OTC LearnOTC derivatives glossary
358 key terms from the 66 products in OTC Learn, each linked to the product that teaches it. Where several products use a term, the first definition is shown and every product is listed.
0–9 · A · B · C · D · E · F · G · H · I · J · K · L · M · N · O · P · Q · R · S · T · U · V · W · X · Y · Z
0–9
25-delta {#25-delta}
The market’s usual reference point away from at-the-money, naming a strike by its delta rather than its rate so quotes stay comparable as spot moves.
In: Risk Reversal
3-2-1 ratio {#3-2-1-ratio}
The standard bundle of three barrels of crude against two of gasoline and one of distillate.
A
Accrual factor
The fraction of days in the period on which the reference fixed inside the range.
Accrual period
The window whose ex-dividend dates count — conventionally a single calendar year.
In: Dividend Swap
Annual contract quantity
The reference volume for the contract year, around which the overall minimum and maximum takes are set.
In: Swing Option
Annualised basis
The spread scaled to a yearly rate, which is the only form in which two contracts are comparable.
Annuity factor
The sum of the discount factors over the bond’s remaining life, which converts an upfront price difference into a running spread.
In: Asset Swap
Asian settlement
Settlement against the average of the reference price over a period rather than its level on one date.
In: Commodity Option
Asset swap spread
The running spread over the floating benchmark the package pays, and the cash market’s measure of the issuer’s credit risk.
In: Asset Swap
Attachment point
The loss level at which the bond begins to lose principal.
In: Catastrophe Bond
Auction final price
The single recovery price set by the industry auction, which every contract on that name settles against.
Autocall trigger
The level at or above which the note redeems early on an observation date, usually the initial level.
Averaging convention
The rule turning a series of daily published prices into the single floating price for a period.
In: Commodity Swap
B
Backtesting exception
A day whose clean P&L loss exceeded the VaR the model predicted for it.
In: Value at Risk
Backwardation
A curve where nearby prices exceed distant ones, which makes rolling a long position cost money.
Barrier
A price level that brings an option into existence or extinguishes it if the underlying trades through it.
Barrier shift
A dealer’s practice of hedging to a level slightly beyond the contractual barrier to make the risk tradable.
In: Barrier Option
Base currency
The first currency in a pair — the one whose price is being quoted, so EUR/USD is dollars per euro.
In: FX Forward
Baseload block
A constant delivery in every hour of the contract period — 1 MW for 31 days is 744 MWh.
Basis
The difference between a future’s price and the spot price of the underlying it references.
Basis risk
The residual exposure left when the fixing differs from the rate the hedger transacts at onshore.
In: Non-Deliverable Forward, Commodity Swap, The LME nickel squeeze, 2022, Longevity Swap
Basis spread
The basis points added to one floating leg so both legs are worth the same at inception, and the price at which the swap trades.
In: Basis Swap
Beneficial ownership
Who is treated as holding a share for disclosure purposes — the dealer hedging a swap, not the fund receiving its return.
In: Archegos, 2021
Bermudan swaption
A swaption exercisable on any one of several agreed dates rather than on a single expiry date.
In: Swaption
Block trade
A trade above a published size threshold, permitted a short reporting delay so that publishing it does not itself move the market against whoever just dealt.
Book value reporting
Reporting holdings at cost rather than market, which conceals a loss until it must be realised.
Break-even move
The daily move at which re-hedging profit exactly covers the position’s theta.
In: Delta and Gamma
Breakeven inflation
The fixed rate that makes both legs settle at the same amount, and so the market’s implied average inflation for that maturity.
In: Inflation Swap
Bump and revalue
Computing sensitivity by shifting an input, repricing the book and taking the difference.
Buyer
The side that is the notional borrower, and so gains when the reference rate fixes above the contract rate.
C
Calendar spread
Long one delivery month and short another in the same commodity, trading the gap rather than the level.
In: Amaranth, 2006
Call
The right to buy at the strike, which caps what a consumer effectively pays for the commodity.
In: Commodity Option
Call spread replication
Hedging a digital with a long and a short vanilla struck either side of the trigger.
In: Digital Option
Cap
A ceiling on the realised volatility used at settlement, limiting how much a seller can lose.
In: Variance Swap
Caplet
One option within a cap, covering a single reset period of the underlying schedule.
In: Cap and Floor
Carry
The funding, borrow and roll-down component of a day’s P&L, separate from market moves.
In: P&L Attribution
Carry trade
Borrowing in a low-yielding currency to invest in a higher one — profitable until the exchange rate moves.
In: The Swiss franc floor, 2015
Cash and carry
Buying the underlying and selling the future against it to capture the basis until expiry.
Cash-or-nothing
A digital paying a fixed cash amount if the condition is met, and nothing if it is not.
In: Digital Option
CDS-bond basis
The CDS spread minus the asset swap spread on the same issuer and maturity, negative when the bond pays more than protection costs.
In: Asset Swap
Clearing member
A firm that faces the CCP directly; most market participants access clearing through one rather than joining themselves.
In: Central Clearing
Client clearing
A clearing member facing the CCP on a client’s behalf, in a segregated account, with its own layer of margin and default provisions on top of the CCP’s.
In: Central Clearing
Close-out netting
Terminating every trade under a Master Agreement together on a default and reducing them to one net figure, rather than settling each on its own.
Collar
A bought cap combined with a sold floor, which cuts the net premium in exchange for giving up gains below the floor.
In: Cap and Floor
Collateral
The high-quality assets the note proceeds are invested in and pledged against, in a vehicle-issued structure.
Collateral account
Where the note proceeds are held, so the vehicle can always pay and the investor takes no credit risk.
In: Catastrophe Bond
Collateral buffer
The headroom a leveraged hedge holds so that a yield move produces a call it can meet without selling.
Collateral call
A repo lender’s demand for more security as the collateral falls, met by selling into the same fall.
Confidence level
The quantile the measure is read at, commonly 97.5% or 99%.
In: Value at Risk
Confirmation
Agreement of a trade’s terms with the counterparty — the check an invented trade cannot survive.
Contango
The opposite shape, where distant prices exceed nearby ones, and a long roll earns rather than costs.
Contingent principal
Repayment that is due in full only if no credit event occurs, and falls to recovery value if one does.
Continuation value
What the remaining allowance is worth if today’s is left unused — the figure a nomination decision is really judged against.
In: Swing Option
Contract price
The price agreed today that the buyer will pay per unit on the delivery date.
Contract rate
The rate agreed on the trade date, against which the reference rate is compared at fixing.
Contract volume
The quantity the per-unit payoff is multiplied by to give the cash amount actually paid.
In: Commodity Option
Convergence
The narrowing of the basis to zero at expiry, which is what makes the captured spread a return.
Convergence trade
Buying the cheaper and selling the dearer of two near-identical instruments, expecting the gap to close.
In: Long-Term Capital Management, 1998
Convexity
The second-order effect that makes DV01 inaccurate for large moves in either direction.
Cooling degree day
The mirror image, counting degrees above the base, used for contracts written on summer cooling demand.
In: Weather Swap
Correlation risk
Exposure to how likely defaults are to arrive together, carried by index tranche positions.
Cost of carry
The storage, insurance and financing cost of holding a commodity until delivery, which shapes the forward price.
In: Commodity Forward, Cash and Carry Basis
Coupon barrier
The lower level the underlying must hold on an observation date for a coupon to be paid without the note calling.
Covered interest rate parity
The no-arbitrage relationship implying that the interest rate differential between two currencies should already be fully reflected in forward points, leaving no room for an extra spread.
Crack spread
The difference between the value of refined products and the cost of the crude used to make them.
Credit event
The defined trigger — bankruptcy, failure to pay, restructuring and, for financials, governmental intervention — that terminates the contract.
Cross-currency basis
The spread added to one floating leg of a floating-for-floating cross-currency swap, which covered interest rate parity implies should be zero and, for the dollar since 2008, persistently is not.
Cross-currency basis swap
The floating-for-floating structure specifically, as distinct from the fixed-for-fixed and fixed-for-floating variants that also trade under the broader cross-currency swap name.
Cross-currency swap
A longer-dated relative that also exchanges interest payments over its life, which an FX swap does not.
In: FX Swap
Crowded position
One whose size and holder are known to the market, so an unwind can be anticipated and traded against.
In: Long-Term Capital Management, 1998
CS01
The change in value for a one basis point widening in the credit spread.
Currency floor
A central bank commitment to prevent a rate falling below a level, held by intervening without limit.
In: The Swiss franc floor, 2015
CVA
Credit valuation adjustment: the expected cost of the counterparty’s own default risk, subtracted from the textbook value.
D
Daily contract quantity
The reference daily volume that the minimum and maximum daily nominations are expressed against.
In: Swing Option
Daily quantity
The standard amount purchased on each fixing when the price is between the strike and the knock-out.
In: Accumulator
Day count convention
The rule converting an annual rate into the fraction actually owed for a period, such as ACT/360.
Day-one P&L
Profit recognised when a trade is booked, on a model price rather than an observed one.
In: P&L Attribution
Days to liquidate
How long a position would take to sell at normal volumes, and so how stale the price used to margin it is.
In: Archegos, 2021
Decumulator
The mirror structure, selling a daily quantity above spot and geared into a rally.
In: Accumulator
Default waterfall
The strict order in which a CCP’s financial resources absorb a defaulting member’s losses, ending only after the defaulter’s own resources and the CCP’s own capital are exhausted.
In: Central Clearing
Deliverable grade
The specification a contract can be settled with physically — and the thing a producer hedge must match.
In: The LME nickel squeeze, 2022
Delivery date
The agreed date, or window, on which payment is made and the commodity is handed over.
Delivery point
The named place where the goods change hands, which fixes who bears freight and where risk passes.
Delta
How much the option’s value changes for a small move in the spot rate.
In: FX Option, Risk Reversal, OTC Equity Option, Delta and Gamma
Delta exchange
The offsetting index position traded alongside the option so the buyer starts without a directional view.
Delta hedging
Holding an offsetting position in the underlying so the option position has no directional exposure.
In: Delta and Gamma
Delta One
Desks trading instruments that track their underlying one-for-one, such as index futures and swaps.
Discount curve
The curve used to bring every cash flow on a trade, fixed and floating alike, back to a present value.
Discounted settlement
The convention of paying the interest difference at the start of the period, reduced to its present value.
Disorderly unwind
A forced liquidation in which sellers compete, so the price achieved is far below the marked value.
In: Archegos, 2021
Distillate
The middle-distillate product group covering diesel and heating oil, the third leg of the 3-2-1.
Dividend adjustment
The agreed proportion of a declared dividend passed through on the equity leg, often net of withholding tax.
In: Equity Swap, Contract for Difference
Dividend curve
The strip of successive annual maturities, whose shape shows what the market will pay for each future year.
In: Dividend Swap
Dividend notional
The cash amount paid per point of difference between realised dividends and the strike.
In: Dividend Swap
Dividend points
The contribution dividends make to an index level, the unit an index dividend swap is quoted and settled in.
In: Dividend Swap
Doom loop
A self-reinforcing spiral where meeting a call requires selling the asset whose fall caused the call.
Dual range accrual
A version conditioning the coupon on two references, paying only on days both are inside.
DV01
The change in a position’s value for a one basis point parallel move in rates.
DV01 (PV01)
The dollar change in a position’s value for a one basis point move in the relevant curve, the standard measure of interest rate sensitivity.
DVA
Debit valuation adjustment: the mirror-image value of the dealer’s own default risk, which a deteriorating dealer can — controversially — book as a gain.
E
Effective duration
The true price sensitivity of a structured note to rates, which can be several times its stated maturity.
Effective federal funds rate
The volume-weighted median rate on overnight unsecured borrowing in the US federal funds market, also published by the New York Fed.
In: Basis Swap
Embedded CDS
The credit default swap inside the note, on which the investor is the protection seller.
Enhanced coupon
The above-market interest the note pays, made up of the collateral return plus the protection premium.
Enhanced strike
The better-than-forward rate the client deals at, funded by the options it has implicitly sold.
Equity leg
The side paying the return on the underlying share, basket or index over each period.
In: Equity Swap
Error account
An account for correcting mistaken bookings, and here the place concealed losses were parked.
In: Barings, 1995
Event of Default
A trigger generally caused by one party’s own conduct — non-payment, bankruptcy, a breach of the agreement — giving the other side the right, not the obligation, to terminate everything.
Exception handling
What happens after an alert fires, and the step that decides whether a control works at all.
Exercise style
Whether the option may be exercised only at expiry (European) or at any time up to it (American).
In: FX Option
Exhaustion point
The loss level at which the bond’s principal is entirely gone.
In: Catastrophe Bond
Expected shortfall
The average loss given that the threshold is breached — the mean of the tail rather than its edge.
In: Value at Risk
Explain
The decomposition of a day’s P&L into the risk factors that produced it.
In: P&L Attribution
F
Family office
A firm managing a single family’s wealth, subject to lighter registration and disclosure than a fund.
In: Archegos, 2021
Far leg
The reversing exchange on the later value date, struck at the forward rate agreed at inception.
In: FX Swap
Fictitious trade
An invented offsetting position booked to make a real exposure appear hedged.
Financial stability operation
A central bank intervention aimed at restoring orderly markets rather than at setting monetary policy.
Financing leg
The floating payment — typically SOFR or €STR plus a spread — that buys the exposure.
In: Total Return Swap, Equity Swap
Fixed leg
The side paying a rate agreed at inception that does not change for the life of the trade.
In: Interest Rate Swap, Longevity Swap
Fixed price
The price agreed at inception for the whole life of the swap, quoted per unit of the commodity.
In: Commodity Swap
Fixing date
The day the reference rate is observed and the settlement amount is calculated.
In: Forward Rate Agreement, Non-Deliverable Forward
Fixing rate
The official reference rate published on the fixing date, against which the contract rate is compared.
Fixing source
The named publisher of that rate, such as a central bank or an industry benchmark administrator.
Flight to quality
A rush into the safest, most liquid assets, which widens every spread that pays for illiquidity at once.
In: Long-Term Capital Management, 1998
Floating leg
The side paying a rate that resets periodically against a published benchmark such as SOFR.
In: Interest Rate Swap, Commodity Swap, Longevity Swap
Floorlet
One option within a floor, covering a single reset period of the underlying schedule.
In: Cap and Floor
Forward points
The adjustment added to or subtracted from spot to give the forward rate, driven by the interest rate differential.
In: FX Forward
Forward sale
An agreement to deliver a quantity at an agreed price on a future date — the orthodox hedging instrument.
Forward volatility
The volatility expected between two future dates, which is what a cliquet is priced on.
In: Cliquet Option
Forward-starting option
An option whose strike is fixed at a future date rather than today, the building block of a cliquet.
In: Cliquet Option
FRA notation
The “3x6” form, giving the months from now to the start and to the end of the period covered.
Freight index
A daily published assessment of shipping rates, compiled from broker submissions, used as the settlement reference.
Front-end protection
Compensation carried into a payer’s payoff for credit events occurring between trade date and expiry.
Frozen fixing
The convention of carrying the last observed fix over the final days of a period so the coupon can be settled.
Funded protection
Protection paid for in cash at the outset, so the buyer has nothing left to collect from the seller later.
Funding interval
How often that payment is exchanged — commonly every eight hours, which compounds quickly.
In: Perpetual Swap
Funding level
A scheme’s assets against its liabilities — which improved through the crisis, even as its liquidity failed.
Funding liquidity
The ability to keep financing a position — the thing that decides whether you can wait for convergence.
In: Long-Term Capital Management, 1998
Funding rate
The periodic payment between longs and shorts that keeps a perpetual contract close to the underlying index.
In: Perpetual Swap
FVA
Funding valuation adjustment: the cost of funding the uncollateralised part of a trade’s exposure over its life.
G
Gamma
The rate of change of delta, and so how fast an existing hedge becomes wrong.
In: Delta and Gamma
Gap risk
The exposure left when the underlying jumps rather than moves smoothly, giving no chance to re-hedge.
In: Delta and Gamma, The Swiss franc floor, 2015
Gearing
The multiple — usually two — applied to the daily quantity on fixings below the strike.
In: Accumulator
Gearing ratio
The multiple applied to the notional on fixings that settle against the client, usually two.
Gilt repo
Borrowing cash against gilts, the usual way an LDI fund obtains leveraged exposure.
Global cap and floor
Limits applied to the total payoff after the individual period returns have been added together.
In: Cliquet Option
Grade specification
The quality standard the delivered commodity must meet for the seller to have performed.
Gross exposure
The total size of positions before offsetting longs against shorts — the number that matters when they move together.
In: Archegos, 2021
Guaranty fund
The mutualised pool of collateral, contributed by every clearing member, that sits behind the CCP’s own capital as the last layer before further assessments.
In: Central Clearing
H
Haircut
The portion of the exposure that must be covered by collateral, which fixes how much leverage the trade carries.
In: Total Return Swap, Collateral and the CSA
Headline coupon
The maximum annual rate, earned only if the reference stays inside the range every day.
Heat rate
The gas needed per unit of electricity produced, the inverse of a plant’s efficiency.
Heating degree day
One unit for each degree the day’s average temperature falls below the base, and none at all for a day above it.
In: Weather Swap
Hedge horizon
How far ahead output is sold, and so how much unmined production a mark-to-market applies to.
Historical simulation
Computing VaR by applying a window of past market moves to today’s portfolio.
In: Value at Risk
Hypothetical P&L
Yesterday’s portfolio revalued on today’s market data, with no intraday trading or fees.
In: P&L Attribution
I
Implied dividend
The fixed strike at which a given year’s dividends can be traded today, before any of them are known.
In: Dividend Swap
Implied volatility
The market’s expectation of how much the underlying swap rate will move, and the main driver of the premium besides the rate level.
In: Swaption, FX Option, OTC Equity Option, Vega and the Volatility Surface
In-out parity
The rule that a matching knock-in and knock-out together equal the plain vanilla option.
In: Barrier Option
Indemnity swap
A hedge referencing the scheme’s own members, matching exactly but requiring detailed data.
In: Longevity Swap
Independent amount
The collateral posted at inception, before any variation margin starts moving with the mark.
Index arbitrage
Trading the same index future on two exchanges for a small price difference, with little directional risk.
In: Barings, 1995
Index basis
The difference between the index level and the aggregate of its constituents’ single-name spreads.
In: CDX Index, CS01 and Jump to Default, The London Whale, 2012
Index coupon
The fixed running premium the series pays — 100bp for investment-grade families, 500bp for high yield.
In: CDX Index
Index factor
The proportion of the original notional still running after defaulted names have been stripped out.
In: CDX Index
Index price
A composite of external spot sources used as the reference, rather than the venue’s own last trade.
In: Perpetual Swap
Index ratio
The final reference index divided by the initial one, which less one is what the inflation leg pays.
In: Inflation Swap
Initial margin (IM)
Collateral sized to cover the potential further loss between the last variation margin call and the time it takes to close out a defaulted counterparty.
Insurance fund
A pool absorbing the shortfall when a liquidation cannot be completed at better than the bankruptcy price.
In: Perpetual Swap
Inverse floater
A note whose coupon falls as a benchmark rate rises, giving it far more interest rate risk than its maturity suggests.
Investment pool
A shared fund holding cash for several public bodies, whose participants here could not see the risk taken.
Issuer call
The issuer’s right to redeem the note early, typically exercised when the structure has performed.
J
Jump to default
The immediate profit or loss if the reference entity defaults now, rather than widens.
K
Key rate DV01
Risk reported bucket by bucket along the curve, rather than as one parallel-shift number.
Knock-in
A barrier option that only becomes a live option once the barrier is reached.
In: Barrier Option
Knock-in barrier
The downside level that, once breached, removes the protection on principal and exposes the investor to the fall.
Knock-in knock-out forward
A close relative pairing a barrier that cancels protection with one that activates a geared obligation.
Knock-out
A barrier option that ceases to exist if the underlying reaches the barrier level.
In: Barrier Option
Knock-out barrier
A rate level that, if spot touches it, cancels the option before expiry.
In: FX Option
Knock-out level
The price above spot at which the contract terminates early, capping the buyer’s gain.
In: Accumulator
L
Leverage
The ratio of position value to margin posted, which magnifies gains and losses alike.
Leverage ratio
Assets against capital, and so how far a position can move before the capital is gone.
In: Long-Term Capital Management, 1998
Liability-driven investment
Investing to match the interest rate and inflation sensitivity of a scheme’s liabilities rather than to beat an index.
Liquidation decision
The choice to close a hedge, which converts an unrealised offset into a realised loss.
Liquidation discount
The gap between a portfolio’s marked value and what a buyer will pay to take it on whole.
In: Amaranth, 2006
Liquidity risk
The risk of being unable to fund a position that is economically sound, which is what closes most of them.
In: The LME nickel squeeze, 2022
Local cap and floor
The limits applied to each period’s return before the periods are summed.
In: Cliquet Option
Longevity risk
The risk that members live longer than assumed, so a scheme pays pensions for more years than it funded.
In: Longevity Swap
M
Made-available-to-trade (MAT) determination
The named, instrument-specific finding that triggers the US trading mandate — once approved, that swap can no longer be executed bilaterally.
Maintenance margin
The equity level below which a position is closed out by the venue rather than allowed to go negative.
In: Perpetual Swap
Margin
The cash posted to open and maintain a position, a fraction of its full value.
Margin close-out
The dealer’s closing of positions once account equity falls below a set fraction of required margin.
Mark price
The valuation used for margin and liquidation, built from the index so a single order cannot move it.
In: Perpetual Swap
Mark-to-market
Valuing a position from directly observable, quoted market inputs.
Mark-to-market reset
A periodic true-up of part of the notional to the current spot rate, used on longer-dated swaps to stop the eventual re-exchange from building up outsized credit exposure.
Mark-to-model
Valuing a position with a pricing model, used where no direct market quote exists and the model’s own inputs are themselves estimated.
Marking within the spread
Valuing a position at a favourable point between bid and offer, which delays recognition of a loss.
Master Agreement
The standard-form core of an ISDA relationship, identical for every pair of counterparties that use it, setting out terms that would otherwise have to be renegotiated on every trade.
Maturity mismatch
A hedge whose settlement dates differ from the exposure’s, leaving a funding gap even when the economics offset.
Memory feature
A term that pays previously missed coupons once the coupon barrier is met again on a later date.
Minimum transfer amount (MTA)
The minimum size a call must reach before it is actually made, so small movements are not settled daily.
Modified duration
The percentage change in price per unit change in yield, from which DV01 is derived.
Multiple
The spread divided by the modelled expected loss — the market’s standard relative value measure.
In: Catastrophe Bond
MVA
Margin valuation adjustment: the cost of funding the initial margin a trade requires to be posted into segregated custody.
N
Near leg
The first exchange, usually at or close to the spot rate and the spot date.
In: FX Swap
Negative client balance
An account whose losses exceed its deposit, leaving the client owing the broker money.
In: The Swiss franc floor, 2015
No-touch
The mirror contract, paying only if the level is never reached during the option’s life.
In: Digital Option
Nomination
The buyer’s notice, given by a deadline in the contract, of the volume it will take on the coming day.
In: Swing Option
Notional
The reference amount interest is calculated on. It is never exchanged in a standard swap.
Notional exchange
The exchange of principal in both currencies at inception, and back again at maturity — the feature that separates a cross-currency swap from a same-currency interest rate swap.
Notional reset
A feature that re-strikes the notional at the current price each period so exposure tracks market value.
In: Equity Swap
Notional volume
The quantity of the commodity the swap is calculated on — barrels, tonnes or ounces — never actually delivered.
In: Commodity Swap
Novation
The legal substitution of the CCP into a trade as counterparty to each side, replacing the original bilateral contract entirely.
In: Central Clearing
O
Observation date
A scheduled date on which the underlying is compared with its initial level to decide whether the note calls or pays.
Observation period
The run of trading days whose daily returns feed the realised variance calculation.
In: Variance Swap
OIS discounting
Discounting off a curve built from overnight index swaps, adopted after 2008 because an overnight rate carries negligible term credit risk — the property a discount curve needs.
On-the-run
The most recently launched series, which concentrates almost all of the trading volume.
In: CDX Index, Long-Term Capital Management, 1998
One-touch
An American digital paying if the level is reached at any time before expiry, not only at it.
In: Digital Option
Open interest
The total number of contracts outstanding, and so the measure a position’s size should be read against.
In: Amaranth, 2006
Operational risk
Loss from failed processes, people or systems, as distinct from market or credit risk.
In: Barings, 1995
Outright forward
A single exchange of two currencies on one future date, with no offsetting near leg.
In: FX Forward
Overnight financing
The daily charge for funding the full value of a long position, accruing for as long as it is held.
P
Par-par structure
The standard form, in which the investor pays par for the bond and the swap notional is par, whatever the bond is actually worth.
In: Asset Swap
Parametric trigger
A payout condition based on physical measurements alone, settling quickly and matching losses imperfectly.
In: Catastrophe Bond
Payer option
The right to buy protection on the index at the strike spread, which gains value as spreads widen.
Payer swaption
The right to enter a swap paying fixed and receiving floating, which gains value as rates rise.
In: Swaption
Payout
The fixed sum a digital pays on exercise; the price is quoted as a percentage of it.
In: Digital Option
Payout cap
The agreed limit on the total either side can be asked to pay, fixed when the contract is written.
In: Weather Swap
Peak block
Delivery only in defined weekday daytime hours, when demand and prices are typically highest.
Physical settlement
Settlement by delivering the actual goods rather than paying a cash difference.
Pin risk
The unhedgeable exposure left when the underlying sits on the strike as the option expires.
In: Digital Option
Pivot TARF
A variant with two strikes, paying inside a band and gearing outside it on either side.
Position limits
Caps on how much of a contract one participant may hold, applied on a regulated exchange.
In: Amaranth, 2006
Premium
The upfront price of the option, paid whether or not the swaption is ever exercised.
In: Swaption, Cap and Floor, FX Option, OTC Equity Option, Commodity Option
Premium financing
Using the premium collected on the leg sold to fund some or all of the premium owed on the leg bought.
In: Risk Reversal
Prime brokerage
The bank service providing financing, execution and custody to a fund, and the margin terms that go with it.
In: Archegos, 2021
Procyclicality
The tendency of risk measures to rise together in a sell-off, forcing simultaneous deleveraging.
In: Value at Risk
Producer hedge
Selling future output forward at a fixed price to insulate a mine or field from a falling market.
Projection curve
The curve used to forecast a floating leg’s future settings, kept separate from the discount curve applied to the resulting cash flows.
In: Basis Swap, Valuation and Marking
Protection buyer
The side paying the coupon and receiving the payout, which leaves it short the credit.
Publication lag
The fixed number of months between the index month a payment references and the payment date itself — two months on a standard UK RPI swap.
In: Inflation Swap
Put
The right to sell at the strike, which puts a floor under what a producer effectively receives.
In: Commodity Option
PV01
The value of a basis point on the par rate — the discounted annuity — rather than on the yield.
Q
q-forward
A forward on a published mortality rate for an age cohort — the standardised, index-based alternative.
In: Longevity Swap
Quality basis
The gap between the index grade and the crude or products a particular refinery actually handles.
R
Realised dividends
The dividends that actually went ex-dividend during the accrual period, which the settlement is measured against.
In: Dividend Swap
Realised variance
The annualised average of squared daily returns actually observed over the contract’s life.
In: Variance Swap
Rebate
A fixed amount paid to the holder when a knock-out barrier triggers, softening the loss.
In: Barrier Option
Receiver option
The right to sell protection on the index at the strike spread, which gains value as spreads tighten.
Receiver swaption
The right to enter a swap receiving fixed and paying floating, which gains value as rates fall.
In: Swaption
Reconciliation
Checking the firm’s records against the exchange’s and the cash actually paid — the control that was absent.
In: Barings, 1995
Recovery rate
The assumed proportion of face value a defaulted claim is worth, fixed in the market by auction.
Redemption
Early termination of the whole strip once the target is reached, whatever fixings remain.
Reference
The observed rate, currency or spread whose daily fixing decides whether coupon accrues.
Reference asset
The bond, loan or portfolio whose economics the swap passes across, held throughout by the payer.
Reference entity
The borrower whose default the contract is written on, identified together with the debt that qualifies for settlement.
Reference index
The named published price the floating leg settles against, such as a dated Brent or gold benchmark assessment.
In: Commodity Swap, Crack Spread Swap
Reference station
The named weather station whose published observations settle the contract, standing in for a whole region.
In: Weather Swap
Rehypothecation
The right to reuse collateral received as if it were the receiving firm’s own, rather than ring-fencing it — routine for cash variation margin, prohibited for segregated initial margin.
Repo specialness
The premium a particular bond commands in the repo market, which cheapens the cost of funding it and tightens its asset swap spread.
In: Asset Swap
Repurchase agreement
Selling a security for cash with an agreement to buy it back, the standard way to borrow against bonds.
Reset date
The date that starts a new calculation period and fixes which benchmark rate applies to it.
In: Interest Rate Swap, Equity Swap, Cliquet Option
Reset frequency
How often the reference rate is compared with the strike, which also sets how many caplets the strip contains.
In: Cap and Floor
Restatement
A correction of previously published financial results, here for the quarter in which the marks were wrong.
Restricted currency
The currency the contract references but never delivers, because capital controls block offshore settlement.
Reverse cash and carry
The mirror trade — short the asset, long the future — which requires borrowing the underlying.
Reverse cliquet
A variant paying a high fixed coupon reduced by the sum of the negative period returns.
In: Cliquet Option
Reverse knock-out
A barrier set in the money, so the option is extinguished exactly when it is most valuable.
In: Barrier Option
Reverse Yankee
A bond issued by a US company in a foreign currency, most often euros, and swapped back into dollars — the mirror of a Yankee bond, in which a foreign issuer borrows dollars in the US market.
RFQ (request-for-quote)
An execution method where a client asks a chosen number of dealers to compete for one specific trade, rather than trading against a continuous public order book.
Risk reversal (quote)
The implied volatility of a call minus the implied volatility of a put at the same delta and tenor — the market’s standard shorthand for which side of the distribution carries the fatter tail.
In: Risk Reversal
Risk-theoretical P&L
The profit the risk model predicts from its own risk factors and sensitivities.
In: P&L Attribution
Risky annuity
The duration-like factor that converts one basis point of index spread into an amount of cash.
In: Credit Index Option, CS01 and Jump to Default
Roll yield
The gain or loss from replacing an expiring contract with a later one, which accumulates every month.
Route basis
The gap between one ship’s actual economics and the index average the hedge references.
S
Schedule
The document that amends and elects within the Master Agreement’s standard form, adding bespoke terms and naming any Additional Termination Events specific to one relationship.
Seasonality
The repeating within-year pattern in a price index, which largely cancels over whole years but must be modelled on short-dated and broken-dated trades.
In: Inflation Swap
SEF / MTF / OTF
The regulated electronic venues — Swap Execution Facilities in the US, Multilateral and Organised Trading Facilities in the EU — that a sufficiently standardised derivative is required to trade on rather than being negotiated bilaterally.
Segregation of duties
Keeping trading, confirmation and settlement in separate hands so no one person can both trade and record.
In: Barings, 1995
Series
One vintage of the index, with a fixed constituent list and coupon, replaced by a new series at each roll.
In: CDX Index
Settlement average
The mean of the index over the contract month, used instead of a single print so it cannot easily be moved.
Settlement currency
The convertible currency the net difference is paid in, most often US dollars.
Settlement period
The month or other window over which each leg’s index is observed and the spread is calculated.
Shape risk
The residual left when a flat hedge covers the same total energy as a profile that is not flat.
Short squeeze
A rise driven by shorts being forced to buy back into a market with too little offer to absorb them.
In: The LME nickel squeeze, 2022
Short straddle
Selling a call and a put at the same strike: premium now, unbounded loss if the market moves far.
In: Barings, 1995
Single agreement
The status, stated in the Master Agreement itself, that every trade under it forms one contract with every other — the legal basis for close-out netting.
Skew
The slope of implied volatility across strikes, quoted in the market as a risk reversal.
In: Vega and the Volatility Surface
Skin in the game
The CCP’s own capital contribution to the waterfall, placed ahead of the mutualised guaranty fund so the CCP shares directly in the cost of a default it failed to price correctly.
In: Central Clearing
SOFR
The Secured Overnight Financing Rate, an overnight rate derived from US Treasury repo transactions and published by the New York Fed.
In: Basis Swap
Sold call
An option written away for premium, which gives up the upside on the very asset the seller produces.
Spark spread
The power price less the fuel cost at a given heat rate — a gas generator’s gross margin.
Special purpose vehicle
A standalone issuing entity created for one deal, holding the collateral and the swap that make the note work.
Sponsor
The insurer or corporate transferring the risk, and the party the bond pays when an event occurs.
In: Catastrophe Bond
Spot rate
The rate for an exchange settling on the standard spot date, normally two business days after the trade.
In: FX Forward
Spread
The gap between the dealer’s buy and sell prices, paid on entry and exit of every trade.
Spread margin
The reduced margin charged on offsetting legs, on the assumption that they move together.
In: Amaranth, 2006
Stack and roll
Holding the whole hedge in nearby contracts and rolling it forward, because distant months are not liquid enough.
Standard coupon
The fixed 100bp or 500bp running premium that standardised contracts pay instead of the traded spread.
Standstill agreement
A negotiated pause in counterparties’ rights to call collateral or close out, bought here with equity.
Stop-loss order
An instruction to trade at the market once a level trades — an order, not a guaranteed price.
In: The Swiss franc floor, 2015
Strike
The rate above which a cap begins to pay out, or below which a floor does.
In: Cap and Floor, FX Option, OTC Equity Option, Commodity Option, Accumulator
Strike rate
The fixed rate on the swap the holder may enter, agreed when the swaption is traded.
In: Swaption
Strike spread
The spread level, in basis points, at which the holder may enter the underlying index swap on exercise.
Strip of FRAs
A run of FRAs covering consecutive periods, used where a single contract would leave later periods unhedged.
Supervision
The obligation on a desk head to know what the desk holds, which no system replaces.
Suppressed volatility
Realised volatility held artificially low by intervention, which flatters every risk measure built on it.
In: The Swiss franc floor, 2015
Swap points
The difference between the far and near rates, which is the price of the swap and reflects the interest differential.
In: FX Swap
Swing factor
The maximum daily nomination divided by the average daily volume, measuring how much flexibility the contract carries.
In: Swing Option
Synthetic credit portfolio
A book of credit derivatives held for hedging or positioning rather than lending — here, indices and tranches.
T
Take-or-pay
The obligation to pay for the annual minimum volume whether or not the buyer actually takes it.
In: Swing Option
Target
The cumulative gain that, once reached, redeems the structure and cancels all remaining fixings.
Tenor
The total life of the swap, from effective date to maturity — commonly 2, 5 or 10 years.
Tenor basis
The spread between two floating legs referencing the same benchmark over different periods, such as one month against three months.
In: Basis Swap
Term SOFR
A forward-looking rate for a period such as three months, derived from SOFR derivatives and therefore known at the start of the period.
In: Basis Swap
Termination Event
A largely no-fault trigger — a change in tax law, illegality, a merger leaving a weaker surviving entity — that can end the relationship without either side having done anything wrong.
Theta
The value lost per day from the passage of time, which is what pays for gamma.
In: Delta and Gamma
Threshold
The amount of uncollateralised exposure a CSA lets each side run before a margin call is triggered at all.
Tick value
The cash amount attached to each degree day of difference between the settlement index and the strike.
In: Weather Swap
Time charter average
The average rate to hire a vessel class per day, the usual underlying for dry bulk contracts.
Tom-next
A one-day swap rolling a position from tomorrow’s value date to the next business day.
In: FX Swap
Total return
An equity leg that passes on dividends as well as price changes, unlike a price return leg.
In: Equity Swap
Total return receiver
The side taking the asset’s income, gains and losses in exchange for paying the financing leg.
Trade cancellation
An exchange’s power to void executed trades, used here for a whole session’s nickel business.
In: The LME nickel squeeze, 2022
Trade repository
The regulated entity every OTC derivative, cleared or not, has to be reported to — the systemic map of exposures that did not exist before 2008.
Tranche
A slice of the basket’s losses between an attachment and a detachment point, sold as a separate contract.
In: CDX Index, The London Whale, 2012
U
Unexplained P&L
The residual between actual profit and what the risk factors account for.
In: P&L Attribution
Unwind cost
The loss incurred while exiting a position, distinct from the loss the position already carried.
Upfront payment
The lump sum exchanged at inception that reconciles the fixed coupon with the level the name actually trades at.
UTI / UPI
The Unique Transaction Identifier, generated once per trade so both counterparties’ reports can be matched, and the Unique Product Identifier, reused across every trade in the same instrument.
V
Valuation date
A scheduled date on which the asset is remarked so accrued gains or losses are settled in cash.
Value at risk
The loss not expected to be exceeded over a stated horizon at a stated confidence level.
In: Value at Risk
Value date
The date on which the two currencies are actually delivered to each other.
In: FX Forward, FX Swap
Vanna
The cross sensitivity: how vega moves with the underlying, or delta with volatility.
In: Vega and the Volatility Surface
VaR model change
A revision to the risk model itself, which can reduce measured risk while the position is unchanged.
Variance notional
The cash amount paid per point of difference between realised variance and the strike.
In: Variance Swap
Variance strike
The level settlement is measured against — the square of the volatility number the trade is quoted at.
In: Variance Swap
Variation margin
The daily cash settlement of a derivative’s mark-to-market, owed whatever the physical position is worth.
In: The LME nickel squeeze, 2022
Variation margin (VM)
Collateral that settles the change in a portfolio’s mark-to-market, so neither side carries an unpaid gain or loss.
Vega
How much the option’s value moves when implied volatility changes by one point.
In: OTC Equity Option, Vega and the Volatility Surface
Vega notional
The approximate payoff per volatility point at the strike, equal to twice the strike times the variance notional.
In: Variance Swap
Vessel class
A size category — Capesize, Panamax, Supramax — whose rates move together and define a contract.
Volatility skew
The pattern of implied volatility across different strikes, which a flat single-number vol does not capture and a risk reversal is the standard way to measure.
In: Risk Reversal
Volatility surface
Implied volatility mapped across every strike and every maturity for one underlying.
In: Vega and the Volatility Surface
Volga
The sensitivity of vega to volatility itself — the convexity of the volatility exposure.
In: Vega and the Volatility Surface
Volumetric risk
Exposure to how much you sell rather than the price you sell it for, which a price hedge leaves untouched.
In: Weather Swap, Power Derivatives
Voyage charter
Hiring a vessel for a specific cargo and route, priced per tonne, as opposed to per day.
W
Washington Agreement
The September 1999 accord in which European central banks capped gold sales, reversing a long price decline.
Widow-maker
The March–April natural gas spread, across the end of the withdrawal season, and its reputation for violence.
In: Amaranth, 2006
Window forward
A forward the client may settle on any date within an agreed range rather than one fixed date.
In: FX Forward
Worst-of
A basket convention under which every trigger and barrier test is run on the weakest of the underlyings.
Wrong-way risk
The case where a counterparty’s probability of default is itself correlated with the dealer’s exposure to it, so the two get worse together rather than independently.
X
XVA
The family of valuation adjustments — credit, funding, margin and others — added to a trade’s textbook value to price what a frictionless, default-free assumption leaves out.
Y
Year-on-year inflation swap
The periodic alternative, exchanging each year’s change in the index against a fixed rate on every payment date.
In: Inflation Swap
Z
Z-spread
The constant spread over the zero-coupon curve that makes a bond’s discounted cashflows equal its market price.
In: Asset Swap
Zero premium
A structure with no up-front cost, funded by options the client has sold rather than bought.
In: Accumulator
Zero-cost collar
A risk reversal sized so the premium received on the sold option roughly offsets the premium paid on the bought one, for no net premium.
In: Risk Reversal
Zero-coupon inflation swap
The standard form, which exchanges nothing until maturity and then settles the whole compounded difference in one payment.
In: Inflation Swap
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