An exotic option that allows the holder to lock in a defined profit while maintaining the right to continue participating in gains without a loss of locked-in monies. Shout options can be structured so that holders of this contract have more than one opportunity to "shout" or lock in profits. This allows holders to continue to benefit from positive market movements without the possibility of losing already locked-in profits.
A specialized index of loan-only credit default swaps (CDS) covering 100 individual companies that have unsecured debt trading in the broad secondary markets. The LCDX is traded over the counter and is managed by a consortium of large investment banks, which provide liquidity and assist in pricing the individual credit default swaps.The index begins with a fixed coupon rate (225 bps); trading moves the price and changes the yield, much like a standard bond. The index rolls every six months. Buyers of the index pay the coupon rate (and purchase the protection against credit events), while sellers receive the coupon and sell the protection. What is being protected is a "credit event" at the company, such as defaulting on a loan or declaring bankruptcy. If a credit event occurs in one of the underlying companies, the protection is paid out via physical delivery of the debt or through a cash settlement between the two parties. The underlying company is then removed, and a new one is placed in the index to return it to 100 members. |||Credit default swaps essentially put a price on the risk of a particular debt issuer's default. Companies with strong credit ratings have low risk premiums, so protection can be purchased for a minimal fee, assessed as a percentage of the notional (dollar) amount of the underlying debt. Companies with low credit ratings cost more to protect against, and the credit default swaps covering them may cost several percentage points of the notional amount. Minimum purchase amounts for the LCDX run in the millions, so most investors are large institutional firms who invest as either a hedge or a speculative play. The advantage is that one can gain access to a diversified group of companies for much less than purchasing the credit default swaps individually.
An options strategy carried out by holding a short position in both a call and a put that have the same strike price and expiration date. The maximum profit is the amount of premium collected by writing the options. If a trader writes a straddle with a strike price of $25 and the price of the stock jumps up to $50, the trader would be obligated to sell the stock for $25. If the investor did not hold the underlying stock, he or she would be forced to buy it on the market for $50 and sell it for $25.The short straddle is a risky strategy an investor uses when he or she believes that a stock's price will not move up or down significantly. Because of its riskiness, the short straddle should be employed only by advanced traders due to the unlimited amount of risk associated with a very large move up or down.
An entity that has an obligation to pay all principal and interest payments on a debt. |||Examples of obligors are bond issuers. Also referred to as debtor.
A measurement of the amount of shareholders' equity flowing out of a company to its executives through exercised stock options. This is usually a dollar based cost, the value is measured as the difference between the strike price of the executive's options and the market value at the time of exercise.
A municipal bond used to secure a mortgage on property or other physical assets that can be liquidated. The face value of the bond is greater than the value of the property itself. |||An obligation bond creates a personal obligation on the part of the borrower to compensate the lender for costs in excess of the value of the mortgaged property or assets, such as closing costs or transaction costs.
A clause in a contract that allows for the terms of the contract to be independent of one another, so that if a term in the contract is deemed unenforceable by a court, the contract as a whole will not be deemed unenforceable. If there were no severability clause in a contract, a whole contract could be deemed unenforceable because of one unenforceable term.Also known as a "severability clause" or a "savings clause". A contract with a severability clause is essentially one contract divided into many different parts: default on one component of the contract does not prevent the rest of the contract from being fulfilled. If a sentence, clause or term in a contract is deemed invalid by a court, then this problem area of the contract will most often be rewritten to fit both the contract's original intent and the requirements of the court.
A formal bidding process that is scheduled on a regular basis by the U.S. Treasury. Currently there are 17 authorized securities dealers (primary dealers) that are obligated to bid on each issue. All Treasury notes are originally issued in this manner. |||The amount of money bid by the highest bidder at these auctions will determine the interest rate paid on each issue. The primary dealers have the option of holding, selling or trading their issues after purchase. The demand for Treasury notes by these dealers will vary according to economic and market conditions.
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