Fixed to Floating Rate:
A note or CD that pays a fixed interest rate for the first months or years of the trade. Thereafter, the interest rate resets periodically based on an index or underlying asset.
An exchange-traded option which allows the buyer to customize contract terms such as expiry date and contract size in addition to the strike price. Flexible options are traded on several option exchanges and are based on asingle stock, index, or currency.
A note or CD in which the interest rate resets periodically based on an index or underlying asset.
This is the name given to a particular type of structured note that offers a minimum return, usually at least the sum invested, plus some additional return based on the performance of an equities market. The key feature of this particular product is that is has no defined term.
Forward Rate Agreement:
An agreement that allows purchasers/sellers to fix the interest rate for a specified period in advance. One party pays fixed, the other an agreed variable rate. The transaction is done on a nominal amount and only the difference between contracted
and actual rates is paid.
Forward Start Option:
An option that gives the purchaser the right to receive a standard put or call option after a specified time. The option’s strike price is set at the time the option is activated, usually at a certain fixed percentage in or out-of-the-money.
Structured notes can be indexed to a wide range of fund-linked assets, including mutual funds, hedge funds or funds of hedge funds. An investment in mutual fund products, for example, provides asset diversification, access to high-quality management and out-performance opportunities (alpha) compared to a benchmark index. Hedge funds provide exposure to professional management and alternative assets.
A contract to buy or sell a standard quantity of a given instrument, at an agreed price, on a given date. Unlike an option, both parties are obliged to abide by the transaction. Futures are almost always traded on an exchange and cleared by a clearing house, and have standard delivery dates and trading units.
The rate of change in the delta of an option for a small change in the underlying. Gamma is greatest when an option is atthe-money and decreases as the price of the underlying moves either up or down away from the strike.
The term gearing refers to the leverage or exposure of a product to movements in the underlying index. A product with 100% gearing would generate a return exactly equal to any rise of the underlying index, that is, a 45% rise in the index would produce a 45% return from the structured note. Sometimes the term participation is used to refer to a product's gearing.
This is a term associated with cliquet (or ratchet) products. A global floor will sometimes provide a minimum return that is more that just the full return of the capital invested. In this case, it would have a global floor of something greater than
Guaranteed Exchange Rate Option:
An option on an asset in one currency denominated in a second currency. Also known as a quanto option, the exchange rate at which the purchaser converts the currency is fixed at the start. This allows investors exposure to foreign assets without the foreign exchange risk.
This term is sometimes used to describe the level of capital protection provided in a high-income type of structured note. A hard protection level of 100% means that the index must be lower than 100% of its starting level in order for the investor's capital to be reduced.
This type of note is usually linked to a basket of shares or sometimes sector indexes. The return is calculated as the average of the performance of the best share or index in each specified period during the term of the note. Once a share or index has been selected, however, it is then removed from the basket for subsequent periods.
The historical volatility of a share or index is simply a mathematical measure of its variability during a given historical period, for example the part three months. The most common form of measure is the standard deviation of the daily returns.
Structured products that pay a return based on underlying assets in multiple asset classes, including any combination of interest rate, commodity, equity, credit and currency derivatives.
Implied Forward Curve:
Also known as the Forward Rate Curve, the curve plots the implied forward interest rate for each of the various maturities on the yield curve. The forward curve is implied by forward rate agreements and is usually steeper than the spot yield curve.
The implied volatility of a share, index or any other asset price is the name given to the volatility that this share or index isexpected to have over some future period.
A structured note or CD that pays a periodic coupon based on the performance of a basket of underlying asset(s), typically a basket of stocks. The performance of each individual underlying in the basket may be capped, or floored.
Initial Index Level:
With most structured notes, the performance of the investment is linked to the movement of an underlying index or share. To measure this performance, the level of the underlying is recorded at the start of the investment return. This recording is
called the initial index level.
Interest Rate Swap:
An agreement to exchange net future cashflows. Most commonly, one counterparty pays a fixed rate and the other pays a floating rate based on a reference rate, such as Libor. There is no exchange of principal – the interest rate payments are made on a notional amount.
This is the term used to describe any option that has a strike price that is far below (for a call option) or above (for a put option) the current level of the underlying.
This is a term used when describing the premium of an option. The intrinsic value of an option is that element of the option's premium that represents the value that the option would have were it to be exercised immediately. The value of an option, that is, its premium, is always at least equal to its intrinsic value.
A type of variable rate investment in which the interest rate adjusts based on an underlying reference rate, such as Libor. The payments made on an inverse floater decrease as the reference interest rate increases.
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