Walter's finance blog

Accronyms and definitions

I thought that a small glossary of terms would be a good idea before I move on:

Analysis and reporting:

• NPV : Net Present Value sum of the present value of all in-flows and the present value of all outflows. The Present Value of a cash-flow happening in the future is the value that should be rationally paid today to obtain this given cash-flow in the future. This is typically obtained by looking on the market for a quoted instrument with the same or a comparable cash-flow.
• Market Value : Value of a given instrument as observed on the market. The NPV is an estimator of this value.
• Sensitivity : Importance of the change in NPV when the market changes.
• VaR (Value At Risk) : value bellow which the NPV of an investment or group of investment won't statistically fall in a given % of confidence and a given time horizon.
• Basel II : Latest set of banking supervisory rules, replaces the Basel Capital Accord of 1988. It basically gives the rules on how to calculate the capital required to cover the bank's risks.
• Solvency II : Latest set of insurance supervisory rules (applicable from 2010 on) equivalent to Basel II but for insurances.
• ... to be continued...

Financial instruments:

• Bonds : Bonds are very close equivalents to loans. The major difference is that they are traded on the market and standardized. Typically a Bond is a loan emitted by a government or a company.
• Stocks : Stocks are property rights (rights to vote, rights to take a share in the profit, ...) on a company. They can be traded or not.
• Futures : Futures are the obligation for two counterparties to exchange a given underlying instrument or cash-flows for a pre-agreed price or other conditions. They can be traded or over the counter(signed between two counterparties without the mediation and standardization of a market place).
• Options : Options are generally a combination of a right without obligation for one counterparty and an obligation for the other one. A typical option is the stock option giving the right to the buyer (which naturally pays something for that) to buy or sell a stock at a given pre-agreed price from the seller who has the obligation to provide the stock to the buyer if he requests it. Options are of very various nature from simple ones like the above described stock-option to very complex ones than the right of getting the value of some stocks in case the exchange rate between two currencies stays in a given corridor. Options can be traded or over the counter.

Options and futures can be used either for speculative reasons (bet on some future market movement of some instrument to make a gain) or for protection reasons (ensure that some needed instrument can be obtained or that some owned instrument can be soled for a guaranteed price)

posted by Walter @ 5:29 PM