■ 11 arbitrage free A situation in which an arrangement fee A fee charged by an arbitrageur cannot make a profit be- agent for arranging a...
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Smutek to uczucie, jak gdyby się tonęło, jak gdyby grzebano cię w ziemi.
Analogous to a commission.
mispriced relative to one another.
Sometimes called a structuring fee if fi-
Sometimes understood to mean an effi-
nancial engineering is involved.
cient market. Alternatively, the absence
of arbitrage opportunities.
arrearage The amount of any past due
obligations, such as interest on bonds
arbitrage pricing theory Known by the
or dividends on preferred stock.
acronym APT. A model for estimating
security returns, particularly for stocks,
arrears An obligation to make a pay-
that is based on systematic risk factors.
ment at the end of a payment period.
These factors are captured by factor-
This is the normal practice, for exam-
replicating portfolios. The method rep-
ple, in the bond markets where the cou-
resents a generalization of the capital
pon interest is paid at the end of the
asset pricing model (CAPM) and
coupon period.
makes use of a statistical technique
called factor analysis.
arrears swap A swap in which one set
of payments is based on an observation
arbitrage profit A profit earned by ex-
made at the end of the relevant period
ploiting a discrepancy between the
by looking back. Total return swaps are
pricing of an asset in two different mar-
typically structured as in-arrears swaps
kets. See arbitrage for more detail.
but not all in-arrears swaps are based
on a total return.
arbitrageur Also spelled “arbitrager . ”
One who engages in arbitrage.
ascending yield curve See upward slop-
ing yield curve.
ARCH model See autoregressive con-
Asian option See average rate option and ditional heteroscedasticity model.
average strike option.
arithmetic average annual return An
ask Also known as an offer price and as average formed by dividing the sum of
an asked price. This is the price at which
successive annual percentage returns
a dealer will sell an asset. In contrast, a
on an investment by the number of
bid price is the price at which a dealer
years. This form of calculating an aver-
will buy the asset.
age annual return can be very mislead-
ing, particularly when the annual
asked price See ask.
returns are volatile. For example, if the
annual returns on an investment for the
assessed value The value placed on
last four years were +20%, –20%, +16%
property by an assessor for purposes of
and +40%, the arithmetic average an-
levying taxes. Assessed values can
nual return would be 14%. A more reli-
differ significantly from true market
able measure is the geometric average
values or appraised value and are not,
annual return. See geometric average an-
necessarily, meant to be indicative of
nual return for comparison.
market value.
ARM See adjustable rate mortgage.
assessment ratio The ratio of the as-
sessed value of real estate or other
ARPS See auction rate preferred stock.
property to its true market value.
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asset allocation–assignment
asset allocation The process of dividing
asset-backed securities Known by the
investment funds among different asset
acronym ABS. These are bond and note
classes. Asset classes can be defined
issues collateralized by a cash flow
broadly, such as stocks and bonds, or
stream that can be associated with al-
narrowly, such as investment grade
most any well-defined source (e.g.,
corporate bonds, Treasury bonds, high-
credit card receivables, auto loan re-
yield bonds, and so forth. See strategic
ceivables, etc.). Mortgage-backed secu-
asset allocation and tactical asset alloca-rities are now viewed as a subset of the
tion.
asset-backed securities market. The
process of packaging a pool of claims
on a cash flow stream into a security is
asset allocation swap Any of a variety
often called securitization. Generally, a
of swap structures that are intended to
corporation holding assets that repre-
effect an asset allocation strategy. For
sent claims to future cash flows trans-
example, an equity swap in which the
fers ownership of those assets to
equity leg pays the higher of the total
a backruptcy-remote, special-purpose
return on two equity indexes.
vehicle, which then issues bonds col-
lateralized by those assets. Various
asset class A group of assets that share
techniques can be used to enhance the
some general characteristic. For exam-
credit quality of the ABS .
ple, real estate makes up an asset class,
common stocks of U.S. corporations
asset/liability management The man-
make up an asset class, and U.S. bonds
agement of assets and/or liabilities in
make up an asset class. Asset classes
such a way as to match cash flows, cur-
can be broadly or narrowly defined. For
rency denominations, durations, or ma-
example, a broad asset class can be sub-
turities of assets and liabilities in order
divided into numerous subclasses.
to manage exposure to price risks (i.e.,
interest rate risk and exchange rate
risk).
asset swap Any swap written to trans-
form the cash flow characteristics of an
asset in order to replicate the cash flow
asset/liability management committee
Usually abbreviated ALCO. Groups of
characteristics of another asset. The
individuals at banks and other financial
combination of the original asset to-
institutions with broad authority to
gether with the swap often constitutes
manage the risks taken on by those in-
a synthetic instrument. Also used to de-
stitutions.
scribe a package consisting of a bond
and a pay-fixed/receive-floating inter-
asset-or-nothing options Options that
est rate swap, which has the effect of
pay off the full market value of an asset
replicating a floating rate note.
if the option is in-the-money at expiry
and nothing if the option is out-of-the-
asset-backed commercial paper Com-
money at expiry. These options are also
mercial paper backed by specific assets
known as all-or-nothing options. See also
of its issuer. Asset-backing of commer-
all-or-nothing options.
cial paper allows poorer quality corpo-
rations to utilize the commercial paper
assignment (1) The transfer of one’s
market. This is in contrast to most com-
rights and obligations under a contract
mercial paper, which is unsecured and
to another party. (2) The notice to an op-
issued by high quality issuers. See also