Naked Option An option bought or sold for speculation, with
no offsetting of existing position behind it.
Naked Writing Where the seller does not own the stock cor-
responding to the call option which he has sold
and would be forced to pay the prevailing
market price for the stock to meet delivery obli-
gations, if called.
NASDAQ National Association of Securities Dealers Auto-
mated Quotation system.
National Association of Trade association of pension funds through
Pension Funds (NAPF) which they can voice their opinions collectively.
Netting Trading partners offset their positions, thereby
reducing the number of positions for settlement.
Netting can be either bilateral, multilateral or
continuous net settlement.
Nikkei Dow Index Main share index in Japan. Futures and options
are listed on this index.
Nikkei Futures Futures contracts traded on the Tokyo Stock
Exchange, SGX and OSAKA exchange.
Nominal Amount Value stated on the face of a security (principal
value, par value). Securities processing: number
of securities to deliver/receive.
Non Clearing Member A member of an exchange who does not under-
take to settle their derivatives business. This
type of member must appoint a clearing mem-
ber to register all their trades at the clearing
organisation.
Non-Private Customer A person who is not a Private Customer or who
has requested to be treated as a Non-Private
Customer.
Notional Most derivatives and contracts for differ-
ences require a notional principal amount
on which strategies and settlement can be
calculated.
Novation The process where registered trades are can-
celled with the clearing members and sub-
stituted by two new ones – one between the
clearing house and the clearing member seller,
the other between the clearing house and the
clearing member buyer.
NYMEX New York Mercantile Exchange; the largest
energy derivative exchange.
192 Glossary of derivatives terms
Offer Price The price at which a trader or market maker is
willing to sell a contract.
Omnibus Account Account containing the holdings of more than
one client.
Open Ended Type of investment such as Unit Trusts or
OEICs which can expand without limit.
Open Ended Investment Corporate structure introduced in 1997. It is a
Company (OEIC) form of collective investment vehicle.
Open Order A purchase or sale order at a stated price that
is good until cancelled or executed.
Open Outcry The style of trading whereby traders face each
other in a designated area such as a pit and
shout or call their respective bids and offers.
Hand signals are also used to communicate. It
is governed by exchange rules.
Opening Trade A bought or sold trade that is held open to
create a position.
Open Interest The number of contracts both bought and sold
which remain open for delivery on an exchange.
Important indicator for liquidity.
Open Position The number of contracts which have not been
offset at the clearing organisation by the close
of business.
Operational risk The risk of losses resulting from inadequate
systems and control, human errors or manage-
ment failings.
Option An option is in the case of the buyer; the right,
but not the obligation, to take (call) or make
(put) for delivery of the underlying product and
in the case of the seller; the obligation to make
or take delivery of the underlying product.
Option Premium The sum of money paid by the buyer, for
acquiring the right of the option. It is the sum
of money received by the seller for incurring
the obligation, having sold the rights, of the
option. It is the sum of the intrinsic value and
the time value.
Options on Futures These have the same characteristics as an
option, the difference being that the underlying
product is either a long or a short futures con-
tract. Premium is not exchanged as the con-
tracts are marked to market each day.
Glossary of derivatives terms 193
Order Driven Market A stock market where brokers acting on behalf of
clients match trades with each other either on the
trading floor of the exchange or through a central
computer system.
Ordinary Shares Known as common stock in the United States and
equities in the United Kingdom. Shareholders are
the owners of a company and are protected so the
maximum loss is the value of their shares and not
the full debt of the company. Ordinary shares are
divided into Preferred and Deferred ordinaries.
Out-of-the-Money A call option whose exercise price is above the cur-
rent underlying share price or a put option whose
exercise price is below the current underlying share
price. This option has no intrinsic value.
Out-Trade A trade which has been incorrectly matched on the
floor of an exchange.
Over-the-Counter A one-to-one agreement between two counter-
(OTC) parties where the specifications of the product are
completely flexible and non-standardised. A nego-
tiated trade where counterparty risk is potentially
an issue.
Par Value See Nominal Value.
Pension Fund Fund set up by a corporation, labour union, gov-
ernmental entity or other organisation to pay the
pension benefits of retired workers. Pension funds
invest billions annually in the securities markets
and are therefore major market players who also
use derivatives markets.
Physical Delivery A derivative contract that on delivery will result in
the asset being delivered, for example bond futures,
stock options, commodities.
Pit The designated area on the market floor where a
particular contract is traded. It may have an alter-
native name in some markets, for example on the
LME trading takes place in the ‘ring’.
Placement The first stage of money laundering, in which the
money is passed placed in the banking system.
See layering, integration.
Portfolio List of investments held by an individual or com-
pany, or list of loans made by a bank or financial
institution. Can also be the derivatives positions
held by a trader/dealer.
194 Glossary of derivatives terms
Premium An option premium is the amount paid up-front by
the purchaser of the option to the writer.
Present Value The amount of money which needs to be invested
(or borrowed) now at a given interest rate in order
to achieve exactly a given cashflow in the future,
assuming compound re-investment (or re-funding) of
any interest payments received (or paid) before the
end. See future value.
Pre-settlement Checks and procedures undertaken immediately after
execution of a trade prior to settlement.
Price (Conversion) The price at which a bond would trade, per 1 nominal,
Factor to yield the notional coupon of the futures contract
on the delivery day (or the first day in the deliverable
month if this applies).
Principal Trading When a firm uses its own money for trading (also
called proprietary trading).
Principal-to- A market where the clearing house only recognises
Principal Market the clearing member as one entity, and not the
underlying clients of the clearing member.
Principal Value That amount inscribed on the face of a security and
exclusive of interest or premium. The amount is the
one used in the computation of interest due on such
a security.
Private Customer An individual person who is not acting in the course
of carrying on investment business.
Project A The after-hours trading system used by the CBOT.
Proprietary Trader A trader who deals for an organisation such as an
investment bank taking advantage of short-term
price movements as well as taking long-term views
on whether the market will move up or down.
Put Option An option that gives the buyer the right, but not the
obligation, to sell a specified quantity of the under-
lying asset at a fixed price, on or before a specified
date. The seller of a put option has the obligation
(because they have sold the right) to take delivery of
the underlying asset if the option is exercised by the
buyer.
RCH Recognised Clearing House under the Financial
Services Act.
Realised Profit Profit which has arisen from a real sale.
Glossary of derivatives terms 195
Reconciliation The comparison of a person’s records of cash
and securities position with records held by
another party and the investigation and reso-
lution of any discrepancies between the two
sets of records. Crucially important in deriva-
tives business to reduce operational risk.
Reputational Risk The risk that an organisation’s reputation will
be damaged by being in breach of regulations,
poor service or by having inadequate controls
over risk and performance.
RIE A Recognised Investment Exchange designated
by a regulatory authority.
Rights Issue Offer of shares made to existing shareholders.
As a corporate action it may change the strike
price and number of shares on which an option
or share future is based.
Right of Offset Where positions and cash held by the Clearing
Organisation in different accounts for a mem-
ber are allowed to be netted.
Risk Warning In the United Kingdom a document that must
be despatched and signed by private customers
before they deal in traded options.
Rollover A rollover can be when the next leg of a swap
is calculated or when a futures position in an
expiring month is ‘rolled’ to the next maturity.
For example, the position in the March expiry
is closed out and reopened in the next avail-
able maturity, say the June expiry.
Securities Can mean any instrument in the markets but
generally refers to bonds and equities.
Securities House General term covering any type of organisation
involved in securities although usually reserved
for the larger firms.
Securities and Exchange The overall investment regulatory body in the
Commission (SEC) United States.
Segregated Account Account in which there is only the holdings of
one client.
Segregation of Funds Where the client assets are held separately
from those assets belonging to the member
firm.
Serious Fraud Office Specialist unit established to tackle large-scale
fraud.
196 Glossary of derivatives terms
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