A

Agency crosses
Agency Cross Trade. Involves an agency broker - one who acts solely as an agent - buying
shares from one party and passing them on to one or more buyers at the same price. The
brokers make their profit from commission.

American option
An option which is exercisable at any time during its life.

Arbitrage
Instruments that have identical characteristics and so are perfect substitutes should trade at the
same price. If they do not, a risk-free profit can be generated by simultaneously selling the
higher-priced asset and buying the lower priced asset. Arbitrage is the identification and
exploitation of such price anomalies.

Assignment
Notice sent by the clearing house to the option writer informing him that the option has been
exercised.

Ask / Offer price

The price at which a trader or market maker is willing to sell a contract.

At-the-money option (ATM option)

The option with the exercise price closest to the current price of the underlying instrument.

Automated trading system

Screen-based trading system, facilitating a market in which participants can come together to buy
and sell securities.

Autoquote
A computer system which continuously calculates theoretical option prices using models
developed jointly by LIFFE and market participants. LIFFE disseminates Autoquote prices for
most financial, equity and index option series. Model variables such as volatility are maintained
during the day by members in the trading pit. Autoquote prices are not firm but LIFFE work
closely with the pit to ensure model variables such as volatility are set correctly in order to keep
model prices in line with pit prices.

Average daily volume (ADV)

See Volume.

Back months
The futures or options on futures months being traded that are furthest from expiration.

Basis
The difference between the underlying product price and the futures price.

Basis point (bp)

A change in the interest rate of 1/100 of 1%. Therefore, one basis point (1 bp) is equivalent to
0.01%.

Basis trading (cash and carry trade)

An arbitrage position typically comprising a long cash position together with a short position in its
respective futures contract, whereby the cash price plus the cost of carry of the underlying
position is lower than the futures price. Arbitrageurs will therefore buy cash and 'carry' to the
futures date for delivery into the futures contract. It is assumed that the cash position is financed
 in the overnight repo market. By convention, buying the basis is to buy cash bonds and sell
futures, and selling the basis is to sell cash bonds and buy futures.

Basis Trading Facility (BTF)

The BTF enables the futures leg of a basis trade to be transacted without execution risk. This
transaction takes place outside the trading pit. See Basis trading.

Bear strategies
Strategies based on the belief that prices will fall.

Benchmark bond
The most recently issued and most liquid government bond.

Bid price
The price at which a trader or market maker is willing to buy an instrument.

Black-Scholes model
Developed by Fischer Black & Myron Scholes in 1973, it is the classic modern options pricing
model for the valuation of European-style options.

Bond
A certificate of debt, generally long term, under the terms of which an issuer contracts, amongst
other things, to pay the holder a fixed principal amount on a stated future date and, usually, a
series of interest payments during its life.

Bond 'stripping'
Separate Trading of Registered Interest and Principal of Securities, i.e. securities which are split
and divided into interest only securities and principal only securities to suit the differing need of
investors.

Broker
A person or firm that acts on another's behalf.

Bucketing
Interest rate risk management which matches interest rate exposure of future inflows and
outflows, with offsetting interest rate exposure at pre-determined future dates.

Bull strategies
A strategy based on the belief that prices will rise.

Bundesanleihen (Bund) future

Futures contract based on notional German Government bond with a 4% coupon and eight and a
half to ten and a half year maturity.

Buoni del Tesoro Poliennali (BTP) future

Futures contract based on notional Italian Government Bond with a 6% coupon and eight to ten
and a half year maturity.

Butterfly
An option strategy involving the purchase of one put (or call), the sale of two puts (or calls) at a
higher exercise price, and purchasing one put (or call) at an equally higher price.

Call option
An option that provides the right but not the obligation to buy the underlying security.

Cap
An option strategy that sets a ceiling on the holder's interest rate exposure.
Cash-and-carry arbitrage (carry arbitrage)
A basis trade involving a long cash position exactly offset by a short futures position. The holder
of the position believes that the futures contract is expensive. He shorts the future, borrows at
money market rates to finance a long position in the underlying, and either delivers the asset into
the futures contract or waits for a narrowing of the basis and closes out the positions in which
case he effectively collects the yield on a synthetic money market instrument. Also called buying
the basis. This arbitrage and its opposite, reverse cash-and-carry, ensures an efficient
relationship between cash and derivatives markets.

Cash market
The market in the underlying financial instrument on which a futures or options contract is based.

Central Gilts Office (CGO)

The computerised book entry settlement system for gilt transactions operated by the Bank of
England.

Change
The difference between the last settlement price and the last reported ask, bid or trade.

Cheapest to deliver
The cash security that provides the lowest cost (largest profit) to the arbitrage trader. The futures
price tracks the CTD instrument.

Chicago Board of Trade (CBOT)

Established in 1848, it is a physical exchange, for open outcry and automated trading, of financial
futures and options, metal futures and options, agricultural futures and options, and equity index
futures.

Chicago Board Options Exchange (CBOE)

Established in April 1973, it is a physical exchange for the open outcry and automated trading of
interest rate and equity options.

Chicago Mercantile Exchange (CME)

A physical exchange for open outcry and automated trading of financial and commodity, futures
and options contracts.

Clearing
The process of registration, settlement, margin and the provision of a guarantee.

Clearing Members
LIFFE members who ensure the process of registration, position maintenance, settlement and
provision of the guarantee of the exchange-traded transaction.

Clearing Processing System (CPS)

LIFFE electronic system which supplies all members with their real-time positions and margin
calculations, as well as maintaining accounts and informing members of all account
developments.

Clearing slips
Slips with details of trade just completed, filled in by clearing members, and sent to LIFFE for
input to the Trade Registration System (TRS). See TRS.

Combo trade
Option strategy where transaction requires going short a call and long a put at a lower exercise
price.

Commodity Trading Advisors (CTAs)

A CTA is anyone who, for compensation or for profit, exercises trading authority over a customers
account or gives advice on the advisability of buying or selling futures and/or options, whether it
be directly or through written publications or other media.

Contract month
 The month in which a futures contract is fulfilled. See Delivery month.

Convergence
The movement of the cash asset price toward the futures price as the expiration date of the
futures contract approaches.

Counterparty
The opposing side(s) of a transaction undertaken.

Counterparty risk
Exposure to a loss resulting from a default on a payment due. Also known as credit risk.

Coupon
Generally, the nominal annual rate of interest of a fixed income security expressed as a
percentage of the principal value. This interest is paid to the holder of the security by the
borrower. The coupon is generally paid annually, semi-annually or, in some cases quarterly
depending on the type of security.

Covered call
The sale of call options while long the underlying instrument. The covered call writer gives up any
potential upside beyond the strike of the calls in exchange for the premium income.

Covered put
The sale of put options while long cash.

Cross currency spreads

Transactions where futures contracts relating to different interest rate markets are bought and
sold.

Delivery
The seller of the futures contract sends the appropriate cash instrument to the buyer during the
futures expiration period or on the specified date(s). The buyer pays the futures price (subject to
a price factor adjustment). Some futures contracts, such as stock index futures, are settled by a
cash payment rather than by the physical delivery of the asset.

Delivery month (contract month)

The specified month to which trading a particular futures or options contract relates. On LIFFE
these are March, June, September, December. Options may also be traded on a 1-2-3 month
cycle e.g. January, February, March, in addition to the quarterly cycle.

Delta
The measure of change in the value of an option compared with a change in the price of the
underlying.

Delta neutral hedging

An option is delta hedged if an offsetting position has been taken in the underlying asset in
proportion to the option's delta, creating, at that moment in time, a position that is immune to
small changes in market direction.

Derivative
A security whose value is dependent on, or derived from, the value of some underlying asset.

Deutsche Terminbцrse (DTB)

Established in 1990, it is a physical exchange for the automated trading of financial futures and
options contracts.
Direct Member Input (DMI)
Electronic system which allows LIFFE members to bypass clearing slips and input details directly
onto TRS themselves. LIFFE CONNECT™ trades are automatically transmitted to TRS. See
TRS.

Discount factor
The rate used to derive net present value of a sum of money to be paid at a future date. See
Present value.

Duration (modified)
A measure of the relative volatility of a bond; i.e. the price change of a bond for a given change in
the interest rate. Duration is measured in units of time. It includes the effects of time until
maturity, cash flows and the yield to maturity.

Economic and Monetary Union (EMU)

Planned by the European Union (EU), it involves a single market to allow the free movement of
people, goods, capital and services, the formation of the European Monetary Institute as a
precursor to a single EU central bank, and a single EU currency.

Elliot Wave Theory

A theory which holds that the market follows a repetitive pattern consisting of a five wave rise
followed by a three wave fall, with these rises and falls completing the cycle. In the advance
stage, the impulse waves (1,3 and 5) are rising waves while the corrective waves (2 and 4) move
against the uptrend. In the subsequent three wave decline, waves A and C are falling but B
moves against the downtrend. Each wave forms part of the wave of the next higher degree.

Equity derivatives
Futures or options based on underlying equity instruments, whether individual stocks, or stock
market indices.

Equity options
The right but not the obligation to buy (call) or sell (put) an underlying equity instrument. Standard
equity options are available on individual UK stocks, FTSE 100 and FTSE 250 equity indices, and
FLEX(r) options are available on the FTSE 100 Index at LIFFE.

Estimated (est.) basis volume

Volume of futures contracts recorded by LIFFE which have been traded as part of a Basis
Trading Facility (BTF) transaction. See BTF.

Estimated (est.) volume

Unofficial LIFFE volume updated every fifteen minutes to actual volume from matched trades
input to the LIFFE TRS system. See Volume, TRS.

European option
An option which is only exercisable at expiry.

Exchange Access System (EASy)

EASy network is a high band-width fault-tolerant channel between LIFFE and its Membership. A
simple communication path is provided to members through which any LIFFE service can be
accessed. Data feeds and services currently available through a variety of different channels can
be consolidated onto this new network. New services can quickly be made available to members
without communication changes.

Execution risk
The risk inherent in completing the final stages of an exchange-traded transaction.
Exercise
The process by which an option holder has the right to buy or sell.

Exercise price
The price at which the option holder has the right to buy or sell.

Expiry
The last date an option can be traded or exercised.

Fair pricing (fair value)

A term used in the futures market which would represent the cash price plus the net cost of carry.
In the options market, it is the value derived from the mathematical equation used (e.g. Black-
Scholes model).

Fibonacci numbers
A number sequence discovered by a 13th century Italian mathematician Leonardo Fibonacci in
which the sum of any two consecutive numbers equals the next highest number. The ratio of any
number to its next highest number approaches 0.618 after the first four numbers. These numbers
are used to determine price objectives from percentage retracements.

FLEX(r) options
Exchange-traded options that allow the buyer to specify the style (American or European), strike,
maturity, and notional principal of an option. This enables hedgers to eliminate the timing
mismatch between hedge and underlying position that can occur with standardised exchange-
traded products. They also avoid the gamma and vega mismatches which occur: for example,
near-the-money options with a long time to run have high vega but little gamma whereas near-
the-money options, with little time to run, have the opposite.

Forward yield curve

The forward yield curve is often derived from the zero coupon yield curve and indicates each
point as the implied forward interest rate.

Futures contract
An agreement (obligation) to buy or sell a given quantity of a particular asset, at a specified future
date, at a pre-agreed price. Futures contracts have standard delivery dates, trading units, terms
and conditions.

French Trйsor (Trйsor Francais)

French Treasury. Issuer of Treasury debt in the form of BTANs and OATs which are fully
guaranteed by the French Government. Maturities range from three months to 30 years. The
introduction of OATs in 1985 has made the French government securities market one of the most
active in the world. The French Treasury has simplified the issuance procedure by regularly
publishing auction calendars and introducing fungible bonds. Foreign investors hold
approximately one third of outstanding French Government debt.

Gamma
The measure of change in the delta of an option compared with a price change in the underlying.
See Delta.
Gann analysis
Analysis of market movements by drawing trendlines from prominent market price tops or
bottoms at certain specific angles. The most important line is the 45 degree line based on a one
to one relationship between units of time and price which means prices rise or fall at the rate of
one price unit per time unit. Channel lines may also be drawn. In an uptrend Gann lines offer
support and, in a downtrend, resistance is noted.

Gap theory
Examines the causes of movements in price graphs based on technical analysis.

Gilt-Edged Market Maker (GEMM)

A market maker in UK government bonds.

General Clearing Members (GCM)

Members who are entitled to clear LIFFE transactions made for their own account and for clients.
They may also clear transactions made by a non-clearing member under the terms of a standard
clearing agreement.

Gilt
Domestic sterling-denominated bond backed by the full faith and credit of the United Kingdom
and issued by the UK Treasury.

Hedge efficiency
The success of a hedging transaction in reducing risk exposure.

Hedging
Reducing the risk of a cash position in the futures instrument to offset the price movement of the
cash asset. A broader definition of hedging includes using futures as a temporary substitute for
the cash position.

Implied forward yield estimates

A forecast of future interest rates based on rates implied by futures prices.

Implied repo rate

The rate of return before financing costs implied by a transaction where a longer term cash
security is purchased and a futures contract is sold (or vice versa).

Implied volatility
The value for volatility embedded in the market price of an option. The market price of the option
is used to derive the level of volatility implied in it. This represents the markets best estimate of
future volatility, and can be compared with historical volatility to determine whether this view has
changed.

Individual Clearing Members (ICM)

An individual clearing member (public order) is entitled to clear transactions made for his own
account and for clients. Individual clearing members (non public order) are entitled to clear
transactions for their own account only.

Initial margin
The returnable collateral deposited when initiating an open position. This is required by the
clearing house from clearing members as protection against default of a futures or options
 contract. The exchange requires the level of initial margin set by the clearing house to be the
minimum required by (clearing) members from their clients. The level is subject to changes in line
with market conditions. See Margining.

Interdealer Broker (IDB)

IDBs display annonymously the GEMMs' bids and offers and then seek to match bids with offers.
IDBs are not permitted to take positions for their own account.

Interest rate swap

An agreement between two counterparties to exchange cash on a notional principal sum which is
not exchanged. The most common structure is the fixed-for-floating swap in which one
counterparty agrees to pay a rate over the term of the swap in exchange for a floating-rate
payment by the other counterparty.

International Petroleum Exchange (IPE)

Physical exchange for trading of oil, gas oil and unleaded gasoline futures. Options available on
oil and gas oil futures contracts.

International Securities Markets Association (ISMA)

Incorporates the Association of International Bond Dealers (AIBD) whose members comprised
organisations in 40 nations and which acted as a forum for questions concerning international
securities markets and issued and enforced rules governing operations. Responsibilities are now
widened out from purely bond dealers to encompass Euromarket bond dealers and managers in
the international securities markets. The Association changed its name from Association of
International Bond Dealers (AIBD) to the International Securities Market Association (ISMA) in
January 1992. Based in Zurich.

In-the-money
An option which has intrinsic value because the market price of the underlying is above (below)
the strike price of a call (put).

Intra day bid/offer prices

Bid and Offer prices occurring at different intervals within the trading day.

J
Japanese Government Bond (JGB) Future
Future contract based on notional Japanese Government Bond with a 6% coupon and a ten year
maturity.

K
Kappa
See Vega

Lifetime high and lows

Highest and lowest traded prices of a futures or options contract, for the full period of its trading
life to date.
LIFFE Information Service (LIS)
A publicly available 'bulletin board' which allows members and other parties to access LIFFE
data. Data includes futures and options settlement files, SPAN parameter files, SPAN risk arrays
for LIFFE, LCE and IPE, as well as general news and messages of the day.

LIFFE Market Feed (LMF)

An integrated data feed which provides direct access to LIFFE's real time price data. It contains a
comprehensive range of data on all LIFFE products; including quotes, trades, volumes,
closing/settlement prices, contract details, introduction of new series and open interest.

LIFFE Membership
LIFFE is owned by approximately 200 member firms who each hold an equity stake in the
organisation.

Liquidity
The ability to buy or sell a large number of units of a financial asset in a short period without
significantly affecting the price of the instrument.

Limit order
An order given to a broker by a customer that specifies a price; the order can be executed only if
the market reaches or betters that price.

London International Financial Futures and Options Exchange (LIFFE)

Established in 1982, it is a physical exchange for open outcry and automated trading of financial
futures and options contracts. LIFFE merged with the London Commodity Exchange (LCE) on 16
September 1996. The LCE is a physical exchange trading soft commodity futures and options
contracts on Cocoa, Robusta Coffee, Sugar, Wheat, Barley, Potatoes and BIFFEX (dry cargo
freight). Trading is by open outcry except for White Sugar which is traded on the Exchange's
automated trading system (FAST).

Local
A 'local' is a trader registered to a member of LIFFE. The local trades for his or her own account,
has sole use of a trading permit and participates in one of LIFFE's incentive schemes, making
them eligible for a discount on transaction charges for relevant trades.

London Clearing House (LCH)

The LCH is a Recognised Clearing House under the Financial Services Act (1986). Its primary
role is to act, in relation to its members, as central counterparty for contracts traded on LIFFE, the
IPE and the LME. When LCH has registered a trade, it becomes the buyer to every LCH member
who sells and the seller to every LCH member who buys, ensuring the financial performance of
trades. To protect itself against the risks assumed as central counterparty, LCH establishes
margin requirements. See Margining.

London Metal Exchange (LME)

Physical exchange for open outcry and automated trading of non-ferrous metals (namely copper,
primary aluminium, aluminium alloy, lead, nickel, tin and zinc), futures and options contracts.

London Stock Exchange

Physical exchange based on an order driven system for the trading of quoted UK and
international equity securities.

London Stock Exchange 'Sequence' Programme

Technological infrastructure on which the London Stock Exchange's electronic trading services
are built and linked.

London Traded Options Market (LTOM)

Formerly exchange-traded options only; merged with LIFFE in 1992 to form a physical exchange
for open outcry and automated trading of financial futures and options.

Long Gilt future

Futures contract based on a notional UK Gilt of Ј50,000 nominal value with a 7% coupon and ten
to fifteen year maturity.
Lots per side
Number of contract lots (standardised contract sizes) traded by the purchaser or the seller in a
transaction.

Marchй а Terme International de France (MATIF)

French International Futures and Options Exchange. Physical exchange, for automated trading of
financial and commodity futures and options.

Margining
The margining system is the means by which the London Clearing House (LCH) controls the risk
associated with a LIFFE clearing member's position on a daily basis. To achieve this, clearing
members deposit cash or collateral with the LCH in the form of initial and variation margin. Initial
margin is the deposit required on all open positions (long or short) to cover short term price
movements. Deposits are returned by LCH to members when the position is closed. Variation
margin is the members' profits or losses, which are calculated daily from the marked-to-market-
close value of their open position. These amounts are credited to, or debited from their accounts.
See Initial margin, Variation margin.

Market maker
Recognised financial institution or individual making buy and sell quotations in the secondary
market.

Mark-to-market
The process by which contracts are revalued daily for the calculation of variation margin.

Market order
An order for immediate execution given to a broker to buy or sell at the best obtainable price.

Matching
The process by which trades are checked and agreed before transmission to LCH.

Maturity
The date on which the principal or nominal value of a bond becomes due and payable in full to
the holder.

Money market
A wholesale market for the buying and selling of money. Money market paper is predominantly
negotiable and traded just like any other product. Money market maturities extend out to one
year.

N
Neutralising positions
Contracts with offsetting risk exposure.

Nominal value
The notional value of a futures or options contract for Exchange-traded derivatives (see also
principal value when related to cash securities).
Non-Clearing Members (NCM)
Members who may make transactions in LIFFE contracts on the market floor or on the automated
pit trading system only if he has entered into a standard clearing agreement with a general
clearing member, unless the Board otherwise prescribes. Otherwise he is able to transact such
business only as a client of another member.

Offset
Counter-balancing of exposure through establishing exposure on the opposite side.

Open interest
The net (i.e. either long or short) open positions in a particular future or option contract which
needs to be either traded out before expiry, or delivered at expiry.

Open order
An order to a broker that is good until it is cancelled or executed.

Open outcry
Describes the method of trading where any bids and offers for a particular contract are made
audibly to all other members in the pit.

Opening range
Represents the two extremes of price for two minutes after the first trade.

Options contract
A contract giving the holder the right, but not the obligation, to buy (call), or sell (put), a specified
underlying asset at a pre-agreed price, at either a fixed point in the future (European-style), or at
a time chosen by the holder up to maturity (American-style). Options are available in exchange-
traded, and over-the-counter (OTC) markets.

Option conversions
An arbitrage trade is so called because it can be used by the holder of a put to alter his position
to a call or vice versa. Converting a put to a call involves the purchase of the put, purchase of the
underlying instrument or future, and sale of the call.

Option expiry
The last date on which an option may be exercised. For European options, this is the only date
on which options may be exercised.

Option reversals
A type of arbitrage which maintains (and relies on) put-call parity. If a put is overvalued (or if the
put is fairly valued but the call is undervalued), a riskless profit can be made by selling the put,
buying the call, and selling the underlying instrument or the future. The actual arbitrage return
depends on the additional borrowing costs/investment returns from the money market
transactions which fund/result from these trades. Also referred to as reverse conversion.

Option sensitivities
Tendency of option price (premium) to change as a result of changes in key factors; changing
prices in the underlying instrument for example (see delta, vega and theta).

Order-driven automated market

Screen based market where trading takes place via directly input commands which may be
matched by corresponding orders from the same computerised network.
OTC (Over-the-counter)
The market for securities or derivatives created outside organised exchanges by dealers trading
directly with one another, or their counterparties, by telephone or screen.
Out-of-the-money
An option that has no intrinsic value because the price of the underlying is below the strike price
of a call or above the strike price of a put.

Pit
A designated area of the LIFFE trading floor where a particular contract is traded.

Portfolio trades
Hedging assets in order to reduce price risk.

Position
An interest in the market, either long or short, in the form of open contracts. See Open interest

Premium
The cost of an option contract.

Present value
The current value of a future cash flow discounted at an appropriate interest rate. See Discount
factor.

Primary market
Market for the placement of new securities such as international, domestic and foreign bond
issues. Any subsequent resale or purchase is handled on the secondary market.

Principal value
That amount inscribed on the face of a security and exclusive of interest or premium. The amount
is the one used in the computation of interest due on such a security.

PSBR
The borrowing needs of all public authorities, expressed as Public Sector Borrowing
Requirement. However, the UK Treasury also issues Treasury bills to control daily liquidity, which
are not considered to be part of government debt issues.

Put option
An option that provides the right but not the obligation to sell the underlying.

Quote Vendors
Providers of quoted real-time prices in recognised exchanges, at a fee, by means of electronic
transfer.

R
Ratio spread
An option strategy whereby the amount of futures or options contracts purchased is not equal to
the amount of contracts sold.
Ratio backspread
Option strategy which involves two short calls (puts) and one long call (put).

Real-time prices
Up-to-date market prices for traded contracts.

Recognised Clearing Houses (RCH)

Authorised by the SIB to carry out clearing functions. See SIB.

Recognised Investment Exchanges (RIE)

An Exchange which is deemed to be carrying on investment business authorised by the SIB.
RIE's develop their own means of fulfilling their regulatory objectives and obligations.

Recognised LIFFE Option Strategies

A listing of recognised option strategies developed by LIFFE for use on its exchange, primarily for
charging purposes. All the components of the strategy must be executed by one transaction
between counterparties in the options pit. All components of the strategy must be for one account
only.

Repurchase agreement
Borrowing funds by providing a government security for collateral and promising to 'repurchase'
the security at the end of the agreed upon time period. The associated interest rate is the 'repo
rate'.

Rollover
The transfer of a futures or options position from one delivery month to a later month.

Round trip
A futures or options position plus its offsetting position. (Commissions are usually quoted per
round trip.)

Scalp
To trade for small gains. Scalping normally involves establishing and liquidating a position
quickly, usually within the same day, hour or even just a few minutes.

Securities and Futures Association (SFA)

Reports to the SIB, its function is to authorise firms to carry out agreed investment business, to
register all investment staff and ensure their fitness for the industry, to monitor firms compliance
with all SFA rules, and to investigate and discipline firms who breach these rules.

Securities and Investments Board (SIB)

Regulatory authority deriving its powers from the UK Treasury and the Financial Services Act
1986. Responsible for overseeing and authorising SRO's, RCH's, RIE's and ways in which they
undertake certain aspects of regulation. See SRO, RCH, RIE.

Self-Regulating Organisation (SRO)

Organisations which are authorised and supervised to an extent by the SIB, to carry out particular
finance functions e.g. SFA.

Serial options
Options which permit trading in specified months, other than, the existing four principal quarterly
delivery months, namely March, June, September, and December.

Settlement/closing price
The price used for daily revaluation (Mark-to-market) of open positions.
Singapore International Monetary Exchange (SIMEX)
Physical exchange for open outcry and automated trading of financial and energy futures and
options contracts.

Spread trade
The purchase of one futures contract and the simultaneous sale of another in order to take
advantage of relative price changes. Examples include buying one futures contract and selling
another futures contract of the same underlying asset but different delivery month; buying a given
delivery month of one futures contract and selling the same delivery month of a different, but
related, futures contract (e.g. Short Sterling v. Long Gilt).

Standard Portfolio Analysis of Risk (SPAN)

A method of calculating initial margin by evaluating portfolio risk under a number of scenarios.
LIFFE use SPAN to calculate initial margin for all contracts. Originally developed by the Chicago
Mercantile Exchange (CME).

Stop order (or stop)

An order to buy or sell at the market when and if a specified price is reached.

Straddles
An option strategy involving one call and one put with the same strike and same expiry date.

Strangle
An option strategy involving one call and one put with different strike levels but with the same
expiry date.

Swap
See Interest rate swap.

Sydney Futures Exchange (SFE)

Established in 1960, it is a physical exchange for open outcry and automated trading of financial
and commodity futures and options.

Synthetic positions
A position constructed in order that its cashflows and sometimes its risk / reward characteristics
replicate those of another asset or liability. Such instruments are created either because certain
users cannot buy the components separately or because an arbitrage opportunity allows the
synthetic to be purchased (sold) more cheaply (expensively) than the straightforward product.

Ten Year Note

Government bond of ten year maturity.

Theta
The measure of change in the value of an option relative to the continuous decrease in time to
expiry.

Tick
The standardised minimum price movement of a futures or options contract.

Time to expiry
Period of time remaining until expiry of a futures or an option contract.

Time and sales data

Timestamped bid, ask, and trade data.
Tokyo International Financial Futures and Options Exchange (TIFFE)
Established in 1989, it is a physical exchange for fully automated trading of financial futures and
options contracts.

Tokyo Stock Exchange (TSE)

Established in 1878, it is a physical exchange which provides for fully automated trading of
financial futures and options, as well as traditional trading in underlying equity markets.

Tradepoint
Order-driven screen based market for UK equities launched in September 1995 as a competitor
to the London Stock Exchange.

Trade Registration Application Message Protocol (TRAMP)

The overall message protocol used by the majority of LIFFE systems (TRS, LMF, TSCS).

Trade Registration System (TRS)

A real-time trade matching and administration system which links the trading floor to members'
back offices to facilitate post trade processing. Details of each trade are entered into the system
through clearing slips passed to the central data area for input, or are directly input to TRS by the
members themselves using Direct Member Input (DMI) terminals.

Trade Status Change Stream (TSCS)

TRS and CPS feed trade details and position notification to back office administration and risk
management systems, as well as supporting client accounting. TSCS provides a real time record
by record transmission to Members' own computer systems or appointed back office systems
suppliers. Every time a trade or position undergoes any change, a record is generated and
transmitted via TSCS.

Transparency
The degree to which a market is characterised by prompt availability of accurate price and
volume information which gives participants comfort that the market is fair.

Treasury Bonds (T-Bonds)

US Government debt security issued with a maturity of ten years or more (maximum 30 years to
date). Treasury bonds are traditionally issued with a fixed coupon; although research is being
carried out for the potential of inflation linked Treasuries.

Treuhandanstalt
The official agency set up by the Government in 1990 for the privatisation of former East German
companies. It issued Treuhand bonds which carry the express guarantee of the German
Government. The Treuhandanstalt ceased to exist at the end of 1994 when its outstanding debt
was passed to the newly established government 'Redemption Fund for Inherited Liabilities'
(Erblastentilgungsfonds).

Turnover
The total value (unit of trading multiplied by number of contracts) of all contract lots traded on an
exchange, for a specified period of time.

UK Treasury
Issuer of Treasury debt in the form of UK Government securities or gilts (gilt-edged stock) which
are fully guaranteed by the UK government. The UK bond market is the sixth largest in the world
following US, Japan, Italy, Germany and France (end of '95).

Underlying cash markets

The markets for financial instruments upon which a futures or options contract is based. These
tend to be homogeneous or a 'basket' of like instruments, e.g. 3 month sterling interest rates,
 German government bonds with 8 1/2 - 10 years to maturity. (In the case of options on futures,
the underlying instrument is the futures contract.)

Underlying price
Cash market price of the contract from which futures and options contracts are derived.

Variation margin
Actual debits (losses) and credits (profits) arising from the mark-to-market process on open
futures and options positions are posted as variation margin. In the event of a shortfall, as a result
of an adverse price move, a call will be made on clearing members for additional funds to cover
the realised loss. Conversely, realised profits may be called from the clearing house. See
Margining.

Vega
The measure of change in the value of an option compared with a change in volatility.

Vertical spreads (Bear spread)

An option strategy combining the purchase and sale of two puts (bear put spread) or two calls
(bear call spread) with different strikes on the same underlying.

Volatility cone
The result of plotting the maximum, average, and minimum volatilities against their sample
horizon period.

Volatility (option volatility)

The tendency of security returns or prices to fluctuate in a random, unpredictable manner. Called
historical volatility when derived from past movements. Called implied volatility when estimated
from the market price of options.

Volatility skews
In statistics, the skew is the difference between an actual distribution and a benchmark (usually
lognormal) distribution. Volatility skew most commonly refers to the difference in implied volatility
between out of-the-money puts and calls.

Volatility trade
'Delta Neutral' trades where options and their related futures contract are transacted
simultaneously in the options pit. Designed primarily for professional users who wish to take a
specific trading view on the level of (implied) volatility of the underlying contract, rather than the
direction of price movement.

Volume
The total number of contract lots traded in a designated period of time.

Writer
An opening seller of an options contract.

X
Y

Yield
Internal rate of return expressed as a percentage.

Yield curve
A diagram showing the relationship between yields and maturities for a set of similar securities or
interbank deposits.

Zero-coupon notes
A bond which pays no coupon but is issued at a deep discount to face value. The difference
between the issue and the redemption prices creates a hefty capital gain which boosts the yield
close to market levels.