
anticipated volatility
Anticipated volatility is the future level of volatility expected by a market participant.

assetbacked securities
Still another subset of fixedincome arbitrage trades is assetbacked securities (ABS), which are securitized products created from pools of underlying loans or other assets.

busted convertibles
Bonds with very high conversion premiums are often called busted convertibles, as the embedded stock options are far outofthemoney.

carry trades
Carry trades attempt to earn profits from carrying or maintaining long positions in higheryielding assets and short postitions in loweryielding assets without suffering from adverse price movements.

classic convertible bond arbitrage trade
The classic convertible bond arbitrage trade is to purchase a convertible bond that is believed to be undervalued and to hedge its risk using a short position in the underlying equity.

classic dispersion trade
The classic dispersion trade is a marketneutral short correlation trade, popular among volatility arbitrage practitioners, that typically takes long positions in options listed on the equities of single companies and short positions in a related index option.

classic relative value strategy trade
The classic relative value strategy trade is based on the premis that a particular relationship or spread between two prices or rates has reached an abnormal level and will therefore tend to return to its normal level.

complexity premium
A complexity premium is a higher expected return offered by a security to an investor to compensate for analyzing and managing a position that requires added time and expertise.

components of convertible arbitrage returns
The components of convertible arbitrage returns include interest, dividends, rebates, and capital gains and losses.

convergence
Convergence is the return of prices or rates to relative values that are deemed normal.

convertible bonds
Convertible bonds are hybrid corporate securities, mixing fixedincome and equity characteristics into one security.

correlation risk
Correlation risk is dispersion in economic outcomes attributable to changes in realized or anticipated levels of correlation between market prices or rates.

correlations go to one
The term correlations go to one means that duing periods of enormous stress. stocks and bonds with credit risk decline simultaneously and with somewhat similar magnitudes.

delta
Delta is the change in the value of an option (or a security with an implicit option) with respect to a change in the value of the underlying asset (i.e., it measures the sensitivity of the option price to small changes in the price of its underlying asset).

deltaneutral
A deltaneutral position is a position in which the valueweighted sum of all deltas of all positions equals zero.

dilution
Dilution takes place when additional equity is issued at belowmarket values, and the pershare value of the holdings of existing shareholders is diminished.

duration
Duration is a measure of the sensitivity of a fixedincome security to a change in the general level of interest rates.

durationneutral
A durationneutral position is a portfolio in which the aggregated durations of the short positions equal the aggregated durations of the long positions weighted by value.

dynamic delta hedging
Dynamic delta hedging is the process of frequently adjusting positions in order to maintain a target exposure to delta, often delta neutrality.

effective duration
Effective duration is a measure of the interest rate sensitivity of a position that includes the effects of embedded option characteristics.

equitylike convertible
An equitylike convertible is a convertible bond that is far inthemoney and therefore has a price that tracks its underlying equity very closely.

fixedincome arbitrage
Fixedincome arbitrage involves simultaneous long and short positions in fixed income securities with the expectation that over the investment holding period, the security prices will converge toward a similar valuation standard.

gamma
Gamma is the second derivative of an option's price with respect to the price of the underlying asset  or, equivalently, the first derivative of the delta with respect to the price of the underlying asset.

general collateral stocks
General collateral stocks, which are stocks not facing heavy borrowing demand, may earn a 2% rebate when Treasury bill rates are at 2%, whereas stocks on special may earn zero rebates or even negative rebates, wherein borrowers must pay the lenders money in addition to the interest that the lender is earning on the collateral.

hybrid convertibles
Convertible bonds with moderately sized conversion ratios have stock options closer to being atthemoney and are called hybrid convertibles.

implied volatility
The implied volatility of an option or an optionlike position  in this case, the implied volatility of a convertible bond  is the standard deviation of returns that is viewed as being consistent with an observed market price for the option.

intercurve arbitrage positions
There are also intercurve arbitrage positions, which means arbitrage (hedged positions) using securities related to different yield curves.

interest rate immunization
Interest rate immunization is the process of eliminating all interest rate risk exposures.

intracurve arbitrage positions
These are examples of intracurve arbitrage positions because they are based on hedged positions within the same yield curve.

markingtomarket
Markingtomarket refers to the use of current market prices to value instruments, positions, portfolios, and even the balance sheet of firms.

markingtomodel
Markingto model refers to valuation based on prices generated by pricing models. The pricing models generally involve two components.

modified duration
Modified duration is equal to traditional duration divided by the quantity [1+(y/m)], where y is the stated annual yield, m is the number of compounding periods per year, and y/m is the periodic yield.

moneyness
Moneyness is the extent to which an option is inthemoney, atthemoney, or outofthemoney.

mortgagebacked securities arbitrage
Mortgagebacked securities arbitrage to generate lowrisk profits through the relative mispricing among MBS or between MBS and other fixedincome securities.

net delta
The net delta of a position is the delta of long positions minus the delta of short positions.

optionadjusted spread
A key concept in pricing fixed income securities with embedded prepayment options is the optionadjusted spread (OAS), which is a measure of the excess of the return of a fixedincome security containing an option over the yield of an otherwise comparable fixedincome security without an option after the return of the fixedincome security containing the option has been adjusted to remove the effects of the option.

parallel shift
A parallel shift in the yield curve happens when yields of all maturities shift up or down by equal (additive) amounts.

portfolio insurance
Portfolio insurance is any financial method, arrangement, or program for limiting losses from large adverse price movements.

price transparency
Price transparency is information on the prices and quantities at which participants are offering to buy (bid) and sell (offer) an instrument.

pricing risk
Pricing risk is the economic uncertainty caused by actual or potential mispricing of positions.

realized volatility
Realized volatility is the actual observed volatility (i.e., the standard deviation of returns) experienced by an asset  in this case, the underlying stock.

rebate
A rebate is a payment of interest to the securities' borrower on the collateral posted.

riding the yield curve
The process of holding a bond as its yield moves up or down the yield curve due to the passage of time is known as riding the yield curve.

rolling down
Rolling down the yield curve is the process of experiencing decreasing yields to maturity as an asset's maturity declines through time in an upwardsloping yield curve environment.

short correlation
The classic dispersion trade is referred to as a short correlation trade bacause the trade generates profits from low levels of realized correlation and losses from high levels of realized correlation.

short squeeze
A short squeeze occurs when holders of short positions are compelled to purchase shares at increasing prices to cover their positions due to limited liquidity.

sovereign debt
Sovereign debt is debt issued by national governments.

special stock
A special stock is a stock for which higher net fees are demanded when it is borrowed.

tail risk
Tail risk is the potential for very large loss exposures due to very unusual events, especially those associated with widespread market prices declines.

term structure of interest rates
Sometimes the term structure of interest rates is distinguished from the yield curve because the yield curve plots yields to maturity of coupon bonds, whereas the term structure of interest rates plots actual or hypothetical yields of zerocoupon bonds.

theta
Theta is the first derivative of an option's price with respect to the time to expiration of the option.

variance notional value
The variance notional value of the contract simply scales the size of the cash flows in a variance swap.

variance swaps
Variance swaps are forward contracts in which one party agrees to make a cash payment to the other party based on the realized variance of a price or rate in exchange for receiving a predetermined cash flow.

vega
Vega is a measure of the risk of a position or an asset due to changes in the volatility of a price or rate that helps determine the value of that position or asset.

vega notional value
The vega notional value of a contract serves to scale the contract and determine the size of the payoff in a volatility swap.

vega risk
Vega risk is the economic dispersion caused by changes in the volatility of a price, return, or rate.

volatility arbitrage
Volatility arbitrage is any strategy that attempts to earn a superior and riskless profit based on prices that explicitly depend on volatility.

volatility risk
Volatility risk is dispersion in economic outcomes attributable to changes in realized or anticipated levels of volatility in a market price or rate.

volatility swap
A volatility swap mirrors a variance swap except that the payoff of the contract is linearly based on the standard deviation of a return series rather than the variance.

yield curve
A yield curve is the ralationship between the yields of various securities, usually depicted on the vertical axis, and the term to maturity, usually depicted on the horizontal axis.

