Markets

Delta

Measures how much option price is expected to change for every $1 move in underlying assets

Gamma

Measures how much delta changes for every $1 move in underlying assets

Theta

time decay, how much options price declines as time passes

Vega

Measures sensitivity to changes in volatility

Rho

Measures sensitivity to changes in interest rates

Alpha

Measures investment's excess return above what its risk would predict (skill), high -> strong active management

Beta

Measures investment’s volatility/sensitivity (systematic risk) compared to the overall market

Black-Scholes

prices options as function of underlying asset price, time, volatility, and interest rates

Dual mandate

maximize employment, control inflation

Inflation currently

2.71%

PCE (Personal Consumption Expenditures)

Fed heavily uses it, currently 2.8%, above target 2

Unemployment

December 4.4%, target 4-5%

Hawkish

tighter monetary policy (hike)

Dovish

easier monetary policy (cut)

Rate cuts

Bond yields decrease

Prices increase

Equities increase 

USD decreases 

Credit spreads tighten 

Curve steepens

Rate hikes

Bond yields increase

Prices decrease 

Equities decrease 

USD increases 

Credit spreads widen 

Curve flattens

Brent

~$67/barrel (energy benchmark, global vs US), falling/under pressure/declining due to global oversupply

WTI (crude oil futures)

~$63.5 (US market), falling due to eased geopolitical risk

Gold

 ~$4800/oz (safe haven), super volatile recently

Silver

 ~$84/oz, similar to gold but more volatile, driven by industrial demand

S&P 500

~6800 (broad US equities benchmark), expect to go up ~9% in next year

US Treasury Yields

1y: 3.4%

2y: 3.5%

5y: ~3.7%

10y: ~4.2%

30y: ~4.9%

Yield curve

Summarizes expectations for future Fed policy, outlook for economic growth, inflation expectations

Normal yield curve

Long-term > Short-term, expected economic growth

Flat yield curve

Similar yields, uncertainty/transition

Inverted yield curve

Short-term > Long-term, expected slower growth/recession

Steepening yield curve

Long rates rise faster than short rates (currently)

Flattening yield curve

Short rates rise, long rates fall faster

Price a bond

Discounting future value of its coupon payments at appropriate rate

Duration

How much bond price moves depending on how much yield moves, higher -> more sensitive to rate changes

Convexity

What happens when rates move a lot, positive -> price gains when yields fall larger than losses when yields rise by same amount

Fed Funds Rate

The Fed Funds Rate is the target interest rate at which U.S. banks lend reserve balances to each other overnight, currently 3.6%

Volatility (VIX)

~21 (low teens = calm, >25 = stressed)

Spread

Different between two prices/yields/rate, used to measure risk, compare relative val

Bid-ask spread

Difference between price to buy and price to sell, measures liquidity and transaction cost, narrower → higher liquidity

Credit spread

yield of corporate bond minus yield on Treasury of same maturity, measures credit risk (risk borrow fails to make required payment on time)

Yield spread

different in yields at two maturities, measures growth/policy expectations

Straddle options spread

Means you think there will be a big move but don’t know which way, buy a call and a put

Butterfly options spread

Means you think there is low volatility in price

Swap spread

Different between swap rate and Treasury yield, reflections funding/liquidity/risk dynamics

Fixed rates

interest payment constant over time

Floating Rates

interest resets periodically based on reference rate

Futures

Agreement to buy/sell an asset at a set price on a specific future date, traded on exchange so liquid

Forwards

Agreement to buy/sell an asset at a set price on a specific future date, over-the-counter trades and more customizable but counterparty risk

Market beta

How sensitive asset is to overall market

Basis point

0.01%, 1% of 1%

What markets react fastest to news?

FX, rates, equity index futures, basically the most liquid and high-volume

Dividends

Companies in industries that are particularly dividend-sensitive have better market valuations if they regularly issue dividends, signals they are doing well

Stock splits

As company grows in value, splits stock so prices don’t become absurdly high, lets them maintain liquidity, generally seen as positive

Stock buybacks

Usually followed by increase in stock price

New stock issues

Reverse of buyback, typically followed by drop in price

Par/face value

Total amount issue pays back at end of maturity period

Coupon payments

Interest payments issuer makes to holder in terms of coupon rates

Bond price

Price the lender pays the borrower to hold the bond

Default risk

Risk company issuing bond may go bankrupt/default on loans

Default premium

difference between yields on a corporate bond and yield on otherwise identical government bond, in theory difference compensates bondholder for default risk

Credit ratings

Bonds rated by credit agencies which determine risk of default, higher rating → easier company to raise money and lower interest rate

Derivative

Financial contracts whose value is derived from another asset that has an intrinsic value

Options

Most common derivative, give owners options to buy/sell security without obligation

Bull steepener

2 year falls faster than 10 year, market pricing in rate cuts and slowing growth

Bear steepener

10 year rises faster than 2 year, markets demanding higher inflation or term premium