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Back Months
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Futures delivery months other than the spot or front month (also called deferred months).
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Back office
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The part of a trading operation that settles the trades carried out by the dealers and brokers in the front-office.
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Back Office
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The department in a financial institution that processes and deals and handles delivery, settlement, and regulatory procedures.
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Back pricing
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Fixing the price of a commodity for which the commitment to purchase has been made in advance. The buyer can fix the price relative to any monthly or periodic delivery using the futures markets.
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Back Spread
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A delta-neutral ratio spread in which more options are bought than sold. A back spread will be profitable if volatility increases. See Delta.
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Backwardation
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Market situation in which futures prices are progressively lower in the distant delivery months. For instance, if the gold quotation for January is $360.00 per ounce and that for June is $355.00 per ounce, the backwardation for five months against January is $5.00 per ounce. (Backwardation is the opposite of contango). See Inverted Market.
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Balance Sheet
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The accounting statement which lists a companys assets and its liabilities including debt and share capital. It is taken at a specific point in time normally the end of the companys financial year.
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Bancassurance
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A business strategy in which a bank also provides products such as life assurance and pension plans.
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Bank of England
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The central bank for the UK. Since 1997 the Bank of Englands Monetary Policy Committee has been responsible for setting UK interest rates independently of Government. Its responsibilities for banking regulation have been transferred to the Financial Services Authority (FSA) and its responsibility for issuing UK Government Treasury bills and bonds has been transferred to the Debt Management Office (DMO) a separate agency of the UK Government.
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Banker's Acceptance
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A draft or bill of exchange accepted by a bank where the accepting institution guarantees payment. Used extensively in foreign trade transactions.
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Bankers Acceptance
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A negotiable short-term debt security issued by a company typically to finance an international trade deal. Payment on the bill is guaranteed by a bank and the goods involved in the trade deal also serve as collateral. Like US commercial paper, BAs trade at a discount to their face value.
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Barrier option
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An option which either comes into existence or ceases to exist when the underlying asset reaches a threshold or barrier level. For example, an up-and-out put with a strike of $100 might have a barrier set at $105 such that the option ceases to exist if at any time before expiry the underlying trades at or above $105. Barrier options can also be up-and-in (the option comes into existence when the underlying price rises to a certain level) or down-and-in (the options comes into existence when the underlying price falls to the barrier) or down-and-out (the option ceases to exist if the underlying hits a barrier set below the strike.)
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Basis
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In futures trading, the relationship between the price of the cash security and the futures price.
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Basis
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The difference between the spot or cash price of a commodity and the price of the nearest futures contract for the same or a related commodity. Basis is usually computed in relation to the futures contract next to expire and may reflect different time periods, product forms, grades, or locations.
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Basis Grade
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The grade of a commodity used as the standard or par grade of a futures contract.
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Basis point
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In the money markets and bond markets 1 basis point equals 0.01%. So if interest rates rise by 0.25% this equals 25 basis points.
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Basis Point
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The measurement of a change in the yield of a debt security. One basis point equals 1/100 of one percent.
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Basis Quote
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Offer or sale of a cash commodity in terms of the difference above or below a futures price (e.g., 10 cents over December corn).
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Basis Risk
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The risk associated with an unexpected widening or narrowing of basis between the time a hedge position is established and the time that it is lifted.
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Basis swap
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A swap in which both legs are based on floating interest rates but each is calculated on a different basis. For example, one leg might be based on the rate on commercial paper and the other on LIBOR.
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Basis Swap
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A swap whose cash settlement price is calculated based on the basis between a futures contract and the spot price of the underlying commodity or a closely related commodity on a specified date.
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Basket option
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An option whose payoff depends on the performance of a specific basket of shares. To price the option the dealer has to make an assumption about the correlation between the price movements of the constituent shares. Normally the shares will not be perfectly correlated and as a result of the offsetting movements in their prices the volatility of the basket will be less than the simple weighted average of the volatility of the constituent shares in the basket.
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BBA
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British Banking Association. The BBA calculates LIBOR rates each business day in a range of currencies.
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Bear
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A bear is someone who thinks that a particular security or the whole market will fall in price. A bear market is one in which many people are feeling negative and prices are falling.
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Bear
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One who expects a decline in prices. The opposite of a bull. A news item is considered bearish if it is expected to result in lower prices.
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Bear Market
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A market in which prices generally are declining over a period of months or years. Opposite of bull market.
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Bear Market Rally
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A temporary rise in prices during a bear market. See Correction.
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Bear spread
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An option strategy which pays a limited profit in the event that the underlying asset falls in value but which only suffers a limited loss if the underlying rises in value.
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Bear Spread
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(1) A strategy involving the simultaneous purchase and sale of options of the same class and expiration date, but different strike prices. In a bear spread, the option that is purchased has a lower delta than the option that is bought. For example, in a call bear spread, the purchased option has a higher exercise price than the option that is sold. Also called bear vertical spread. (2) The simultaneous purchase and sale of two futures contracts in the same or related commodities with the intention of profiting from a decline in prices but at the same time limiting the potential loss if this expectation does not materialize. In agricultural products, this is accomplished by selling a nearby delivery and buying a deferred delivery
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Bear Vertical Spread
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See Bear Spread.
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Bearer security
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A security where the owner of the physical certificate has full title. There is no register of ownership. Eurobonds are normally bearer securities.
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Beta
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A measure of the market (price) risk of a share relative to the rest of the stockmarket. Beta can be measured statistically based on historical evidence. It is the percentage change in the stock price for a 1% change in the whole market. Shares with betas higher than 1 are more volatile and hence more risky than the market and the required return on such shares is higher than the required return on the market as a whole.
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Beta (Beta Coefficient)
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A measure of the variability of rate of return or value of a stock or portfolio compared to that of the overall market, typically used as a measure of riskiness.
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Bid
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The price a dealer is prepared to pay to buy a security. In the deposit markets, the interest rate a dealer pays for borrowing funds.
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Bid
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An offer to buy a specific quantity of a commodity at a stated price.
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Bid-Ask Spread
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The difference between the bid price and the ask or offer price.
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Bid/offer spread
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The difference between the price a dealer will pay for buying and for selling a security. In the deposit markets, the difference between the interest rate a dealer pays for borrowing and for lending funds.
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Big figure
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In the FX markets, the first decimal places of a rate quotation. In major currency pairs such as the euro against the US dollar the full quotation is normally given to four decimal places.
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Black-Scholes
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The option pricing model developed in 1973 refinements of which form the basis of most option trading systems used today.
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Black-Scholes Model
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An option pricing model initially developed by Fischer Black and Myron Scholes for securities options and later refined by Black for options on futures.
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Blackboard Trading
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The practice, no longer used, of buying and selling commodities by posting prices on a blackboard on a wall of a commodity exchange.
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Block trade
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The sale or purchase of a large number of shares. In the UK sometimes called a portfolio trade.
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Blue chip
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A top-name company whose shares are often considered to provide a consistently good level of earnings.
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Bond
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A debt security issued by a company (corporate), a sovereign state and its agencies, or by a supranational body such as the World Bank. A straight or plain vanilla bond pays fixed amounts of interest - known as coupons - on regular dates. The principal or par value of the bond is also repaid when the bond matures (its redemption date). Non-straight bonds have other features - for example, there may be no maturity or redemption date, or a variable coupon.
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Bond ratings
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Ratings of the credit risk on bonds issued by agencies such as Moodys and Standards & Poor. The highest rating is AAA, called triple-A. This means that it is highly unlikely that the issuer will default on its payments. See also: credit risk.
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Book value
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The assets of a companies less its liabilities. To calculate book value per share divide by the number of shares issued. Book value may be very different to market value (see: market capitalisation).
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Bookbuilding
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Used in IPOs. The investment bank acting for the company asks potential investors to indicate how many shares they would buy at a certain price. The bank then determines a price that is likely to sell all the shares. See also: Initial Public Offers.
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Bookrunner
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An investment bank which is in control of the pricing, underwriting and distribution of a new issue of securities.
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Bottom fishing
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Buying shares when the price has fallen to low levels expecting the pricing to rise again.
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Bottom up
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A style of portfolio management which is based on building up a portfolio from the bottom up based on individual stock selections. The contrast is with a top down style.
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Boutique
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A financial services firm that specialises in a limited range of activities.
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Brady Bonds
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Bonds issued in the 1990s are part of a scheme to reschedule the debt of Latin American countries. The bonds were issued in US dollars and US Treasuries were used as collateral to guarantee some or all of the payments on the bonds. They are named after Nicholas Brady the former US Treasury Secretary.
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Break
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A rapid and sharp decline in the price of a security or commodity.
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Broker
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A person or firm paid a fee or commission to act as an agent in arranging purchases or sales of securities or arranging contracts.
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BTP
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Treasury Bond issued by the Italian Government.
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Buba
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Bundesbank, the Federal German central bank.
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Bulge bracket firm
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An investment bank that is one of the small group of top firms with global capability. Who is and who is not a member is much disputed. At the time of writing (2001) most observers would agree on three members: Merrill Lynch, Morgan Stanley Dean Witter, Goldman Sachs. The expression comes from the heavy type on tombstone advertisements used for the lead managers of issues.
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Bull
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A bull is someone who thinks that a particular security or the whole market will increase in price. A bull market is one in which many people are feeling positive and prices are rising.
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Bull spread
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An option strategy which pays a limited profit in the event that the underlying asset rises in value but which only suffers a limited loss if the underlying falls in value.
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Bund
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Treasury Bond issued by the Federal German Government.
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Buy (or Sell) On Close
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To buy (or sell) at the end of the trading session within the closing price range.
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Buy side
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An analyst or fund manager working for an investment management firm is said to operate on the buy side. An analyst or security salesperson working for a securities house and providing investment ideas to fund managers is said to operate on the sell side.
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Buyer's Market
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A condition of the market in which there is an abundance of goods available and hence buyers can afford to be selective and may be able to buy at less than the price that previously prevailed. See Seller's Market.
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Buying Hedge (or Long Hedge)
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Hedging transaction in which futures contracts are bought to protect against possible increases in the cost of commodities. See Hedging.
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