An option that may be exercised at any time up to and including the expiration date.

The price at which a dealer will sell a security.

When the price of the underlying security equals the strike price of the option.

One one-hundredth of a percentage point.

The risk that the relationship between the prices of a security and the instrument used to hedge it will change, thereby reducing the effectiveness of the hedge.

The difference between the bid price and the ask price.

The price at which a dealer will purchase a security.

A method for centrally registering the ownership and transfer of securities.

A contract in which the buyer pays a fee to set a maximum to the flexible interest rate that it must pay on a loan. The seller agrees to pay the difference between current interest rates and an agreed rate, times the notional principal, if interest rates rise above the agreed rate.

The settlement provision on some options and futures contracts that do not require delivery of the underlying security. For options, the difference between the settlement price on the underlying asset and the option’s exercise price is paid to the option holder at exercise. For futures contracts, the exchange establishes a settlement price on the final day of trading and all remaining open positions are marked to market at that price.

The branch of an exchange through which transactions executed on the floor are settled using a process of matching purchases with sales. The clearinghouse generally provides a netting system for payments between members of the exchange. A clearing organization is also charged with the supervision of all trading accounts, the proper conduct of delivery procedures, and the adequate financing of the entire operation.

The simultaneous purchase of a cap and sale of a floor that has the result of keeping interest rates between a desired range.

The risk that the other party to a contract will not fulfill the terms of the contract.

To close out a position previously taken, for example, by taking a long position equal to an existing short position.

The amount representing the credit risk exposure of off-balance-sheet transactions. For derivatives, this represents the potential cost at current market prices of replacing the contract’s cash flows if the counterparty defaults.

The risk associated with the possibility that the other party to a contract will be unwilling or unable to fulfill the terms of the contract thereby causing the holder of the claim to suffer a loss.

A swap involving the exchange of cash flows and principal in one currency for those in another with an agreement to reverse the principal swap at a future date.

The change in the value of an option that is associated with a unit change in the price of the underlying asset.

A method of hedging exposures by purchasing or selling the underlying instruments in proportion to the option’s delta.

The risk of an unanticipated change in the price of foreign currency that will cause the agent to suffer a loss.

Vulnerability of a portfolio to changes in asset or commodity prices.

An option that may be exercised only on the expiration date.

A contract in which the buyer pays a fee to set a minimum to the flexible interest rate that it receives on a loan. The seller agrees to pay the difference between current interest rates and an agreed rate, times the notional principal, if interest rates fall below the agreed rate.

A transaction in which two parties agree to exchange a specified amount of one currency for a specified amount of another currency at some future time under conditions agreed by the two parties.

An exchange-traded contract generally calling for delivery of a specified amount of a particular financial instrument at a fixed date in the future. Contracts are highly standardized, and traders need only agree on the price and number of contracts traded.

Assets that banks are always willing to receive from other banks to represent final payment of claims. Currency and, especially, deposits at the central bank constitute good funds.

A speculative fund managing investments for private investors.

The proportion of one asset required to hedge against movements in the price of another.

The process of offsetting an existing exposure by taking an opposite position in the same or a similar risk.

The value of the volatility parameter used in pricing an option (usually the annualized standard deviation of the log of the underlying asset’s price), which is estimated from the observed option price by substituting the observed price and known variables into an option-pricing model.

A call (put) option contract is in-the-money when the market price of the underlying instrument exceeds (is less than) the strike price.

A transaction in which two counterparties exchange interest payment streams of different character based on a notional principal amount.

A list of traders’ and dealers’ limit prices.

The announced price at which a trader will buy or sell a security. Also, the largest permitted price fluctuation in a futures contract during a trading session as determined by the market’s rules.

The ease with which a prospective seller of a financial instrument can find a buyer at the prevailing market price.

A situation in which an agent is owed (owes) or owns a positive (negative) amount of a security, and is therefore in a position to profit if the price of the security rises (falls).

An amount of money deposited by participants in the futures market to ensure performance of the contract. The initial margin is the amount that must be deposited to open either a long or short position in a derivatives exchange, while the maintenance margin is the minimum amount that must remain in the account after any losses are deducted from the account as a result of marking the position to market.

The risk of a change in the price of an asset that is correlated with movements in the economy as a whole and that cannot be diversified away.

The process of recalculating the exposure in a trading position or portfolio on the basis of current market prices.

The medium-term financing facility through which EMS member countries with serious balance of payments difficulties can obtain financing conditional on their agreeing to take corrective measures.

Substituting the amount owed by one party from the amount owed to that party and agreeing to transfer only the resulting difference.

Substituting new contractual obligations, equal to the net obligations, for the existing ones.

The hypothetical amount on which swap payments are based. The notional principal in an interest rate swap is never paid or received.

Financial commitments that do not generally involve booking assets or liabilities. Derivative contracts are an example.

The number of contracts recorded with the exchange at the end of the day as transactions that have not been offset by an opposite trade or settled by delivery.

The contractual right, but not obligation, to buy (call option) or sell (put option) a specified amount of the underlying security at a fixed price (strike price) before or at a designated future date (expiration date). The option writer is the party that sells the option.

A financial transaction that is not made on an organized exchange. Generally the parties must negotiate all the details of each transaction or agree to use simplifying market conventions.

A call option contract is out-of-the-money when the worker price of the underlying instrument is less than (exceeds) the strike price.

A market commitment. For example, a purchaser of a futures contract has a long position, while a seller of a futures contract has a short position.

A means of short-term financing of an asset that consists of a sale of a security together with a promise to repurchase the security at some specific time in the future at a prearranged price.

The possibility that operational difficulties interrupt delivery of funds even where the counterparty is willing and able to perform.

The sale of an asset that one does not own, which results in a short position in that asset.

A strategy in which a security is sold when its price falls below a certain level.

The price at which the holder of an option has the right to buy or sell the underlying instrument.

A financial transaction in which two counterparties agree to exchange streams of payments over time according to a predetermined rule. A swap is normally used to transform the market exposure associated with a loan from one interest rate base (fixed-term or floating) or currency of denomination to another. A special case is a foreign exchange swap, which combines a spot transaction with an equivalent opposite forward transaction.

A combination of securities and/or derivative instruments that produces a risk/return position equivalent to that associated with another security that may not be directly obtainable. For example, a synthetic put is a combination of spot and/or forward transaction that replicates a put option.

The total number of units transacted in a particular financial instrument, per unit of time.

The very short-term financing facility, through which EMS member countries’ central banks can finance either marginal or (since September 1987) intramarginal foreign exchange market intervention.