Financial Term

 Algorithmic Trading (ALGO Trading): Algorithmic trading (also called automated trading, black-

box trading, or algo-trading) uses a computer program that follows a defined set of instructions
(an algorithm) to place a trade. The trade, in theory, can generate profits at a speed and
frequency that is impossible for a human trader. The defined sets of instructions are based on
timing, price, quantity, or any mathematical model. Apart from profit opportunities for the
trader, algo-trading renders markets more liquid and trading more systematic by ruling out the
impact of human emotions on trading activities.
 All Ordinaries: The All Ordinaries, or as it is commonly referred to as the ‘All Ords’, is the oldest
share index in Australia. It tracks the performance of the top 500 companies listed on the ASX,
based upon their market capitalization. The market capitalization or market cap value of a
company is calculated by multiplying the total number of issued shares by the share price.
 Arbitrage/Arbitraging: Arbitrage occurs when a security is purchased in one market and
simultaneously sold in another market at a higher price, thus considered to be risk-free profit for
the trader.
 Ask Price: The ask is the price a seller is willing to accept for a security, which is often referred to
as the offer price. Along with the price, the ask quote might also stipulate the amount of the
security available to be sold at the stated price. The bid is the price a buyer is willing to pay for a
security, and the ask will always be higher than the bid.
 Asset-backed Securities (ABS): An asset-backed security (ABS) is a financial security such as a
bond or note which is collateralized by a pool of assets such as loans, leases, credit card debt,
royalties, or receivables. For investors, asset-backed securities are an alternative to investing in
corporate debt. An ABS is similar to a mortgage-backed security, except that the underlying
securities are not mortgage-based. When a consumer takes out a loan, their debt becomes an
asset on the balance sheet of the lender. The lender, in turn, can sell these assets to a trust or
“special purpose vehicle,” which packages them into an asset-backed security that can be sold in
the public market. The interest and principal payments made by consumers “pass through” to
the investors that own the asset-backed securities. Typically, individual securities are gathered
into "tranches" or groups of loans with similar ranges of maturities and delinquency risks.
 Asset Swap: Asset swaps are seen to be both cash market instruments and credit derivatives in
the financial markets. They are similar in structure to plain vanilla swaps and the difference
between the two instruments is in the underlying swap contract. Plain vanilla swaps exchange
fixed and floating interest rate products whereas asset swaps exchange fixed rate investments
such as bonds which pay a guaranteed coupon rate with floating rate investments such as an
index. Asset swaps are used to alter the cash flow profile of a bond.
 Basel Accords: The Basel Accords are a set of banking regulation recommendations that the
Basel Committee on Banking Supervision (BCBS) created. The BCBC is a committee of banking
supervisory authorities. The governors of the central banks of the Group of Ten countries
created the committee in 1974.In other words, the Basel Accords are a set of banking
regulations created by the world’s ten largest economies. Their main purpose is to ensure banks
have enough money to meet their obligations and absorb unexpected losses. Basel I, published
in 1988, focuses on capital adequacy - the minimum reserves that a bank or financial institution
must have available. Basel II was published in 2004 and introduced risk weighting. The greater
 the risk to which a bank is exposed, the greater the amount of capital it needs. Basel III, created
in 2010, aimed to strengthen bank capital requirements and increase liquidity.
 Basis Points: Basis points, otherwise known as bps or "bips," are a unit of measure used in
finance to describe the percentage change in the value of financial instruments or the rate
change in an index or other benchmark. One basis point is equivalent to 0.01% (1/100th of a
percent) or 0.0001 in decimal form. Likewise, a fractional basis point such as 1.5 basis points is
equivalent to 0.015% or 0.00015 in decimal form.
 Bear Spread: An option investment strategy. It is a combination of two call options on the same
stock with the same time-to-maturity but different exercise prices. Specifically, a bear spread
takes a short position on a call option with a lower exercise price and a long position on a call
with a higher exercise price. It is essentially a bet on a modestly bear market. When the stock
price goes down, you get to keep the proceed from the short call since the option is not going to
be exercised; when the stock price goes up substantially your gain from the long call will offset
the loss from the short call so that you still get to keep the proceed from the short call (minus
the purchase cost of the long call). Why is this option strategy called a “bear spread”? “Bear” in
that you are bearish; “spread” in that you have two call options in opposite directions (i.e., one
short, one long).
 Currency Appreciation: It is a change in exchange rate. Specifically, it is the increase in one
currency’s value against that of another currency due to market conditions. For instance, if one
Canadian dollar was worth 95 cents U.S. yesterday and it is worth 95.5 cents U.S. today, then we
say the Canadian dollar has appreciated against the U.S. dollar. We speak of currency
appreciation or depreciation when the currency in question is free to respond to market
conditions.
 Financial Inclusion: Financial inclusion refers to efforts to make financial products and services
accessible and affordable to all individuals and businesses, regardless of their personal net
worth or company size. Financial inclusion strives to remove the barriers that exclude people
from participating in the financial sector and using these services to improve their lives. It is also
called inclusive finance.
 Clean Price: The clean price is the price of a coupon bond not including accrued interest
payments. The clean price is typically the quoted price on financial news sites. This price does
not include any interest accrued between the scheduled coupon payments for the bond.
 Currency Depreciation: Currency depreciation is a fall in the value of a currency in a floating
exchange rate system. Currency depreciation can occur due to factors such as economic
fundamentals, interest rate differentials, political instability or risk aversion among investors.
 Draft: A draft is also called a “bill of exchange.” It is a form signed by one party to request a sum
of money from another party. It is used most often by importers and exporters. Once the draft is
accepted or guaranteed by a bank or a company, it becomes a “Bankers’ Acceptance.” In
finance, “draft” has nothing to do with snapping up good hockey players or going to the army.
 Equity Premium: Refers to the extra return (over and above the risk-free rate) investors demand
from investing in equity. Since stocks or equity are risky, investors would require fair
compensation for bearing that risk. That compensation is in the form of higher expected returns
from investing in the stock. For instance, if the GIC rate is 3%, then an investor investing in a
stock may require the stock to return 8% per year. The 5% differential in this case is the equity
premium. Obviously, the risky the stock, the higher the equity premium. How do we measure a
 stock’s risk level? One measure is the so-called “beta,” which can be plugged into the CAPM to
obtain an expected return. Please see “Equity,” “Beta” and “Capital Asset Pricing Model
(CAPM)” for details.
 Currency Devaluation: It is a change in exchange rate. Specifically, it is the decrease in one
currency’s value against that of another currency due to market conditions. For instance, if one
Canadian dollar was worth 95 cents U.S. yesterday and it is worth 94.3 cents U.S. today, then we
say the Canadian dollar has depreciated against the U.S. dollar. We speak of currency
depreciation or appreciation when the currency in question is free to respond to market
conditions.
 Duration: Duration is a measure of the sensitivity of the price of a bond or other debt
instrument to a change in interest rates. A bond's duration is easily confused with its term or
time to maturity because they are both measured in years. However, a bond's term is a linear
measure of the years until repayment of principal is due; it does not change with the interest
rate environment. Duration, on the other hand is non-linear and accelerates as time to maturity
lessens.
 ETF (Exchange-traded Fund): An exchange-traded fund (ETF) is a type of security that involves a
collection of securities—such as stocks—that often tracks an underlying index, although they
can invest in any number of industry sectors or use various strategies. ETFs are in many ways
similar to mutual funds; however, they are listed on exchanges and ETF shares trade throughout
the day just like ordinary stock.
 Currency Revaluation: A revaluation is a calculated upward adjustment to a country's official
exchange rate relative to a chosen baseline. The baseline can include wage rates, the price of
gold, or a foreign currency.
 Dirty Price: A dirty price is a bond pricing quote, which refers to the cost of a bond that includes
accrued interest based on the coupon rate. Bond price quotes between coupon payment dates
reflect the accrued interest up to the day of the quote. In short, a dirty bond price includes
accrued interest while a clean price does not.
 Financial Engineering: Financial engineering is the use of mathematical techniques to solve
financial problems. Financial engineering uses tools and knowledge from the fields of computer
science, statistics, economics, and applied mathematics to address current financial issues as
well as to devise new and innovative financial products.
 Golden Parachute: A golden parachute consists of substantial benefits given to top executives if
the company is taken over by another firm, and the executives are terminated as a result of the
merger or takeover. Golden parachutes are contracts with key executives and can be used as a
type of anti-takeover measure, often collectively referred to as poison pills, taken by a firm to
discourage an unwanted takeover attempt. Benefits may include stock options, cash bonuses,
and generous severance pay.Golden parachutes are thus named as such because they are
intended to provide a soft landing for employees of certain levels who lose their jobs.
 Exercise Price: The exercise price is the price at which an underlying security can be purchased
or sold when trading a call or put option, respectively. The exercise price is the same as
the strike price of an option, which is known when an investor takes a trade. An option gets its
value from the difference between the fixed exercise price and the market price of the
underlying security.
 Hedging: A hedge is 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.
 Junk Bonds: Junk bonds are bonds that carry a higher risk of default than most bonds issued by
corporations and governments. A bond is a debt or promises to pay investors interest payments
and the return of invested principal in exchange for buying the bond. Junk bonds represent
bonds issued by companies that are struggling financially and have a high risk of defaulting or
not paying their interest payments or repaying the principal to investors.
 Fundamental Analysis: Fundamental analysis (FA) is a method of measuring a security's intrinsic
value by examining related economic and financial factors. Fundamental analysts study anything
that can affect the security's value, from macroeconomic factors such as the state of the
economy and industry conditions to microeconomic factors like the effectiveness of the
company's management.
 Hostile Takeover: A hostile takeover is the acquisition of one company (called the target
company) by another (called the acquirer) that is accomplished by going directly to the
company's shareholders or fighting to replace management to get the acquisition approved. A
hostile takeover can be accomplished through either a tender offer or a proxy fight.
 High Frequency Trading: High-frequency trading, also known as HFT, is a method of trading that
uses powerful computer programs to transact a large number of orders in fractions of a second.
It uses complex algorithms to analyze multiple markets and execute orders based on market
conditions. Typically, the traders with the fastest execution speeds are more profitable than
traders with slower execution speeds.
 Going Public: Going public refers to a private company's initial public offering (IPO), thus
becoming a publicly-traded and owned entity. Businesses usually go public to raise capital in
hopes of expanding. Additionally, venture capitalists may use IPOs as an exit strategy (a way of
getting out of their investment in a company).
 Idiosyncratic Risk: Idiosyncratic risk is a type of investment risk, uncertainties and potential
problems that are endemic to an individual asset (like a particular company's stock), or group of
assets (like a particular sector's stocks), or in some cases, a very specific asset class (like
collateralized mortgage obligations). It is also referred to as a specific risk or unsystematic risk.
 Limit Order: A limit order is a type of order to purchase or sell a security at a specified price or
better. For buy limit orders, the order will be executed only at the limit price or a lower one,
while for sell limit orders, the order will be executed only at the limit price or a higher one. This
stipulation allows traders to better control the prices they trade. By using a buy limit order,
the investor is guaranteed to pay that price or less. While the price is guaranteed, the filling of
the order is not, and limit orders will not be executed unless the security price meets the order
qualifications. If the asset does not reach the specified price, the order is not filled and the
investor may miss out on the trading opportunity.
 Market Efficiency: Market efficiency refers to the degree to which market prices reflect all
available, relevant information. If markets are efficient, then all information is already
incorporated into prices, and so there is no way to "beat" the market because there are no
undervalued or overvalued securities available. Market efficiency was developed in 1970 by
economist Eugene Fama, whose efficient market hypothesis (EMH) states that an investor can't
outperform the market, and that market anomalies should not exist because they will
immediately be arbitraged away. Fama later won the Nobel Prize for his efforts. Investors who
 agree with this theory tend to buy index funds that track overall market performance and are
proponents of passive portfolio management.
 OECD Organization for Economic Co-operation and Development: The Organisation for
Economic Co-operation and Development (OECD) is variously referred to as a think tank or
monitoring group. Its stated goals include fostering economic development and cooperation,
fighting poverty, and ensuring the environmental impact of growth and social development is
always considered. Over the years, it has dealt with a range of issues, including raising the
standard of living in member countries, contributing to the expansion of world trade and
promoting economic stability.
 Liquidity: Liquidity describes the degree to which an asset or security can be quickly bought or
sold in the market at a price reflecting its intrinsic value. In other words: the ease of converting
it to cash.
 Ponzi Scheme: A Ponzi scheme is a fraudulent investing scam promising high rates of return
with little risk to investors. The Ponzi scheme generates returns for early investors by acquiring
new investors. This is similar to a pyramid scheme in that both are based on using new investors'
funds to pay the earlier backers.
 Repo (Repurchase Agreement): A repurchase agreement (repo) is a form of short-term
borrowing for dealers in government securities. In the case of a repo, a dealer sells government
securities to investors, usually on an overnight basis, and buys them back the following day at a
slightly higher price. That small difference in price is the implicit overnight interest rate. Repos
are typically used to raise short-term capital. They are also a common tool of central bank open
market operations.