Trading Glossary

Actuals

The physical commodity underlying a futures contract.

Agency basis

A means of compensating the broker of a program trade solely on the basis of commission established through bids submitted by various brokerage firms.

Agency incentive arrangement

A means of compensating the broker of a program trade using benchmark prices for issues to be traded in determining commissions or fees.

Alpha

In a Jensen Index, a factor to represent the portfolio's performance that diverges from its beta, representing a measure of the manager's performance.

American Depository Receipt (ADR)

Security representing the ownership interest in a foreign company's common stock. ADRs allow foreign shares to be traded in the United States much like any other security.

American option

An option that may be exercised at any time up to and including the expiration date. Related: European options

Annual fund operating expenses

For investment companies, the management fee and "other expenses," including the expenses for maintaining shareholder records, providing shareholders with financial statements, and providing custodial and accounting services. For 12b-1 funds, selling and marketing costs are included.

Arbitrage

The simultaneous buying and selling of a security at two different prices in two different markets, resulting in profits without risk. Perfectly efficient markets present no arbitrage opportunities.

Arbitrage-free option-pricing models

Yield curve option-pricing models.

Arbitrage pricing theory (APT)

An alternative model to the capital asset pricing model developed by Stephen Ross and based purely on arbitrage arguments.

Arithmetic average (mean) rate of return

Arithmetic mean return.

Arithmetic mean return

An average of the subperiod returns, calculated by summing the subperiod returns and dividing by the number of subperiods.

Ask price

Also called "offer". Indicates a willingness to sell a futures contract at a given price.

Asset

Any possession that has value in an exchange.

Asset/equity ratio

The ratio of total assets to stockholders' equity.

Asset/liability management

Also called surplus management, the task of managing funds of a financial institution to accomplish the two goals of a financial institution: (1) to earn an adequate return on funds invested and (2) to maintain a comfortable surplus of assets beyond liabilities.

Asset allocation decision

The decision regarding how the institution's funds should be distributed among the major classes of assets in which it may invest.

Asset-backed securities

Securities backed by assets that are not mortgage loans. Examples include assets backed by automobile loans and credit card receivables.

Asset classes

Categories of assets, such as stocks, bonds, real estate, and foreign securities.

Asset swap

An interest rate swap used to alter the cash flow characteristics of an institution's assets so as to provide a better match with its liabilities.

Asset turnover

The ratio of net sales to total assets.

At-the-Money

An option which has a strike price that is nearest to the underlying futures price.

Attribute bias

The tendency of stocks preferred by the dividend discount model to share certain equity attributes such as low price-earnings ratios, high dividends yield, high book-value ratio, or membership in a particular industry sector.

Average (across-day) measures

An estimation of price that uses the average or representative price or a large number of trades.