Definition of Kappa

Kappa

The ratio of the dollar price change in the price of an option to a 1% change in the expected price volatility.

Abandonment option

The option of terminating an investment earlier than originally planned.

Acid-test ratio

Also called the quick ratio, the ratio of current assets minus inventories, accruals, and prepaid
items to current liabilities.

American option

An option that may be exercised at any time up to and including the expiration date.
Related: European option

American Stock Exchange (AMEX)

The second-largest stock exchange in the United States. It trades
mostly in small-to medium-sized companies.

American-style option

An option contract that can be exercised at any time between the date of purchase and
the expiration date. Most exchange-traded options are American style.

Appraisal ratio

The signal-to-noise ratio of an analyst's forecasts. The ratio of alpha to residual standard
deviation.

Arbitrage-free option-pricing models

Yield curve option-pricing models.

Arm's length price

The price at which a willing buyer and a willing unrelated seller would freely agree to
transact.

Articles of incorporation

Legal document establishing a corporation and its structure and purpose.

Asian option

option based on the average price of the asset during the life of the option.

Ask price

A dealer's price to sell a security; also called the offer price.

Asset/equity ratio

The ratio of total assets to stockholder equity.

Asset activity ratios

ratios that measure how effectively the firm is managing its assets.

Bargain-purchase-price option

Gives the lessee the option to purchase the asset at a price below fair market
value when the lease expires.

Barrier options

Contracts with trigger points that, when crossed, automatically generate buying or selling of
other options. These are very exotic options.

Basis price

price expressed in terms of yield to maturity or annual rate of return.

Basket options

Packages that involve the exchange of more than two currencies against a base currency at
expiration. The basket option buyer purchases the right, but not the obligation, to receive designated
currencies in exchange for a base currency, either at the prevailing spot market rate or at a prearranged rate of
exchange. A basket option is generally used by multinational corporations with multicurrency cash flows
since it is generally cheaper to buy an option on a basket of currencies than to buy individual options on each
of the currencies that make up the basket.

Bid price

This is the quoted bid, or the highest price an investor is willing to pay to buy a security. Practically
speaking, this is the available price at which an investor can sell shares of stock. Related: Ask , offer.

Bill of exchange

General term for a document demanding payment.

Binomial option pricing model

An option pricing model in which the underlying asset can take on only two
possible, discrete values in the next time period for each value that it can take on in the preceding time period.

Black-Scholes option-pricing model

A model for pricing call options based on arbitrage arguments that uses
the stock price, the exercise price, the risk-free interest rate, the time to expiration, and the standard deviation
of the stock return.

Call an option

To exercise a call option.

Call option

An option contract that gives its holder the right (but not the obligation) to purchase a specified
number of shares of the underlying stock at the given strike price, on or before the expiration date of the
contract.
Call premium
Premium in price above the par value of a bond or share of preferred stock that must be paid to
holders to redeem the bond or share of preferred stock before its scheduled maturity date.

Call price

The price, specified at issuance, at which the issuer of a bond may retire part of the bond at a
specified call date.

Call price

The price for which a bond can be repaid before maturity under a call provision.

Capital rationing

Placing one or more limits on the amount of new investment undertaken by a firm, either
by using a higher cost of capital, or by setting a maximum on parts of, and/or the entirety of, the capital
budget.

Capitalization ratios

Also called financial leverage ratios, these ratios compare debt to total capitalization
and thus reflect the extent to which a corporation is trading on its equity. Capitalization ratios can be
interpreted only in the context of the stability of industry and company earnings and cash flow.

Cash flow coverage ratio

The number of times that financial obligations (for interest, principal payments,
preferred stock dividends, and rental payments) are covered by earnings before interest, taxes, rental
payments, and depreciation.

Cash flow from operations

A firm's net cash inflow resulting directly from its regular operations
(disregarding extraordinary items such as the sale of fixed assets or transaction costs associated with issuing
securities), calculated as the sum of net income plus non-cash expenses that were deducted in calculating net
income.

Cash ratio

The proportion of a firm's assets held as cash.

Changes in Financial Position

Sources of funds internally provided from operations that alter a company's
cash flow position: depreciation, deferred taxes, other sources, and capital expenditures.

Chicago Mercantile Exchange (CME)

A not-for-profit corporation owned by its members. Its primary
functions are to provide a location for trading futures and options, collect and disseminate market information,
maintain a clearing mechanism and enforce trading rules.

Clean price

Bond price excluding accrued interest.

Commodities Exchange Center (CEC)

The location of five New York futures exchanges: Commodity
Exchange, Inc. (COMEX), the New York Mercantile exchange (NYMEX), the New York Cotton Exchange,
the Coffee, Sugar and Cocoa exchange (CSC), and the New York futures exchange (NYFE). common size
statement A statement in which all items are expressed as a percentage of a base figure, useful for purposes of
analyzing trends and the changing relationship between financial statement items. For example, all items in
each year's income statement could be presented as a percentage of net sales.

Common stock ratios

ratios that are designed to measure the relative claims of stockholders to earnings
(cash flow per share), and equity (book value per share) of a firm.

Compound option

option on an option.

Concentration account

A single centralized account into which funds collected at regional locations
(lockboxes) are transferred.

Concentration services

Movement of cash from different lockbox locations into a single concentration
account from which disbursements and investments are made.

Consumer Price Index (CPI)

The CPI, as it is called, measures the prices of consumer goods and services and is a
measure of the pace of U.S. inflation. The U.S.Department of Labor publishes the CPI very month.

Controlled foreign corporation (CFC)

A foreign corporation whose voting stock is more than 50% owned
by U.S. stockholders, each of whom owns at least 10% of the voting power.

Conversion parity price

Related:Market conversion price

Convertible price

The contractually specified price per share at which a convertible security can be
converted into shares of common stock.

Conversion ratio

The number of shares of common stock that the security holder will receive from
exercising the call option of a convertible security.

Convertible exchangeable preferred stock

Convertible preferred stock that may be exchanged, at the
issuer's option, into convertible bonds that have the same conversion features as the convertible preferred
stock.

Corporation

A legal "person" that is separate and distinct from its owners. A corporation is allowed to own
assets, incur liabilities, and sell securities, among other things.

Cost-benefit ratio

The net present value of an investment divided by the investment's initial cost. Also called
the profitability index.

Coverage ratios

ratios used to test the adequacy of cash flows generated through earnings for purposes of
meeting debt and lease obligations, including the interest coverage ratio and the fixed charge coverage ratio.

Covered or hedge option strategies

Strategies that involve a position in an option as well as a position in the
underlying stock, designed so that one position will help offset any unfavorable price movement in the other,
including covered call writing and protective put buying. Related: naked strategies

Currency option

An option to buy or sell a foreign currency.

Current ratio

Indicator of short-term debt paying ability. Determined by dividing current assets by current
liabilities. The higher the ratio, the more liquid the company.

Customary payout ratios

A range of payout ratios that is typical based on an analysis of comparable firms.

Days' sales in inventory ratio

The average number of days' worth of sales that is held in inventory.

Dealer options

Over-the-counter options, such as those offered by government and mortgage-backed
securities dealers.

Debt/equity ratio

Indicator of financial leverage. Compares assets provided by creditors to assets provided
by shareholders. Determined by dividing long-term debt by common stockholder equity.

Debt ratio

Total debt divided by total assets.

Debt-service coverage ratio

Earnings before interest and income taxes plus one-third rental charges, divided
by interest expense plus one-third rental charges plus the quantity of principal repayments divided by one
minus the tax rate.

Declaration date

The date on which a firm's directors meet and announce the date and amount of the next
dividend.

Delivery options

The options available to the seller of an interest rate futures contract, including the quality
option, the timing option, and the wild card option. Delivery options make the buyer uncertain of which
Treasury Bond will be delivered or when it will be delivered.

Delivery price

The price fixed by the Clearing house at which deliveries on futures are in invoiced; also the
price at which the futures contract is settled when deliveries are made.

Devaluation A decrease in the spot price of the currency

Dirty price

Bond price including accrued interest, i.e., the price paid by the bond buyer.

Dividend payout ratio

Percentage of earnings paid out as dividends.

Dollar bonds

Municipal revenue bonds for which quotes are given in dollar prices. Not to be confused with
"U.S. dollar" bonds, a common term of reference in the Eurobond market.

Dollar duration

The product of modified duration and the initial price.

Dollar price of a bond

Percentage of face value at which a bond is quoted.

Dollar return

The return realized on a portfolio for any evaluation period, including (1) the change in market
value of the portfolio and (2) any distributions made from the portfolio during that period.

Dollar roll

Similar to the reverse repurchase agreement - a simultaneous agreement to sell a security held in a
portfolio with purchase of a similar security at a future date at an agreed-upon price.

Dollar safety margin

The dollar equivalent of the safety cushion for a portfolio in a contingent immunization
strategy.

Dollar-weighted rate of return

Also called the internal rate of return, the interest rate that will make the
present value of the cash flows from all the subperiods in the evaluation period plus the terminal market value
of the portfolio equal to the initial market value of the portfolio.

Domestic International Sales Corporation (DISC)

A U.S. corporation that receives a tax incentive for
export activities.

Doubling option

A sinking fund provision that may allow repurchase of twice the required number of bonds
at the sinking fund call price.

Down-and-in option

Barrier option that comes into existence if asset price hits a barrier.

Down-and-out option

Barrier option that expires if asset price hits a barrier.

Duration

A common gauge of the price sensitivity of an asset or portfolio to a change in interest rates.

Earnings retention ratio

Plowback rate.

Edge corporations

Specialized banking institutions, authorized and chartered by the Federal Reserve Board
in the U.S., which are allowed to engage in transactions that have a foreign or international character. They
are not subject to any restrictions on interstate banking. Foreign banks operating in the U.S. are permitted to
organize and own and Edge corporation.

Effective call price

The strike price in an optional redemption provision plus the accrued interest to the
redemption date.

Effective duration

The duration calculated using the approximate duration formula for a bond with an
embedded option, reflecting the expected change in the cash flow caused by the option. Measures the
responsiveness of a bond's price taking into account the expected cash flows will change as interest rates
change due to the embedded option.

Elasticity of an option

Percentage change in the value of an option given a 1% change in the value of the
option's underlying stock.

Electronic data interchange (EDI)

The exchange of information electronically, directly from one firm's
computer to another firm's computer, in a structured format.

Embedded option

An option that is part of the structure of a bond that provides either the bondholder or
issuer the right to take some action against the other party, as opposed to a bare option, which trades
separately from any underlying security.

Equilibrium market price of risk

The slope of the capital market line (CML). Since the CML represents the
return offered to compensate for a perceived level of risk, each point on the line is a balanced market
condition, or equilibrium. The slope of the line determines the additional return needed to compensate for a
unit change in risk.

Equity options

Securities that give the holder the right to buy or sell a specified number of shares of stock, at
a specified price for a certain (limited) time period. Typically one option equals 100 shares of stock.

Eurodollar

This is an American dollar that has been deposited in a European bank or an U.S. bank branch
located in Europe. It got there as a result of payments made to overseas companies for merchandise.

Eurodollar bonds

Eurobonds denominated in U.S.dollars.

European option

option that may be exercised only at the expiration date. Related: american option.

European-style option

An option contract that can only be exercised on the expiration date.

Exchange

The marketplace in which shares, options and futures on stocks, bonds, commodities and indices
are traded. Principal US stock exchanges are: New York Stock Exchange (NYSE), American Stock Exchange
(AMEX) and the National Association of Securities Dealers (NASDAQ)

The Exchange

A nickname for the New York stock exchange. Also known as the Big Board. More than
2,000 common and preferred stocks are traded. The exchange is the oldest in the United States, founded in
1792, and the largest. It is located on Wall Street in New York City.

Exchange controls

Governmental restrictions on the purchase of foreign currencies by domestic citizens or
on the purchase of the local domestic currency by foreigners.

Exchange of assets

Acquisition of another company by purchase of its assets in exchange for cash or stock.

Exchange of stock

Acquisition of another company by purchase of its stock in exchange for cash or shares.

Exchange offer

An offer by the firm to give one security, such as a bond or preferred stock, in exchange for
another security, such as shares of common stock.

Exchange rate

The price of one country's currency expressed in another country's currency.

Exchange Rate Mechanism (ERM)

The methodology by which members of the EMS maintain their
currency exchange rates within an agreed upon range with respect to other member countries.

Exchange rate risk

Also called currency risk, the risk of an investment's value changing because of currency
exchange rates.

Exchange risk

The variability of a firm's value that results from unexpected exchange rate changes or the
extent to which the present value of a firm is expected to change as a result of a given currency's appreciation
or depreciation.

Exchangeable Security

Security that grants the security holder the right to exchange the security for the
common stock of a firm other than the issuer of the security.

Exercise price

The price at which the underlying future or options contract may be bought or sold.

Exercising the option

The act buying or selling the underlying asset via the option contract.

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