Glossary
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The amount or percentage of value that is at risk of being lost
from a change in prevailing interest rates (similarly defined for
things other than interest rates as well). The sensitivity of the
value of a single financial instrument, a portfolio of financial
instruments, or an entire entity’s balance sheet to changes
in interest rates can be calculated. The resulting sensitivity is
the amount of value at risk. See earnings at risk for an alternative
measure of interest rate risk. VAR, sometimes called equity value
at risk or EVAR, can be calculated by at least four different mathematical
expresions. The simplest and least accurate measure of VAR is the
difference between the calculated economic value of equity (EVE)
under one projected rate scenario and the calculated EVE under a
different projected rate scenario. See correlation VAR, empirical
VAR, and historical VAR for definitions of VAR calculated under
more rigorous formulae.
A form of life insurance very similar to whole life insurance. In
a variable life insurance policy, the cash value is invested in
equity or debt securities. Policyholders can select and switch investment
instruments. The policyholder bears the risk of the securities investment;
the insurance company only guarantees a minimum death benefit amount.
A less common name for an adjustable-rate mortgage (ARM).
Statistical term that quantifies the dispersion of data such as
rates or prices around the mean. For example, highly volatile rates
are rates that are sometimes high above the mean and sometimes way
below the mean. Less volatile rates are dispersed closer to the
mean and therefore have smaller variances. Similar to, but not the
same as, the average amount by which data deviates from the mean
for that data.
A series of prepayment speeds, in a sequence, that is chosen to
reflect an assumed interest rate scenario. For example, if prevailing
interest rates are near a cyclical low and still falling, a selected
vector path might project a rate path that assumes steady or falling
rates in the short run but rising rates for a year or more thereafter.
A way of modeling future MBS performance with more complex assumptions
than the customary single estimate of future prepayment speed.
The change in an option’s price resulting from changes in
the volatility of the price for the underlying.
The portion of the accumulated benefit obligation under a defined
benefit plan to which the employees have a legal right even if their
employment is terminated before retirement.
A collateralized mortgage obligation (CMO) backed by seasoned mortgage
securities.
Statistical term to quantify the dispersion of variables such as
rates or prices around the mean. A measure of the variability of
the price of an underlying financial instrument, rate, commodity,
or currency. Volatility only measures the quantity of the change
- not the direction. Volatility is not influenced by the direction
of the change; it does not matter whether the price rises or falls.
See variable-rate mortgage.
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