International Equity An equity of a company based outside the UK
but traded internationally.
International Petroleum London market for derivatives of energy con-
Exchange (IPE) tracts like those based on gas, electricity and oil
products. It is now part of the Intercontinental
Exchange.
International Securities A US electronic option exchange that has
Exchange (ISE) quickly established significant volumes in
traded options.
International Securities A coding system developed by the ISO for
Identification (ISIN) identifying securities. The ISINs are design-
ated to create one unique worldwide number
for any security. It is a 12-digit alpha/numeric
code.
In-the-Money An option whose strike is more advantageous
to the option buyer than the current market
rate. See at-the-money, out-of-the-money.
Intra-Day Margin An extra margin call which the clearing organi-
sation can call during the day when there is a
very large movement up or down in the price of
the contract.
Intrinsic Value The amount by which an option is in-the-
money.
Investment Banks A bank that has multiple activities, i.e. banking,
principal trading, asset management, etc.
Investment Services European Union Directive imposing common
Directive (ISD) standards on investment business. The most
recent Directive has opened up the greater
use of derivatives, particularly off-exchange, by
funds.
Investment Trust Company whose sole business consists of buy-
Company ing selling and holding shares. The difference
with unit trusts is that investors in unit trusts
do not receive a part of the profits of the com-
pany managing the trust.
Investment Business Dealing, advising or managing investments.
Those doing so need to be authorised.
Investments Items defined in the FSA 86 to be regulated by
it, includes shares, bonds, options, futures, life
assurance and pensions.
Investment Grade A grading level that is used by certain types of
funds for determining assets that are suitable
for investment by the fund.
Glossary of derivatives terms 187
Initial Margin or Deposit A returnable deposit required by a clearing
house and clearing broker for open positions,
the exception being some long option positions
where the maximum possible loss (the pre-
mium) has already been paid by the buyer.
Invoice Amount The amount calculated under the formula
specified by the futures exchange, which will
be paid in settlement of the delivery of the
underlying asset.
Know Your Customer The conduct of business rule requiring invest-
ment advisers to take steps, before giving
investment advice, to determine the financial
position and investment objectives of the client.
Last Notice Day The final day that notification of delivery of
a futures contract will be possible. On most
exchanges all outstanding short futures con-
tracts will be automatically delivered to open
long positions.
Last Trading Day Often the day preceding last notice day which
is the final opportunity for holders of long posi-
tions to trade out of their positions and avoid
ultimate delivery.
Layering The second stage of money laundering, in
which the money is passed through a series of
transaction to obscure its origin. See place-
ment, integration.
LCH/LCH.Clearnet London Clearing House now merged with
Clearnet to create LCH.Clearnet.
Leverage The magnification of gains and losses by pay-
ing only for part of the underlying value of the
instrument or asset; the smaller the amount
of funds invested, the greater the leverage. It
is also known as gearing.
LIBID The London interbank bid rate. The rate at
which one bank will lend to another.
LIBOR The London interbank offered rate. It is the rate
used when one bank borrows from another
bank. It is the benchmark used to price many
capital market and derivative transactions.
LIFFE London International Financial Futures and
Options Exchange.
LIFFE Connect LIFFE electronic dealing system.
188 Glossary of derivatives terms
Limit Order (i) Type of order input into SETS. If not com-
pleted immediately the balance is displayed
on the screen and forms the Order Book.
(ii) An order in which a customer sets the maxi-
mum price he is willing to pay as a buyer or
the minimum price he is willing to accept as
a seller.
Liquidation Term used to describe the closing of open
positions.
Liquidity A liquid asset is one that can be converted easily
and rapidly into cash without a substantial loss
of value. In the money market, a security is said
to be liquid if the spread between bid and asked
price is narrow and reasonable size can be done
at those quotes.
Liquidity Risk The risk that a bank may not be able to close out
a position because the market is illiquid.
Local An individual member of an exchange who trades
solely for their own account.
Local Currency Currency of the country of settlement.
Lombard Rate The rate of interest at which the German
Bundesbank lends to commercial banks when
the loans are against Treasury Bills or bills of
exchange.
London Interbank Rate at which banks lend to each other which
Offer Rate (LIBOR) is often used as the benchmark for floating rate
loans (FRNs).
London International Market for trading in bond, interest rate and
Financial Futures index futures and options, plus equity stock
and Options Exchange options and universal share futures plus soft
(LIFFE) commodity derivatives, now part of Euronext.
London Metal Market for trading in derivatives of metals such
Exchange (LME) as copper, tin, zinc, etc.
London Stock Market for trading in securities. Formerly known
Exchange (LSE) as the International Stock Exchange of the
United Kingdom and Republic of Ireland or ISE.
Long A term to describe a market view or a bought
position in a derivative, which is held open. Thus
a fund manager or a trader may be bullish of
the equity market and is contemplating going
‘long’ of say 50 index futures. If purchased they
have a long position (see below).
Glossary of derivatives terms 189
Long Position Refers to an investor or trader’s account in which he
has purchased and is holding open a bought position.
The position may be created as a result of the combin-
ation of several trades and therefore can increase of
decrease. If the position is sold off in its entirety then
the position would become flat.
Lot A common term used to describe the standard unit of
trading for futures and options but equally it is also
often referred to as a ‘contract’.
Managed Fund A unit-linked policy where the managers decide on
the allocation of premiums to different unitised funds.
Mandatory Event A corporate action that affects the securities with-
out giving any choice to the security holder. Likely
to affect the contract specification of any related
derivative.
Margin (i) Initial margin is collateral placed by one party
with a counterparty or clearing house at the time
of a deal, against the possibility that the market
price will move against the first party, thereby
leaving the counterparty with a credit risk.
(ii) Variation margin is a payment made, or collateral
transferred, from one party to the other because
the market price of the transaction of collateral
has changed. Variation margin payment is either
in effect a settlement of profit/loss (for example,
in the case of a futures contract) or the reduction
of credit exposure.
(iii) In a loan, margin is the extra interest above a
benchmark such as LIBOR required by a lender
to compensate for the credit risk of that particular
borrower.
(iv) Money or assets that must be deposited by
participants in securities lending, repo’s or OTC
derivatives markets as a guarantee that they will
be able to meet their commitments at the due
date.
Mark-to-Market The process of revaluing an OTC or exchange-traded
product each day. It is the difference between the
closing price on the previous day against the current
closing price. For exchange-traded products this is
referred to as variation margin.
Market Description of any organisation or facility through
which items are traded. All exchanges are markets.
190 Glossary of derivatives terms
Market A person dealing as agent or principal with the broker
Counterparty and involved in the same nature of investment busi-
ness as the broker. This also includes fellow mem-
bers of the SFA or trading members of an investment
exchange, for those products only where they are
members.
Market Forces Supply and demand allowing buyers and sellers to
fix the price without external interference.
Market Maker A trader who works for an organisation such as an
investment bank. They quote bids and offers in the
market and are normally under an obligation to make
a price in a certain number of contracts. They create
liquidity in the contract by offering to buy or sell.
Market Price In the case of a security, the market price is usually
considered as the last reported price at which the
stock or bond has been sold. In derivatives it can be
the current price showing hence the term trade ‘at
market’.
Market Risk Also position risk. The risk that the market value of
a position falls.
Market Value The price at which a security is trading and could
presumably be purchased or sold.
MATIF Former French derivatives exchange now part of
EURONEXT.
Maturity The date on which the derivative ceases.
Model Risk The risk that the computer model used by a bank
for valuation or risk assessment is incorrect or mis-
interpreted.
MONEP Former French options exchange now part of
EURONEXT.
Money Laundering The process where criminals attempt to conceal the
true origin and ownership of the proceeds of their
criminal activities and to legitimise these proceeds
by introducing them into the mainstream of financial
activities.
Money Market The market for the purchase and sale of short-term
financial instruments. Short term is usually defined
as less than one year.
Mutual Fund Fund operated by an investment company that raises
money from shareholders and invests it in stocks,
bonds or other instruments (unit trust, investment
fund, SICAV – BEVEK).
Glossary of derivatives terms 191
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