American Option - An option that can be exercised on any business day during its life.
Ask Price (Offer Price) - The offer or sale price of an asset or derivatives contract.
Assignment – Formal notification from an exchange that the writer of a call (put) option must deliver (take delivery of) the underlying asset at the exercise price.
Bear – Someone who thinks that a security or sector or market will fall in price.
Bid Price – The buy price of an asset or derivatives contract.
Bond – A debt security issued by a company, a sovereign state and its agencies, or a supra-national body. A straight or ‘plain vanilla’ bond pays a fixed coupon (interest amount) on regular dates and the par or face value is paid at maturity.
Broker – A person or firm paid a fee or commission to act as an agent in arranging purchases or sales of securities or derivatives contracts.
Bull – Someone who thinks that a particular asset or market will increase in price.
Call Option – An option that gives the holder the right, but not the obligation, to BUY a specified quantity of the underlying asset at a specified price until a certain date.
Cash Settlement – Use of the cash value difference between the price of the derivative and the price of the underlying asset to satisfy an obligation specified in a derivative contract.
Commission – The fee charged by a broker to a customer for completing a purchase or sale.
Commodity – A physical item such as oil, gold or grain. Commodities are traded for spot and for future delivery.
Counterparty – The other party to a trade or contract.
Counterparty Risk – The risk that a trading counterparty might fail to fulfill its contractual obligations.
Delivery – The process of delivering assets. Some derivatives contracts involve the physical delivery of the underlying. Others are settled in cash.
Derivative - A derivative is an asset whose value is derived from the value of some other asset, known as the underlying.
European Option – An option that can only be exercised on the day of expiration.
Exchange – An organized market in which derivatives are traded.
Exercise – The action take by the holder of a call (put) option when he takes up the option to buy (sell) the underlying.
Exotic Derivative – A non-standard contract.
Forward Contract – An agreement between two parties to buy and to sell an asset at a fixed price on a future date.
Futures Contract – An agreement transacted through an organized exchange to deliver an asset at a fixed price in the future.
Instrument – A share or a bond or some other tradable security or a derivative contract.
Limit Order – An order from a client to a broker to buy or sell a derivatives contract with a maximum purchase price or minimum sale price.
Liquidity – There is a liquid market in an asset if it is easy to find a buyer or seller without affecting the price to any significant extent.
Long Position (Long) – The position of a trader who has bought derivatives contracts
Market Order – An order from a client to a broker to buy or sell a derivatives contract at the best available price.
Open Interest – The number of derivatives contracts still open
Open Position – A long or short position in derivatives contracts which give rise to market risk until the position is closed out or hedged.
Option Contract – A derivative contract that conveys the right but not the obligation to buy or sell an asset at a fixed strike price by a set expiration date.
Over-the counter (OTC) Transaction – A deal agreed directly between two parties rather than through an exchange.
Physical Delivery – use of the underlying asset to satisfy an obligation specified in a derivative contract
Plain Vanilla – The most standard form of a financial instrument.
Put Option - an option that gives the holder the right, but not the obligation, to SELL a specified quantity of the underlying instrument at a specified price until a certain date.
Short Position (Short) – In derivatives, when more contracts have been sold than purchased.
Strike Price – the price specified in an option contract at which the trade will take place, if the holder exercises the option.
Swap Contract – A contract between two parties agreeing to make payments to each other on specified future dates over an agreed time period, where the amount that each has to pay is calculated on a different basis.
Underlying – The asset that underlies a derivative product. The value of the derivative is based on the value of the underlying.
Value at Risk (VAR) – A statistical estimate of the maximum loss that can be made on a portfolio of assets to a certain confidence level over a given time period.
Volatility – A measure of the variability of the returns on the underlying security. Volatility is based on historic evidence or future projections.