Equilibrium market price of risk
The slope of the capital market line (CML). Since the CML represents the expected return offered to compensate for a perceived level of risk, each point on the line is a balanced market condition, or equilibrium. The slope of the line determines the additional expected return needed to compensate for a unit change in risk. The equation of the CML is defined by the capital Asset Pricing Model (CAPM).
Similar financial termsEquilibrium price
The price when the supply of goods matches demand.
Full employment equilibrium
This is the level at Net National Income at which everyone who wants to work is able to. There is in other words sufficient demand to employ everyone. Classical economists argued that the economy would automatically tend to this equilibrium, whereas Keynesians said that it was the role of government, through their policy, to ensure we got there.
The practice of revaluing an instrument ot reflect the current values of the relevant market variables.
A market where futures prices decrease with maturity.
An unofficial market where new share issues are bought and sold before they officially become available for trading on the stock exchange. The same logic applies to the forward market for newly issued bonds market - bonds are traded before the final terms on the bond are negotiated.
General market condition characterized by optimism, rising prices in stocks, and a belief that near-term future will see higher market prices for stocks.
An extended period of general price decline in an individual security, an asset, or a market.
The term market close refers to the time of day that a market closes. In the 24h foreign exchange market, there is no official market close. 5:00 PM EST is often referred to and understood as the market close because value dates for spot transactions change to the next new value date at that time.
A theory about the stock market stating that the current prices of stocks reflect all that is known about the company at that moment, and that new information is reflected immediately in changes to that stock's market price.
The foreign market in the United States.
Middle East dollar market
A Middle East dollar market exists in Bahrain where eurodollars and other currencies are intermediated in by a number of Arab and non-Arab banks. Collectively these various regional banking centres make the eurocurrency market one of the largest moneymarkets in the world.
A network of trading desks for the major brokerage firms and institutional investors that communicate with each other by means of electronic display systems and telephones to facilitate block trades and program trades.
A market in which both bid and asked prices, good for the standard unit of trading, are quoted.
A tight market, as opposed to a thin market, is one in which volume is large, trading is active and highly competitive, and spreads between bid and ask prices are narrow.
Exchange-listed securities trading in the OTC market.
A market in which trading volume is low and in which consequently the bid-ask spread are wide and the liquidity of the instrument traded is low.
Technical condition of a market
Demand and supply factors affecting price, in particular the net position, either long or short, of the dealer community.
Also called the equity market, the market for trading equities.
Specific issues market
The market in which dealers reverse in securities they wish to short.
Security market plane
A plane that shows the equilibrium between expected return and the beta coefficient of more than one factor.
Security market line
Line representing the relationship between expected return and market risk.
The market where securities are traded after they are initially offered in the primary market. Most trading is done in the secondary market. The New York stock Exchange, as well as all other stock exchanges, the bond markets, etc., are secondary markets. Seasoned securities are traded in the secondary market.
The foreign market in Japan.
The foreign market in the Netherlands.
The bid and offer prices at which a dealer could do "size." Quotes in the brokers market may reflect not the real market, but pictures painted by dealers playing trading games.
The first buyer of a newly issued security buys that security in the primary market. All subsequent trading of those securities is done in the secondary market.
Compares a stock's market value to the value of total assets less total liabilities (book value). Determined by dividing current stock price by common stockholder equity per share (book value), adjusted for stock splits. Also called Price/book ratio
Perfectly competitive financial markets
Markets in which no trader has the power to change the price of goods or services. Perfect capital markets are characterized by the following conditions: a) trading is costless, and access to the financial markets is free, b) information about borrowing and lending opportunities is freely available, c) there are many traders, and no single trader can have a significant impact on market prices.
Perfect market view (of dividend policy)
Analysis of a decision on dividend policy, in a perfect capital market environment, that shows the irrelevance of dividend policy in a perfect capital market.
Perfect market view (of capital structure)
Analysis of a firm's capital structure decision, which shows the irrelevance of capital structure in a perfect capital market.
Perfect capital market
A market in which there are never any arbitrage opportunities.
Over-the-counter market (OTC)
A decentralized market (as opposed to an exchange market) where geographically dispersed dealers are linked together by telephones and computer screens. The market is for securities not listed on a stock or bond exchange. The NASDAQ market is an OTC market for U.S. stocks.
Operationally efficient market
Also called an internally efficient market, one in which investors can obtain transactions services that reflect the true costs associated with furnishing those services.
Open-market purchase operation
A systematic program of repurchasing shares of stock in market transactions at current market prices, in competition with other prospective investors.
Purchase or sale of government securities by the monetary authorities to increase or decrease the domestic money supply.
(a) A market in which only one side, the bid or asked, is quoted or firm. (b) A market that is moving strongly in one direction.
Claims that cannot be easily bought and sold in the financial markets, such as those of the government and litigants in lawsuits.
The market in which a new issue of securities is first sold to investors.
Markets in which each transaction is separately negotiated between buyer and seller (i.e. an investor and a dealer).
Money market notes
Publicly traded issues that may be collateralized by mortgages and MBSs.
Money market hedge
The use of borrowing and lending transactions in foreign currencies to lock in the home currency value of a foreign currency transaction.
Money market fund
A mutual fund that invests only in short term securities, such as bankers' acceptances, commercial paper, repurchase agreements and government bills. The net asset value per share is maintained at $1. 00. Such funds are not federally insured, although the portfolio may consist of guaranteed securities and/or the fund may have private insurance protection.
Money market demand account
An account that pays interest based on short-term interest rates.
Money markets are for borrowing and lending money for three years or less. The securities in a money market can be U.S.government bonds, treasury bills and commercial paper from banks and companies.
Marketplace price efficiency
The degree to which the prices of assets reflect the available marketplace information. Marketplace price efficiency is sometimes estimated as the difficulty faced by active management of earning a greater return than passive management would, after adjusting for the risk associated with a strategy and the transactions costs associated with implementing a strategy.
Claims that can be bought and sold in financial markets, such as those of stockholders and bondholders.
A negotiable security is said to have good marketability if there is an active secondary market in which it can easily be resold.
A price order, below market if a buy or above market if a sell, that automatically becomes a market order if the specified price is reached.
Market value-weighted index
An index of a group of securities computed by calculating a weighted average of the returns on each security in the index, with the weights proportional to outstanding market value.
Market value ratios
Ratios that relate the market price of the firm's common stock to selected financial statement items.
(a) The price at which a security is trading and could presumably be purchased or sold. (b) The value investors believe a firm is worth; calculated by multiplying the number of shares outstanding by the current market price of a firm's shares.
Market timing costs
Costs that arise from price movement of the stock during the time of the transaction which is attributed to other activity in the stock.
Asset allocation in which the investment in the market is increased if one forecasts that the market will outperform T-bills.
A money manager who assumes he or she can forecast when the stock market will go up and down.
Market segmentation or preferred habitat theory
A biased expectations theory that asserts that the shape of the yield curve is determined by the supply of and demand for securities within each maturity sector.
The classifications of bonds by issuer characteristics, such as state government, corporate, or utility.
Risk that cannot be diversified away.
The return on the market portfolio.
The amount of money that a willing buyer pays to acquire something from a willing seller, when a buyer and seller are independent and when such an exchange is motivated by only commercial consideration.
Market price of risk
A measure of the extra return, or risk premium, that investors demand to bear risk. The reward-to-risk ratio of the market portfolio.
A portfolio consisting of all assets available to investors, with each asset held -in proportion to its market value relative to the total market value of all assets.
The theory that in certain situations, institutions wish to sell their shares but postpone the share sales because large orders under current market conditions would drive down the share price and that the consequent threat of securities sales will tend to retard the rate of share price appreciation. Support for this theory is largely anecdotal.
This is an order to immediately buy or sell a security at the current trading price.
This relationship is sometimes called the single-index model. The market model says that the return on a security depends on the return on the market portfolio and the extent of the security's responsiveness as measured, by beta. In addition, the return will also depend on conditions that are unique to the firm. Graphically, the market model can be depicted as a line fitted to a plot of asset returns against returns on the market portfolio.
Market impact costs
Also called price impact costs, the result of a bid/ask spread and a dealer's price concession.
The period between the 2 latest highs or lows of the S&P 500, showing net performance of a fund through both an up and a down market. A market cycle is complete when the S&P is 15% below the highest point or 15% above the lowest point (ending a down market). The dates of the last market cycle are: 12/04/87 to 10/11/90 (low to low).
Market conversion price
Also called conversion parity price, the price that an investor effectively pays for common stock by purchasing a convertible security and then exercising the conversion option. This price is equal to the market price of the convertible security divided by the conversion ratio.
Total demand for loans by borrowers equals total supply of loans from lenders. The market, any market, clears at the equilibrium rate of interest or price.
Market capitalization rate
Expected return on a security. The market-consensus estimate of the appropriate discount rate for a firm's cash flows.
The total dollar value of all outstanding shares. Computed as shares times current market price. It is a measure of corporate size.
An arrangement whereby the profits or losses on a futures contract are settled each day.
Make a market
A dealer is said to make a market when he quotes bid and offered prices at which he stands ready to buy and sell.
A market is locked if the bid = ask price. This can occur, for example, if the market is brokered and brokerage is paid by one side only, the initiator of the transaction.
Open market purchase
An order placed by an insider, after all appropriate documentation has been filed, to buy restricted securities openly on an exchange.
TMWX (Wilshire 5000 Total Market Index)
The TMWX measures the performance of all U.S. headquartered equity securities with readily available price data.
The description of the four P's of marketing - i.e. Price, Place (Distribution), Product, and Promotion as it applies to a particular commercialization plan.
- Product. The product is the full bundle of goods and services offered to the customer. This includes the appearance, functionality, and support or non-tangibles the customer will receive. The physical product itself is part of product as well as any packaging it arrives in.
- Place. This is where and how your product is di ...
In the US, trading in shares of companies not listed on the main stock exchange board is reffered to as kerb trading.
In the UK, kerb trading is trading in commodities outside official market hours.
In Australia the term 'kerb market' has been applied to 'junior' shares which have little turnover.
An illegal market.
A market where an intermediary offers search services to buyers and sellers.
The foreign market in the United Kingdom.
The market for trading long-term debt instruments (those that mature in more than one year).
Capital market efficiency
Reflects the relative amount of wealth wasted in making transactions. An efficient capital market allows the transfer of assets with little wealth loss.
Capital market imperfections view
The view that issuing debt is generally valuable but that the firm's optimal choice of capital structure is a dynamic process that involves the other views of capital structure (net corporate/personal tax, agency cost, bankruptcy cost, and pecking order), which result from considerations of asymmetric information, asymmetric taxes, and transaction costs.
Capital market line (CML)
The line defined by every combination of the risk-free asset and the market portfolio.
Also called spot markets, these are markets that involve the immediate delivery of a security or instrument.
An agreement between two or more countries that permits the free movement of capital and labor as well as goods and services.
Common stock market
The market for trading equities, not including preferred stock.
Complete capital market
A market in which there is a distinct marketable security for each and every possible outcome.
Corner A Market
To purchase enough of the available supply of a commodity or stock in order to manipulate its price.
Any marketing method that uses electronic communication between the marketer and customer. Web sites, and consumer electronic kiosks are examples of interactive marketing.
Away from the market
In context of general equities, out of line with the inside market at this time, such as when a bid on a limit order is lower or the offer price is higher than the current market price for the security; held by the specialist for later execution unless fill-or-kill.
The place where inputs or resources are bought or sold. Factor markets usually refer to labor or capital.
Free market economy
A system where resources are owned by households: markets allocate resources through the price mechanism; and income depends upon the value of resources owned by an individual.
CARICOM (Caribbean Common Market)
Caribbean Common Market. Consists of 14 sister-member countries of the Caribbean community. Members include: Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent, Surinam, Trinidad and Tobago. They have set as a goal that in 1997 there will be a single market allowing for the free movement of labor. Conspicuous by their absence are the Cayman Islands and the British Virgin Islands, two major players in interna ...
Kerb market is in fact an unofficial name for an unofficial activity - the trading of securities outside a recognized stock exchange. The name derives from the historical practice of dealers continuing to trade on the pavement after the exchange's hours of business.
An arrangement in a public share distribution whereby the price at which the shares are sold is determined after a period of marketing activities. During the marketing period, the underwriters are able to contact potential purchasers to assess potential demand and price sensitivity. Shares continue to be publicly traded, if they had been previously listed. The underwriters minimize the price risk on resale (thereby lowering the discount to market), but the seller bears a risk of a price decline ...
London Gold Market
Refers to the five dealers who set (fix) the gold price in London: Mocatta & Goldsmid, N. Rothschild & Sons, Johnson Matthey, Sharps Pixley, and Samuel Montagu & Co.
Usually synonymous with commodity exchange or futures market, specifically in the United Kingdom.
A market in which new information is immediately available to all investors and potential investors. A market in which all information is instantaneously assimilated and therefore has no distortions.
Market Index Deposits (MIDs)
Bank certificates of deposit or deposit notes with a return linked to the performance of an index, usually a stock market index.
Price at which the holder of an option can buy (call option) or sell (put option) the underlying stock. Also referred to as strike price.
The price at which a market maker is prepared to sell a security. Also known as offer price.
The price at which a market maker is prepared to sell a security. Also known as ask price.
The price at which a market maker is prepared to buy a security.
The average of the prices that a futures contract trades for immediately before the bell signaling the close trading for a day. It is used in mark-to-market calculations.
Variable price security
A security, such as stocks or bonds, that sells at a fluctuating, market-determined price.
The price at which one unit of a firm sells goods or services to another unit of the same firm.
Theoretical futures price
Also called the fair price, the equilibrium futures price.
Price that the existing shareholders are allowed to pay for a share of stock in a rights issue.
The stated price per share for which underlying stock may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract.
Stated conversion price
At the time of issuance of a convertible security, the price the issuer effectively grants the security holder to purchase the common stock, equal to the par value of the convertible security divided by the conversion ratio.
The current marketprice of the actual physical commodity. Also called cash price.
Reverse price risk
A type of mortgage-pipeline risk that occurs when a lender commits to sell loans to an investor at rates prevailing at application but sets the note rates when the borrowers close. The lender is thus exposed to the risk of falling rates.
The price at which the asset will be sold if a put option is exercised. Also called the strike or exercise price of a put option.
A relationship espoused by some technical analysts that signals continuing rises and falls in security prices based on accompanying changes in volume traded.
Adjustment mechanism under the classical gold standard whereby disturbances in the price level in one country would be wholly or partly offset by a countervailing flow of specie (gold coins) that would act to equalize prices across countries and automatically bring international payments back in balance.
Price of a share of common stock on the date shown. Highs and lows are based on the highest and lowest intraday trading price.
Price value of a basis point (PVBP)
Also called the dollar value of a basis point, a measure of the change in the price of the bond if the required yield changes by one basis point.
The market has already incorporated information, such as a low dividend, into the price of a stock.
Individuals who respond to rates and prices by acting as though they have no influence on them.
The risk that the value of a security (or a portfolio) will decline in the future. Or, a type of mortgage-pipeline risk created in the production segment when loan terms are set for the borrower in advance of terms being set for secondary market sale. If the general level of rates rises during the production cycle, the lender may have to sell his originated loans at a discount.
The percentage change in the quantity divided by the percentage change in the price.
Price discovery process
The process of determining the prices of the assets in the marketplace through the interactions of buyers and sellers.
The limitation of the price appreciation potential for a callable bond in a declining interest rate environment, based on the expectation that the bond will be redeemed at the call price.
Determined by dividing current stock price by revenue per share (adjusted for stock splits). Revenue per share for the P/S ratio is determined by dividing revenue for past 12 months by number of shares outstanding.
Shows the "multiple" of earnings at which a stock sells. Determined by dividing current stock price by current earnings per share (adjusted for stock splits). Earnings per share for the P/E ratio is determined by dividing earnings for past 12 months by the number of common shares outstanding. Higher "multiple" means investors have higher expectations for future growth, and have bid up the stock's price.
Also called the option premium, the price paid by the buyer of the options contract for the right to buy or sell a security at a specified price in the future.
The range of prices at which the first bids and offers were made or first transactions were completed.
Price quotations on futures for a period in which no actual trading took place.
Minimum price fluctuation
Smallest increment of price movement possible in trading a given contract. Also called point or tick. The zero-beta portfolio with the least risk.
Maximum price fluctuation
The maximum amount the contract price can change, up or down, during one trading session, as fixed by exchange rules in the contract specification.
Low price-earnings ratio effect
The tendency of portfolios of stocks with a low price-earnings ratio to outperform portfolios consisting of stocks with a high price-earnings ratio.
This is the day's lowest price of a security that has changed hands between a buyer and a seller.
Maximum price fluctuation
Law of one price
An economic rule stating that a given security must have the same price regardless of the means by which one goes about creating that security. This implies that if the payoff of a security can be synthetically created by a package of other securities, the price of the package and the price of the security whose payoff it replicates must be equal.
Gives the lessee the option to purchase the asset at a price below fair market value when the lease expires.
Price expressed in terms of yield to maturity or annual rate of return.
The price, specified at issuance, at which the issuer of a bond may retire part of the bond at a specified call date.
Bond price excluding accrued interest.
Consumer Price Index
The CPI, as it is called, measures the prices of consumer goods and services and is a measure of the pace of U.S. inflation. The U.S. Department of Labor publishes the CPI very month.
The contractually specified price per share at which a convertible security can be converted into shares of common stock.
Daily price limit
The level within many commodity, futures, and options markets are allowed to rise or fall in a day. Exchanges usually impose a daily price limit on each contract.
Known price item
When a good whose price is widely known by members of the public is priced to attract customers.
Variable Price Limit
A price limit schedule, determined by an exchange, that permits variations above or below the normally allowable price movement for any one trading day.
Commodity Price Index
Index or average, which may be weighted, of selected commodity prices, intended to be representative of the markets in general or a specific subset of commodities (for example, grains or livestock).
Price discrimination occurs whenever a firm charges differential prices across customers that are not related to differences in production and distribution costs. Thus, discriminating firms seek to exploit the perceived consumer surplus and maximize producer surplus.
Interest-rate risk on bonds
The price of a typical bond will change in the opposite direction from a change in interest rates. As interest rates rise, the price of a bond will fall; as interest rates fall, the price of a bond will rise. The actual degree of sensitivity of a bond’s price to changes in market interest rates depends on various characteristics of the issue maturity, coupon and special provisions.
Reinvestment risk on bonds
Usually, when the yield of a bond is calculated, you assume that the coupons received before maturity are reinvested. The additional income from such reinvestment is sometimes referred to as interest-on-interest which depends on the prevailing interest-rate levels at the time of reinvestment. Volatility in the reinvestment rate of a given strategy because of changes in market interest rates is called reinvestment risk. This risk is that the interest rate at which interim cash flows can be reinve ...
Call risk on bonds
Many bonds include a call feature that allows the issuer to redeem or “call” all or part of the issue before the maturity date. The issuer usually retains this right in order to have flexibility to refinance the bond in the future if the market interest rate drops below the coupon rate. This implies three risks from the investor: (a) The cash flow pattern becomes uncertain, (b) The investor becomes exposed to reinvestment risk because the issuer will call the bond when interest rates drop, and ( ...
Default risk on bonds
Issuers that potentially run into cash flow problems, simultaneously attaches default risk to their bonds if there is uncertainty whether they can afford to pay coupons and principals. Bonds with default risk trade in the market at a price that is lower than comparable U.S. Treasury securities, which are considered free of default risk. Default risk is gauged by quality ratings assigned by recognised rating companies such as Moody’s Investor Service, Standard & Poor’s Corporation, Morningstar an ...
Inflation risk on bonds
If investors purchase a bond on which they can realize a coupon rate of 5% but the rate of inflation is 6%, the purchasing power of the cash flow actually has declined. Inflation risk arises because of the variation in the value of cash flows from a security due to inflation, as measured in terms of purchasing power.
Exchange-rate risk on bonds
A non-domestic-currency nominated bond has unknown domestic currency cash flows. The domestic currency cash flows are dependent on the exchange rate at the time the payments are received. For example, suppose that a German investor purchases a bond whose payments are in British pounds (GBP). If pounds depreciate relative to euros (EUR), fewer euros will be received and vice versa. This risk is also referred to currency risk.
Liquidity risk on bonds
The primary measure of liquidity is the size of the bid-ask spread. Liquidity risk depends on the ease with which an issue can be sold at or near its value. It follows that the wider the dealer spread, the more liquidity risk.
The practice of buying the stock of takeover targets after a merger is publicly announced and hold the stock until the deal is officially accomplished.
The systematic risk of an asset or portfolio is the risk that cannot be diversified away.
The risk in the value of options portfolios due to the unpredictable changes in the volatility of the underlying asset.
A value-at-risk (VAR) model is a procedure for estimating the probability of portfolio losses exceeding some specified proportion based on a statistical analysis of historical market price trends, correlations, and volatilities.
Also called the diversifiable risk or residual risk. The risk that is unique to a company such as a strike, the outcome of unfavorable litigation, or a natural catastrophe that can be eliminated through diversification.
Also called unsystematic risk or idiosyncratic risk. Specific company risk that can be eliminated through diversification.
Systematic risk principle
Only the systematic portion of risk matters in large, well-diversified portfolios. The expected returns must be related only to systematic risks.
The risk that a central bank will impose foreign exchange regulations that will reduce or negate the value of FX contracts. Also refers to the risk of government default on a loan made to it or guaranteed by it.
The risk of falling short of any investment target.
The rate earned on a riskless asset.
An asset whose future return is known today with certainty.
Return earned on an asset normalized for the amount of risk associated with that asset.
An asset whose future return is uncertain.
The simultaneous purchase and sale of the same asset to yield a profit.
Riskless rate of return
The rate earned on a riskless asset.
Risk premium approach
The most common approach for tactical asset allocation to determine the relative valuation of asset classes based on expected returns.
The reward for holding the risky market portfolio rather than the risk-free asset. The spread between Treasury and non-Treasury bonds of comparable maturity.
Willing to pay money to transfer risk from others.
Insensitive to risk.
The process of identifying and evaluating risks and selecting and managing techniques to adapt to risk exposures.
A person willing to accept lower expected returns on prospects with higher amounts of risk.
Categories of risk used to calculate fundamental beta, including (a) market variability, (b) earnings variability, (c) low valuation, (d) immaturity and smallness, (e) growth orientation, and (f) financial risk.
Risk controlled arbitrage
A self-funding, self-hedged series of transactions that generally utilize mortgage securities as the primary assets.
Groups of projects that have approximately the same amount of risk.
A risk-averse investor is one who, when faced with two investments with the same expected return but two different risks, prefers the one with the lower risk.
A probability used to determine a "sure" expected value (sometimes called a certainty equivalent) that would be equivalent to the actual risky expected value.
Typically defined as the standard deviation of the return on total investment. Degree of uncertainty of return on an asset.
The risk that proceeds received in the future will have to be reinvested at a lower potential interest rate.
Regulatory pricing risk
Risk that arises when regulators restrict the premium rates that insurance companies can charge.
In banking, the risk that profits may decline or losses occur because a rise in interest rates forces up the cost of funding fixed-rate loans or other fixed-rate assets.
A type of mortgage-pipeline risk that occurs when a lender has an unusual loan in production or inventory but does not have a sale commitment at a prearranged price.
Possibility of the expropriation of assets, changes in tax policy, restrictions on the exchange of foreign currency, or other changes in the business climate of a country.
Overnight delivery risk
A risk brought about because differences in time zones between settlement centers require that payment or delivery on one side of a transaction be made without knowing until the next day whether the funds have been received in an account on the other side. Particularly apparent where delivery takes place in Europe for payment in dollars in New York.
The inherent or fundamental risk of a firm, without regard to financial risk. The risk that is created by operating leverage. Also called business risk.
Nonmarket or firm-specific risk factors that can be eliminated by diversification. Also called unique risk or diversifiable risk. Systematic risk refers to risk factors common to the entire economy.
Risk that cannot be eliminated by diversification.
The risk associated with taking applications from prospective mortgage borrowers who may opt to decline to accept a quoted mortgage rate within a certain grace period.
The risk that arises from the difficulty of selling an asset. It can be thought of as the difference between the "true value" of the asset and the likely price, less commissions.
The risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk.
The uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for price risk.
The risk that the cash flow of an issuer will be impaired because of adverse economic conditions, making it difficult for the issuer to meet its operating expenses.
The combination of cash flow uncertainty and reinvestment risk introduced by a call provision.
The risk that a foreign debtor will be unable to pay its debts because of business events, such as bankruptcy.
The risk that a project will not be brought into operation successfully.
The risk that the other party to an agreement will default. In an options contract, the risk to the option buyer that the option writer will not buy or sell the underlying as agreed.
Country economic risk
Developments in a national economy that can affect the outcome of an international financial transaction.
Country financial risk
The ability of the national economy to generate enough foreign exchange to meet payments of interest and principal on its foreign debt.
General level of political and economic uncertainty in a country affecting the value of loans or investments in that country.
The risk that an issuer of debt securities or a borrower may default on his obligations, or that the payment may not be made on a negotiable instrument.
Refers to the volatility of returns on international investments caused by events associated with a particular country as opposed to events associated solely with a particular economic or financial agent.
Currency risk sharing
An agreement by the parties to a transaction to share the currency risk associated with the transaction. The arrangement involves a customized hedge contract embedded in the underlying transaction.
Risk-adjusted return on capital (RAROC)
Measures performance on a risk-adjusted basis. Calculated as the economic return divided by economic capital. RAROC helps determine if a company has the right balance between capital, returns and risk. The central concept in RAROC is economic capital: the amount of capital a company should put aside needed based on the risk it runs.
The uncertainty that an option position may be exercised into the underlying instrument. It is risky because it often refers to markets flirting with the prevailing at-the-money level. At such times, the gamma on a position is very erratic and difficult to hedge. Also, there are doubts about the exercise or assignment process. A trader can experience significant changes in net positions due to option exercises.
Money put up by ordinary shareholders, an individual entrepreneur or venture capitalist that will be lost if the enterprise fails.