A swap agreement created through the synthesis of two swaps differing in duration for the purpose of fulfilling the specific time-frame needs of an investor. Also referred to as a "forward start swap," "delayed start swap," and a "deferred start swap." For example, if an investor wants to hedge for a five-year duration beginning one year from today, this investor can enter into both a one-year and six-year swap, creating the forward swap that meets the needs of his or her portfolio. Sometimes swaps don't perfectly match the needs of investors wishing to hedge certain risks.
The advance purchase of a put or call option with a strike price that will be determined at a later date, typically when the option becomes active. A forward start option becomes active at a specified date in the future; however, the premium is paid in advance, and the time to expiration and the underlier are established at the time the forward start option is purchased. A group of consecutive forward start options is called a ratchet option or cliquet option. In this instance, the first forward start option is active immediately, and each successive forward start option becomes active when the previous one expires. Forward start options are often priced using a calculation known as the Rubenstein formula.
A technique for calculating termination payments on a prematurely ended swap. Termination payments are used to compensate the party who did not cause the swap to end early for its financial loss. Because they are not very liquid, currency swaps tend to use the formula method, but it is one of the less common methods for calculating damages. Of the three official methods for calculating termination payments as established by the International Swaps and Derivatives Association, the agreement value method, which is based on the terms available for a replacement swap, is most common. The third method, the indemnification method, is not often used. A swap may be terminated early if a termination event such as an illegality, tax event, tax event upon merger or credit event occurs. An event of default, such as bankruptcy or failure to pay, can also cause early termination.
The rate of change for delta with respect to the underlying asset's price. Mathematically, gamma is the first derivative of delta and is used when trying to gauge the price of an option relative to the amount it is in or out of the money. When the option being measured is deep in or out of the money, gamma is small. When the option is near the money, gamma is largest.
A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets. Futures can be used either to hedge or to speculate on the price movement of the underlying asset. For example, a producer of corn could use futures to lock in a certain price and reduce risk (hedge). On the other hand, anybody could speculate on the price movement of corn by going long or short using futures. Watch: Future Contract The primary difference between options and futures is that options give the holder the right to buy or sell the underlying asset at expiration, while the holder of a futures contract is obligated to fulfill the terms of his/her contract. In real life, the actual delivery rate of the underlying goods specified in futures contracts is very low. This is a result of the fact that the hedging or speculating benefits of the contracts can be had largely without actually holding the contract until expiry and delivering the good(s). For example, if you were long in a futures contract, you could go short in the same type of contract to offset your position. This serves to exit your position, much like selling a stock in the equity markets would close a trade.
Mainly pertaining to options and futures, this is the options or futures contract that has the most distant deliverly month or expiration. This is also known as the "back month".
A good or asset's interchangeability with other individual goods/assets of the same type. Assets possessing this property simplify the exchange/trade process, as interchangeability assumes that everyone values all goods of that class as the same. Many diverse types of assets are considered to be fungible. For example, specific grades of commodities, such as No.2 yellow corn, are fungible because it does not matter where the corn was grown - all corn designated as No.2 yellow corn is worth the same amount. Cross-listed stocks are considered fungible as well because it doesn't matter if you purchased a share of XYZ stock in its home country or in a foreign country; it should be accepted at either location as XYZ stock.
The process a government uses to swap out floating stock or short-term bonds for long-term bonds. Because floating stock does not guarantee payout or a fixed rate of interest, swapping it for funded debt (long-term bonds that carry a fixed rate of interest) introduces more stability into the government's financing of its national debt. The process a company uses to convert its capital funding from short-term to long-term debt instruments. In July of 2009, amid the lingering global credit crisis, Sheila Bair, Chairwoman of the Federal Deposit Insurance Corporation (FDIC) weighed in on the creation of a Financial Services Oversight Council to prevent a recurrence of the global economic meltdown and credit market freeze of 2007-2008. As part of the proposed Council's work, it was suggested that financial companies be subject to rules that would require them to issue short-term debt that would automatically convert to long-term debt under certain conditions such as during a liquidity crisis.
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