal and
opposite position in a related market, in order to take advantage of small price differentials between markets.
Asset Class
Securities with identical risk/reward composition, attributes and features.
At-the-money
An option contract with identical risk/ reward composition and features.
Asset Allocation
Investment practice that divides funds among different markets to achieve diversification for risk management purposes and/or expected returns consistent with an investor’s objectives.
Asset Liability Management (ALM)
A risk management technique designed to earn an adequate return while maintaining a
comfortable surplus of assets beyond liabilities.
Business Risk
Risk associated with the unique circumstances of a particular entity, as they might affect the price of that entity’s securities.
Back-office
The departments and processes related to the settlement of financial transactions.
Cash
Money in the form of authorized currency (including coins) and bank balances.
Cash Management: The strategy by which a company administers and invests its cash.
Cash Flow at Risk
The Cash Flow at Risk approach answers the question of how large the deviation between actual cash flow and the planned value (or that used in the budget) is due to changes in the underlying risk factors.
Cash Position
Cash Position in foreign exchange deals with all the transactions affecting Nostro account, funding of Nostro (in case of overdraft), utilization of surplus cash balance in Nostro and deployment of funds so as to ensure optimum utilization.
Examples are delivery under forward contracts, inward /outward telex transfer, etc. It is also called fund position.
Centralised Funds Management System (CFMS)
The Centralised Funds Management System (CFMS) provides for a centralised viewing of balance positions of the account holders across different accounts maintained at various locations of the RBI.
Collar Option
A protective options strategy that is implemented after a long position in a stock
has experienced substantial gains. It is created by purchasing a “put option” while
simultaneously writing a “call option.” (also known as “hedge wrapper”)
Cost of Carry
Expenses incurred while a position is being held, for example, interest on securities
bought on margin, dividends paid on short positions, and other expenses.
Cross Hedge
Hedging a cash market position in a futures or option contract for a different but price-
related commodity.
Credit Information Bureau of India Ltd. (CIBIL)
India’s first credit information bureau is a repository of information, which contains the
credit history of commercial and consumer borrowers. CIBIL provides this information to
its members in the form of credit information reports.
Currency Position
It deals with daily sale/purchase of foreign currency/transaction. It could be excess, less or equal. In that case we call it overbought (more purchase) oversold (more sales) or square (purchase matches sales) respectively.
Currency Risk
The probability of an adverse change in exchange rates.
Day Trading
Refers to positions which are opened and closed on the same trading day.
Derivative
A contract that changes in value in relation to the price movements of a related or underlying security, future or other physical instrument. An option is the most common derivative instrument.
Duration
The weighted average term to maturity of a security’s cash flows, where the weights are the present value of each cash flow as a percentage to the security’s price.
Earnings at Risk
Outcome of notional interest rate shock on interest income.
Electronic Clearing Services
(ECS) ECS (Credit)
Credit clearing ensures multiple repetitive credits to the accounts of constituents of banks situated at various branches of banks on the basis of a single debit to the account of a corporate customer called the “user”.
ECS (Debit)
Debit clearing ensures multiple repetitive debits to the accounts of constituents of banks situated at various branches of banks and a corresponding single debit to the account of a corporate customer called the “user”.
Expected Loss
High frequency but low severity from any activity or risk.
Financial Risk
Uncertainty of results to the investor due to financial modality.
Forward
The pre-specified exchange rate for a foreign exchange contract settling at some agreed future date, based upon the interest rate differential between the two currencies involved.
Fundamental Analysis
Analysis of economic and political information with the objective of determining future movements in a financial market.
Futures Contract
An obligation to exchange a good or instrument at a set price on a future date.
(The primary difference between a future and a forward is that futures are typically traded over an exchange (Exchange Traded Contracts – ETC), versus forwards, which are considered Over the Counter (OTC) contracts. An OTC is any contract not traded on an exchange.)
Growth Stock
Stock of a company which is growing earnings and/or revenue faster than its industry or the overall market, and as compared to stock with similar risk features.
Herstatt Risk
This risk was in focus in 1974 when Herstatt Bank (a German bank) had to shutter down, as settlement of second leg of currency could not be completed due to time zone factors.
Hedge
A position or combination of positions that reduces the risk of your primary position.
Indian Financial Network (INFINET)
The Indian Financial Network (INFINET) is the communication backbone for the Indian Banking and Financial Sector. All banks, public sector undertakings, private sector organisations, co-operative, etc., and the premier financial institutions in the country are eligible to become members of the INFINET.
Inflation
An economic condition whereby prices for consumer goods rise, eroding purchasing power.
Initial Margin
The initial deposit of collateral required to enter into a position as a guarantee on future performance.
In the Money
Situation in which an option’s strike price is below the current market price of the underlier (for a call option) or above the current market price of the underlier (for a put option). Such an option has intrinsic value.
Leading Indicators
Statistics that are considered to predict future economic activity.
Limit Order
An order with restrictions on the maximum price to be paid or the minimum price to be received.
Liquidity
The ability of a market to accept large transactions with minimal to no impact on price stability.
Liquidity Risk
The risk that arises from the difficulty of selling an asset. An investment may sometimes need to be sold quickly. Unfortunately, an insufficient secondary market may prevent the liquidation or limit the funds that can be generated from the asset.
Liquidation
The closing of an existing position through the execution of an off-setting transaction.
Long Position
A position that appreciates in value if market prices increase.
Market Risk
Exposure to changes in market prices.
Mark-to-Market
Process of re-evaluating all open positions with the current market prices. These new values then determine margin requirements.
Maturity
The date for settlement or expiration of a financial instrument.
National Settlement System (NSS)
All clearings conducted in all clearing houses in all parts of the country will be settled in a single centralized location in central bank money.
Negotiated Dealing System (NDS)
Negotiated Dealing System (NDS) is an electronic platform for facilitating dealing in Government Securities and Money Market Instruments.
Offer
The rate at which a dealer is willing to sell a currency.
Open Position
A deal not yet reversed or settled with a physical payment.
Operational Risk
The risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.
Over the Counter (OTC)
It is used to describe any transaction that is not conducted over an exchange.
Overnight
A trade that remains open until the next business day.
Political Risk
Exposure to changes in governmental policy which will have an adverse effect on an investor’s position.
Position
The netted total holdings of a given currency.
Premium In the currency markets, it describes the amount by which the forward or futures price exceeds the spot price.
Primary Dealers
Primary dealers can be referred to as Merchant Bankers to the Government of India, comprising the first tier of the government securities market. Satellite dealers work in tandem with the Primary dealers forming the second tier of the market to cater to the retail requirements of the market.
Quote
An indicative market price, normally used for information purposes only.
Rate
The price of one currency in terms of another, typically used for dealing purposes.
Risk Exposure to uncertain change, most often used with a negative connotation of adverse
change.
Risk Management
The employment of financial analysis and trading techniques to reduce and/or control exposure to various types of risk.
Roll Over
Process whereby the settlement of a deal is rolled forward to another value date. The cost of this process is based on the interest rate differential of the two currencies.
Settlement
The process by which a trade is entered into the books and records of the counterparts to
a transaction .The settlement of currency trades may or may not involve the actual
physical exchange of one currency for another.
Settlement Risk
The risk that one party will fail to deliver the terms of a contract with another party at the time of settlement.
Short Position
Investments position that benefit from a decline in market price.
Spot Price
The current market price. Settlement of spot transactions usually occurs within two business days.
Spread
The difference between the bid and offer prices.
Structured Financial Messaging Solution (SFMS)
SFMS allows intra/inter bank message transfer. This also provides for transfer of file attached in a secured mode.
Swap
A currency swap is the simultaneous sale and purchase of the same amount of a given currency at a forward exchange rate.
Tail Risk
Probability of loss due to most unsecured market movements.
Technical Analysis
An effort to forecast prices by analyzing market data, i.e., historical price trends and averages, volumes, open interest, etc.
Tick Size
The smallest increment in which the price for a futures contract can move.
Transaction Cost
The cost of buying or selling a financial instrument.
Transaction Date
The date on which a trade occurs.
Turnover
The total money value of all executed transactions in a given time period.
Value at Risk (VAR)
It is a measure of how the market value of an asset or of a portfolio of assets is likely to decrease over a certain time period under usual conditions.
Yield to Maturity (YTM)
The percentage rate of return paid on a bond, note, or other fixed income security if the investor buys and holds it to its maturity date.
