> For the complete documentation index, see [llms.txt](https://eako-capital.gitbook.io/eako-user-guide/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://eako-capital.gitbook.io/eako-user-guide/glossary.md). # Glossary ### **Accrual Option** An option whose Notional Amount depends on the number of fixings below or higher than a pre-defined barrier. This is a generic name for a family of options whose payoff depends on the observation of fixings during a time schedule, such as Fade Options, Time Swaps and Accumulators. ### **All or Nothing** An option or an option strategy that pays either a fixed amount (“all”) or zero (“nothing”), belongs to the Digital Options Family. ### **American Barrier** A barrier that is continuously observed. ### **American Option** An option that can be exercised at any time during its life. ### **Annualised Basis** The nominal basis between a futures contract and spot price can be converted into an annual percentage difference, by dividing by the time to expiry of the contract expressed in years. Annualised Basis = (Future Price/Spot Price - 1)/Time to Expiry ### **Ask (or Offer price)** It indicates the willingness to sell at the stated price. It is always the second price in a 2-way quote, also called “right” or “top”. ### **At-The-Money ATM** An option whose strike price is equal to the current spot rate (ATM Spot) or to the current forward rate (ATM Forward). But by market convention it is generally understood to mean a zero-delta Straddle Strike. ### **Backwardation** A market in backwardation occurs when the forward price of the futures contract is lower than the spot price. This generates a downward sloping forward, or inverted, curve which is in backwardation. Volatility in backwardation is a signal that investors expect more volatility in the near-term. ### **Basis Point** 1 basis point = 1/100th of 1% or 0.01%. ### **Bear Spread** Any simultaneously short and long position that will appreciate in value if the market declines, e.g.: Option Bear Spread = long a Put and short another Put with lower delta. ### **Bearish** Having a bearish view on something means that you expect it to decrease. Also said when wanted to sell or when holding a short position. ### **Bid** The “Buying” price indicates willingness by the party that quotes the price to buy at that price. The bid price is always quoted first in a 2-way quote, also called “left” or “bottom”. ### **Binary** An event which has only 2 possible outcomes. Usually said of options that will pay a fixed amount if a certain condition is met (= Digital). ### **Broken Date** A non-standard forward date (non-pillar date) in the FX, e.g.: 9 days or 7 ½ months as opposed to 1 week, 2 weeks, 1-month etc… ### **Bull Spread** Any simultaneously short and long positions that will appreciate in value if the markets rise, e.g.: Option Bull Spread = long a Call and short another Call with less moneyness, but both have the same Notional. ### **Bullish** Having a bullish view on something means that you expect it to increase. Also said when wanting to buy something or when holding a long position. ### **Butterfly** A butterfly is a limited risk, non-directional options strategy that is designed to have a high probability of earning a limited profit when the future volatility of the underlying asset is expected to be lower (when long the butterfly) or higher (when short the butterfly) than that asset's current implied volatility. It is a neutral option strategy that uses four call options contracts with the same expiration but three different strikes. Simultaneously purchase of an ITM Call, an OTM Call and the sale of 2 ATM Call to the same date. Relative to option pricing and volatility smile, a measure of kurtosis in the underlying distribution of performances. ### **Cable** FX term for the GBPUSD rate, the price of one Pound Sterling expressed in Dollars. ### **Calendar Spread** The simultaneous purchase and sale of contracts that expire on different dates. Also known as “horizontal spread”. ### [**Call**](/eako-user-guide/call-option.md) A call is an option giving the right, but not the obligation to buy a fixed quantity of currency 1 against currency 2 during or at the end of a certain period. In FX, a Call on currency 1 is therefore a Put on currency 2. To be precise, it is recommended to say Currency 1 Call Currency 2 Put. Investors buy calls when they believe the price of the underlying asset will increase and sell calls if they believe it will decrease. ### Capital Valuation Adjustment (KVA) KVA differs from CVA. Banks are required by regulation to hold large capital reserves in preparation for unexpected market and operational losses. Basel III increased the capital reserve requirements for banks that hold derivative contracts. The adjustment is associated with all derivative contracts, but it tends to be more punitive for OTC derivative trades that are not cleared. ### **Cash Market** Generally used for the OTC currency market that trades currency for spot and forward delivery, as opposed to the future or options market. ### **Cash Settlement** In contrast with physical delivery, a transaction is said to be “cash settled” when all cashflows are netted and a net amount is paid/received by the buyer to the seller. ### **CFTC** Commodities and Futures Trading Commission. This is the government agency that regulates the US Futures markets. ### **Choice** A 2-way quote which shows only one price. Ask = Bid, spread is zero. The party showing the price is willing to buy or sell at the same price. ### **Close** Period at the end of a trading session. Often used to refer to the closing range. ### **Closing range** The high and low prices recorded during the period designated as the official close, used in the futures market. In the OTC FX market, there is no “official close”. The day’s close is by general agreement 5pm NY time and there is no official closing range. ### [**Collar**](/eako-user-guide/risk-reversal-fx-collar.md) See Risk Reversal. ### **Contango** A market is in contango when the futures contracts are trading at a premium to the spot price. When the spot price is lower than the futures price which has generated an upward sloping forward curve. Volatility is normally in contango. Contango is the options and futures market way of saying that volatility further out in time is higher than volatility in the near-term. ### **Contingent Premium Option** An option whose premium becomes payable only if a certain trigger level is breached. ### **Convertible Currency** Freely convertible currency. Currencies that can be imported, exported, exchanged and loaned across borders without restrictions or regulatory requirements. ### **Correction** A price move that follows an established trend. ### **Correlation Products** A trade or series of trade where the final value depends on the relative performance of difference underlying instruments or asset classes. ### **Credit Risk** The risk that a counterparty will default on its obligations. ### Credit Valuation Adjustment (CVA) Credit Valuation Adjustment (CVA) estimates the value of counterparty credit risk. It takes into account the possibility that the other party in the transaction will default. It is the difference between the risk-free portfolio and the true portfolio value. ### **Cross Rate** Any exchange rate where neither of the 2 currencies is the US Dollar. ### **Currency Pair** A currency pair is the quotation of two different currencies, with the value of one currency being quoted against the other. The first listed currency of a currency pair is called the base currency, and the second currency is called the quote currency. Currency pairs compare the value of one currency to another—the base currency (or the first one) versus the second or the quote currency. It indicates how much of the quote currency is needed to purchase one unit of the base currency. ### **Delivery** The tender or receipt of a physical commodity, security, cash, or other financial instrument in settlement of an existing contract, usually futures, options, or forward contracts. ### **Delta** Delta (Δ) represents the rate of change between the option's price and a $1 change in the underlying asset's price. In other words, the price sensitivity of the option is relative to the underlying asset. ### **Digital** An event which has only 2 possible outcomes. Usually said of options that will pay a fixed amount if a certain condition is met (= Binary). ### **Diagonal Spread** The simultaneous purchase and sale of 2 options having different strikes and different expiration dates. Usually both options of the same type (Put or Call). ### **European Option** An option that can be exercised at expiration date only. ### **European Barrier** A barrier that is observed at one pre-defined point in time. ### **Exotic Option** Generic term for options that have more complex payoffs than regular Put or Call options. ### **Expiry Date** Date on which an option expires: It is the last date on which an American style option can be exercised. It is the only date on which a European style option can be exercised. Not to be confused with the Delivery Date. ### **Figure** Number of 100pips. EURUSD 1.1225, figure = 1.12. USDJPY = 142.55, figure = 142. ### **Fixed Exchange Rate** Official exchange rate set by monetary authorities on a currency that is in a fixed regime. In most instances, these currencies are still allowed to fluctuate within relatively narrow ranges. Many fixed exchange rate currencies are also restricted. ### **Forward Points ( = Swap Points)** The difference between the spot and the forward rate. Forward points can be positive or negative. ### Funding Valuation Adjustment (FVA) FVA refers to the funding cost of an uncollateralised OTC derivative instrument that is priced above the risk-free rate. It concerns estimating the present value of market funding costs into the pricing of a derivative on the first day rather than spreading the cost over the life of the derivative. FVA depends on the size and timing of the underlying exposures and market funding rates. ### **Gamma** Gamma (Γ) represents the rate of change between an option's delta and the underlying asset's price. This is called second-order (second-derivative) price sensitivity. Gamma indicates the amount the delta would change given a $1 move in the underlying security. ### **Greeks** "Greeks" is a term used in the options market to describe the different dimensions of risk involved in taking an options position. These variables are called Greeks because they are typically associated with Greek symbols. ### **GTC** Good Till Cancelled. Denotes an order that remains valid until it is executed or cancelled by the placer. ### **Hedge** For purchase or sale of a currency or other instruments to offset an existing market risk. Hedges can be 100% efficient or partially efficient. Partially efficient hedges are often sought when efficient hedges are either unavailable or uneconomical. ### **Implied Volatility** Volatility implied by the prices at which options trade. Markets quote different levels of implied volatility for different maturities; this is called the term structure of volatility. The market quotes options expiring on the same date with different implied volatility prices according to delta: OTM options have higher implied than ATM, this is called the Smile. Puts and Calls with the same delta have different vols, this is called the Skew. ### **Intrinsic Value** The realised difference between spot (S) and strike (K) if exercised now, but no less than 0. Max (0 ; K – S) for a Put Max (0 ‘ S – K) for a Call ### **In-the-Money ITM** "In the money" (ITM) is an expression that refers to an option that possesses intrinsic value. ITM thus indicates that an option has value in a strike price that is favourable in comparison to the prevailing market price of the underlying asset: A call whose strike is below the current spot is ITM. A Put whose strike is above the current spot is ITM. ### **Knock-In Option** Option that becomes exercisable once a certain price level has been touched. It is sometimes said that the option becomes “alive”. ### **Knock-Out Option** Option that ceases to be exercisable once a certain price level has been touched. Once touched, the option is effectively “cancelled”. ### **Limit Order** An order that can only executed at a price equal to the limit or better. ### **Liquidity** A measure of the depth of the market. How much can be bought or sold without moving the price. ### **Long** A long - or a long position - refers to the purchase of an asset with the expectation it will increase in value (a bullish attitude). A long position in options contracts indicates the holder owns the underlying asset. A long position is the opposite of a short position.\ \ Because every currency trade involves a pair, you will always simultaneously go long on one currency and short on the other when making a trade. When you are long on a currency, it means you are betting the base currency will strengthen against the quote currency. ### **Mark-to-Market M2M / MtM** Revaluing a position according to what price it would currently be liquidated at. Can either be positive (representing an asset to the owner) or negative (representing a liability). ### **Market if touched** Once the limit price is touched, the order becomes a “market order”. ### **Momentum** An expression meaning the speed at which a price changes. ### **NDF** Non-Deliverable Forward, a contract for difference which allows the replication of a forward contract in an otherwise not tradable currency. NDFs are usually settled in USD. ### **NDO** Non-Deliverable Option, an option where if exercised, the settlement of the contract is made, not by actual delivery of the currencies, but by taking the difference between the agreed rate and an officing “fixing rate” to determine the net settlement amount in US Dollars. ### **Notional Amount** The principal face amount underlying a derivative transaction. It is called notional because it is not usually part of the actual cash flows. ### **Offer** See Ask ### **One Touch** An event barrier (American style) that triggers a change in the derivative or its payout once it is touched. ### **Open Interest** The number of future contracts or options on future contracts that are deemed to be open positions. Often used as an indicator of the depth of the market. ### **Options contract** An option is a derivative, a contract that gives the buyer the right, but not the obligation, to buy or sell the underlying asset by a certain date (expiration date) at a specified price (strike price). ### **Out-of-the-Money OTM** A term used to describe an option that has no intrinsic value. A Call whose strike is above the current spot is OTM. A Put whose strike below the current spot is OTM. ### **Over-the-counter OTC** As opposed to exchange traded. A financial contract that is not traded on an official exchange. ### **Overnight (o/n)** A short-term FX swap or option from today to the next business day. ### **Pip** Name for a point in FX (see Point). ### **Pillar Dates** A standard forward date in the FX, e.g., : Overnight, 1-week, 2 weeks, 1 month… ### **Point** The minimum “tick” move in the price of a currency. For EURUSD, it is 0.0001. For USDJPY, it is 0.01. ### **Premium** The price of an option. Usually paid at Trade Date by the option buyer. ### [**Put**](/eako-user-guide/put-option.md) A Put is an option giving the right but not the obligation to sell a fixed quantity of currency 1 against currency 2 during or at the end of a certain period. In FX, a Put on currency 1 is therefore a Call on currency 2. To be precise, it is recommended to say Currency 1 Put Currency 2 call. Investors buy puts when they believe the price of the underlying asset will decrease and sell puts if they believe it will increase. ### **Restricted Currency** A currency that may only be bought or sold within restrictions. Typically, this involves allowing currency trades that are directly related to import/export and/or to investment activity. Usually, documentation is required for every trade. ### **Realised Volatility** Sometimes referred to as the historical volatility, this term usually used in the context of derivatives. While the implied volatility refers to the market's assessment of future volatility, the realized volatility measures what actually happened in the past. Volatility measures the variability of returns of an underlying asset and in some sense provides a measure of the risk of holding that underlying. Below is one method to calculate it: Annualised standard deviation of daily (log) returns calculated from a data set over some fixed period of time. ### **Rho** Price sensitivity of an option with respect to interest rate. In FX, there is a rho for sensitivity with foreign (asset) interest rate and one for sensitivity with domestic (numeraire) rate. ### [**Risk Reversal**](/eako-user-guide/risk-reversal-fx-collar.md) A risk reversal is an option strategy that combines the purchase of an OTM Call (Put) with the sale of an OTM Put (Call), with similar deltas and same expiration. It can be used as a measure of volatility skew. ### **Settlement Risk** That part of the credit risk that pertains to actual settlement of the principal amounts in an FX transaction. Because amounts have to be paid on the same value date, there is the risk that one counterparty defaults while the other payment has already been made. To mitigate this risk, safe settlement can be used. This refers to funds (e.g., USD) only being released by counterparty A once the corresponding funds (e.g., EUR) have been received from counterparty B. ### **Shopping around** Practice of calling a number of market makers successively to ask for a price in the same transaction The consequence of shopping around is that the market becomes aware of a pending transaction. If it is big in size, bid-offer spreads will widen. It is considered to be counterproductive. ### **Short** Having sold a financial instrument without first owning it, with a view to buying it back at a lower price. A short- or a short position - refers to the sale of an asset with the expectation it will decrease in value (a bearish attitude). A short position is the opposite of a long position.\ \ Because every currency trade involves a pair, you will always simultaneously go long on one currency and short on the other when making a trade. When you are short on a currency, it means you are betting the base currency will weaken against the quote currency. ### **Spot Next SN** A short (1 business day) swap from the spot to the next business day. ### **Spot Rate** The spot rate is the current exchange rate at which a currency pair can be bought or sold. For the majority of currency pairs, the spot delivery date will be T+2. ### **Spread** The difference between bid and ask prices. The simultaneous purchase and sale of 2 (slightly) different contracts. ### **Strike K** The price at which an option can be exercised. ### **Swap Points** See forward points. ### [**TARF**](/eako-user-guide/tarf.md) Target Accrual Redemption Forward. Also known as a Target Profit Forward (TPF), Target Accrual Redemption Note (TARN) ### **Tenor** The length of the lifetime of a derivative contract. ### **Term Structure** Futures term structure is the prices of futures contracts on a single underlying asset over all available expiration months. The term structure of volatility is the curve depicting the differing implied volatilities of options with the same strike price but different maturities. ### **Theta** Theta (Θ) represents the rate of change between the option price and time, or time sensitivity - sometimes known as an option's time decay. Theta indicates the amount an option's price would decrease as the time to expiration decreases, all else equal. ### **Tick** A change in the price either up or down. The minimal price change in a future or OTC contract. A 1-point change in a cash contract. ### **Time Decay** The change in value of an option with the passage of one day, all other factors remaining equal. ### **Tom Next TN** Tomorrow / next day. A one-day swap that goes from the next business day (tom) to the spot date (next). ### **TV** Theoretical value. Premium of an option given by a standard option pricing system (e.g., Black & Scholes). Not necessarily tradable. ### **Underlying** Underlying asset are the financial assets upon which a derivative’s price is based. For example, the underlying for a EUR Call / USD Put would be the EURUSD spot rate. ### **Value or Value Date** The date on which actual delivery of the amount in a FX forward / option contract takes place. Also called the delivery date. ### **Vanilla** A simple Put or Call option, as opposed to an exotic option. ### **Vega** Vega (v) represents the rate of change between an option's value and the underlying asset's implied volatility. This is the option's sensitivity to volatility. Vega indicates the amount an option's price changes given a 1% change in implied volatility. ### **Volatility** Volatility is a measure of the amount by which price fluctuates over a given period. In FX, volatility measures how large the upswings and downswings are for a particular currency pair. When a currency's price fluctuates wildly up and down, it is said to have high volatility. ### **Volatility Skew (Smile)** The volatility skew is the difference in implied volatility (IV) between out-of-the-money options, at-the-money options, and in-the-money options. The volatility skew, which is affected by sentiment and the supply and demand relationship of particular options in the market, provides information on whether fund managers prefer to write calls or puts. ### **Volatility Surface** Combining the ATM term structure of volatility and the skew per expiry date, will render a 3-dimensional graph (time to expiry versus strike versus volatility). This is known as the volatility surface. ### **Volume** The number of contracts in futures or options on futures transacted during a specified period of time, often over the course of a day. ### **Warrant** A securitised option. It has the same characteristics as an option, except that it is securitised and can be traded on an exchange. Only a limited number of any warrant can exist. The warrant issuer is usually a bank or a financial institution. ### **Window Period** The period that a barrier condition is observed. ### XVA XVA, or X-Value Adjustment, is a collective term that covers the different types of valuation adjustments relating to derivative contracts. The adjustments are made to account for the credit risk (CVA), funding (FVA), and capital costs (KVA). When initiating new trades in the derivatives market, traders incorporate XVA into the price of the derivatives instrument. ### **Zero Cost** An option structure that involves buying and selling options, such that there is no upfront premium to be paid. --- # Agent Instructions This documentation is published with GitBook. GitBook is the documentation platform designed so that both humans and AI agents can read, navigate, and reason over technical content effectively. 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