A technique for calculating termination payments when a swap is ended early. The indemnification method requires the responsible counterparty to compensate the nonresponsible counterparty for all losses and damages caused by the early termination. This method was common when swaps were first developed, but was considered inefficient because it did not actually quantify, or describe how to quantify, the losses and damages from a prematurely terminated swap. Today, the agreement value method, which is based on the terms and interest rates available for a replacement swap, is the most widely used method for calculating termination payments. Another, less-common alternative is the formula method. A swap may be terminated early if either counterparty experiences an event of default, such as bankruptcy or failure to pay, or a termination event, such as an illegality, tax event, tax event upon merger or credit event.
A type of employee stock option with a tax benefit, when you exercise, of not having to pay ordinary income tax. Instead, the options are taxed at a capital gains rate. Although ISOs have more favorable tax treatment than non-qualified stock options (NSOs), they also require the holder to take on more risk by having to hold onto the stock for a longer period of time in order to receive the better tax treatment. Also, numerous requirements must be met in order to qualify as an ISO.
In the context of options and futures, this is when the current (or short-term) contract prices are higher than the long-term contracts. This usually occurs because a good is currently in short supply, which drives up prices in the short term.
1. The actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value. Value investors use a variety of analytical techniques in order to estimate the intrinsic value of securities in hopes of finding investments where the true value of the investment exceeds its current market value.2. For call options, this is the difference between the underlying stock's price and the strike price. For put options, it is the difference between the strike price and the underlying stock's price. In the case of both puts and calls, if the respective difference value is negative, the instrinsic value is given as zero. 1. For example, value investors that follow fundamental analysis look at both qualitative (business model, governance, target market factors etc.) and quantitative (ratios, financial statement analysis, etc.) aspects of a business to see if the business is currently out of favor with the market and is really worth much more than its current valuation.2. Intrinsic value in options is the in-the-money portion of the option's premium. For example, If a call options strike price is $15 and the underlying stock's market price is at $25, then the intrinsic value of the call option is $10. An option is usually never worth less than what an option holder can receive if the option is exercised.
A division of the Chicago Mercantile Exchange (CME) that deals with the trading of currency and interest rate futures and options. Trading on the IMM started in May 1972 when the CME and the IMM merged. The IMM division of the CME includes such currencies as the U.S. dollar, British pound, the euro and the Canadian dollar. Along with currencies the IMM trades the London Interbank Offer Rate, the 10-year Japanese bond and the U.S. Consumer Price Index.
Going long on one futures market in a given delivery month and simultaneously going short on the same commodity and delivery month but a different futures market but with similar underlying asset. Examples of intercommodity spreads include the crack spread (crude oil vs. unleaded gasoline) and the crush spread (soybean oil vs. soybean meal).
A derivative used to transfer inflation risk from one party to another through an exchange of cash flows. In an inflation swap, one party pays a fixed rate on a notional principal amount, while the other party pays a floating rate linked to an inflation index, such as the Consumer Price Index (CPI). The party paying the floating rate pays the inflation adjusted rate multiplied by he notional principal amount. For example, one party may pay a fixed rate of 3% on a two year inflation swap, and in return receive the actual inflation. Investors use inflation swaps to hedge inflation risk. A more complicated example of an inflation swap would be an investor purchasing commercial paper. At the same time, the investor enters into an inflation swap contract, in which he receives a fixed rate and pays a floating rate linked to inflation. By entering into an inflation swap, the investor effectively turns the inflation component of the commercial paper from floating to fixed. The commercial paper gives the investor real LIBOR plus credit spread plus a floating inflation rate, which the investor exchanges for a fixed rate with a counterparty.
Used in regression analysis, Kappa represents the ratio of the dollar price change in the price of an option to a 1% change in the expected price volatility. Remember, the price of the option increases simultaneously with the volatility.
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