Research guide: Financial terminology from Annuities to to Zero-coupon bonds
Do you know your Apportionment from your Binary Options? Your Collateralized Obligations from your Gross Redemption Yields? If not, you needn’t look any further as this exclusive downloadable guide brought to you by Euromoney has over 30 pages of terminology from the financial industry explained. <br><br> A degree of blurring and overlapping in the terminology of the banking, insurance and investment management industries has been inevitable. This guide aims to demystify many of those terms, bringing some of the more frequently used technical expressions in all three disciplines into a concise, single volume. We hope it will serve as a useful guide for market participants in all three areas of the financial services sector.
download free guide
List of included financial terms
Introduction: Towards a Common Risk Management Language In recent years, the worlds of banking, insurance and investment management have become increasingly intermingled, and for good reason – investment is, after all, a form of insurance, albeit one in which the parameters of risk and reward are generally broader.
That process of convergence has been visible at a regulatory and corporate level, with the passage of a series of financial reforms – such as the Gramm-Leach-Bliley Act in the US in 1990 – opening the way for consolidation between banks, insurance companies and investment management firms. The consequence has been a number of high profile mergers within the financial services sector – many of them negotiated on a cross-border basis – that have created global groups whose fields of expertise extend across all areas of business.
This is a logical development, given that one of the most important disciplines common to all three businesses is risk management: the proactive identification and measurement of financial risks and the timely implementation of measures designed to minimize or eliminate those risks. Over the past two decades, the risk management capabilities of the financial services sector have taken giant strides towards ensuring that the chances of a system-wide failure are minimized.
As risk management techniques have become more sophisticated and more efficient, innovations developed in banking and investment management have increasingly used the nomenclature of the insurance industry to describe the processes used to address the issue of risk.
An obvious example of this process has been the contribution made to the evolution of the structured finance market by monoline insurance companies, the specialists that started out by providing insurance in the market for municipal bonds, but that now also play a key role in providing protection for investors in areas ranging from project finance to the market for collateralized debt obligations (CDOs). Less obvious but equally important examples are to be observed in the growing importance of capital market products that go by different names, but which also effectively act as insurance policies.
Credit default swaps (CDS), for example, have been a key building block in the development of a new class of hedging and investment products that have transformed the fixed-income markets, although CDS themselves are essentially just insurance policies allowing for credit protection to be bought and sold among participants in the capital market.
In other words, the cross-fertilization of banking and insurance products and their closer integration with investment management is bringing with it a range of by-products from new hedging mechanisms to entirely new asset classes. These products allow investment managers to better manage their portfolios by enabling them to customize risk/return payoffs in a way that was, until recently, impossible.
On one level, this process has underpinned the development of a number of innovations that have improved efficiencies for retail and institutional investors alike – with the emergence of capital-guaranteed products such as constant proportion portfolio insurance (CPPI) one notable example. At another, it has helped in the evolution of products insuring a range of risks that were previously thought of as uninsurable, with the growing popularity of catastrophe bonds (or cat-bonds) one example of an innovation that will become more important as weather patterns become increasingly unpredictable.
Against this background, a degree of blurring and overlapping in the terminology of the banking, insurance and investment management industries has been inevitable. This guide aims to demystify many of those terms, bringing some of the more frequently used technical expressions in all three disciplines into a concise, single volume. We hope it will serve as a useful guide for market participants in all three areas of the financial services sector.
List of financial terms:
* you may click on any of the linked topics to view Euromoney's coverage related to the term.
Alpha (see also ‘Greeks’)
Annuity (see also ‘Deferred Annuity’)
Arbitrage & Arbitrage Pricing
Asset-Backed Security (ABS)
Barbell Investment Strategy
Bell Curve (see also ‘Normal Distribution’)
Beta (see also ‘Greeks’)
Capital Asset Pricing Model (CAPM)
Collateral (see also ‘Asset- Backed Security’)
Portfolio Insurance (CPPI)
Contractual Trust Arrangement (CTA)
Credit Default Swap (CDS)
Credit-Linked Note (CLN)
Dedicated Long & Dedicated
Short Investing (Long Only & Short Only strategies)
Default & Default Rates
Deferred Annuity (see also ‘Annuity’)
Defined Benefit Plan
Defined Contribution Plan
Delta & Delta Hedging (see also ‘Greeks’)
Dividends & Dividend Cover
Duration Management, Duration Matching & Duration Risk
Efficient Frontier (see also ‘Markowitz, Markowitz Diversification’)
Excess of loss (reinsurance)
Expected Value, Expected Loss & Expected Return
Financial Guarantee Insurance (see also ‘Monoline Insurance’)
Floating Rate Note
Forwards (see also ‘Options’)
Generally Accepted Accounting Principles (GAAP)
Gamma (see also ‘Greeks’)
Gross Redemption Yield (see also ‘Delta’, ‘Gamma’)
Hedging & Dynamic Hedging
Immediate Annuity (see also ‘Annuity’)
Incurred but not reported (IBNR)
inflation (CPI or RPI)
Internal Rate of Return (IRR)
Internal Ratings-Based Approach (IRB)
Junior debt (see also ‘Subordinated Debt’)
Leverage & Leveraged Loan
Liquidity, Liquidity Risk & Liquidity Premium
Loan Loss Provision
Long Tail Event
Long/Short Positions & Long/Short Strategies
Loss Given Default (LGD)
Loss Portfolio Transfer
Markets in Financial
Instruments Directive (MiFID)
Markowitz, Markowitz Diversification
Minimum Variance Frontier
Monoline Insurance (see also ‘Wraps’)
Monte Carlo & Monte Carlo Simulation
Net Asset Value (NAV)
Normal Probability Distribution
Political Risk Insurance
Price to Earnings (P/E) Ratio
Primary Market (see also ‘Secondary Market’)
Prime Broker & Prime Brokerage
Product recall (insurance)
Probability of Default (PD)
Qualifi ed Institutional Buyer (QIB)
Quantitative Analysis & Quantitative Management
Random Walk Theory
Repurchase Agreement (Repo)
Return on Assets (ROA)
Return on Invested Capital (ROIC)
Return on Equity (ROE)
Rho (see also ‘Greeks’)
Secondary Market (see also ‘Primary Market’)
Special Purpose Vehicle (SPV)
Tier III Capital
Value at Risk (VAR)