Delta The sensitivity of an option price to changes
in the price of the underlying product. Also
used to determine the amount of underlying
needed to hedge a derivative position and
vice versa.
Dematerialised (form) Circumstances where securities are held
in a book entry transfer system with no
certificates.
Department of Trade Department of government responsible for
and Industry some commercial matters including monop-
olies and prosecution of insider dealing. Also
issues some guidelines on use of derivatives.
Derivative A financial instrument whose value is
dependent upon the value of an underlying
asset.
Derivative Instruments Instruments that are based on other
or Derivative Securities underlying instruments. Examples would be
options on shares or futures on bonds or for-
wards on commodities or swaps on interest
rates.
Direct Market Participant A broker, broker/dealer or any direct member
of an exchange.
Dirty Price The total price of a bond including accrued
interest.
Discount The amount by which a future is priced
below its theoretical price or fair value. If the
fair value of an index future is 3000 and it is
trading at 2990 it is described as trading at a
discount of 10 points to its fair value.
Discount Factor The number by which a future cash flow
must be multiplied in order to calculate its
present value.
Discount Rate The rate of interest charged by the Federal
Reserve in the United States to banks to
whom money has been lent. Is also a term
used by other central banks for the same
purpose. Some derivatives reference sources
are based on it.
Discount Securities Non-interest-bearing short-term securities
that are issued at discount and redeemed at
maturity for full face value.
Deutsche Börse The German Stock and Derivatives Exchange
Group that includes Eurex.
Glossary of derivatives terms 177
Dividend Distribution of profits made by a company to its share-
holders if it chooses to do so.
Diversification Investment strategy of spreading risk by investing the
total available in a range of investments. Derivatives
are sometimes used to achieve this (see also asset
allocation).
Domestic Bond Bond issued in the country of the issuer, in its country
and according to the regulations of that country.
Dow Jones Index A share index used in the USA which is the underlying
for futures and options contracts.
DTC Depository Trust Company – CSD for shares in the
USA.
Due Diligence The carrying out of duties with care and perseverance.
Due diligence is generally referred to in connection
with the investigations of a company, carried out by
accountants to ascertain the value of that company
and also applies from a regulatory point of view that
firms and key personnel should carry out their duties
with due diligence to the regulatory environment.
Duration A measure of the relative volatility of a bond; it is an
approximation for the price change of a bond for a
given change in the interest rate. Duration is meas-
ured in units of time. It includes the effects of time
until maturity, cash flows and the yield to maturity.
Bond futures are used to manage duration.
ECB European Central Bank.
EFP Exchange of futures for physical. Common in the
energy markets. A physical deal priced on the futures
markets, with the derivative transacted off-exchange
but recognised by the exchange for clearing.
EUREX German-Swiss derivatives exchange created by the
merger of the German (DTB) and Swiss (SOFFEX)
exchanges; part of Deutsche Börse.
EURONEXT A pan-European securities and derivatives exchange
listing Dutch, French, Portuguese and Belgium securi-
ties and derivatives plus the derivative products traded
on LIFFE.
Emerging Market Often a non-industrialised country with
– Low or middle per capita income, as published
annually by the World Bank,
– Undeveloped capital market (i.e. the market repre-
sents only a small portion of their GDP).
178 Glossary of derivatives terms
Investors sometimes prefer to use derivatives that
give an exposure to shares, commodities, interest
rates or currencies on the emerging market
but which are traded on established derivative
markets or off-exchange with banks.
Equity A common term to describe stocks or shares.
Equity/Stock Options Contracts based on individual equities or shares.
On exercise of the option the specified amount of
shares are exchanged between the buyer and the
seller through the clearing organisation.
ETD This is the common term which is used to des-
cribe Exchange-Traded Derivatives which are the
standardised products. It also differentiates
products which are listed on an exchange as
opposed to those offered over-the-counter.
ETF/Exchange-Traded Passively managed basket of stocks that mirrors
Funds a particular index and that can be traded like
ordinary shares. They trade intra-day on stock
exchanges, like securities, at market-determined
prices. In essence, ETFs are index funds that
trade like stocks.
Ethical Investments The investment in specific sectors through either
personal conviction or the view that such
companies have a higher potential, for example
investment in funds or companies supporting
‘green’ issues, or the avoidance of the so-called
‘unethical’ areas such as animal experimenta-
tion, pollution, etc.
EURIBOR A measure of the average cost of funds over the
whole euro-area based on a panel of 57 banks.
Is the underlying for the highly successful LIFFE
interest rate futures and options.
Euro The name of the single European currency.
Eurobond An interest-bearing security issued across national
borders, usually issued in a currency other than
that of the issuer’s home country. Because there
is no regulatory protection, only governments and
top-rated multinational corporations can issue
Eurobonds that the market will accept.
Euroclear A book-entry clearing facility for most Euro-
currency and foreign securities. Linked to Euro-
next through the acquisition of SICOVAM and
recently announced a merger with CREST.
Glossary of derivatives terms 179
European Style Option An option which can only be exercised on the
expiry day.
Execution and Clearing An agreement signed between the client and
Agreement the clearing broker. This agreement sets out
the terms by which the clearing broker will
conduct business with the client including
how trades to be received from other execu-
tion brokers will be advised to the clearing
broker.
Exchange Marketplace for trading futures and options,
the derivative exchange develops (see contract
specification), markets and lists its own prod-
ucts as well as setting out the membership
criteria, rules and regulations for trading.
Exchange Delivery The price determined by the exchange for the
Settlement Price (EDSP) closing out of the futures position and the
calculation of the final value for the cash or
physical delivery of the underlying instrument
or cash settlement.
Exchange-Owned Exchange- or member-owned clearing organisa-
Clearing Organisation tions are structured so that the clearing
members guarantee each other with the use
of a member’s default fund and additional
funding like insurance, with no independent
guarantee.
Exchange Rate The rate at which one currency can be
exchanged for another.
Execute and Eliminate The amount that can be tracked immediately
Order against displayed orders is completed, with the
remainder being rejected.
Execution The action of trading in the markets.
Execution and Clearing An agreement signed between the client and
Agreement the clearing broker. This agreement sets out the
terms by which the clearing broker will conduct
business with the client.
Execution Only or Tripartite agreements that are signed by the
Give-Up Agreement executing broker, the clearing broker and the
client. This agreement sets out the terms by
which the clearing broker will accept business
on behalf of the client.
Exercise The process by which the holder of an option
may take up their right to buy or sell the
underlying asset.
180 Glossary of derivatives terms
Exercise Price The fixed price, per share or unit, at which an option
(or Strike Price) conveys the right to call (purchase) or put (sell) the
underlying shares or units.
Exotic Options New generation of option derivatives, including look-
backs, barriers, baskets, ladders, etc. They have
different terms to standardised traded call and put
options.
Expiry Date The last date on which an option holder can exercise
their right. After this date an option is deemed to
lapse or be abandoned.
Face Value The value of a bond, note, mortgage or other security
that appears on the face of the issue, unless the
value is otherwise specified by the issuing company.
Face value is ordinarily the amount the issuing
company promises to pay at maturity. Face value is
also referred to as par value or nominal value. For
instance, a bond future that has a unit of trading of
£100 000 would require a bond(s) with a face value
of £100 000 to be delivered if tendered.
Fair Value For futures, it is the true price not the market price,
allowing for the cost of carry. For options, it is the
true price not the market price, as calculated using
an option pricing model.
Fill or Kill Order Type of order input into SETS. It is either completed
in full against displayed orders or rejected in full.
Final Settlement The completion of a transaction when the delivery of
all components of a trade is performed. In the case of
delivery of a derivative it can be the final amount due
on closeout, maturity or delivery. At final settlement
any collateral covering margin calls is returned.
Financial Futures/ Financial futures and options is a term used to
Options Contracts describe futures or options contracts based on finan-
cial instruments like currencies, debt instruments,
interest rates and financial indices.
Financial Services The legislation that created the single UK
and Markets Regulator, the Financial Services Authority.
Act 2000
Financial Services The agency designated by the Treasury to regulate
Authority (FSA) investment business as required by FSA, 1986. It is
the main regulator of the financial sector and was
formerly called the Securities and Investments Board
(SIB). It assumed its full power on 1st December
2001.
Glossary of derivatives terms 181
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