A kicker is a term sometimes used to describe an additional bonus payment that is received at maturity of a structured note if the underlying reference asset rises by a significant amount.
Knock-out or Knock-in:
knock-in or knock-out feature is a characteristic of a structured note whereby the return is dependent on the underlying reference asset reaching, or not reaching, a pre-specified level at some time during the term (x2) of the investment. An example would be a reverse convertible where the risk to capital arises only if the underlying falls by a fixed amount at some time during the term of the investment. This level is called the barrier level, and if the underlying reaches this level then the derivative or option that is used to create the product is said to have knocked in.
A measure of how fast the tails or wings of a probability distribution approach zero, evaluated relative to a normal distribution. The tails are either fat-tailed (leptokurtic) or thin-tailed (platykurtic). Fatter tails imply a greater chance a variable will reach an extreme value.
This is a type of call option that locks in the return as the value of the underlying reference asset rises.
The London inter-bank offered rate (LIBOR) is the interest rate charged on short-term interbank loans by banks operating in London. The fixing is conducted each day at 11am (London time). The rate is an average derived from the quotations provided by the banks determined by the British Bankers' Association. The top and bottom quartile is eliminated and an average of the remaining quotations calculated to arrive at fixing. The fixing is rounded up to 5 decimal places where the sixth digit is five or more. BBA USD Libor is calculated on an ACT/360 basis and for value two business days after the fixing. 6 month LIBOR refers to the applicable rate for a loan term of 6 months.
The term local cap is used to describe a feature of a cliquet (x2) product. It is the maximum return in each period of the product that is used in calculating the overall return.
The term local floor is used to describe a feature of a cliquet product. It is the minimum return in each period of the product that is used in calculating the overall return.
An option that gives the holder the right at expiry to exercise the option at the best price reached by the underlying over the life of the option. Also known as a high water mark option.
The phenomenon by which prices or rates (i.e. interest rates, volatility) appear to move back to a long-run average level.
This is a type of bond typically issued by regular borrowers in the capital markets, such as banks and large corporations.
Monte Carlo Simulation:
A method of determining the value of a derivative by generating the potential future outcomes for the underlying variable(s) over a very large number of random simulations. The discounted average outcome of the simulations gives an approximation of the derivative’s value. This method may be used to value complex derivatives, particularly path-dependent options, for which closed-form solutions have not been or cannot be found. The principal difficulty with Monte Carlo analysis is that it can be very computationally intensive.
This is the term used to describe any option that has a strike price that is far above (for a call option) or below (for a put option) the current level of the underlying reference asset.
An option that pays based on the outperformance of one asset over another asset. The value of an outperformance option will largely be dictated by the historical correlation between those assets.
Over the Counter - OTC:
Any financial product that is not traded on an exchange is traded Over the Counter.
DISCLAIMER: This business is not responsible for and has no control over the subject matter, content, information, or graphics when viewing links attached to this website.