instruments in interest-rate, currency and ... - Volksbank AG

CALL OPTION Is the right to buy that is related to a defined underlying instrument. Opposite: Put option.CAP Contractual agreement about the upper interest-rate limit for a specific amount of capital against payment of a oneofffee (cap premium). Opposite: floor.CAPLET Portion of a cap referring to a variable interest-rate period.CASH OUT Premature termination of a forward rate agreement or an interest-rate options contract whereby theclaims are mutually offset based on current market prices.CASH SETTLEMENT In this case, there is no purchase/sale of the underlying instrument when an option is exercised.Instead, the differential amount between the agreed price (strike price) and the current market value (market price) ofthe underlying is determined and paid out.CHOOSER CAP Contractual agreement on a rate ceiling for a specific amount of capital in return for payment of aone-off fee (cap premium); the choice is limited to a certain number of interest periods.COLLAR The simultaneous purchase of a cap and the sale of a floor. The goal of this instrument is to secure a certainfluctuation range of the interest rates within a certain set maximum and minimum.COMPOUND OPTION An option on an option.CONFIDENCE LEVEL Confidence interval In the value at risk concept, the confidence level denotes the probabilitywith which a potential loss will lie within a certain interval which is shown as the value at risk. See value at risk.CONSTANT MATURITY SWAP CMS. A special form of interest-rate swap where at least one swap partner paysa variable swap rate with a constant maturity that is periodically reset (e.g. semi-annual adjustment to the 3-year swaprate). The second swap partner, on the other hand, can pay either a variable rate (e.g. 6-month EURIBOR) or a fixedrate.CONTANGO Term used in commodity futures markets. In this case today’s spot price is lower than the forward price.CONVERSION The exchange of one currency into another.CORRELATION Measures the degree to which two or more underlyings move, as a reaction to a predeterminedevent, in the same direction. Correlations are indicated on a scale of minus one to plus one. It the prices of twoinvestments move continuously in the same direction they are perfectly correlated and have a grade of plus one on thescale or minus one if the opposite happens.CREDIT FORWARD A bank makes an agreement with a company to provide a loan at a later date at an interestrate that is agreed upon in advance. Such a structure holds two risks for the bank, the credit risk and the interest raterisk.CURRENCY SWAP Agreement between two contracting parties to exchange capital and interest payments over aspecific period in different currencies.CYLINDER OPTION With this option strategy, for example, an importer buys a foreign currency call option andsells a foreign currency put option. This gives him a certain range, above which he is protected by the call option. If therate drops below this range, the put option will be exercised, limiting possible gains to the strike price of the put.72