Asset swap
When a
fixed investment, such as a bond with guaranteed coupon payments,
is swapped for a floating investment, such as an index.
Asset-backed commercial paper money
market fund liquidity facility
The
AMLF provides institutions funding at a discount rate to purchase Asset-Backed
Commercial Paper (ABCP) from money market funds, allowing these funds to
meet redemptions.
At the market
An
order to buy or sell a futures contract at the best available price upon entry
into
the exchange for execution.
Base currency
First
currency quoted in a currency pair on FX, which is also considered the
domestic
currency or accounting currency.
Basis
The
difference between the spot price of an instrument and the price of a related
derivative
that synthetically mimics the original instrument. Analogously, the basis
is the
difference in the yield of the synthetic position and the yield of the original
instrument;
for example, the bond-CDS basis is the difference between the CDS
premium
and the yield spread of a bond.
Buying forward
Investment
strategy that involves the buying of money market instruments or
currencies
in anticipation of a price rise or a future increase in demand; looks to
take
advantage of future and potential profits by buying at a lower price.
Carry and roll-down
The
carry of a position over a fixed horizon measures the difference between total
expected
return of the position and the financing rate over the period. The rolldown
over a
fixed horizon measures the total expected return of a position from a
change
in yield due to the decrease in maturity, but assumes the yield curve
remains
unchanged over the period.
Credit Default Swap (CDS)
A
credit default swap is a bilateral credit derivative agreement that gives the
buyer
credit protection against default or related credit events of a third party
(reference
entity). The buyer of protection pays the premium periodically (fixed
payments)
while the seller collects the premium. If default or a credit event
occurs,
the seller pays to the buyer an amount (floating payment) determined by
settlement
terms specified in the contract, usually in accordance with International
Swaps
and Derivatives Association (ISDA) standards.
CDX
A
family of tradable CDS indices administered by MARKIT that covers sovereign
and
corporate CDS indices. The CDX emerging markets index is composed of 14
major
sovereign issuers across global emerging markets.
Commodity block currency
A
currency that belongs to a country whose economy is strongly correlated with
the
price fluctuations of a particular commodity (eg, Canada and oil,
Australian/New
Zealand and precious metals, etc.).
Commodity pairs
The
three foreign exchange pairs that include currencies from countries with large
amounts
of commodities (ie, USD/CAD, USD/AUD, USD/NZD), and that are
highly
correlated to changes in commodity prices.
Convertible currency
A
currency that can be readily exchanged without government restrictions on the
amount
and manner in which it can be traded for another currency.
Convexity
Measures
the sensitivity of the rate of change of a bond price to changes in the
yield
to maturity, normalized by the bond's price.
Core inflation
An
inflation measure that eliminates certain products that can have temporary
price
shocks, diverge from the overall trend of inflation and give a false measure;
typically,
it is based on the Consumer Price Index and excludes certain items
from
the index that experience volatile price movements such as energy and food
products.
Country basket
A
derivative security designed to mimic the major index of an international
exchange;
allows investors to invest in specific foreign markets without restrictive
costs.
Country risk
A
collection of risks associated with investing in a foreign country, including
political,
exchange rate, economic, sovereign and transfer risk; varies from one
country
to the next.
Cross currency
A pair
of currencies in FX that does not include the US dollar; one foreign
currency
is traded for another without first having to exchange the currencies into
US
dollars.
Cross rate
The
currency exchange rate between two currencies that are not the official
currencies
of the country in which the exchange rate quote is given.
Currency basket
A
select group of currencies in which the weighted average is used as a measure
of the
value or the amount of an obligation; functions as a benchmark for regional
currency
movements.
Currency forward
A
forward contract in the FX market that locks in the price at which an entity
can
buy or
sell a currency on a future date.
Currency pairs
Two
currencies with exchange rates that are traded in the retail FX market. The
rates
of exchange between foreign currency pairs are calculated as the factor by
which a
base currency is multiplied to yield an equivalent value or purchasing
power
of foreign currency.
Currency swap
A swap
that involves the exchange of principal and interest in one currency for
the
same in another currency; it is considered to be an FX transaction and is not
required
to be shown on the balance sheet.
Current account deficit
Occurs
when a country's total import of goods, services and transfers is greater
than
the country's total export of goods, services and transfers; this situation
makes a
country a net debtor to the rest of the world.
Cycles
Measurement
of time between regularly recurring price highs and lows.
Deflation
A
reduction in the general price level of goods and services; usually associated
with a
drop in national income and output.
Depression
A time
of economic crisis in commerce, finance and industry, characterized by
falling
prices, restricted credit, low output and investment, bankruptcies, and a
high
level of unemployment; a less severe crisis is usually known as a recession.
Disinflation
When
the inflation rate is declining over time; for example, if inflation was 5% in
2008
and 4% in 2009, then disinflation has occurred.
Duration
Measures
the relative price sensitivity of a bond (in percentage points) to changes
in the
yield to maturity.
Dutch disease
An
economic condition that refers to negative consequences arising from large
increases
in a country’s income; the term originated from a 1960s crisis in the
Netherlands
following the discovery of vast natural gas deposits in the North Sea.
DV01
Measures
the monetary change of the value of a bond position for every 1 basis
point
variation in the yield to maturity; it is expressed as a multiple of the face
value.
Earnings revision ratio
The
breadth measure of earnings expectations that measures the number of
stocks
for which the consensus EPS estimates have risen versus the number for
which
they have fallen.
Either-way market
In the
eurodollar interbank deposit market when the bid and offer rates for a
particular
period are equal; increasing levels of liquidity can narrow the spread
between
bid and offer rates until the two values are identical, resulting in an
either-way
market.
Emerging Markets (EM)
Developing
countries in the process of rapid growth and industrialization.
Emerging Market Foreign Exchange
(EMFX)
Currency
markets and investment strategies in emerging markets using
currencies
and related bonds and derivatives.
Emerging Portfolio Financial Research,
Inc (EPFR)
Provides
fund flows and asset allocation data to financial institutions, tracking
both
traditional and alternative funds domiciled globally.
External Debt Market (EXD)
Refers
to sovereign and quasi-sovereign debt market instruments in foreign
currency,
including related derivatives such as sovereign credit default swaps.
FDIC’s Temporary Liquidity Guarantee
Program
A
two-part program that fully insures non-interest-bearing accounts and provides
a
government guarantee of newly issued bank debt; both are fee-based
programs.
Federal Deposit Insurance Corporation
(FDIC)
An
independent agency of the US government that protects against the loss of
deposits
if an FDIC-insured bank or savings association fails. FDIC insurance is
backed
by the full faith and credit of the US government.
Fed’s Commercial Paper Funding
Facility (CPFF)
Fed
funded structured investment vehicle (SIV) that facilitates the issuance of
commercial
paper by banks and corporations by providing a buyer of last resort to
organizations
for a fee.
Fed’s Money Market Investor Funding
Facility (MMIFF)
A
structured investment vehicle (SIV) with leverage to purchase commercial
paper, CDs
and bank notes with maturity of 90 days or less.
Fibonacci concept
Number
sequence constructed by summing the first two numbers to arrive at the
third
(1,2,3,5,8,13,21…n). The ratio between any two consecutive integers in the
series
converges toward 61.8%, which is considered a key retracement level, as
is the
square of this ratio 38.2%. Fibonacci interpretation of price patterns makes
the
assumption that important movements will come about in increments of 1.618.
Flattener
A
strategy that expects to profit when the yield curve flattens (rotates
clockwise).
A
flattener can be implemented with swaps by paying short rates and receiving
long
rates, or with fixed rate bonds by shorting short maturity bonds and buying
long
bonds.
Forward contract
A cash
market transaction where delivery of the commodity is deferred until after
the
contract has been made; although the delivery is made in the future, the price
is
determined on the initial trade date.
Forward discount
When
the domestic current spot exchange rate is trading at a higher level than
the
current domestic futures spot rate for a maturity period; it is an indication
by
the
market that the current domestic exchange rate is expected to trade lower.
Forward premium
When
the spot futures exchange rate, with respect to the domestic currency, is
trading
at a higher spot exchange rate than it is currently; it is frequently
measured
as the difference between the current spot rate and the forward rate.
Fund flows
The
difference between inflows and outflows of mutual funds; inflows represent
total
purchases and outflows represent total redemptions. Funds do not usually
report
inflows and outflows; the net flows can be estimated from assets under
management
and total returns.
Gaps
A price
gap occurs when there is clearly no overlap between successive trading
periods;
gaps indicate enthusiastic buying or selling and can serve as a very
powerful
trend-validating tool.
Global wave
An
amalgamation of seven components that quantifies trends in global economic
activity;
the components are global industrial confidence, global consumer
confidence,
global capacity utilization, global unemployment, global producer
prices,
global credit spreads and the global earnings revision ratio.
Gross Domestic Product (GDP)
The
total of goods and services produced by a nation over a given period, usually
one
year. GDP measures the total output from all the resources located in a
country,
wherever the owners of the resources live.
Gross National Product (GNP)
The
value of all final goods and services produced within a nation in a given year,
plus
income earned by its citizens abroad, minus income earned by foreigners
from
domestic production. GNP equals GDP plus net property income from
abroad.
Hard currency
A
currency, usually from a highly industrialized country, that is widely accepted
around
the world as a form of payment for goods and services; a hard currency is
expected
to remain relatively stable over a short period of time, and to be highly
liquid.
High Yield (HY)
Refers
to bonds that are rated below investment grade according to the rating
scale
of a Nationally Recognized Statistical Ratings Organization (NRSRO). HY
bonds
are also referred to as junk bonds and typically pay higher yields than
other
bonds in order to compensate for higher credit and market risk.
Implied policy path
An
implicit path of future monetary policy rates that matches the fair value of
money
market instruments and derivatives to current market prices; an implied
policy
path can be estimated from market prices of interest rate swaps or futures.
Index
of industrial production.A quantity index designed to measure changes in the
physical volume or production levels of industrial goods over time.
Inflation
Increase
in the overall level of prices over an extended period of time.
Inflation breakeven
The
inflation rate that equates the nominal yield of an inflation linker to the
nominal
yield of a nominal bond.
Inflation linker
Bonds
with yields expressed in real rates and coupons, and principal payments
indexed
to an inflation index; also known as inflation indexed bonds.
Interbank market
The
financial system and trading of currencies among banks and financial
institutions,
excluding retail investors and smaller trading parties; most interbank
trading
takes place from the banks’ own accounts.
Interbank rate
The
rate of interest charged on short-term loans made between banks.
International
Swaps and Derivatives Association (ISDA)
Refers
to a trade organization of participants in over-the-counter derivatives that
sets
standards and basic trading terms between counterparties with the goal of
promoting
a secure and orderly derivatives market.
Investment Grade (IG)
Refers
to bonds that are rated above the investment grade threshold according to
the
rating scale of an NRSRO. IG bonds typically pay low yields, reflecting the low
credit
and market risk.
Local Debt Market (LDM)
Interbank
and sovereign debt securities denominated in local currency, including
related
derivatives. In our coverage universe LDM excludes corporate bonds,
which
are covered by the corporates team.
Long-dated forward
Contracts
typically involving positions that have settlement dates longer than one
year;
sometimes used by companies to hedge certain currency exposures.
Long-term Refinancing Organization
(LTRO)
The
European Central Bank's liquidity-providing reverse transactions that offer
banks
cheaper financing for longer-term securities; LTRO is one of the four types
of open
market facilities operated by the ECB.
Macroeconomics
The
study of the sum total of economic activity, dealing with the issues of growth,
inflation
and unemployment, as well as the national economic policies relating to
these
issues.
Major pairs
The
four pairs considered to be the most heavily traded in the FX market
(EUR/USD,
USD/JPY, GBP/USD, USD/CHF).
Market breadth
Breadth
is a comparison of advancing stocks versus declining stocks; positive
breadth
indicates that more stocks are advancing than declining, and vice versa.
Market sentiment
Sentiment
indicators attempt to assess the prevailing psychological tendencies of
the
general marketplace; they are known as contrary indicators, and most useful
when
they reach extreme levels.
Microeconomics
The
study of the individual parts of the economy, the household and the firm, how
prices
are determined, how prices determine the production, as well as
distribution
and use of goods and services.
Minimum wage
A wage
below which employers may not legally pay employees for specific kinds
of
employment.
Momentum
A
leading indicator used to gauge the rate of advance or decline of a price
pattern
in
order to better assess the trend’s strength.
Momentum investing
An
investment approach based on the view that stock price trends are likely to
continue.
Momentum investing advocates buying stocks that have been
outperforming
the market irrespective of companies’ underlying value or
fundamentals.
Monetary base
The
total amount of a currency that is either circulated in the hands of the public
or in
the commercial bank deposits held in the central bank's reserves; typically
only
includes the most liquid currencies.
Monetary policy
The
regulation of the money supply and interest rates by a central bank in order
to
control inflation and stabilize currency. If the economy is heating up, a
central
bank
can withdraw money from the banking system, raise the reserve
requirement
or raise the discount rate to make it cool down. If growth is slowing, it
can
reverse the process-increase the money supply, lower the reserve
requirement
and decrease the discount rate. The monetary policy influences
interest
rates and money supply.
Monetary Policy Rate (MPR)
The
target interest rate set by the central bank's committee at regularly scheduled
meetings.
Central banks announce the target rate, while open market operations
set the
effective interest rate.
Monetary reserve
A
nation’s assets in foreign currency and/or commodities like gold and silver,
which
are used to back up the national currency; also provides a cushion for
executing
central banking functions like adding to the money supply and settling
foreign
exchange contracts.
Money supply
The
total stock of money in the economy; currency held by the public plus money
in
accounts in banks. It consists primarily of currency in circulation and
deposits in
savings
and checking accounts. Too much money in relation to the output of
goods
tends to push interest rates down and push inflation up; too little money
tends
to push rates up and prices down, causing unemployment and idle plant
capacity.
The central bank manages the money supply by raising and lowering
the
reserves banks are required to hold and the discount rate at which they can
borrow
money from the central bank. The central bank also trades government
securities
called repurchase agreements to take money out of the system or put it
in. In
the US measures of money supply include M1, M2, M3 and L; these are
referred
to as monetary aggregates.
Monopoly
A
market with only one supplier.
Moving average
An
indicator used to help smooth a data series to better spot prevailing trends
over a
set time. There are different types of moving averages, the most
complicated
of which uses mathematical formulations to weigh more recent data
over
older data. The simple moving average is found by calculating the average
price
of a security over a specified interval of time, and assigning that value to
the
last
observation during that interval.
Nominal
An
unadjusted rate, value or change-in-value type of measurement; often reflects
the
current value without adjustments over time to reflect factors such as
seasonality
or inflation.
Nominal effective exchange rate
The
unadjusted weighted average value of a country's currency relative to all
major
currencies being traded within an index or pool of currencies; weights are
determined
by the importance a home country places on all other currencies
traded
within the pool.
Non-convertible currency
A
currency that cannot be readily exchanged for another currency due to
government
regulations, quotas or other controls.
Non-deliverable Forward (NDF)
A
cash-settled (ie, no delivery occurs) forward contract that in most cases
refers
to a
currency forward on a non-convertible or illiquid foreign currency. For
currency
NDFs, the exchange rate at expiration determines the cash settlement
amount.
Payer
A
position in a swap that pays the fixed leg amount and receives the floating leg
amount;
benefits when the fixed leg amount settles below the floating leg amount.
Primary Dealer Credit Facility (PDCF)
Discount
window-type facility for primary dealers, limited to overnight loans with
investment-grade
securities as collateral. During the 2008-09 financial crisis the
Board
of Governors of the Federal Reserve opened the discount window to
organizations
other than commercial banks for the first time since the 1930s.
Put/call ratio
Probably
the most widely used sentiment indicator, the ratio is calculated by
dividing
put volume by call volume. A high ratio indicates relatively more putbuying,
which
indicates greater market pessimism; a lower ratio indicates
relatively
more call-buying, which indicates greater market optimism.
Quantitative Easing (QE)
Refers
to unconventional monetary policy led by the central bank, which may
include
large-scale asset purchases aimed at improving liquidity or financial
conditions,
reducing credit spreads, or other broader monetary stimulus goals.
The US
Fed initiated QE in March 2009 and QE2 in November 2010. QE was
also
used by the Fed in 1932, the Bank of Japan in 2001 and the Bank of
England
in 2009.
Quasi-sovereign
The
debt issued by an agency or a government owned (or controlled) corporation.
Quote currency
The
second currency quoted in a currency pair. In a direct quote, the quote
currency
is the foreign currency. In an indirect quote, the quote currency is the
domestic
currency.
Real effective exchange rate (REER)
The
weighted average of a country's currency relative to an index or basket of
other
major currencies, adjusted for the effects of inflation; weights are
determined
by comparing the relative trade balances, in terms of one country's
currency
with each other.
Receiver
A position
in a swap that receives the fixed leg amount and pays the floating leg
amount;
benefits when the floating leg amount settles below the fixed leg amount.
Relative Strength Index (RSI)
The
relative internal strength of a price pattern; the index attempts to measure
the
same
thing as the rate of change indicator, but tries to filter out the erratic
swings
that
the ROC indicator is sometimes prone to exhibit. RSI values range from 0 to
100;
traditionally, a reading of 30 or less indicates an oversold condition, while a
reading
of 70 or more indicates an overbought condition.
Repatriation
The
process of converting a foreign currency into the currency of the investor’s
own
country; amount that the investor will receive depends on the exchange rate
between
the two currencies being traded at the settlement time.
Repo rate
Discount
rate at which a central bank repurchases government securities from the
commercial
banks, depending on the level of money supply it decides to maintain
in the
country's monetary system. To temporarily expand the money supply the
central
bank decreases repo rates, so that banks can swap their holdings of
government
securities for cash; to contract the money supply, the central bank
increases
the repo rates. Alternatively, the central bank decides on a desired
level
of money supply and lets the market determine the appropriate repo rate.
Reserve currency
A
foreign currency held by central banks and other major financial institutions
as
a means
to pay off international debt obligations, or to influence their
domestic
exchange rate; currently, the US dollar is the primary reserve currency
used by
many countries.
Resistance
An area
that typically represents a concentration of supply of a security, and at
which
traders are willing to sell. This selling pressure appears to stop an uptrend,
at
least temporarily, and could serve to move prices lower.
Revaluation
A
calculated adjustment to a country's official exchange rate relative to a
chosen
baseline;
the baseline can be anything from wage rates, to the price of gold, to a
foreign
currency. In a fixed exchange rate regime, only a decision by a country's
government
(ie, central bank) can alter the official value of the currency.
Revision ratio
The
ratio of the number of upward estimate revisions versus the number of
downward
estimate revisions.
Risk aversion
The
reluctance to bear risk, the level of which determines the premium required
by an
individual to accept switching from a safe asset to a risky asset.
Risk reversal
Measures
the implied volatility skew in the options market as the difference
between
the volatility of an out of the money call and an out of the money put.
Single-tranche Open Market Operations
(OMOs)
An
extension of the Fed’s normal OMOs, providing dealers with easier financing
for
Agency MBS positions. In normal OMOs, dealers submit distinct bids for
Treasury,
Agency and Agency MBS financing. In a single-tranche OMO, only one
rate is
offered, ensuring that the majority of assets financed via this facility are
Agency
MBS, which typically finance at a higher rate.
Soft currency
A
currency that fluctuates due to political or economic uncertainty; foreign
exchange
dealers tend to avoid holding such currencies.
Sovereign bond
A debt
security issued by a national government and denominated in a foreign
currency;
the foreign currency used will most likely be a hard currency, and may
represent
significantly more risk to the bondholder.
Sovereign risk
The
risk of a government becoming unwilling or unable to meet its loan
obligations,
or reneging on loans it guarantees.
Steepener
A
strategy that expects to profit when the yield curve steepens (rotates
counterclockwise).
A steepener can be implemented with swaps, by paying long
rates
and receiving short rates; and can be implemented with fixed rate bonds, by
shorting
long bonds and buying short bonds.
Stock mutual fund cash/assets ratio
Mutual
funds typically keep a portion of their assets in liquid securities to answer
potential
customer redemptions over the short term. The amount of liquid assets
(cash)
and its proportion to total assets changes depending on market conditions.
Style investing
An
investment philosophy where rotation within various “styles” is deemed to be
important
for successful investing. BofA Merrill Lynch Global Research style
reports
provide recommendations on style rotation based on the direction of the
global
economic cycle. The reports include style portfolios, which provide
exposure
to these individual styles.
Supplemental Financing Program (SFP)
Off-cycle
Treasury bill program that allows the Fed to drain liquidity from the
banking
system without selling assets; bills are issued to the public, with
proceeds
deposited at Fed.
Support
An area
that typically represents a concentration of demand for a security, and
where
traders are willing to buy. This buying interest can appear to stop a
downtrend,
at least temporarily, and possibly serve to move prices higher.
Swap (cross currency)
An
interest rate swap where the cash flows are in different currencies. Upon
initiation
of a cross-currency swap, the counterparties make an initial exchange of
notional
principals in the two currencies. During the life of the swap, each party
pays
interest (in the currency of the principal received) to the other; at the
maturity
of the swap, the parties make a final exchange of the initial principal
amounts,
reversing the initial exchange at the same spot rate
Swap (fixed for floating or interest
rate swap)
A
bilateral agreement where one counterparty agrees to pay a fixed interest rate
in
exchange for payment of floating interest rate.
Swap dealer
An
individual who acts as the counterparty in a swap agreement for the fee,
called
a spread; these are the market makers for the swap market. Because swap
arrangements
are not actively traded, swap dealers allow brokers to standardize
swap
contracts to some extent.
Swaption
An
option on a swap, or a forward start swap, that gives the owner the right but
not an
obligation to enter into a swap. A payer swap gives the owner the right to
enter
into a swap as the payer of the fixed leg and receiver of the floating leg. A
receiver
swap gives the owner the right to enter into a swap as receiver of the
fixed
leg and payer of the floating leg.
Term Auction Facility (TAF)
Derivative
of the discount window, the TAF program allows commercial banks to
bid on
term financing (28- or 84-day) using the same collateral allowed for the
discount
window. It is designed to improve a commercial bank’s ability to fund
loans
and security holdings.
Term discount window
Term
version of the discount window; allows commercial banks to obtain 90-day
financing
using a broad range of collateral types rather than the overnight loans
that
traditionally were done via the discount window.
Term Securities Lending Facility
(TSLF)/Term Option Program (TOP)
Derivative
of the securities lending function. Unlike the normal securities lending
function,
the bond swap that occurs is not overnight but for a 28-day term. The
key
difference is that dealers are allowed to post non-Treasury collateral and
obtain
Treasuries in return where the normal program only allowed for a
Treasury-to-Treasury
swap. The program goal is to improve the ability of dealers
to
finance non-Treasury positions. The TSLF program now has an attached
option
facility, the Term Option Program.
Terms of trade
The
ratio of a country's average export price to its average import price; also
known
as the commodity terms of trade. A country’s terms of trade are said to
improve
when this ratio increases, and worsen when it decreases; that is, when
import
prices rise at a relatively faster rate than export prices, which has been the
experience
of many less developed countries (LDCs) in recent decades.
Treasury bill
A
short-term debt issued by a national government with a maximum maturity of
one
year. Treasury bills are sold at discount, such that the difference between
purchase
price and the value at maturity is the amount of interest.
Treasury’s guaranty program for money
market funds
Extends
FDIC-like insurance to certain money market funds for a fee.
Troubled Asset Relief Program (TARP)
Originally
designed as a $700 billion asset purchase vehicle, this program
morphed
into a combined capital injection ($250 billion) and asset purchase
program
($450bn).
Two-way quote
Provides
the bid and the ask price of a security, informing would-be traders of the
current
price at which they could buy or sell the security; also shows the spread
between
the bid and the ask, giving traders an idea of the current liquidity in the
security
(eg, a smaller spread indicates more liquidity).
VIX
A
volatility index compiled by the Chicago Board Options Exchange (CBOE) that
measures
the implied volatility of a blend of S&P 500 index options.
Volatility (vol)
Measures
the historic or expected variation of a financial instrument’s market
price.
Volume
A
measure of the strength of the current price trend; it should increase in the
direction
of the major price trend. Volume measures how anxious traders are to
establish
or close out their positions.
Weak dollar
When
the US dollar's value is decreasing relative to a single currency or a basket
of
foreign currencies due to changes in the interest rate and/or the US economic
outlook;
a US dollar is exchanged for lower amounts of a foreign currency.
ZIRP
Acronym
for zero interest rate policy.
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