ECON 302 Chapter Notes -Interest Rate Swap, Underlying, Call Option

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25 Nov 2011
Green Book Glossary Terms
ECON 302
Daniel Goh
Green Book Glossary Terms
American-Style Option (also American Option): an option which may be exercised at any time
up to and including the expiration date.
Basis Point: one one-hundredth of one percentage point, most often used in quotation of spreads
between interest rates or to describe changes in yields on securities.
Break-Even Point: the price of the underlying instrument at which an option buyer just recovers
the initial outlay or premium. For a call option, the break-even point is the exercise price plus the
premium; a put option's break-even point is the exercise price minus the premium.
Commercial Paper: a short-term unsecured promise to repay a fixed amount (representing
borrowed funds plus interest) on a certain future date and at a specific place. The note stands on
the general creditworthiness of the issuer or on the standing of a third party that is obligated to
repay if the original borrower defaults. The most active commercial-paper market is in the
United States. (See also Letter of Credit.)
Country Risk: the risk that most or all economic agents (including the government) in a
particular country will for some common reason become unable or unwilling to fulfill
international financial obligations.
Covered Writing: generally refers to selling call options "covered" by an equal or larger long
position in the security underlying the option. It is a strategy intended to augment overall returns
by earning fee income on the options written against securities held for normal investment
Currency Swap: a transaction in which two counterparties exchange specific amounts of two
different currencies at the outset and repay over time according to a predetermined rule which
reflects interest payments and possibly amortization of principal. The payment flows in currency
swaps (in which payments are based on fixed interest rates in each currency) are generally like
those of spot and forward currency transactions.
Duration: a measure of a security's maturity which takes into account the periodic coupon
payments. Specifically, it is the weighted average maturity of all payments of a security, coupons
plus principal, where the weights are the discounted present values of the payments. As such the
duration is shorter than the stated term to maturity on all securities except for zero coupon bonds,
for which they are equal because the zero coupon bond is a single-payment security
European-Style Option (also European Option): an option which may be exercised only on the
expiration date. It is an alternative to an American option, which can be exercised on any
business day prior to expiration, or on the expiration date.
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