Financial market Glossary

7/29/2019 Financial market Glossary

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GLOSSARYGLOSSARY


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706 GLOSSARY

acceptance A process whereby a bank acts as acceptor byplacing its name on a bill of exchange issued by a third party, and

thereby accepts primary liability to repay the face value of the billto the holder at the maturity date, and thus improves the pricingand marketability of the bill

accounting ratios Quantitative measures of a companysfinancial and management performance, strength and efficiency;for example, a debt to equity ratio

accounts receivable financingA firm obtains a loan using

its current debtors as security to support the loan application

accumulation fund A superannuation fund that accumulatesthe contributions plus fund earnings of an individual for theireventual retirement

accumulation index A measure of changes in specific shareprices, plus the reinvestment of dividends received

active investment Occurs where an investment portfoliostructure is based on stock analysis, new information andrisk/return preferences

active strategies Hedging techniques that are continuallyadjusted in response to forecast changes in exchange rates,interest rates and price

agency theory Describes the conflict of interests that mayexist between the owners and managers of a corporation

agent bank Conducts the ongoing administration role of anestablished syndicated loan facility

All Ordinaries index An index reflecting share pricemovements on the Australian Stock Exchange

American depositary receipt A security issued by a USdepositary bank that is evidenced by a depositary share based onspecified shares listed on an overseas stock exchange

American-type option An option contract that can beexercised by the buyer at any time up to and including the expirydate

amortised loan A credit foncier type loan where each regularand equal loan instalment comprises the interest payment due,plus repayment of a portion of the principal outstanding

annuity A financial instrument with a cash flow of equalamounts, paid at regular time periods and for a specified numberof periods

annuity due An annuity where cash flows occur at thebeginning of each period

approved deposit fund A rollover fund used to hold eligiblesuperannuation funds

arbitrage A strategy of making a risk-free profit by takingadvantage of price differences between markets, such aspurchasing an asset in one market while simultaneously selling inanother

ascending triangle A pattern of share price variations thatforms an uptrend characterised by troughs increasing in heightand peaks that remain horizontal

ask price The price at which an FX dealer will sell a unit of aquotation

asset management Strategy whereby a bank restrictsgrowth in its lending activities to the level of funds available fromits depositor base

asset transformation The ability of financial intermediaries toprovide borrowers and savers with a wide range of financialinstruments to meet their portfolio preferences

assets repriced before liabilities (ARBL) A riskmanagement principle that ensures net interest margins andprofitability are protected

at-the-market Orders to buy or sell securities are executedby a broker at the best current price

at-the-money An option contract with an exercise price veryclose to the current market price of the underlying asset

Austraclear An electronic clearing-house for a range offinancial transactions, including Treasury bonds

Australian Office of Financial Management (AOFM)A body established to manage the Commonwealth Governmentsdebt issues

Australian Prudential Regulation Authority (APRA)Prudential regulator and supervisor of authorised deposit-takinginstitutions (ADIs) and certain non-bank financial institutions

Australian Securities and Investment Commission(ASIC) The regulatory body responsible for the supervision ofAustralian corporations law and markets

authorised deposit-taking institution (ADI) A financialinstitution authorised by APRA to accept retail deposits; includesbanks, building societies and credit cooperatives (unions)

bailment A situation where a finance company holds title overa dealerships trading stock

balance of payments A countrys account of its transactionswith the rest of the world; comprises current and capitalaccounts

balanced growth fund An investment fund that targets alonger-term income stream supported by capital growth in thevalue of its asset portfolio

bank bills held Bills of exchange that have been acceptedand discounted by a bank and are currently held as an asset onits balance sheet

Bank for International Settlements (BIS) A multilateralorganisation representing central banks of major developedeconomies of the world

bank An authorised deposit-taking institution. Its principalfunction is often seen as an intermediary between borrowers andlenders. However, banks generally provide a full range of financialservices

bank-accepted bill A bill of exchange issued by a corporationthat has been accepted by a bank. Such undertakings improvethe instruments creditworthiness, pricing and marketability

base currency The first-named currency in an FX quote; onecurrency unit expressed in terms of another currency. Forexample the USD is the base currency in the quoteUSD/EUR0.9850

basis point A fractional interest rate measure where 100 basispoints equals one per cent

basis risk A situation where pricing differentials are evidentbetween two markets; for example a futures contact market and itsunderlying physical asset market. Initial basis risk may be evident

today and final basis risk at the closing out of the futures position


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BBSW Bank bill swap rate; the average mid-point of banks bidand offer rates in the bank bill secondary market

bear market A market environment where there is anexpectation that prices will fall. An investor may be said to bebearish. Opposite to a bull market

bearer bond A bond issue where the physical stock is issued;the current holder is presumed to have legal entitlement

beneficiary The party who is entitled to receive payment

under the terms of an insurance policybeta A statistical measure of the volatility relationship between

the price risk of an individual stock, or a portfolio of stocks,relative to the price risk of the whole market

bid price The price at which an FX dealer will buy the unit of aquotation

bid An order to buy a security, at a price based on its yield; inthe futures market, an offer to buy a contract

bill of exchange A short-term security issued at a discount toface value. The discount amount constitutes the cost of borrowing.The drawer issues the bill and the discounted amount is paid to thepayee. An acceptor may be used to increase the creditworthinessof the bill. The bill is purchased by a discounter. At maturity date,

the holder of the bill will be paid the face value of the billbill option clause An agreement that allows a bank toconvert a term loan into a commercial bill facility

bills market An active money market in the issue and tradingof commercial bills that enables participants to manage short-

term liquidity requirements

blue chip company A listed corporation with establishedstrong management and financial structures

board of directors A body elected by shareholders todetermine the objectives and policies of the corporation andgenerally represent the interests of the shareholders

bond A straight bond is a long-term, fixed-interest security thatpays a regular coupon stream (interest payments), with the face

value redeemed on the maturity date. Bonds may also be issuedas indexed bonds, where coupon payments and/or the value of

the bond may be indexed to price movements. Floating rate notesare bonds issued with a variable rate of interest

bonus issue A strategy that allows a company to capitalize itsreserves through the issue of additional shares to shareholders

book-entry USCP The electronic recording of US commercialpaper issues and payments

bottom-up approach Performance analysis that focuses onthe accounting ratios of a corporation

breakout A pattern of share price variation that occurs whenprices break through the neckline

broad money A measure of the money supply that constitutescurrency plus balances held with banks and non-bank financialinstitutions, less NBFI holdings of currency and bank deposits

broker An agent who acts on behalf of a client in order toexecute a buy or sell order. A broker will charge a fee for service

budget deficit Occurs where Government expendituresexceed revenues over a financial year

budget surplus Occurs where Government revenues exceedexpenditures over a financial year

building society A authorised deposit taking institutiona cooperative society providing housing loans and other finservices to the retail and small business sectors

bull market A market environment where there is anexpectation that prices will rise

bullet repayment The principal amount due on a securonly repaid on the maturity date

business cycle Changes in economic activity over time

through cycles of expansion and contraction. The highest peconomic activity in the business cycle is a peak and the lotrough

business risk The exposure of shareholders to the risk cash flows may vary unexpectedly due to changes in the firoperations or structure

call bull spread A combined-option strategy involving tsimultaneous purchase and sale of call options

call deposit Funds held in a savings account that can bewithdrawn on demand

call option An option giving the buyer the right, but not aobligation, to purchase the underlying asset specified in theoption contract at a predetermined price, on or by a specific

cap An over-the-counter option that specifies a maximuminterest rate level. The buyer of a cap pays a premium, but icompensated if interest rates rise above the exercise level

capital adequacy requirement Consolidated bank gromust maintain a ratio of at least 8 per cent of defined capitarisk-weighted assets and off-balance-sheet items. Defined must consist of at least 50 per cent Tier 1 (core) capital. Balsheet assets and off-balance-sheet items are weighted by trelative credit risk. Banks must also hold additional capital fmarket risk exposures

capital gain Occurs where the value of an asset increasabove the purchase and maintenance costs

capital guaranteed fund An investment fund in which

value of the initial investment is guaranteedcapital markets Longer-term finance markets, includingequity, corporate debt and government debt markets, plusassociated foreign exchange and derivatives markets

capital stable fund A fund in which the initial investmesecured, but not explicitly guaranteed

capital structure The proportion of company assets finaby various forms of debt and equity

capital-indexed bond The periodic fixed rate coupon rto the inflation-adjusted principal amount of the bond

carded rate A financial institutions advertised nominal dand loan interest rates

cash advance facility A flexible funding arrangement fcorporate clients

cash and conversion loan A loan that allows an invespurchase new bonds with cash, or convert an existing hold

that is due to mature

cash management trust A trust fund that invests theaccumulated savings of individuals in wholesale money marsecurities

cash market The physical market where the issue and t

GLOSSARY


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GLOSSARY

of commodities and financial instruments occurs; for example, acompany may raise funds in the market through a P-note issue

cash rate The interest rate paid in the interbank market forexchange settlement account funds

CDI A depositary receipt issued by the ASX representinguncertificated equity and debt instruments

central borrowing authority An authority established byeach State and Territory government to facilitate its debt

management program through the issue of debt securitiescertificate of deposit (CD) A short-term money marketsecurity issued by a bank at a discount to the face value

CHESS sponsor A market participant such as a stock-brokerwho has access to CHESS

CHESS Acronym for the electronic payment and settlementsystem operated by the ASX

clean float Where an exchange rate is determined by marketforces without central bank intervention

clearing-house Associated with a formal exchange, such asa stock exchange or a futures exchange; facilitates the financialsettlement and transfer of ownership between buyers and sellers.May provide transaction guarantees. If appropriate, will hold

deposit payments and make margin calls as required

close out To liquidate or offset an open position by taking anequal and opposite position. For example, in the futures market, acompany hedging a risk of interest rate rises would close out itsinitial sell position by buying an opposite futures contract

coincident indicators Economic variables that change at thesame time as the business cycle changes

co-insurance clause If an asset is under-insured the policywill only cover the proportional value of the asset insured

collar A combination of over-the-counter option contractsthrough the purchase of a cap and the sale of a floor. Thesimultaneous buy/sell strategy reduces the net premium cost ofinterest rate cover

collateralised floating charge Allows the lender to takepossession of the assets of a borrower if the borrower defaults onloan repayments

co-managers Assist the lead manager of a syndicated debtfacility

commercial bill market A very liquid secondary market forthe buying and selling of bills of exchange

commercial bill A bill of exchange issued by a drawer toraise funds for business purposes. The bill is sold at a discountand the holder at maturity receives the face value

commercial paper The lending and borrowing of very short-term funds by corporations through the issue of promissory notes

commitment fee A fee charged on any portion of a financingfacility that has not been drawn down

commitments The contractual obligations of a bank that areyet to be completed or delivered

Commonwealth Government The central government inAustralia

company-issued equity warrant An option to buyadditional shares that is attached to an initial debt issue

company-issued option Bestows the right, but not theobligation, on the holder to buy additional company shares

compound interest An arrangement where periodic interestpayments accumulate on a financial instrument

comprehensive insurance A policy that covers damage to amotor vehicle plus any third-party damage

compulsory superannuation Minimum retirement savingsfor employees, specified by legislation

compulsory third party insurance A policy that coverslegal liability for bodily injury resulting from a motor vehicleaccident

confirmations, settlements and reconciliation Theprocess of confirming an FX dealer transaction, arrangingfinancial settlement, and reconciling the FX position

conglomerate takeover Takeover in which the business ofthe target company is unrelated to the business of the takeovercompany

Consumer Price Index (CPI) A measure of changes in theprice of a basket of goods and services

contingency plan A set of predetermined strategies to beimplemented if a designated event occurs

continuation pattern A pattern of sideways trading of sharethat does not normally signal a change in a trend

continuous disclosure A requirement that a listed entitymust immediately advise the stock exchange of any materialchanges

contract date The date on which two parties enter into aforward rate agreement

contract month The month in which delivery or cashsettlement is to be made under the terms and conditions of afutures contract

contract note Advice sent from broker to its client giving fulldetails of a share transaction

contract period The term of an interest-rate cover; forexample with a forward rate agreement, three-month moneybeginning in two months (2Mv5M)

contributing shares Partly paid shares; only a portion of theissue value of the shares has actually been paid. The outstandingamount is payable when the company makes future calls

convertible bond A bond that has the option, at a future date,to convert into equity of the issuer

convertible note Quasi-equity; a debenture that pays periodicinterest until the holder converts the note into ordinary shares of

the issuer company. Where the note has not been converted bymaturity, the holder is entitled to its redemption (face) value

convertible preference shares Preference shares that maybe converted to ordinary shares in the company at a future date

and at a specified price

convexity The existence of curvature in the price/yield curveof a security

corporate bond market The market for the direct issue oflonger-term debt securities by companies

corporate governance The internal relationships betweenshareholders, the board of directors and the managers of acompany

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corporate mission The objectives and purpose of acorporation as determined by the board of directors

corporation A legal entity formed under corporations law; themain source of equity is ordinary shares

correlation coefficient A statistical measure of the degree towhich the movement in a variable is related to a dependentvariable

counter-trade The exchange of product for product, rather

than currency-based buy or sell contractscountry risk The risk that changes in the laws of a foreigncountry will affect a financial transaction

coupon The periodic interest payments associated a bondissue. For example, a Commonwealth Treasury bond pays a half-yearly coupon at a fixed interest rate based on the face value of

the bond. The word coupon derives from bearer bonds where thebond-holder would cut the attached physical coupon from thebond and present it for payment

co-variance or correlation The historic directionalrelationship between share price movements; may be eitherpositive or negative

covenant A term in a loan agreement that protects the lender by

restricting some activity of the borrower, or requiring the borrowerto do something. For example, a covenant may require theborrower to maintain minimum levels of liquidity, capital or stock

cover The purchase of a physical market security to offset aderivatives market short position

covered option An option where the writer holds theunderlying asset or provides a financial guarantee

credit (default) risk The risk that a borrower may not meetfuture commitments to pay interest or repay principal outstandingwhen due

credit card A credit facility that allows the cardholder to obtainfunds up to an agreed limit

credit channel The effect of monetary policy changes on theavailability of credit in the financial system

credit enhancement A financial arrangement, such as aletter of credit, that supports an underlying debt security issue

credit facility An arrangement with a lender that allows aborrower access to short-term funds

credit foncier loan A loan that is amortised over the term ofthe loan; that is, the loan instalments comprise periodic interestand principal repayments

credit rating A measure of the creditworthiness of a debtissue, or of an issuer of financial securities, provided by a creditrating agency

credit rating agency An organisation that specialises inassessing the credit quality associated with financial obligations;provides a standard measure of the creditworthiness of a debtissuer

credit risk transformation A savers credit risk exposure islimited to that of the intermediary, whereas the intermediary isexposed to the credit risk of the ultimate borrower

credit risk weight The multiplication factor used to calculatethe proportional 8 per cent capital adequacy requirement basedon the counterparty to the asset

credit union A cooperative society that pools members in order to extend consumer loans to members. Membersgenerally have a common bond of association such as profe

credit watch Advice to the market that a credit rating is review; may be positive or negative

cross-border transaction International financialtransactions

cross-commodity hedging Strategy of using a futures

contract based on one commodity or financial instrument tohedge a risk associated with a different commodity or finaninstrument

cross-currency swap The transfer of a principal amounassociated ongoing interest payments from one currency toanother based on a fixed exchange rate. The principal is re-exchanged at maturity

cross-rate the application of two sets of exchange rates determine a third exchange rate; for example, USD/EUR andJPY to determine EUR/JPY

crowding out Situation where government borrows a lathan usual proportion of the total funds available for investmthus reducing the amount of loan funds available to the bus

sectorcrystallise Transformation of a f loating charge into a f ixecharge over the assets of a company

cum-dividend When a share price incorporates anentitlement to receive a declared dividend

cumulative preference share A preference share thastipulates that when the fixed dividend is not paid in one pewill be carried forward until paid

currency swap The transfer of a principal amount plusassociated ongoing interest payments from one currency toanother based on a fixed exchange rate. The principal is re-exchanged at maturity

current account The net record of a countrys internatio

earnings less its international paymentscurrent account deficit A situation in which internationexport and investment receipts are less than imports andoverseas debt payments

current deposits Liquid funds held in a cheque accountthe purpose of issuing cheques to conduct financial transacfor goods and services

current ratio Ratio of current assets to current liabilities

dealer Makes a market in a security by quoting both buysell prices

dealer panel Panel whose members promote and distribdebt issues to clients and maintain a secondary market in thpaper

debenture A secured corporate bond. The debenture is acharge over the assets of an issuer; generally incorporates charge and a floating charge over company assets

debenture trust deed Deed that specifies and protectsunderlying security attached to the debenture issue

debt Various forms of funding where repayment is requireexample, an intermediated loan, the issue of discount secur

the issue of fixed-interest or floating rate securities

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debt-to-equity ratio The proportion of a firms debt fundsrelative to its equity funds

default (credit) risk The risk that a borrower will not meetcontractual obligations, such as interest payments and principalrepayment on a loan when they are due

defensive strategy Strategy in which a defined percentageof a risk exposure is automatically hedged

deferred annuity An annuity that provides an income stream

that will begin at a future datedeferred repayment loan A loan for which instalmentscommence after a specified period, usually at a time when aproject is expected to generate cash inflows

deficit unit An economic unit such as a company that spendsmore than it saves in a given period.

defined benefit scheme A superannuation scheme in whichthe amount paid on retirement is based on a defined formulausually related to years of service and final salary

definitive notes Securities issued in their physical form; thebearer securities

delta The change in the value of an option premium relative tothe change in the value of the underlying futures contract;

expressed as a coefficient

demutualisation Changing a company structure to that of apublicly listed corporation

depositary receipt A security representing a quantity ofshares listed on a stock exchange

depositary share A share that represents one or moreordinary shares of a foreign issuer listed on a foreign stockexchange

depreciation The writing-down on the balance sheet of thevalue of an asset over its effective life; the amount by which thevalue of an asset is written down in an accounting period

depth of the market The overall market capitalisation ofcorporations listed on a stock exchange

deregulation The so-called removal of major regulatoryconstraints on specific sectors of the financial system, inparticular the banking sector

derivative contract A synthetic security that derives its pricefrom a physical market commodity or security. Generic derivativecontracts are futures, forwards, options and swaps

derivatives market Exchange traded and over-the-countermarkets for futures, forwards, options and swaps

descending triangle A pattern of share price variation thatforms a downward trend characterised by peaks decreasing inheight and troughs that remain horizontal

detachable warrant A warrant that can be sold separately

from the host bond debt issuedevaluation Occurs when the official value of a currency isreduced in terms of other currencies

direct credit substitute An undertaking by a bank to supportthe financial obligations of a client

direct finance lease Lease in which the lessor purchases anasset and leases it directly to a lessee

direct financing Borrowers and lenders deal directly with

each other; for example, a company issuing debentures into thecapital markets

direct interest-rate risk The possibility that a change ininterest rates will affect the value of assets, liabilities and futurecash flows

direct investment An investor buys and sells shares directlythrough a stockbroker

direct quote An FX quotation that uses the USD as the base

currency or unit of the quotationdiscount broker A broker that executes buy and sell ordersfor clients, but does not provide investment advice to the client

discount rate The effective (simple interest) rate of returnearned on a discount security by an investor

discount security A short-term instrument, such as acommercial bill, P-note, T-note or CD. The security is issued at adiscount to its face value, typically for up to 180 days, and mayinclude a roll-over option. The holder of the discount security willbe paid the face value at maturity date

discounter The party that purchases a discount security; theprovider of funds

dishoarding Occurs when normal cash holdings are reduced

and invested in financial instrumentsdiversification A strategy to lower risk exposures by holding awide range of financial securities and assets in a portfolio

dividend The amount of a corporations after-tax earningsdistributed to shareholders

dividend reinvestment plan An arrangement that allowsshareholders to reinvest their dividends back into a company bypurchasing additional shares

divisibility problem Occurs when a transaction is difficultto carry out because the medium of exchange does not representequal value

domestic bond A bond issued into a local capital market, inthe local currency, by a local company

domestic economy The local or home economy of a nationstate

double coincidence of wants Arises when two parties cometogether to conduct a transaction that meets their mutual needs

downtrend line A line achieved by connecting the higherpoints of a falling price series

drawer The party that issues a bill of exchange

dummy variable A binary variable (either zero or one) used todistinguish between two sets of groups

duration The weighted average time over which cash flowsoccur, where the weights are the relative present values of thecash flows

duration of a portfolio The weighted duration of each assetor liability in the portfolio

earnings per share The net return on a companys sharesexpressed in cents per share

EBIT The earnings of a firm before allowing for interest expenseand tax payments

economic indicators Data that provide some insight intopossible future economic performance

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economic recession Defined as two consecutive quarters ofnegative economic growth

economies of scale Financial and operational benefitsgained as a function of organisation size and volume of business

effective interest rate The actual rate of return earned afteradjusting the nominal rate for the effect of compounding. Theeffective interest rate will be higher than the nominal rate wherecompounding occurs more than once annually

efficient market hypothesis The hypothesis that shareprices reflect available information; there are weak, semi-strongand strong levels of efficiency

efficient price discovery Occurs when new informationrapidly reaches the market and is reflected in share prices

electronic funds transfer at point of sale (EFTPOS) Anelectronic system that facilitates value transactions for goods andservices

electronic sub-register A record of share ownership held ona computer-based system

eligible collateral A claim that is secured by a counterpartyapproved by APRA

eligible termination payments Superannuation funds dueon termination of employment and related redundancy payments

Elliott wave theory The existence of distinctive wavepatterns that characterise share-market cycles

embedded option A specific performance guaranteecontracted into a project

employer-sponsored fund A superannuation fundestablished by an employer for the benefit of employees

endorser The party that signs the reverse of a bill when sellinga bill of exchange

endowment policy A life insurance policy for a specifiedterm that incorporates an investment component

equilibrium exchange rate The FX rate at the point where

the demand and supply curves intersectequity lease A lease in which the lessor provides the majorityof the funds required to purchase an asset to be leased

equity market A market that facilitates the issue of financialsecurities that represent an ownership interest in an asset, suchas ordinary shares in a corporation listed on a stock exchange

equity trust Subject to the trust deed, a trust that invests inclasses of shares listed on stock exchanges

equity Funds provided by, or an interest of, owners of an entity;for example, the issue of ordinary shares in a listed company.Ordinary shares have no maturity date. Shareholders are entitled

to share in the profits of the organisation. Profit distribution mayoccur in the form of dividends payments

equity-funded takeover When a takeover company issuesits own shares in exchange for shares in the target company

escrow A situation in which assets are held by a third partyuntil conditions of a contract are fulfilled

establishment fee A fee charged by the bank to meet thecosts associated with approving a loan facility

euro The official currency of nations who are members of theEuropean Monetary Union

euro floating rate note A bearer bond issued into theeuromarkets that has a variable coupon rate based on anindicator interest rate

euro medium-term note An unsecured, non-homogenbearer security that pays a specified coupon; usually issued

tranches with different currencies, interest rate structures maturities

eurobond A fixed-interest security issued by a foreign

borrower in an offshore market and in a currency other thancurrency of the market in which the bond is being issued

eurocommercial paper A discount security issued intoeuromarkets that is not underwritten

euromarket A market for transactions carried out in a focountry, but denominated in a currency other than the curre

that country; for example, USD securities issued by a NewZealand corporation in London. Includes the eurocurrency,euronote and eurobond markets

euronote issuance facility A discount security issuedthe euromarkets that is underwritten

European-type option An option that can be exercisedon its maturity date

exception report A report that is automatically generatcomputer when a policy or procedure is ignored or exceedesuch as an FX limit is breached

exchange rate The price of one currency in terms of anfor example, AUD/USD0.6750 means $1 Australian will purch$0.6750 US

exchange settlement account (ESA) An accountmaintained by banks and other financial entities with the ReBank for the purpose of clearing transactions between part

the payments system

exchange-traded contract A financial contract issuedtraded on a formal exchange such as a futures exchange;transactions are usually conducted with a broker, and invol

clearing-house

excluded fund A superannuation fund with less than fivmembers

ex-dividend A share is ex-dividend after a declared dividhas been paid to shareholders

exercise (strike) price The price specified in an optioncontract at which the option buyer can buy (call option) or s(put option)

expectations theory A theory that explains the shape oyield curve through current and future short-term interest ra

expected return of a portfolio The weighted averagethe expected returns of each investment held in a port folio

exposure management system Structured procedurenable a firm to effectively measure and manage risk

factoring A factoring company buys a firms accountsreceivable at a discount to book value

factoring company A finance company that purchasesfirms accounts receivables

fiat money Currency issued by the government, held by tnon-bank public, with legal tender status

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final basis risk Occurs at the completion of a hedgingstrategy, where pricing differentials are evident between markets

finance companies and general financiers Companiesthat raise funds in the debt markets and provide finance to smallbusiness and personal borrowers

finance lease A longer-term lease; ownership passes to thelessee on payment of the residual amount

financial asset An asset that entitles the owner to future cash

flows generated by the asset. The cash flows may take the formof interest payments, principal repayments and capital gains.Examples include shares, discount securities and bonds

financial conglomerate A consolidated group of differenttypes of financial institutions

financial engineering The creation of innovative financetechniques or instruments

financial instrument An instrument issued by a party raisingfunds, which acknowledges a financial commitment and entitles

the holder to specified future cash flows

financial risk That part of total risk that affects future cashflows and/or the value of assets and liabilities on the balancesheet. Includes interest rate, foreign exchange, liquidity, price,

investment, credit and capital risksfinancial security A financial asset or instrument issued in aprimary market that can then be bought and sold on an organisedsecondary market

financial system A system comprising a range of financialinstitutions, instruments and markets that facilitate transactionsfor goods and services and financial transactions

financial system liquidity The amount of funds within afinancial system that are available to carry out current

transactions

financing decision The capital structure that provides thefunds for the firms business activities

fiscal policy The management of the annual revenues andexpenditures of government, resulting in a budget surplus ordeficit

fixed charge A charge over the assets of a borrowingcompany, offered as security to support a loan facility. If theborrower defaults on the loan the lender has the right to takepossession of specific asset(s) of the borrower. These assetscannot be sold until the loan has been repaid

fixed exchange rate An exchange rate that is determined bya nations government. A fixed exchange rate may be tied to aspecific currency, such as the USD, or to a basket of currencies

fixed interest rate A specified rate of interest that is set for aperiod specified in a financial contract

fixed interest security A medium- to-longer-term securitythat pays a specified coupon or interest payment at regular timeperiods. Straight bonds are fixed interest securities

float (1) The practice of allowing a currency exchange rate tobe market-determined (2) A primary market issue of ordinaryshares

floating charge Loan security giving the lender the right totake possession of any of the borrowers assets, bar thosespecifically pledged to any other lender in a fixed charge, if the

borrower should default on its loan obligations. A floating chargeallows certain assets to continue to be sold in the course ofnormal business operations

floating exchange rate An exchange rate that is determinedby supply and demand factors in the FX markets

floating rate note (FRN) A medium- to-longer-term securityissued with a variable interest rate. Interest payable on the FRNwill change in line with a nominated reference interest rate atspecified review dates. In the eurobond market, LIBOR may be

the reference rate

floor plan finance Finance provided by a goods supplier forstock on a showroom f loor, such as vehicles

floor An over-the-counter option that specifies a minimuminterest rate level. The buyer of a floor pays a premium, but iscompensated if interest rates fall below the exercise level

flotation of a business The public listing and quotation of acorporation on a stock exchange

foreign bond A bond issued into an overseas debt market anddenominated in the currency of that country

foreign currency liabilities The issue of debt instrumentsinto the international capital markets that are denominated in a

foreign currencyforeign exchange market A global market wherecurrencies are traded. Within Australia, FX dealers require anauthority from the Reserve Bank

foreign exchange risk The risk that the price of onecurrency relative to another currency will change thereby havingan adverse impact on balance sheet values, cash flows orcompetitive position

foreign exchange channel The effect of monetary policychanges on the exchange rate, exports, imports and investment

forward contract An over-the-counter contract negotiatedwith a bank that locks in a price today that will be applied at aspecified future date. Includes forward rate agreements and a

forward exchange contractsforward discount Occurs where the forward exchange rateis less than the spot rate

forward exchange rate The FX bid/offer rate applicable at aspecified date beyond the spot value date

forward exchange contract An agreement to buy or sell aforeign currency at a future date at an exchange rate specified

today. Pricing is based on an adjustment of the spot rate by theinterest rate differentials the relevant countries

forward points The forward exchange rate variation to a spotrate based on interest rate differentials between the twocountries of the quote

forward premium Occurs where the forward exchange rate

is higher than the spot rateforward rate agreement (FRA) an agreement between twoparties that fixes a rate of interest to be applied, at a specifiedfuture date, against a notional principal amount. The agreed rateis established today and measured against a reference rate, suchas the bank bill swap rate (BBSW) or the London interbankoffered rate (LIBOR), at the settlement date. One party willcompensate the other for any adverse movement in the interestrate between the agreed rate and the settlement rate

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FRA agreed rate The interest rate stipulated in the FRA at thecommencement of the contract

FRA settlement rate The reference rate against which theFRA agree rate is benchmarked and compensation calculated

fractional reserve banking Occurs where banks hold someproportion of their liabilities, in the form of liquid assets, asreserves to meet day-to-day demand for operational andprudential liquidity

franked dividend The payment of a dividend thatincorporates an imputed tax credit that can be used to off-set theshareholders personal tax liability

full-service lease A lease in which the lessor is responsiblefor the insurance and maintenance of the leased asset

full-service advisory broker A broker who provides arange of services to clients, including investment advice and theexecution of buy and sell orders

fully drawn advance A term loan issued by a financialinstitution

fundamental analysis A method of analysis that considersmacro and micro fundamentals that impact upon future shareprice movements

futures contract An agreement to trade a specific commodityor financial asset of a specified quality and quantity, at a pre-determined price, and at a specified date in the future; anexchange-traded derivative product that may be used formanaging an underlying risk exposure

FX appreciation Where the value of one currency increasesrelative to another currency

FX broker A broker who obtains the best prices in the FXmarket and matches FX dealers buy and sell orders for a fee(commission)

FX dealer A financial institution that quotes buy and sellprices, and acts as a principal in the FX markets

FX depreciation Where the value of one currency falls

relative to another currencyFX operating exposure The risk that day-to-day operatingrevenues and expenses will be affected by FX movements

FX smoothing Central bank buy/sell actions in the FX marketdesigned to stabilise a volatile market

G-10 Belgium, Canada, France, Germany, Italy, Japan, theNetherlands, Sweden, the United Kingdom, and the United Statesof America

gearing ratio The percentage of a firms total funding providedby debt

general meeting A meeting of shareholders called under theprovisions of the rules of the company

global industry classification standard Ten standardinternational industry sector stock market indices

global notes Securities issued and controlled through anelectronic clearing-house

globalisation The integration of financial institutions,instruments and markets into an international financial system

Government debt Borrowings by government to manage itsday-to-day liquidity position (short-term) and to fund budgetexpenditures (medium- to long-term)

grey market Contingent trading in a security before the closing date of the primary issue

gross domestic product The aggregate value of goodsservices produced within a domestic economy

grossed-up amount The total of a franked dividend pluassociated imputation credit

guarantee An assumption of the liabilities of a third partthe event of default, agreed to by a guarantor

hard currency A currency such as the USD that is generaccepted in international trade transactions

head and shoulders pattern Three successive ralliesreactions; the second rally being stronger than the first or thrally

hedge A strategy that allows an entity (the hedger) to maor protect against an identified risk exposure. For example, company may hedge an exposure to a rise in interest rates selling a futures contract today and closing out the positionlater date

high-value payments Larger value transactions that mcleared by real-time gross settlement

holding period yield The actual return received for theperiod an investment is held

horizontal takeover A takeover in which the companieinvolved in a merger and acquisition are in the same busine

host bond The original bond to which a warrant is attach

hostile takeover A situation in which the target comparejects the advances of the takeover company

humped yield curve The shape of a yield that curve chover time from normal to inverse

hybrid security A financial instrument that incorporatescharacteristics of both debt and equity; for example a prefeshare or a convertible note

immediate annuity The purchase of a specified, periodincome stream

imputation credit The amount of company tax paid on afranked dividend transferred to the shareholder

income effect on interest rates If interest rates rise,economic activity will begin to slow, thus allowing rates to

to ease

income protection insurance An insurance policy thapay a limited income stream if the insured person is unable work due to illness or accident

index fund An investment fund that acquires a share pothat replicates a specific stock market index

index market capitalisation Index share prices multip

by the number of shares issued multiplied by the liquidity faindicator interest rate (reference rate) The adjusteaverage of an interest rate applicable to a specific market dsecurity; for example, BBSW or LIBOR

indirect finance Also called intermediation. Surplus anddeficit units interact via a financial intermediary such as a b

indirect interest-rate risk The risk that a change in intrates will affect the future actions of market participants

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GLOSSARY

indirect investment Investing through a funds manager; forexample, buying units in an equity trust

indirect quote An FX quotation in which the USD is the termscurrency and the other currency is the unit currency

inflation A rise in prices resulting in a depletion in the value ofmoney over time. Generally measured by comparing price changesof a basket of goods in a consumer price index

inflation effect on interest rates As the economy slows

the upward pressure on prices will ease, thus allowing interestrates to fall further

inflation theory An interest rate determination hypothesisthat an inflationary premium, reflecting expected inflation, isincluded in the nominal interest rate in order to maintain the realrate of interest

information memorandum Limited information provided toinstitutional investors by a company issuing securities in a privateplacement issue

information transparency Level of information provided tothe market

initial basis risk Basis risk that exists at the commencementof a hedging strategy

initial margin A deposit lodged with an exchange to coveradverse price movements in a contract

initial public offering (IPO) An offer to investors ofordinary shares in a newly listing company on a stock exchange

inscribed stock Stock for which there is no physical bondissued; ownership is registered electronically with a registry

instalment receipt A receipt issued upon payment of the firstinstalment on a share issue, in lieu of the ordinary share

institutional investors These include funds managers,insurance companies and superannuation funds

interbank market The lending and borrowing of very-short-term funds by banks operating within a financial system

intercompany market Direct, wholesale money marketborrowing and lending between large, creditworthy corporationswith surplus funds and those with short-term funding needs

interest capitalised Occurs when payments due, butdeferred, are added to the total amount owing

interest cover ratio The number of times a firms financialcommitments are covered by earnings

interest rate The return on investment due to the lender fromthe borrower. It can be expressed in a number of ways: real,nominal and effective. Calculation may be simple or compounding

interest rate market Listing, quotation and trading incorporate and government debt securities

interest rate parity Principle that exchange rates will adjustto reflect interest rate differentials between countries

interest rate risk Exists when unexpected changes in interestrates affect the cash flows of a business. Movements in interestrates may also affect the value of existing financial instruments,or the repricing of associated cash flows and maturinginstruments

interest rate sensitivity Occurs when an asset or liability isto be repriced during a planning period

interest rate structure A debt facility with either a fixedinterest rate or a variable interest rate

interest rate swap The exchange between two parties ofinterest payments associated with a notional principal amount

interest withholding tax A tax applied to the amount ofinterest paid by a local borrower to a non-resident lender

interest-indexed bond A bond with periodic coupons thatincrease relative to increases in inflation

intermediated finance A financing arrangement wherebysurplus and deficit units interact via a financial intermediary suchas a bank. Two financial contracts are created: one between thelender and the financial intermediary, and the second between

the financial intermediary and the borrower

internal rate of return (IRR) The required rate of return thatresults in a NPV of zero

in-the-money A situation in which the strike price of a calloption is lower than the price of the underlying commodity orfinancial asset; alternatively, where the strike price of a put optionis above the price of the underlying commodity or financial asset.In these instances an option has a positive intrinsic value; thebuyer is able to exercise the contract at a profit

intrinsic value The market price of the underlying assetrelative to the option exercise price

inverse or negative yield curve The yield curve evidentwhen shorter-term interest rates are higher than longer-terminterest rates

investment banks Specialist providers of financial andadvisory services to corporate and government clients. Oftenspecialise in off-balance-sheet services, including international

trade finance, project finance, corporate finance advice, balancesheet restructuring advice, mergers and acquisition advice, andfunding advice (debt and equity, domestic and offshore)

investment decision The capital budgeting process thatdetermines the strategic activities of a firm

investment grade A debt issue with a credit rating of BBB, orits equivalent, and above

invoice A document that describes the goods supplied andpayment arrangements

junk bond market The issue of securities with a credit ratingless than the investment grade of BBB

lagging indicator An economic variable that changes afterthe business cycle has changed

lagging A strategy of changing the timing of existingtransactions by delaying the cash flows

lead manager The dealer financial institution that acts as thearranger of a syndicated debt facility; structures the issue, forms

the syndicate, prepares documentation

leading indicator An economic variable that changes beforethere is a change in the business cycle

leading A strategy of changing the timing of existingtransactions by bringing cash flows forward

lease A contract where the lessor allows the lessee to usecertain property for a specified period in return for lease payments.The lessor retains ownership of the asset during the contract. The

two basic types are financial leases and operating leases

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lease manager The arranger of a leveraged lease that bringstogether the lessor, debt parties and lessee

lender of last resort The provider (usually a central bank) ofa loan facility to banks under certain circumstances. Penalty ratesare generally charged. It is, as the term suggests, a last-resortoption only. In Australia, the Reserve Bank has withdrawn thisfacility to banks, but offers a rediscount facility for banks holdingsof government securities

lessee The user of an asset subject to a lease agreement;makes lease rental payments to lessor

lessor The owner of an asset that is subject to a leaseagreement; receives lease rental payments

letter of comfort Advice given by a parent company that itssubsidiary can meet its obligations

letter of credit A guarantee issued by a borrowers bank onbehalf of a customer, giving a third party the right to approach thebank that issued the letter of credit for funds should the customerdefault on a f inancial commitment. Often used in conjunction witha bill of exchange in import/export transactions

leveraged finance lease A partnership in which a lessorborrows a substantial portion of the funds required to buy an

asset for leasingliability management The current practice of financialintermediaries whereby they actively manage their sources offunds (liabilities) in order to meet future loan demand (assets)

LIBOR (see London Interbank Offered Rate)

limit order An instruction to a broker to buy or sell a certainquantity of a commodity or financial asset at a specific price, ator within a nominated time period

limited liability company A company structure where theclaims of creditors against shareholders are limited to the valueof fully paid shares

limited recourse lending Lenders have restricted claims on

project sponsor assets if project cash flows are insufficient tocover loan repayments

line fee A fee charged by a lender on the total amount of fundsadvanced to a borrower

liquid ratio Ratio of current assets, less inventory, to currentliabilities, less bank overdraft

liquidation The legal process, carried out by a liquidator, ofwinding-up the affairs of a company in financial distress, through

the sale of its assets and payment of liabilities

liquidity effect on interest rates The effect on the moneysupply and system liquidity of a central banks market operations

liquidity preference theory The hypothesis that investorsperceive that risk and the period of investment are positively

correlated. Therefore, they require a greater reward, via aliquidity premium, from longer-term investments

liquidity transformation Term describing the ability of asaver to convert a financial asset into cash

liquidity Having sufficient cash or liquid assets to meet day-to-day operating needs. Banks must also meet liquidity prudentialstandards. A liquid asset is one that is quickly and easilyconverted into cash without loss of value

listed trust A unit trust in which the units are listed and on a stock exchange

listing rules Specific rules with which an entity seekingon a stock exchange must comply

loan covenant A condition or restriction specified in a locontract, designed to protect the lender; for example, minimliquidity levels and financial reporting requirements

loanable funds The amount of funds available within a

financial system for lendingloanable funds approach Method of determining interates by estimating the supply of and demand for loanable fDemand for loanable funds is affected by government andbusiness, while the supply is affected by savings, changes imoney supply, and dishoarding

London interbank offered rate (LIBOR) A benchmareference interest rate. It is an average of the interest ratesmajor London banks charge one another. Published daily byReuters

long call party The buyer or holder of a call option

long position Holding a financial security, currency orcommodity in expectation of a future sale

long straddle The simultaneous purchase of a long call long put, with a common exercise price

long strangle The purchase of a long call and a long puoption, with out-of-the-money exercise prices

maintenance margin The top-up of an initial margin paan exchanges clearing house to cover adverse contract primovements

managed fund An investment vehicle through which thepooled savings of individuals are invested and managed byprofessional funds managers

managed growth fund A investment fund that seeks greturn through capital growth and less through income stre

margin call Made by an exchanges clearing-house; requfutures contract-holder to top up their margin account in ordcover the risk of closing out an open position

margin (1) Funds lodged with an exchanges clearing houa guarantee of performance in relation to a contract. If thecontract price moves adversely the clearing-house require maintenance margin to be paid; (2) That part of an interest charged on a loan facility over a benchmark or reference rawhich reflects the credit risk of a particular borrower; forexample, LIBOR plus 0.50 per cent

marginal rate of tax The percentage of personal tax pathe highest level of a persons income

marked-to-market The repricing of a contract on a daibasis to reflect current market valuations. Losses are debitegains credited on contracts each day. For example, if the prspecified in the contract is above the days futures price, thseller is credited with a gain and the buyer is debited the lo

market capitalisation The number of shares issued bylisted corporations on a stock exchange multiplied by the cushare prices

market convention A common practice that occurs witparticular financial market

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market liquidity The ratio of the value of share marketturnover to market capitalisation

market maker A dealer that quotes buy (bid) and sell (ask)prices on the secondary market

market operations Intervention in the short-term money marketsby the Reserve Bank in order to affect the level of short-term interestrates, specifically the overnight cash rate. This is achieved byinfluencing the level of liquidity (money supply) in the market.

market order An instruction to a broker to buy or sell at thecurrent market price

market rate-related contract A contract that uses aderivative product to manage an exposure to foreign exchangerisk, interest rate risk, equity price risk or commodity risk

market segmentation theory Interest rate on securitieswith different maturities are determined by market forces within

that market segment. Assumed that investors prefer a particularmaturity market segment and will invest in a different marketsegment only if offered a suitable premium

mark-up An increase in the price of exports or imports tocover worst-case scenario changes in an exchange rate

matched swap A swap intermediary, such as a bank, enters

into opposite swap transactions to offset its net swap exposuresmatching principle Contends that short-term assets shouldbe funded by short-term liabilities, and longer-term assets shouldbe funded by longer-term liabilities and shareholders funds

maturity structure The relative proportions of assets andliabilities on a balance sheet maturing at different time intervals

maturity transformation The process whereby financialintermediaries are able to provide savers and borrowers withfinancial instruments of differing maturities

maximising shareholder value Management strategiesthat seek to increase the share price of a corporation

mean The average of a set of observations; an indicator ofcentral tendency

medium-term note An unsecured debt instrument that paysa specified coupon; issued in tranches

merchant bank Specialist providers of financial and advisoryservices to corporate and government clients. Often specialise inoff-balance-sheet services, including international trade finance,project finance, corporate finance advice, balance sheetrestructuring advice, mergers and acquisition advice, and fundingadvice (debt and equity, domestic and offshore)

mergers and acquisitions Corporate manoeuvres in whicha takeover company seeks to gain control over a target company

modern portfolio theory Concepts that enable aninvestment portfolio to be constructed with optimal risk andreturn relationships

monetary policy Actions of a central bank that influence thelevel of interest rates in order to achieve certain economicperformance outcomes such as managing inflation, employmentand economic growth

monetary policy channel The effects of a change inmonetary policy on interest rates and economic activity

money A commodity that is universally accepted as a mediumof exchange

money market Wholesale market in which securities with amaturity of less than one year are issued and traded, with aminimum transaction size of at least $100 000. This marketenables large corporations and financial institutions to manage

their short-term liquidity demands

money market corporation Official classification ofinvestment banks and merchant banks operating in the Australianfinancial system

money market hedge A strategy that involves borrowing FXtoday, converting it to local currency at the spot rate, theninvesting it in money markets

money supply Various measures of the amount of fundsavailable within the financial system

money-laundering transaction A transaction that enablesthe movement of illegally gained funds into the financial system

moral hazard The risk associated with unnecessarily riskyinvestments undertaken because the downside risk has beenremoved by some form of insurance or implied guarantee

mortgage (service) manager Within a securitisationstructure, is responsible the special purpose vehicle trustee forcollecting the principal and interest payments from the originalsecurities, and paying interest and principal to investors in theasset-backed securities

mortgage insurance Insurance that protects the lender inthe event that a borrower defaults on a loan

mortgage originator The party responsible for originating amortgage contract with a borrower. Typically, a mortgageoriginator will fund its lending program through the process ofsecuritisation

mortgage trust A unit trust that invests in mortgagesregistered as loan securities over land

mortgage A form of security that conveys an interest in landand property thereon to a lender

mortgagee The lender who registers a mortgage as security

for a loanmortgagor The borrower who assigns the mortgage assecurity over land and property thereon

moving averages model A graph of a series of averageprices constructed over time

mutual fund A managed fund in the USA, established under acorporate structure

mutually exclusive projects From a choice of two or moreprojects, only one project will be chosen

naked call option A call option for which the writer does nothold the underlying physical market asset or provide a financialguarantee

naked warrant A warrant that is issued independently of abond

National Guarantee Fund A fund established to compensateinvestors in the event of misconduct by a stockbroker

natural hedge The use of matching transactions to offset apotential risk exposure; for example, the matching of foreigncurrency inflows and outflows

negative correlation The relationship between data, such asexchange rates or share prices, that move in opposite directions

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negative covenant A restriction imposed on the activities andfinancial structure of a borrower; for example, restrictions onfuture borrowings

negotiable certificate of deposit (CD) A discount securityissued by banks into the money markets to raise short-term funds

to meet forecast liquidity needs

negotiable security A financial instrument that can easily besold into a secondary market

net interest margin The difference between the cost offunds and the return on assets

net lease The lessee is responsible for the insurance andmaintenance of the leased asset

net present value (NPV) The difference between the cost ofan asset and the present value of its returns

no liability company A company structure in whichshareholders may decide not to meet future calls on an unpaidportion of shares held, but forfeit the shares instead

nominal rate of interest The market rate incorporating thereal rate of return plus an anticipated inflation component.Typically, interest rates quoted in the market place are nominalrates

non-bank financial institution (NBFI) A financialintermediary that has not been granted a banking authority, suchas a building society, credit union or finance company

non-conventional cash flow Occurs when the ongoingcash flows from an investment are not always positive

non-detachable warrant A warrant that can only be soldwith the associated bond issue

non-executive director A member of a board of directorswho is not part of the management of an institution or itssubsidiaries

non-notification basis Accounts receivables are paid by afirms debtors directly to an address controlled by the factor

non-recourse lending The lender is totally reliant on aprojects future cash flows for loan repayments

non-renounceable right A right attached to a security thatcan only be exercised by the shareholder; it cannot be sold to a

third party

normal or positive yield curve An upward-sloping yieldcurve; longer-term interest rates are higher than shorter-termrates

notification basis The firm must notify debtors that accountsreceivables should be paid directly to the factor

novation An agreement that allows a lender to transfer to athird party all rights and obligations due under a loan agreement

NOW account A negotiable order of withdrawal issued on aninterest-bearing cheque account

objectives and policies What a company intends to achieveand how that will be achieved

obligor A person who is bound to another by contract or otherlegal procedure

off-balance-sheet business Transactions conducted by abank that are currently only a contingent liability and thereforeare not recorded on the balance sheet

offer price The price at which an FX dealer will sell a unquotation

off-exchange transaction Buying and selling of securover-the-counter

official interest rate The central banks target interest for the overnight cash rate

official list The list of companies whose securities are qon a stock exchange

official reserve assets Comprise central bank holdingsforeign currencies, gold and international drawing rights

open outcry A system of share trading whereby dealersconduct face-to-face transactions using verbal and hand siconventions

open position In the futures market, where a futures coposition has not been closed out

operating account A cheque account through which a conducts its day-to-day financial transactions

operating lease A short-term lease where the asset isreturned to the lessor on completion; asset is maintained bylessor

operational liquidity Access to cash to meet day-to-dexpenses and business opportunities

option The right, but not the obligation, to buy or sell acommodity or financial asset at a predetermined exercise pat, or within, a specified time. The buyer of the option pays toption writer or seller a premium. There are two types of opAmerican and European

ordinary annuity An annuity in which regular equal casflows occur at the end of each period

ordinary share A form of equity bestowing ownership rin a company. The security entitles the holder to voting righgeneral meetings and to any dividend declared by the boarddirectors. It ranks last at liquidation

out-clause Specific conditions that preclude an underwagreement from being fully enforced

out-of-the-money A situation where the strike price of aoption is higher than the price of the underlying commodity ofinancial asset; alternatively, where the strike price of a put ois below the price of the underlying commodity or financial a

overdraft facility A fluctuating credit facility provided tborrower by a bank, that allows a business to place its operaccount into deficit without notice, up to an agreed limit

over-the-counter contract A derivative market transacthat is not conducted on an organised exchange, but isnegotiated with a financial institution such as a bank. Produare not standardised and are designed to meet the specific of the client. Examples include forward rate agreements an

forward exchange contracts

P/E ratio The current share price divided by the earningsshare

participating bank A bank that provides funds as part osyndicated loan facility

participating preference share A type of share whosholder will receive a higher dividend if shareholders receiveabove a specified dividend

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passive investment A portfolio in which the structure isbased on the replication of a specific share market index, such as

the S&P/ASX 200 index

payee The party who receives the funds

paying agent The party who arranges periodic couponpayments when due, and redeems bonds at the maturity date

payments system The regulated process that enablesfinancial institutions to settle value transactions for goods and

servicespegged exchange rate An exchange rate that locks onecurrency into a multiple of another currency, such as the USD.For example, the HKD is currently locked into the USD

physical market A market in which a commodity or financialinstrument is traded; for example, the bank accepted bill marketor the stock market

placement The issue of new ordinary shares by a corporationto selected institutional investors

point (1) The final decimal place in an FX quotation. (2) Theminimum price fluctuation permitted in a contract traded on thefutures exchange

pole Rapid rise in share prices and volumes before a pennantor flag forms

policyholder The person who takes out an insurance policythat covers a defined event

portfolio structuring The selection of a combination ofassets and liabilities; each asset and liability comprising desiredattributes of return, risk, liquidity and timing of cash flows

portfolio variance The correlation of pairs of securitieswithin an investment portfolio

positive correlation A relationship between data, such asexchange rates, whereby a price change will be a movement in

the same direction

positive covenant An action stipulated in a loan contract that

must be taken by a borrowerposted rate The interest rate or yield at which an issuer iswilling to sell a security

preference share A hybrid security that pays a fixed dividend,and has priority over ordinary shares if the company is liquidated.They may be cumulative, redeemable, converting, participatingand of different ranking

premium (1) A regular, periodic amount paid by an insurancepolicyholder. (2) The amount paid to the writer of an option by thebuyer

present value The current value of a future cash flowdiscounted by a required rate of return

price risk The possibility that a change in interest rates willaffect the value of a firms assets and liabilities

price series A graph of historic share price or share priceindex movements over time

price to earnings ratio The current share price divided bythe earnings per share

primary market Markets for the issue of new securities suchas shares or debentures; that is, markets in which new funding israised by the issuer/borrower

prime assets requirement A prudential liquidityrequirement imposed by the bank regulator in Australia that hasnow been replaced with new liquidity management guidelines

prime rate An indicator interest rate set by a financialinstitution for the purpose of loan pricing

principal The initial, or current, amount borrowed or invested

profit and loss profile The potential gains and lossesavailable to the buyers and writers of an option

profit test Minimum financial performance requirements to bemet by an entity seeking listing

program trading Buy and sell orders automatically triggeredby computer programs

project completion Point at which a project is built and isgenerating a prescribed level of cash flows

project finance Lending for large projects where loanrepayments are based on projected cash flows

project sponsors The originators and equity providers of aproject

promissory note (P-note) A short-term discount securityissued today for less than the face value which is payable to theholder at maturity. Issued by corporations without an acceptor so

the borrower needs to have a good reputation. Also referred to ascommercial paper. There is an active secondary market incommercial paper

promoter The party seeking to list a corporation on a stockexchange

property trust A unit trust that may invest in industrial,commercial or retail property under the terms of the trust deed

pro-rata offer A proportional offer to existing shareholders tobuy additional shares based on a percentage of their currentshareholding

prospectus Document prepared by a company stating the termsand conditions of a formal offer to the public to purchase securities

proxy A party authorised to vote on behalf of a shareholder at ageneral meeting

prudential liquidity A requirement of the regulator thatfinancial institutions hold a certain amount of liquid assets

prudential supervision The imposition and monitoring ofstandards designed to ensure the soundness and stability of thefinancial system

public liability insurance Insurance that compensates forinjury or death of a third party due to negligence of a propertyowner or occupier

public sector borrowing requirement The total borrowingrequirements of various levels of government and theirinstrumentalities

public unit trust A trust in which funds from the sale of unitsin a trust are pooled and invested in asset classes specified in thetrust deed. Includes equity trust, property trusts, fixed interesttrusts

publicly listed corporation An entity whose ordinaryshares are quoted and traded on a formal stock exchange

purchasing power parity (PPP) The hypothesis thatexchange rates will adjust to ensure that the relative prices for

the same goods are equal between countries

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purchasing power risk The risk that inflation in prices will,over time, erode the ability of a certain sum to purchase assets

put bear spread The simultaneous purchase and sale of putoptions; short put further out-of-the-money

put option An option that gives the buyer the right, but not anobligation, to sell the underlying commodity or financial asset at apredetermined price, at or by a specific date. The buyer pays apremium to the option writer for that right

quasi-equity A security that has the attributes of both debtand equity

quota A government restriction on the amount of a specifiedgood that may be imported

quoting two-way prices The practice of a dealer in quotingboth buy and sell prices on a security

rally An upward movement in market prices after a period ofdecline

random walk hypothesis Contends that each new shareprice is independent of the previous price

rate of return The financial benefit gained from an investment;usually expressed in percentage terms

rating symbol Represents a credit rating given to an issuer;for example, S&P long-term symbols range from AAA to C

real interest rate The nominal interest rate less theanticipated inflation rate; for example, a nominal rate of 7 per centless expected inflation of 2 per cent equals a real interest rate of5 per cent

real-time gross settlement High-value payments systemtransactions are settled immediately through exchangesettlement accounts

reasonable benefit limit The amount of concessionallytaxed superannuation funds allowable to an individual, based onlump sum and pension limits

red herring A preliminary prospectus prepared by the leadmanager

redeemable preference share A preference share that maybe redeemed for cash at the expiry date

redemption yield The total return (interest and capital gains)received if a security is held to maturity

rediscount facility An arrangement where the Reserve Bankrepurchases T-notes in order to increase financial system liquidity

rediscounting The practice of selling existing discountedsecurities, such as bank bills and commercial paper, in the moneymarkets

reference rate A benchmark interest rate published daily andused for pricing variable rate loans; for example, the bank bill

swap rate (BBSW)regression analysis A statistical technique that determines

the relationship between a dependent variable and independentvariables

regression coefficient Measures the responsiveness of adependent variable to an independent variable

reinvestment risk The impact of interest rate changes on theearning potential of future cash flows

renounceable right A right attached to a security that sold to a third party before it is exercised

repricing gap analysis Monitoring the interest ratesensitivities of assets and liabilities over specified planningperiods. Repricing gap equals rate-sensitive assets minusrate-sensitive liabilities

repurchase agreement (repo) The sale of a financialsecurity with an agreement to repurchase that asset at a

specified date. For example the Reserve Bank offers repoarrangements intra-day and overnight to assist with themanagement of financial system liquidity

Reserve Bank of Australia (RBA) The Australian cenbank, responsible for the determination of monetary policy, stability of the financial system, the soundness of the paymsystem, and gathering statistical data

reserve requirement A prudential requirement that a bhold a specified percentage of funds in liquid assets

resistance line The price level at which an increase in shalts a price rise

responsible entity The trustee appointed under a trust

retail market Transactions conducted primarily with finaintermediaries by the household sector (individuals) and thesmall- to medium-sized business sector

return line A line drawn by technical analysts parallel totrend line to create a trend channel

return on equity Net income of a firm as a percentage shareholders funds

return or yield The total financial compensation receivefrom an investment expressed as a percentage of the amouinvested

revolving credit A term loan rollover facility for a specifnumber of periods

revolving facility An arrangement where a P-note facil

matures, new notes are issued and discountedright of foreclosure The right of a lender to take posseof an asset and realise any amount owing

right of perpetual succession The right of a corporatcontinue to operate regardless of changes in ownership

rights issues The issue of additional shares to existing sholders on a pro-rata basis

risk The uncertainty or probability of variance associatedexpected cash flows; the actual return on an investment mafrom the expected return

risk-free rate of return The yield on a security issued bgovernment; zero default risk assumed

RITS An electronic system that facilitates payments systetransactions with the Reserve Bank

rollover facility An arrangement where a bank agrees tdiscount new bills over a specified period as existing bills m

rollover fund A fund that holds eligible termination paymwithin the superannuation tax concession environment

S&P/ASX200 index An aggregate measure of share prmovements of the top 200 companies listed on the ASX

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sale and lease-back arrangement An arrangementwhereby an asset is sold to a lessor on condition that it is leasedback to the original owner

same-day funds Funds that do not require clearing throughthe payments system; used for exchange settlement accounttransactions

SEATS An acronym for the ASXs electronic share tradingsystem

secondary market A market that facilitates the buying andselling of existing financial securities. New securities issued inthe primary market benefit from liquidity in the secondary market

sectorial flow of funds The flow of funds between surplusor deficit sectors in an economy: the business, financialinstitutions, government and household sectors and the rest-of-

the-world sector

secured debt A debt instrument that gives the lender a claimover specified assets of the borrower or a third party in the event

that the borrower defaults on loan repayments

securities dealers licence Issued by ASIC and required bya stockbroker

securities portfolio A portfolio of financial securities held by

an institution that can easily be sold into the secondary marketsfor investment and trading purposes

securitisation A process whereby non-marketable assets aresold in order to generate additional funds and manage thestructure of the balance sheet. These non-liquid assets arebundled into a parcel and sold into a special-purpose vehiclecontrolled by a trustee, who issues new asset-backed securities

that are then serviced with cash flows from the original assets

security A financial asset or instrument that generally can betraded in a secondary market, for example shares, debentures,bank bills, commercial paper

segmented markets theory The theory that all bonds arenot perfect substitutes for each other; that investors have

preferences to invest either short-term or long-termsell-down provision A clause in a loan contract that enablesa lender to sell the debt security to another party

semi-government security A longer-term coupon securitysuch as a note or bond issued by a State government centralborrowing authority

semi-strong form efficiency The hypothesis that all publiclyavailable information is fully reflected in a share price

serial offering technique A method of releasing newinstruments into the market whereby each series tranche has thematurity and coupon characteristics set when the facility isestablished

service fee A fee charged by a lender to offset ongoing loanaccount administration costs

settlement risk The risk that one party to a financialtransaction will not deliver value; for example, due to time zonedifferences

share buy-back An arrangement whereby a company usesexcess capital to repurchase existing shares

share market A formal exchange that facilitates the issue,buying and selling of equity securities, including ordinary shares

share price index Measures changes over time in the priceof shares included in the index; for example the S&P/ASX200index

share price to net tangible assets The current shareprice relative to a firms net tangible assets

share split A proportional division of the number of sharesissued by a company

shelf registration Registration of a delayed or continuous

debt issue with the Securities and Exchange Commission (SEC) inthe USA

short call party The writer or seller of a call option

short position Occurs when the underlying asset has beensold forward, but is not actually owned at the time of entering into

the transaction

short straddle The simultaneous selling a call option and aput option with a single exercise price

short strangle The simultaneous selling of a call option and aput option with out-of-the-money exercise prices

simple interest Interest paid on the original principal amountborrowed or invested

Singapore interbank offered rate (SIBOR) A benchmarkinterest rate in the South-East Asian markets; it is the average of

the interest rates charged among Singapore banks

sovereign risk The risk that a foreign government will defaulton its obligations

special-purpose vehicle A trust established to hold assetsand issue asset-backed securities within the context of asecuritisation structure

speculator A trader of securities and derivatives that takes aview to making a profit from price movements in the contractsbeing traded

spot price In the FX market, it is the price quoted today fordelivery in two days time

spot transaction A transaction in which the FX contract valuedate is two business days from the date of the transaction

spread position Buying and selling of related, same-delivery-date contracts to benefit from price variances

spread The points difference or margin between bid and offerprices for the same commodity or financial asset; for example inan FX quotation

standard deviation A statistical measure of the dispersion ofa set of data around a central point

stand-by facility A contingency line of credit that isestablished with a financial institution

stock market index A measure of the price performance of asector of the share market

stockbroker A party who acts as the agent to an investor inthe buying and selling of stock market securities

straddle Buying and selling of contracts with different deliverydates to benefit from price variances

straight bond A fixed-interest bond paying periodic coupons;principal repayable at maturity

strategic asset allocation The structuring of a portfolio tomeet an investors personal preferences

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strike or exercise price The price specified in an optioncontract, at which the option-holder may exercise a right under

the terms of the contract

strong form efficiency The hypothesis that all publiclyavailable information and private research is fully reflected in ashare price

structured finance Funding provided for major infrastructureprojects

subordinated debt A long-term debt issue; holders claimsare subordinated against all other creditors

subparticipation A lender retains a loan but, for a price,transfers its rights to receive interest and principal repayments

subscription to an issue An agreement to purchase some ofthe securities offered in an issue

Superannuation Savings accumulated by an individual tofund his or her retirement; retirement savings that are availablefor investment

superannuation guarantee charge The compulsorysuperannuation scheme in Australia

superannuation savings plan A structured plan of regularcontributions into a private superannuation fund

support line The price level at which an increase in demandhalts a price fall

surplus unit An economic unit that saves more than it spendsin a given year, providing a source of funds for investment; usually

the household sector and overseas sector within the Australianeconomy

swap contract An agreement between two parties to swapfuture pre-determined cash flows. An interest rate swapexchanges interest payments. A currency swap exchangesforeign currency denominated principal amounts, plus relatedinterest payments

SWIFT Society for Worldwide Interbank FinancialTelecommunications. Global electronic system for financial

transactionssymmetrical triangle A series of price fluctuations witheach top and bottom smaller than the previous triangle

syndicated loan facility A large loan facility made to aborrower by a group of financial institutions. A syndicate will

typically include both domestic and international commercialbanks, investment banks and other institutional lenders.Syndication is necessary due to the higher level of riskassociated with lending a large amount of funds

system being down Payments from the private sectorexceed payments from the official sector

system surplus Payments from the official sector exceedpayments from the private sector

systematic risk Exposures that affect the price of the majorityof shares listed on the stock exchange

systemic risk The risk that the failure of an institution willadversely affect the market as a whole

T + 3 A term for the settlement of a share transaction that willoccur on the transaction day plus three days

tactical asset allocation The structuring of a portfolio totake account of a dynamic investment environment

tap system of selling Series of securities continually oto the public: as one series closes another is opened

tariff A charge levied by a

Financial market Glossary

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