The Most Popular Search Words and Phrases on Wilmott.com

The following are some of the most common search words or phrases on wilmott.com, and a few comments on each. If other people want to know about these, then maybe you should too.

American option

An option which can be exercised at any time of the holder's choosing prior to expiration. See page 464.

Arbitrage

Arbitrage is the making of a totally riskless profit in excess of the risk-free rate of return. See page 27.

Asian option

An option whose payoff depends on the average value of the underlying asset over some time period prior to expiration. See page 464.

Asset swap

The exchange of two investments, or the cash flows to those investments, between two parties.

Barrier option

An option which either comes into being or becomes worthless if a specified asset price is reached before expiration. See page 465.

Base correlation

A correlation used in a CDO model to represent the relationship between all underlyings from zero up to a given detachment point. For example, the 0-3% and a 3-6% tranches are separate instruments but between them one can price a 0-6% tranche and so back out an implied correlation from 0-6%, that is the base correlation. See page 469.

Basket

A collection of financial instruments. In a basket option the payoff depends on the behaviour of the many underlyings. See page 466.

Bermudan swaption

An option to enter into a swap that may be exercised on any of a specified number of dates.

C++ An enhanced version of the C programming language developed by Bjarne Stroustrup in 1983. The enhancements include classes, virtual functions, multiple inheritance, templates, etc.

Calibration

Determining parameters (possibly state and time dependent) such that one's theoretical prices match traded prices. Also called fitting. This is a static process using a snapshot of prices. Calibration does not typically involve looking at the dynamics or time series of the underlying. See page 203.

Callable

A contract which the issuer or writer can buy back (call). The amount he has to pay and the dates on which he can exercise this right will be specified in the contract.

Cap

A fixed-income contract paying the holder when the underlying interest rate exceeds a specified level. See page 468.

CDO

A Collateralized Debt Obligation is a pool of debt instruments securitized into one financial instrument. See page 469.

CDS

A Credit Default Swap is a contract used as insurance against a credit event. One party pays interest to another for a prescribed time or until default of the underlying instrument. See page 472.

CFA

Chartered Financial Analyst. A professional designation offered by the CFA Institute for successfully completing three examinations. The syllabus includes aspects of corporate and quantitative finance, economics and ethics.

CMS

Constant Maturity Swap is a fixed-income swap in which one leg is a floating rate of a constant maturity (from the date it is paid). A convexity adjustment is required for the pricing of these instruments. See page 469.

Convertible

An instrument that can be exchanged for another of a different type. A convertible bond is a bond that can be turned into stock at a time of the holder s choosing. This gives an otherwise simple instrument an element of optionality. See page 471.

Convexity

Related to the curvature in the value of a derivative (or its payoff) with respect to its underlying. A consequence of Jensen's Inequality for convex functions together with randomness in an underlying is that convexity adds value to a derivative. A positive convexity with respect to a random underlying or parameters increases the derivative s value, a negative convexity decreases value. In equity derivatives convexity is known as gamma.

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