Financial Terms and Definitions

Double Auction Market

ashivapu — Thu, 04 Mar 2010 00:11:07 +0000

A system in which buyers enter competitive bidders and sellers enter competitive offers simultaneously, as opposed to the over-the-counter market, where trades are negotiated (NYSE and AMEX). Also called auction market.

A double auction market can also be carried out by open outcry, in which buyers and sellers call out prices that they are willing to buy and sell at, and a match is made if a buyer and seller call out the same price.

Double auction markets usually feature a large number of buyers and sellers, and thus participants tend to incur lower transaction costs than in the over-the-counter market.

Exotic Options

ashivapu — Thu, 18 Feb 2010 17:07:35 +0000

A category of options which includes complicated components and complex payoffs.

Its payoff or other key values often depend on outside factors which vary over time, such as exchange rate. Because of their complexity, exotic options are often traded over the counter rather than through an exchange.

Asian-style options are one type of exotic options. opposite of plain vanilla option.

Book To Market Ratio

ashivapu — Fri, 12 Feb 2010 22:32:52 +0000

A stock’s book value divided by its market value.

Book value is calculated from the company’s balance sheet, while market value is based on the price of its stock.

A ratio above 1 indicates a potentially undervalued stock, while a ratio below 1 indicates a potentially overvalued stock. Technology companies and other companies in industries which do not have a lot of physical assets tend to have low book to market ratios.

Conversion Price

ashivapu — Fri, 29 Jan 2010 22:45:13 +0000

The price at which a given convertible security can be converted to common stock. The conversion price is specified when the security is issued. The number of shares to be received is the principal amount of the security divided by the conversion price (after the conversion price is adjusted for stock splits anddividends). Related posts:Initial Public Offering [...] Related posts:

Cross-Hedging

ashivapu — Mon, 18 Jan 2010 01:36:58 +0000

Hedging one instrument’s risk with a different by taking a position in a related derivatives contract. This is done when there is no derivatives contract for the instrument being hedged, or a suitable derivatives contract exists but the market is highly illiquid.

The maturity of the derivatives contract must be at least as long as the maturity of the desired hedge, otherwise the investor will be left with an unhedged exposure for a period of time.

The success of cross-hedging depends completely on how strongly correlated the instrument being hedged is with the instrument which underlies the derivatives contract. Additionally, the credit quality of the derivative and the instrument being hedged needs to be similar and their markets need to be of similar liquidity, so that price changes are similar.

Call Option

Offering Circular

ashivapu — Fri, 15 Jan 2010 16:34:49 +0000

A legal document offering securities or mutual fund shares for sale, required by the Securities Act of 1933.

The document must explain the offer, including the terms, issuer, objectives (if mutual fund) or planned use of the money (if securities), historical financial statements, and other information that could help an individual decide whether the investment is appropriate for him/her. also called prospectus or circular.

Back-to-Back Loans

ashivapu — Fri, 08 Jan 2010 06:42:58 +0000

See Parallel Loan

No related posts.

Parallel Loan

ashivapu — Tue, 05 Jan 2010 06:43:41 +0000

A loan in which two companies in different countries borrow each other’s currency for a given period of time, in order reduce foreign exchange risk for both of them. Also referred to as back-to-back loans. Related posts:Purchasing Power Parity – PPP Vendor Financing Bond Related posts:

Principal-Agent relationship

ashivapu — Tue, 29 Dec 2009 16:29:14 +0000

The arrangement that takes place when one person or entity (called the agent) acts on behalf of another (called the principal).

An example of this can be seen when shareholders of a company (principals) elect management (agents) to act on their behalf, and investors (principals) choose fund managers (agents) to manage their assets.

A contract is used to specify the terms of a principal-agent relationship.

Purchase Acquisition

ashivapu — Mon, 28 Dec 2009 04:24:21 +0000

Accounting method used in any merger which is not treated as a pooling of interests. The purchasing company treats the acquired as an investment, adding the acquired’s assets to its own balance sheet, and recording any premium paid above market price as goodwill, to be charged against future earnings. Related posts:P/E Ratio Earnings Book To Market Ratio Related posts: