-A-

- A -

ABS
Asset-Backed Security (q.v.).

Accrual Note
A note that accrues daily interest only when the index rate (e.g., LIBOR) falls within some range (such as under 6.5%). A Fixed (Floating) Rate Accrual Note accrues interest that is a spread over the corresponding ordinary Fixed (Floating) Note. The spread compensates for the probability that the note will accrue no interest over some day.

AC-DC Option
An option that the owner could choose to become at some future date either a Call or a Put. Another name for a Hermaphrodite Option (q.v.).

Accreting Swap
A Swap (q.v.) for which the Notional Amount (q.v.) increases during its life.

Act-of-God Bond
A Catastrophe Bond (q.v.). (Source: Sophie Belcher, "USAA to Try Again with Hurricane Bond, Derivatives Week, 5/5/97.)

ADR
American Depository Receipt (q.v.).

All Ordinaries Index
An index of stock prices on the Australian Stock Exchange.

alpha
The amount that an investment's average rate of return exceeds the riskless rate, adjusted for the inherent systematic risk. One way to compute alpha is to regress an investment's excess rate of return (rate of return minus the riskless rate) against the market portfolio's excess rate of return. The intercept in this regression is an estimate of the risk-adjusted excess rate of return.

American Depository Receipt
A receipt indicating a claim on some number (less than one, one, or more than one) of shares in a foreign corporation that a Depository Bank holds for U.S. investors.

Amortizing Swap
A Swap (q.v.) for which the Notional Amount (q.v.) decreases during its life.

APO
Average Price Option (q.v.).

Arbitrage

1. The act of buying something at a low price in one market and simultaneously selling it for a higher price in another.

2. Buying something at the lowest price available in the market, rather than stupidly paying the higher price.

3. Doing a spread trade – i.e., selling one thing and using the proceeds to buy a second thing.

4. (Yield Curve Arbitrage) Doing a spread trade that exploits anomalies in the yield curve.

5. (Statistical Arbitrage) Taking a calculated gamble that the two sides of a spread trade will move in your favor, back to a more normal relationship.

Atlantic spread
Long (short) an American option and short (long) the otherwise identical European option – hence, long (short) the value of early exercise. (Stephen R. Gould)

ARGO
A J.P. Morgan SPV (q.v.), originated in 1994. It hedges the swap leg with puts. (Source: http://emwl.oyster.co.uk/contents/publications/euromoney/em.96/em.96.04/em.96.04.12.html)

Asian Option

Definition: An Average Price Option (q.v.).
Example: Some banks offer their retail customers an equity-linked CD that repays principal, plus a form of "average return" on the S&P 500 that amounts to an Average Price Call Option.
Application: Some hedgers use an Asian Option as a one-stop way to hedge the price risk of regular purchase or sale of a constant amount of a currency or commodity.
Pricing: One can ordinarily price an Average Price Option satisfactorily by using an adjusted volatility and dividend yield in the Black-Scholes-Merton pricing model. If the underlying source of risk is an exchange rate, the price of gold or silver, a share price, or an equity index, then the "square root of three" rule for the volatility may apply. For underlying oil price risk that rule may not work so well.

Risk Management: With underlying currency, precious metal, or equity risk, one can ordinarily delta hedge an Asian Option with a single position in the underlying. With underlying oil risk and averaging over a long period, delta hedging an Asian Option may require hedging in oil futures contracts with several different delivery dates.
Comment: Rarely, the expression, Asian Option, may indicate an Average Strike Option (q.v.).

ask (asked)
The price at which a dealer (market maker) stands ready to sell. Ordinarily the ask exceeds the bid (q.v.), and the bid-ask spread is what the dealer stands to make by quickly turning around one unit of product. Also known as offer, offered, or offering price.

Asset-Backed Bond
A bond that is also an Asset-Backed Security (q.v.). An Asset-Backed Bond is to an Asset-Backed Security as a Mortgage-Backed Bond is to a Mortgage-Backed Security.

Asset-Backed Security (ABS)
A "fixed income" security that pays its coupon and principal from a specific revenue stream and has a specific asset as collateral. Collateral has included accounts receivable for aircraft, automobile and r.v. loans, credit card receivables, health club contracts, lottery winnings, mortgages, real property, and taxi medalions. Sources of revenue have included payments on various loans, credit card payments, mortgage payemts, rent, royalities, lotter payments, mortgage debt service, and rent from real estate. An Asset-Backed Bond may or may not have an issuer's or guarantor's full faith and credit behind it. A special case is an Asset-Backed Bond (q.v.).

The revenue stream and collateral may support more than one "class", "piece", or "tranche", just a corporation's assets may support shares and bonds. Thus, the ABS, whose value depends on the underlying revenue stream and collateral, is a Derivative Product in the same sense that financial economists have long recognized that corporate shares and bonds are Derivatives, whose prices depend on the underlying asset value and cash flow.

Asset Swap
A Swap that converts a fixed- (floating-) coupon asset into a floating- (fixed-) coupon asset. This is in contrast to the more familiar (Liability) Swap that converts a fixed- (floating-) coupon liability into a floating- (fixed-) coupon liability.

ATM
At-the-money (q.v.).

At-the-money
Having a strike price that equals the spot price.

At-the-money forward
Having a strike price that equals the forward price.

Average Price [Call or Put] Option
An Option – Call or Put – whose underlying price is an average over time of a risk factor.