First Notice Day The first day as listed in the contract specification that
the holders of short positions can give notification to
the exchange/clearing house that they wish to effect
delivery.
Fit and Proper Under Financial Services Act, everyone conducting
investment business must be a ‘fit and proper person’.
The Act does not define the term, a function which is
left to the regulators such as FSA.
Fixed Income Interest on a security that is calculated as a constant
specified percentage of the principal amount and paid
at the end of specified interest periods, usually annu-
ally or semi-annually, until maturity.
Fixed Rate (i) A borrowing or investment where the interest or
coupon paid is fixed throughout the arrangement.
(ii) In an FRA or coupon swap, the fixed rate is the
fixed interest rate paid by one party to the other
in return for a floating-rate receipt (i.e., an inter-
est rate that is to be re-fixed at some future time
or times).
Flat Position A position which not only is equal in terms of long
and short amounts or value but has been fully closed
out so that no liability to make or take delivery exists,
i.e. no exposure.
Flex Options Newly introduced contracts which are a cross between
OTCs and exchange-traded products. The advantage
of flex options is that participants can choose various
parts of the contract specification such as the expiry
date and exercise price.
Floor A package of interest rate options whereby, at each of
a series of future fixing dates, if an agreed reference
rate such as LIBOR is lower than the strike rate, the
option buyer received the difference between them, cal-
culated on an agreed notional principal amount for the
period until the next fixing date. See also cap, collar.
Floorbrokerage The process of delegating the execution of futures and
options to another counterparty who then charges a
floorbrokerage fee for doing the trade. The floorbroker
then ‘gives up’ or allocates the trade to the broker
concerned or if a client trade to the clearing broker
of the clients choice who deals with the clearing and
settlement.
Foreign Exchange Exchange of one currency for another one.
Forex Abbreviation for foreign exchange (currency trading).
182 Glossary of derivatives terms
Forward Market Where a price is agreed now for delivery of goods
in the future. Used in currency, securities and com-
modities markets, often in conjunction with dealing
in immediate delivery (see Spot Market) as a safety
net.
Forward Delivery Transactions that involve a delivery date in the future.
Forwards These are very similar to futures contracts but they
are not mainly traded on an exchange. Often they are
not marked to market daily but settled only on the
delivery date. However, for some forward contracts
there is a mark to market process and any loss
occurring during the life of the contract is paid to the
clearing house and profits are held by the clearing
house until settlement on maturity with interest
being paid on the amount held.
Friendly Society Societies formed initially to benefit members in return
for regular contributions against sickness, poverty and
bereavement. Now generally provide various insurance
covers (life, medical, etc.) as well as savings vehicles.
Front Running The illicit utilising by brokers and market-makers
of advance warning or information for personal or
corporate profit. Illegal on derivative exchanges.
FSA Financial Services Authority (UK), also Financial
Services Agency (Japan).
FT Index The Financial Times Ordinary Share Index consists of
30 large companies across a broad field and gives an
indication of share price trends. The larger Index, the
FT-SE 100 (Footsie) provides a wider indication of 100
leading companies on the Stock Market. All stock
markets have an index, for example The Dow Jones in
the US, the DAX in Germany or the Nikkei in Japan.
FT-SE 100 Index Main UK share index based on 100 leading shares.
FT-SE Mid 250 UK share index based on the 250 shares immediately
below the top 100.
Fund Manager Individuals or specialists companies responsible for
investing the assets of a fund in such a way as
to maximise its value. They do this by following a
strategy to buy and sell equities and other financial
instruments.
Fungible Contract A futures contract with identical administration in
more than one financial centre. Trades in various
geographical locations can be offset (e.g. bought on
the IPE and sold on the SIMEX).
Glossary of derivatives terms 183
Futures An agreement to buy or sell an asset at a certain
time in the future for a certain price.
Future Value The amount of money which can be achieved at a
given date in the future by investing (or borrowing)
a given sum of money now at a given interest rate,
assuming compound re-investment (or re-funding)
of any interest payments received (or paid) before
the end.
Futures and Options Type of authorised unit trust that can invest in
Fund (FOF) derivatives to a greater degree than other author-
ised unit trusts but still within certain parameters.
Gamma The rate at which the delta of an option changes.
Geared Futures and Type of authorised unit trust that can invest in
Options Fund (GFOF) derivatives to a greater extent than other unit
trusts including FOFs but still only within certain
parameters.
Gearing The characteristic of derivatives which enables a
far greater reward for the same, or much smaller,
initial outlay. It is the ratio of exposure to invest-
ment outlay, and is also known as leverage.
General Principles Eleven fundamental principles of behaviour writ-
ten by FSA to apply all investment businesses.
Gilt Domestic sterling-denominated long-term bond
backed by the full faith and credit of the United
Kingdom and issued by the Treasury.
Gilt Edged Security UK government borrowing through the issue of
bonds that is considered a very ‘safe’ investment
in terms of the likelihood of default.
Give-Up The process of giving a trade to a third party who
will undertake the clearing and settlement of the
trade.
Global Clearing The channelling of the settlement of all futures
and options trades through a single counterparty
or through a number of counterparties geographi-
cally located.
Global Custodian Institution that safekeeps, settles and performs
processing of income collection, tax reclaim, multi-
currency reporting, cash management, foreign
exchange, corporate action and proxy monitoring,
etc. for clients’ securities in all required market-
places.
Global Depository A security representing shares held in custody in
Receipt (GDR) the country of issue.
184 Glossary of derivatives terms
GLOBEX The overnight trading system operated by Reuters
and the Chicago Mercantile Exchange (CME).
Gold Widely used commodity and regarded as a safe haven
in times of uncertainty.
Granter Another term for a person who has sold an option
position to a buyer.
‘Greeks’ A collective term for delta, gamma, theta and vega
which relate to the movement in price of an option
as a result of the movement in the underlying price,
the rate of that movement and time erosion.
Gross A position which is held with both the bought and the
sold trades kept open rather than being netted out.
GSCC Government Securities Clearing Corporation – clearing
organisation for US Treasury securities.
Haircut Amount by which collateral put-up against margin is
discounted.
Hard Commodities Commodities such as tin or zinc. Futures and options
on them are traded on specialist derivative exchanges
like the London Metal Exchange.
Hedge Ratio Determining the ratio of the futures to the cash
position so as to reduce price risk. Also the propor-
tion of the underlying asset needed to delta hedge an
option.
Hedging A trading method which is designed to reduce or
mitigate risk. Reducing the risk of a cash position in
the futures instrument to offset the price movement
of the cash asset. A broader definition of hedging
includes using futures as a temporary substitute for
the cash position.
HKE/HKEx The holding company of the Hong Kong Futures
Exchange, The Stock Exchange of Hong Kong Ltd
and The Hong Kong Securities Clearing Company
Ltd Exchange is collectively called HKEx (Hong Kong
Exchanges).
Holder A term describing a person who has bought a deriv-
atives contract that creates an open long position.
Home State Under the ISD, an investment business is authorised
Regulation in the place of its head office and registered office.
This home state authorisation entitles it to conduct
business in any member state of the European Union.
Host State Any European investment business operating outside
Regulation its home basis is regulated by its host for its Conduct
of business.
Glossary of derivatives terms 185
In-the-Money A call option where the exercise price is below the
underlying share price, or a put option where the
exercise price is above the underlying share price.
Income Enhancement Strategy that uses written call options to generate
premium against underlying assets held.
Independent Clearing A clearing house or organisation that is quite sep-
Organisation arate from the actual members of the exchange,
and will guarantee to each member the perform-
ance of the contracts by having them registered in
the organisation’s name.
Index Funds Unit trusts or mutual funds which invest in the
constituent parts of an index.
Indirect Market Non-broker/dealers, such as institutional invest-
Participation ors, who are active investors/traders.
Initial Margin The deposit that the clearing house calls as
protection against a default of a contract. It is
returnable to the clearing member once the posi-
tion is closed. The level is subject to changes in
line with market conditions.
Inside Information Information relating to a security which is not
publicly known and which would affect the price
of the security if it was public.
Insider Directors, employees, shareholders and other per-
sons having inside information.
Insider Dealing The criminal offence whereby those with unpub-
lished price sensitive information deal, advise
others to deal or pass the information on. Maxi-
mum penalty is seven-year jail and an unlimited
fine. Where sudden severe movements in a share
price occur, the regulatory authority will check
dealings in derivatives on the share as well as
share trades to establish if any insider dealing
has possibly occured.
Institutional Investor An institution that is usually investing money on
behalf of others. Examples are mutual funds and
pension funds.
Integration The third stage of money laundering, in which
the money is finally integrated into the legitimate
economy. See placement, layering.
Interest Rate Futures Based on a debt instrument such as a Govern-
ment Bond or a Treasury Bill as the underlying
product and require the delivery of a bond or bill
to fulfil the contract.
186 Glossary of derivatives terms
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