Settlement The fulfilment of the contractual commitments of
transacted business.
Settlement Date The date on which a trade is cleared by delivery of
securities against funds (actual settlement date, con-
tractual settlement date).
Share Futures Based on individual shares. Delivery is fulfilled by
the payment or receipt of cash against the exchange-
calculated delivery settlement price. Also called stock
futures and universal stock futures.
Share Option A right sold to an investor conferring the option to
buy or sell shares of a particular company at a pre-
determined price and within a specified time limit.
Short A term used to describe a market view that if traded
would create a sold position in a derivative that is
held open. For instance, a fund manager believes the
equity market might fall and so contemplates going
short by selling index futures to hedge the portfolio of
shares held. Opposite of long.
Short Position The selling of securities, commodities, etc. that are
not already owned, which creates a position.
SGX The merged central Stock Exchange of Singapore &
the derivative exchange SIMEX.
Soft Commodities Description given to commodities such as sugar, coffee
and cocoa, traded through LIFFE since its incorpor-
ation of the former London Commodity Exchange
(LCE).
SPAN Standardised Portfolio Analysis of Risk. A form of
margin calculation which is used by various clearing
organisations.
Speculation A deal undertaken because the dealer expects prices
to move in his favour and thereby realise a profit.
Speculator The speculator is a trader who wants to assume risk
for potentially much higher rewards.
Spot Delivery A delivery or settlement of currencies on the value
date, two business days later.
Spot Market Market for immediate as opposed to future delivery.
In the spot market for foreign exchange, settlement is
in two business days ahead.
Spot Month The first month for which futures contracts are
available.
Spot Rate The price prevailing in the spot market.
Glossary of derivatives terms 197
Spread (i) 1. The difference between bid and asked
price on a security or derivative
2. Difference between yield on or prices of two
securities of different types or maturities
3. In underwriting, difference between price
realised by an issuer and price paid by
the investor
4. Difference between two prices or two rates.
What commodities traders would refer to
as the basis.
(ii) A trading strategy in which a trader buys one
instrument and sells another, related instru-
ment with a view to profiting from a change
in the price difference between the two. A
futures spread is the purchase of one futures
contract and the sale of another; an option
spread is the purchase of one call (or put)
and the sale of another.
(iii) The difference between one price or rate and
another, for example, the extent to which a
swap fixed-rate is higher than a benchmark
Treasury bond yield, or the extent to which
the floating-rate in a swap is above or below
LIBOR.
Standard Settlement Instructions for settlement with a particular count-
Instructions terparty which are always followed for a particular
kind of deal and, once in place, are therefore not
repeated at the time of each transaction.
Standing Instruction Default instruction, for example, provided to an
agent processing payments or clearing securities
trades; provided by shareholder on how to vote
shares (for example, vote for all management-
recommended candidates).
Standard & Poors US indices on which futures and options contracts
are based CME introduced S&P 500 Index Futures
as the first index-based derivative.
Stock In some countries (e.g. United States), the term
applies to ordinary share capital of a company. In
other countries (e.g. United Kingdom), stock may
mean share capital that is issued in variable
amount instead of fixed specified amounts, or it
can describe government loans.
Stock Dividend Dividends paid by a company in stock instead of
cash. As a corporate action it does not usually
change the contract specification.
198 Glossary of derivatives terms
Stockmarket Term used to describe where securities are/have been
traded, i.e. ‘today on the stockmarket shares closed
higher’.
Stock Index Based on the value of an underlying stock index
Futures/Options like the FTSE 100 in the UK, the S&P 500 Index in
the United States and the Nikkei 225 and 300 in
Japan. Delivery is fulfilled by the payment or receipt of
cash against the exchange-calculated delivery settle-
ment price. These are referred to as either indices or
indexes.
Stop (Order) An owner of a physical security that has been muti-
lated, lost or stolen will request the issuer to place
a stop (transfer) on the security and to cancel and
replace the security.
Straddle The purchase or sale of a call combined with the
purchase or sale of a put at the same strike (generally
purchased with both at-the-money).
Straight-through Computer transmission of the details of a trade, with-
Processing out manual intervention, from their original input by
the trader to all other relevant areas – position keep-
ing, risk control, accounts, settlement, reconciliation.
Strike Price The fixed price, per share or unit, at which an option
conveys the right to call (purchase) or put (sell) the
underlying shares or units.
Strike Price/Rate Also exercise price. The price or rate at which the
holder of an option can insist on the underlying trans-
action being fulfilled.
SWIFT Society for Worldwide Interbank Financial Telecom-
munications – secure electronic communications net-
work between banks.
Tender Futures positions that are depending on the market
short on or before expiry are tendered for delivery.
Theoretical Value Another term for fair value of a futures or options
contract.
Theta A term used to describe the rate of decline of time
value in an option price.
Tick Size The value of a one-point movement in the contract
price.
Time Value The amount by which an option’s premium exceeds
its intrinsic value. Where an option has no intrinsic
value the premium consists entirely of time value.
TIMS Theoretical Intermarket Margin System, margin system
used on some exchanges.
Glossary of derivatives terms 199
Traded Option An option which is traded on an exchange.
Trader An individual who buys and sells securities with
the objective of making short-term gains.
Trading Permits These are issued by exchanges and give the holder
the right to have one trader at any one time trading
in the contract(s) to which the permit relates.
Treasury Bill Money market instrument issued with a life of less
than one year issued by the US and the UK gov-
ernments. Good collateral against margin calls.
Treasury Bonds (US) US government bond issued with a 30-year matu-
rity. Underlying of the CBOT Treasury Bond future.
Treasury Note A government obligation with maturities of one–ten
years, carrying a fixed rate of interest.
Treasury Notes (US) US government bond issued with 2-, 3-, 5- and
7-year maturity. Underlying for futures traded on
CBOT.
Triple A – Rating The highest credit rating for a bond or company –
the risk of default (or non-payment) is negligible.
Underlying Asset or The asset or product from which the future or
Underlying option’s price is derived and which may be
deliverable.
Unit Trust A system whereby money from a number of invest-
ors is pooled together and invested collectively
on their behalf. Each owns a unit (or number of
them) the value of which depends on the value of
those items owned by the trust. Unit trusts can
use derivatives subject to regulatory directives and
trust mandates.
Unrealised Profit Profit that has not arisen from a sale – an increase
in value of an asset.
Value at Risk (VaR) The maximum amount which a bank expects to
lose, with a given confidence level, over a given
time period.
Variation Margin The process of revaluing an exchange-traded prod-
uct each day. It is the difference between the closing
price on the previous day against the current closing
price. It is physically paid or received each day by
the clearing organisation. It is often referred to as
the mark-to-market.
Vega Another part of the ‘Greeks’ and is a measure of
the rate of change in an option’s price caused by
changes in volatility.
200 Glossary of derivatives terms
Volatility The range or scatter of the price of an underlying or a
derivative around a mean. Volatility is a crucial part of
option pricing and therefore option price models as the
price of the option is affected by both the volatility of the
underlying and the specific option series. Option strat-
egies like straddles are based on the expected volatility of
the underlying through to maturity.
Warrants An option which can be listed on an exchange, with a life-
time of generally more than one year.
Warrant Agent A bank appointed by the issuer as an intermediary between
the issuing company and the (physical) warrant holders,
interacting when the latter want to exercise the warrants.
Writer A person who has sold an open derivatives contract and is
obliged to deliver or take delivery upon notification of exer-
cise from the buyer.
XETRA Dealing system of the Deutsche Börse.
The contents of this glossary of terms and appendices have been compiled
from reliable sources and are believed to be correct; however, Derivatives
Management Services Ltd and Computer Based Learning Limited can take no
responsibility whatsoever for any loss, claim or damages caused in whatever
manner as a result of the reader using information taken from this work.
© Computer Based Learning Ltd/DMS Ltd October 2004
No part of this document may be copied or stored in any format without
prior permission from: Computer Based Learning Ltd, 1 Talbot Yard, London
Bridge, London, SE1 1YP.
Glossary of derivatives terms 201
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