Glossary
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(1) A lender's informal expression for a collateral margin. The
amount by which the value of collateral exceeds the loan it secures.
Commonly used with repurchase and reverse repurchase agreements
informally called repos and reverses.
(2) The dealer's commission for a transaction.
An informal name for the portion of a security's price that is comprised
of the numbers to the left of the decimal point, colon, or dash.
For example, if a bond's price is 103.25, its handle is 103. Sometimes
brokers and dealers only quote the numbers to the right of the decimal
point and assume that the handle is understood.
For convertible bonds, one of two types of call protection. Hard
call protection prohibits an issuer from calling an issue within
a certain period of time. For convertible bonds, hard call protection
is most often set at three years, but can range from two to five
years.
Insurance covering losses incurred by an insured as a result of
damage, destruction, or loss of property. Mainly, but not entirely,
insurance against fire and lightning damage. Insurance other than
life or liability insurance.
An interest in or claim under a policy of insurance which is a right
to payment of a monetary obligation for health care goods or services.
A category of personal property collateral defined by the 2001 revisions
to Article 9 of the UCC.
(1) Verb— To reduce risk or behavior that reduces risk from
future price movements.
(2) Noun — A transaction undertaken to reduce
risk by offsetting the risk in another transaction. The risk in
one position is hedged by counterbalancing it with the risk in another
transaction. The values of each position must change inversely and
with a high degree of correlation. Hedges may be cash to cash in
which a position in a cash instrument such as a loan or investment
reduces or offsets the risk in another cash position such as a deposit.
For example, a $1,000,000 investment in a U.S. Treasury bond maturing
in 10 years and a $1,000,000 certificate of deposit are largely
(but not completely) offsetting risks. Hedges may also be cash to
futures or futures to futures.
Deferring recognition of unrealized gains and losses from a hedge
instrument until the corresponding gains or losses from the hedged
instrument(s) are recognized. See FAS 133 and FAS 149.
The extent to which a hedge transaction results in the offsetting
changes in value or cash flow that the transaction was and is intended
to provide. FAS 133 requires users to regularly assess the effectiveness
of hedges. Furthermore, under FAS 133 only the portion of a transaction
that is deemed effective may qualify for hedge accounting treatment.
Under FAS 133, any part of fair value changes in a derivative that
are not perfectly correlated with the fair value (or variable cash
flow) changes of the hedged item must be reported in current earnings.
FAS 133 does not delineate a specific methodology for assessing
whether a hedge is expected to be highly effective or for measuring
hedge ineffectiveness. Hedge effectiveness is a very broad concept,
and FASB believes each company must define it relative to the intent
of its hedging activities. The only requirement is that there be
a reasonable basis for assessing hedge effectiveness. The focus
on hedge effectiveness in FAS 133 contributes to a significant difference
between previous practice and the new accounting standard. Whereas
the earnings effect of minor hedge ineffectiveness was spread over
the life of the hedge in the past, the FAS 133 rules result in anything
other than perfect correlation being recorded in current earnings.
Thus under FAS 133 there is the potential (and even likelihood)
that hedges may have both an effective component and an ineffective
component even for a highly effective hedge. The fact that some
portion of a derivative is ineffective does not preclude a hedge
from being deemed highly effective. See cash flow hedge, fair value
hedge, and FAS 133.
The relationship between the size of a position needed in a hedge
instrument and the size of the position being hedged. The hedge
ratio is determined by the delta.
One of three defined categories established in FAS 115 for the classification
of financial instruments held as assets on the books of an investor.
HTM securities are those the investor intends to hold to maturity
and is able to hold to maturity. Designation of a security as HTM
allows the investor to report the security value at historical cost
plus accretion or minus amortization. Unrealized gains or losses
are not shown on the balance sheet, reflected in reported income,
or reflected in reported net worth. FAS 115 imposes conditions that
restrict an investor’s flexibility to remove securities from
the HTM category. See available-for-sale, FAS 115, and trading.
An option feature in an instrument in which the option feature is
only a minor feature of that product. Sometimes called an embedded
option. They are hidden because they are not separate, detachable
features that issuers or holders can add or subtract to customize
individual transactions. Instead, they are one part of a number
of features embedded in the product.
A phrase used to describe investments with the highest quality ratings
— usually AAA or AA.
A formal name for junk bonds.
A table or bar chart displaying a probability distribution. All
of the probabilities in the histogram total to 100 percent. The
frequency of the data for each interval is represented by the height
of the bar. The technique can be used to combine a group of individual
rate forecasts to obtain a single probability weighted average of
the various subjective predictions for interest rates.
A measure of a financial instrument’s, a portfolio of financial
instruments’, or an entity’s exposure to reductions
in value resulting from changes in prevailing interest rates. Historical
VAR is one of several different methods for calculating VAR. Historical
VAR calculates value at risk by comparing the actual volatility
of components or risk elements within a portfolio to the historical
sensitivity of those components. This provides a range or distribution
of possible losses. A single value at risk can then be calculated
for the selected confidence level. Historical VAR is generally preferred
for its ability to capture risk from unlikely events. However, the
measured amount of VAR is heavily influenced by the choice of time
horizon and by the volatility that occurred during that historical
time period. If future changes do not resemble the change in value
that occurred during the selected time horizon, the forecasted VAR
will not be a good indicator of the real risk. See correlation VAR,
empirical VAR, and VAR.
See Home Mortgage Disclosure Act. Pronounced hum-da.
A process by which a bank restricts funds deposited by checks. Usually
but not always used to restrict the proceeds of checks drawn on
other banks until the funds have been transferred by the drawor’s
bank to an account that the depositor’s bank maintains with
the Federal Reserve.
A contract under which the liability of one party for damages is
assumed by another.
A Federal statute that requires most lenders in metropolitan areas
to collect data about their housing-related lending activity. Lenders
must file annual reports with their Federal supervisory agencies
and make disclosures available to the public regarding their origination
of housing-related loans. The reports cover loan originations, applications
that are declined or withdrawn, and loan purchases. The data is
used to evaluate possible discrimination in loan approvals. The
Federal Reserve Board of Governors has adopted Regulation C to implement
this statute.
A 1994 Federal statue enacted to address perceived abuses in high
cost home mortgage lending. Final rules implementing this law where
adopted by the Federal Reserve Board as amendments to Regulation
Z, Truth-In-Lending in December 2001.
A less-common name for total return analysis. The term "horizon
analysis" derives from the fact that total return analysis
requires the user to select an ending date for the investment being
analyzed. That ending date is sometimes called the investor's horizon.
An informal term used to describe funds provided by the most price-sensitive
and credit quality-sensitive sources. The bank liabilities that
are likely to be lost most quickly in the event of a loss of confidence
or competitiveness.
See Department of Housing and Urban Development.
or
A package or combination of financial instruments. Hybrid structures
range from simple to highly complex. See structured notes.
(1) An archaic term for pledging that did not involve either possession
or title transfer.
(2) Any pledge of an asset as collateral for a
debt. (An uncommon but correct usage.)
(3) The pledge of marketable securities or deposits
to secure a loan — particularly the pledge of marketable securities
or deposits owned by someone other than the borrower.
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