CISI CWM Level 7 Unit 1 Glossary Flashcards

Vocabulary practice flashcards generated from the CISI CWM Level 7 Unit 1 Glossary transcript.

Accounting Entity Concept

Financial records are prepared for a distinct unit or entity, separate from the individuals that own it.

Accruals Concept

Income and expenses are recognised in the periods in which they arise, ie when the transactions occur.

AIM

Formerly Alternative Investment Market. LSE unit for smaller, riskier UK plcs with less demanding admission and continuing obligations than the Main Market.

Alpha

Return from a security or portfolio in excess of a risk-adjusted benchmark return.

Amortisation

Allocating the cost of an intangible asset over its projected life. A book entry that affects reported income and position, not cash. Indefinite-life intangibles are not amortised.

Asian-Style Options

Option whose pay-off depends on the average price of the underlying over a period of time.

Backwardation

Commodity / futures markets where shorter-dated contracts trade at a higher price than longer-dated ones.

Basis

Difference between the present cash price and the nearby futures price (Cash minus futures). Negative in contango, positive in backwardation.

Bermudan-Style Options

Options exercisable at specific times (often one day a month) up to and including expiry. Midway between American (anytime) and European (only at expiry).

Beta

Relationship between a stock's returns and market returns. Measures systematic risk of a security or portfolio against the market.

Black-Scholes

Equation for valuing plain vanilla options, developed by Fischer Black and Myron Scholes in 1973.

Call Option

Right, not the obligation, to buy a pre-set amount of the underlying at a pre-set price with a pre-set maturity date.

Cap

Right, not the obligation, to borrow a pre-set amount at a pre-set interest rate with a pre-set maturity date. Equivalent to a call option.

Central Securities Depository (CSD)

Institution that holds financial instruments (bonds, equities, money market instruments, mutual funds) where ownership is transferred electronically by updating records.

Clearing House

Institution that facilitates exchange of payments, securities or derivatives between two firms, aiming to reduce the risk of a member firm failing to honour its settlement obligations.

Collar

Combination of options: holder buys an out-of-the-money call (or put) and sells an out-of-the-money put (or call), locking in effective minimum and maximum rates at expiry.

Contango

Markets where shorter-dated contracts trade at a lower price than longer-dated ones.

Contracts for Difference (CFDs)

Derivative exchanging the cash difference between a pre-agreed price and the closing price of an underlying (commodity, index, share). Cash settled.

Credit Default Swap (CDS)

Derivative similar to an insurance contract: investors transfer or offset credit risk with another investor, protecting against a default.

Credit Spreads

Yield difference between two bonds of similar maturity but different credit quality.

CREST

UK settlement system for shares, gilts, money market securities, ADRs and mutual funds.

Current Ratio

Working capital ratio assessing whether current assets recoverable within one year cover liabilities due within one year.

Decentralised Finance (DeFi)

Umbrella term for peer-to-peer financial services on public blockchains, built on secure distributed ledgers.

Delta

Sensitivity of the option premium to a change in the underlying price, on a scale of $0\%$ to $100\%$.

Depreciation

Allocating the cost of a tangible non-current asset over its useful life. Annual charge in the statement of comprehensive income.

Dual Aspect Concept

Double-entry bookkeeping principle that two aspects, the assets of the business and the claims against them, are always equal.

Duration

Macaulay's duration; weighted average term to maturity of a bond's cash flows, including final repayment.

Electronic Money

E-money; balance or record of money stored electronically (online account, bank card, e-wallet) in exchange for the same amount of fiat currency.

Euro Short-Term Rate (€STR)

Wholesale euro unsecured overnight borrowing costs of euro area banks.

Exchange Delivery Settlement Price (EDSP)

ICE Futures term for the price at which maturing futures are settled.

Exchange For Physicals (EFP)

Also known as 'Against actuals' (AA); exchange of a futures position for a physical position.

Exotic Derivatives

Any derivative that is not plain vanilla, featuring customised terms and complex structures.

Financial Action Task Force (FATF)

Independent inter-governmental body that sets standards and promotes measures to combat money laundering and terrorist financing.

Financial Policy Committee (FPC)

Bank of England committee responsible for macro-prudential regulation: stability and resilience of the whole financial system.

Financial Services Compensation Scheme (FSCS)

Scheme to compensate eligible claimants when authorised firms fail.

Floor

Right, not the obligation, to lend a pre-set amount at a pre-set rate and maturity. Equivalent to a put option.

Forward Rate Agreements (FRAs)

Cash-settled obligation on interest rates for a pre-set period and index, with a forward start date.

Gamma

Sensitivity of an option's delta to a $1\%$ move in the underlying: the rate of change of delta (delta of the delta).

Gearing

Leverage; borrowing vs equity on the balance sheet (net debt / ordinary shareholders' funds). In derivatives, paying a small percentage gives large percentage gains or losses.

Greenshoe

Over-allotment provision in IPO underwriting letting the syndicate buy up to an additional $15\%$ of shares at the offer price if demand exceeds expectations.

Gross Redemption Yield (GRY)

Discount rate or yield to maturity (YTM); total return from holding a fixed-income security to maturity (coupon plus capital gain / loss), calculated using DCF.

Implied Volatility

Volatility that can be implied mathematically when the option price and all other parameters (spot, rates, expiry, delivery date, strike) are known, e.g. via Black-Scholes.

Initial DEX Offering (IDO)

Like an ICO, but hosted on a decentralised exchange (DEX), so no cryptocurrency exchange approval is needed.

Intrinsic Value

Economic value of an option if exercised now: how far in the money it is. Cannot be less than zero.

Materiality Concept

Accounting standards may be ignored if the impact is so small that a reader would not be misled.

Modified Duration

Percentage change in a bond's price for a 1 percentage point change in the GRY.

Multilateral Trading Facility (MTF)

Regulated activity letting investors trade shares or securities other than on a recognised investment exchange (RIE).

Novation

The clearing house becomes counterparty to both buyer and seller of futures contracts, substituting the original contract.

Operational Gearing

Measure of operating risk (risk to operating profit) assessing the level of variable vs fixed operating cost.

Organised Trading Facility (OTF)

Multilateral system introduced under MiFID II where multiple third-party buying and selling interests in non-equity 'off-venue' instruments interact to form a contract.

Price Stabilisation

Lead manager buys back newly issued shares in the market if the price falls below a predefined level.

Prudence Concept

Conservatism in accounting: 'anticipate no profit and provide for all possible losses'.

Prudential Regulation Authority (PRA)

Operationally independent part of the Bank of England responsible for prudential regulation of deposit takers, insurers, and systemically important investment firms.

Public Sector Net Cash Requirement (PSNCR)

Difference between government revenue and government expenditure.

Qualified Investors (QIs)

Individuals legally permitted to invest in unregulated investments such as hedge funds who meet criteria as professional clients, per se professional clients or eligible counterparties (ECPs).

Quick Ratio

Acid test ratio or liquidity ratio; adaptation of the current ratio that removes inventory.

Return on Capital Employed (ROCE)

Operating profit / capital employed, expressed as a percentage. Measures overall management performance relative to capital invested.

Secured Overnight Financing Rate (SOFR)

US broad measure of the cost of borrowing cash overnight, using Treasury debt as collateral.

Senior Managers & Certification Regime (SM&CR)

UK regime to raise governance standards and increase individual accountability, reinforcing consumer confidence.

Sterling Overnight Index Average (SONIA)

Benchmark representing the average rate banks pay to borrow sterling overnight from other institutions, based on actual transactions.

STRIPS

Separate Trading in Registered Interest & Principal of Securities; a bond coupon removed from the bond and sold separately as a zero coupon bond.

Structured Product

Packaged derivative-based product providing capital protection if held to maturity, with participation in the return of a higher-performing, riskier underlying.

Sukuk

Instruments of equal value representing a common share in ownership of an underlying asset, complying with Shariah law.

Systematic Internalisers (SIs)

Qualifying investment firm that, on an organised, frequent, systematic and substantial basis, deals on its own account by executing client orders outside a regulated market, MTF or OTF.

Theta

Sensitivity of an option's premium to the time remaining to expiry, all else constant.

Variation Margin

Margin transferred from the loser to the winner as positions are marked-to-market daily. Total equals profit or loss on close-out.

Vega

Sensitivity of an option's premium to a $1\%$ change in implied volatility, all else constant.

Zero Coupon Bond (ZCB)

Pays no interest or coupons; issued at a discount to par and usually redeemed at face value. May offer tax advantages.