​Calendar Spread- Calendar spread, a trading strategy, involves the simultaneous purchase of futures or options expiring in a particular month and the sale of the same instrument expiring in another month.

 

Call Option- Call option, a financial derivative, gives the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument from the seller of the option at a certain time (expiration date) for a certain price (strike price); the seller is obligated to sell the commodity or financial instrument should the buyer so decide.

 

Callable Bond- Callable bond is a bond that can be repaid at the discretion of the issuer and before the maturity of the bond using at a pre-determined formula.

 

Capital- Capital denotes financial assets or the financial value of assets, such as cash, or the long-term financial contribution of investors in a corporation.

 

Capital (Book Value)- This is the book value of debt plus the book value of common equity, as reported on the balance sheet.

 

Capital Adequacy- Capital adequacy is achieved when a bank's capital ratio meets or exceeds the minimum capital ratio, which under the Basel Accords is 8% of risk weighted assets and can be satisfied with Tier 1, Tier 2, and Tier 3 capital. Tier 1 capital has to account for at least 4% of risk-weighted assets; the remainder can be satisfied through Tier 2 and, in the case of market risk capital, Tier 3 capital. National banking regulators can deviate from these minimum capital adequacy ratios.

 

Capital Asset Pricing Model (CAPM)- The Capital Asset Pricing Model describes the relationship between risk and expected return and can be used in pricing risky securities.

 

Capital Expenditures- This is the cumulated capital spending, as reported in the statement of cash flows, for the sector. It generally does not include acquisitions.

 

Cap Ex/ Depreciation- Estimated by dividing the capital expenditures by depreciation. For the sector, we estimate the ratio by dividing the cumulated capital expenditures for the sector by the cumulated depreciation and amortization.

 

Capital Requirement- Capital requirement determines how much minimum capital level regulators require each bank to hold against its risk levels.

 

Cash- Cash and Marketable Securities reported in the balance sheet.

 

Cash Flow Loan- A cash flow loan provides funds that are repaid from the cash flow generated from the borrower's operations.

 

Central Bank- A central bank is the principal monetary authority of a country, or a group of countries, and may also exercise regulatory and supervisory responsibilities over other banks, arrange payment between banks, and when needed, provide stability to the financial and banking system.

 

Chief Risk Officer (CRO)- The Chief Risk Officer plans, leads, and manages the risk management activities of an organization.

 

Chooser Options- Chooser options are exactly what their name suggests - it is an option which allows the holder to choose whether their option is a call or a put at a particular date.

 

Clearinghouse- A clearing house guarantees the financial performance of a trade on an exchange by becoming the buyer to each seller and the seller to each buyer, and provide clearing and settlement services for financial transactions.

 

Cliquet Options- A cliquet or ratchet option is a series of at the money options, with periodic settlement, resetting the strike value at the then current price level, at which time, the option locks in the difference between the old and new strike and pays that out as the profit. The profit can be accumulated until final maturity, or paid out at each reset date.

 

Collateral- Collateral is an asset pledged by a borrower to secure a loan or other credit and is forfeited to the lender in the event of the borrower's default.

 

Collateralized Debt Obligation (CDO)- Collateralized Debt Obligation is a type of structured asset-backed security; its value is determined by payments derived from a specific portfolio of fixed-income generating assets or instruments.

 

Collateralized Mortgage Obligations (CMO)- Collateralized Debt Obligation is a type of structured asset-backed security; its value is determined by payments derived from a specific portfolio of fixed-income generating assets or instruments.

 

Commercial Bank- A commercial bank offers a wide range of highly specialized loans to large businesses, acts as an intermediary in raising funds, and provides specialized financial services including payment, investment, and risk management services.

 

Commercial Paper- A commercial paper is an unsecured, short-term debt security issued by a typically large, financially strong, organization that uses the proceeds to finance its operations.

 

Committed Facility- A committed facility is a type of loan, whereby its terms and conditions, such as margins, fees and duration, are clearly defined in a formal agreement by the bank and are imposed on the borrower, and the facility is funded.

 

Commodity- A commodity is generally physical item such as food, oil, metal or other object with no differences in its makeup irrespective of the geographical or physical market where they are being sold.

 

Commodity Risk- Commodity risk is the potential loss from an adverse change in commodity prices.

 

Common Risk Factors- Common risk factors are risk factors that may impact several obligors with similar exposures, financial instruments, or financial assets in a similar fashion at the same time.

 

Common Share- Common share, or common stock, common equity, typically refers to the equity in and ownership of a corporation.

 

Compliance- Compliance is the process to ensure that the organization operates by conforming to rules, policies, or legal standards.

 

Compound Options- Compound Options are options on options. They are constructed in one of the following four ways:

1. Call on Call (CoC)

2. Call on Put (CoP)

3. Put on Put (PoP)

4. Put on Call (PoC)

These options are highly sensitive to the volatility of the volatility as there is also an underlying option, making it more difficult to hedge, relative to standard single options.

 

Consortium- A consortium denotes a cooperative underwriting of loans by a select group of banks; also called a syndicate.

 

Contagion- Contagion, typically a financial or banking crisis, engulfs several banks, markets, and countries.

 

Contango- Contango occurs when the price of futures with longer maturities are higher than prices of futures with shorter maturities; it is the opposite of backwardation.

 

Convertible Bonds- A convertible bond is a type of a bond that can be converted into a equity using a predetermined relationship, and this right to convert can be exercised typically at the discretion of the bondholder.

 

Convexity- Convexity is a measure of the nonlinear relationship between yield changes and bond price effects.

 

Core Banking Services- The core banking services are deposit collection, loan underwriting, and payment services.

 

Corporate Bonds- A corporate bond is issued by a corporation to raise money from investors, and in return the investors receive interest payments from the corporation issuing the bonds.

 

Corporate Borrower- Corporate borrowers range from small local companies to large global conglomerates.

 

Corporate Credit Risk- Corporate credit risk is the risk of loss resulting from the non-payment of a corporate financial instrument.

 

Corporate Governance- Corporate governance is a set of relationships between the board of directors, shareholders and other stakeholders of a organization, outlines the relationship among these groups, sets rules how the organization should be managed, and sets its operational framework.

 

Correlation- Correlation is a single measure of association between two variables, and establishes the strength of a statistical relationship and also forms the basis for statistical regression.

 

Correlation with the market- This is the correlation of stock returns with the market index, using the same time period as the beta estimation (see beta) .

 

Cost of Capital- The weighted average of the cost of equity and after-tax cost of debt, weighted by the market values of equity and debt:

Cost of Capital = Cost of Equity (E/(D+E)) + After-tax Cost of Debt (D/(D+E))

For the weights, we use cumulated market values for the entire sector.

 

Cost of Credit- The cost of credit is the interest rate, required return, or other compensation associated with securing and using credit.

 

Cost of Debt (After-tax)- The after-tax cost of debt is:

After-tax cost of debt = Pre-tax Cost of debt (1 — tax rate)

The average effective tax rate for the sector is used for this computation.

 

Cost of Debt (Pre-tax)- This is estimated by adding a default spread to the riskfree rate. To estimate the default spread, we use the standard deviation in stock prices over the last 5 years. The higher the standard deviation, the higher the default spread.

 

Cost of Equity- Estimated using the capital asset pricing model:

Cost of Equity = Riskfree Rate + Beta (Risk Premium)

The average beta for the sector is used. We use the long term treasury bond rate as the riskfree rate, and a 5.5% risk premium. You can change these inputs in the excel spreadsheet.

 

Cost of Funds- The cost of funds is the interest rate, required return, or other compensation associated with securing and using capital.

 

Counterparty- Counterparty is a party to a contract who is contractually bound and is expected to perform - deliver securities, make payments, or similar - sometime in the future.

 

Counterparty Credit Risk- Counterparty credit risk is the risk that the other party to a contract or agreement will fail to perform under the terms of an agreement.

 

Coupe Options- Coupe options and cliquet / ratchet options are almost identical in nature with one key distinction. Going back to our consideration of cliquet options, we noted that these type of options had periodic reset dates in which the profit was locked in to the new price level. Payout to the holder could take place either at these prespecified dates or at maturity. Coupe options have these exact same characteristics, except that instead of reset the strike to the current spot level, the coupe option will reset itself to the worse of the current spot level and the initial strike price.

 

Coupon Rate- The coupon rate is a percentage of the principal borrowed, and determines the coupon payment, the promised and regularly paid interest payment to the buyer of a bond or other debt security.

 

Covariance- Covariance is a measure of association between two variables that quantifies the change between these variables.

 

Covenant- A covenant is an agreement that requires one party to refrain from specified actions and is imposed on the borrower by a lender to prevent a potential deterioration in the borrower's financial and business condition.

 

Credit Analysis- Credit analysis is a structured approach to analyze, assess, and evaluate the creditworthiness of a business, organization, or an individual credit or similar exposure.

 

Credit Concentration Risk- Credit concentration risk is the risk stemming from a single large exposure or group of smaller exposures that are adversely impacted by similar variations in conditions, events, or circumstances.

 

Credit Default Swap (CDS)- A credit default swap is a swap, where the protection buyer of makes a series of payments to the protection seller; the protection seller provides a payment if a financial instrument (such a bond or loan) or a portfolio of financial instruments experiences a predefined credit event.

 

Credit Derivative- A credit derivative is a contract that provides protection if a credit instrument or a portfolio of credit instruments (typically a bond or loan) experiences a credit event.

 

Credit Event- A credit event can be a default on a loan or similar exposure, or delays making full or partial interest and/or principal payments; may also include the impact of reduced external credit rating.

 

Credit Grading Model- A credit grading or rating model quantifies the relative creditworthiness of a borrower, exposure, or facility.

 

Credit Portfolio Model- A credit portfolio model is computational system used to quantify the credit risk an dcreditworthiness of borrowers, exposures or facilities and compute both expected and unexpected losses.

 

Credit Portfolio Risk- Credit portfolio risk is the potential loss a bank can suffer from default, delayed or missed repayment or interest payments, or credit quality/ rating downgrade.

 

Credit Quality- Credit quality reflects the risk associated with a loan, borrower, or facility; a higher credit quality translates to higher credit grade or credit rating.

 

Credit Rating- A credit rating identifies the relative creditworthiness of a borrower, exposure, or facility by assigning a credit grade.

 

Credit Rating Agency (CRA)- A credit rating agency evaluates the creditworthiness of various borrowers, issuers, or credits.

 

Credit Risk- Credit risk is the risk of loss due to non-payment of a loan, bond, or other credit.

 

Credit Risk Capital- Credit risk capital is capital allocated against possible credit losses.

 

Credit Risk Management- Credit risk management is a structured approach to monitoring, measuring, and managing exposures to reduce the risk of potential loss due to default.

 

Credit Risk Mitigation Technique- A credit mitigation technique reduces credit risk through the use of such things as collateral, loan guarantees, securitization, or insurance.

 

Credit Score- A credit score is a number that relates the relative strength of each borrower to a larger group of borrowers and indicates the relative chance of default.

 

Credit Spread- A credit spread is the yield differential between different securities, caused by differences in their credit quality.

 

Credit VAR (CVAR)- Credit Value-at-Risk is a quantitative estimate of the credit risk of the portfolio and is typically the difference between expected and unexpected losses on a credit portfolio over a one year time horizon expressed at a certain level statistical confidence.

 

Crowded Trade- A crowded trade is a series of simultaneous and similar trades by a larger number of market participants that follow, implement, or execute essentially the same or highly similar strategy.

 

Currency- A currency is a generally accepted form of money - coins and bills - used in a country or a group of countries issued by their governments, central banks, or monetary authorities.

 

Currency Futures- A currency future, also FX future or foreign exchange future, is a exchange traded futures contract that conveys the right to exchange one currency for another at a specified date in the future at a predetermined exchange rate known at the purchase date.

 

Currency Options- A currency option, also FX option or foreign exchange option, is a derivative where the holder has the right but not the obligation to exchange one currency into another currency at a known exchange rate at or before a specified date.

 

Currency Swaps- A currency swap that involves the exchange of principal and interest in one currency for the same in another currency; this type of swap is different from a forex swap.

 

Cyclical Financing- Cyclical financing funds temporary and recurring increases in inventory, production, and sales due to changes in the business cycle.

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