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A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are
subject to the same laws and regulations. They are classified as Traditional and Non Traditional. It
should be noted that in addition to the three main asset classes, some investment professionals
would add real estate and commodities, arts, wine, antiques, and possibly other types of
investments, to the asset class mix. The three main asset classes are c c
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Asset Allocation ʹ William Sharp

http://en.wikipedia.org/wiki/Asset_allocation

CPPI and Constant Mix

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A method of portfolio insurance in which the investor sets a floor on the dollar value of his or her
portfolio, then structures asset allocation around that decision. The two asset classes used in CPPI
are a risky asset (usually equities or mutual funds), and a riskless asset of cash, equivalents or
Treasury bonds. The percentage allocated to each depends on the "cushion" value, defined as
(current portfolio value ʹ floor value), and a multiplier coefficient, where a higher number denotes a
more aggressive strategy.

Consider a hypothetical portfolio of $100,000, of which the investor decides $90,000 is the absolute
floor. If the portfolio falls to $90,000 in value, the investor would move all assets to cash to preserve
capital. The value of the multiplier is based on the investor's risk profile, and is typically derived by
first asking what the maximum one-day loss could be on the risky investment. The multiplier will be
the inverse of that percentage. So, if one decides that 20% is the maximum "crash" possibility, the
multiplier value will be (1/.20), or 5. Multiplier values between 3 and 6 are very common. Based on
the information provided, the investor would allocate 5 x ($100,000 - $90,000) or $50,000 to the
risky asset, with the remainder going into cash or a riskless asset.



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The constant-mix strategy maintains equity allocations that are set at a constant fixed percentage of
the total portfolio value. Therefore, periodic rebalancing of the portfolio to return it to the initial
desired asset allocation is required. The trading strategy is to purchase equities as they decline, and
sell equities as they rise in value.

Balanced for 60% equity and 40% bonds. Used in a Volatile Market.

c" 
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Investment is driven by asset liability management. Liability driven Investment (LDI). This investment
is driven by the demand and asset liability.

What is market?
Any place/process that brings together buyers/sellers

ͻ Physical markets -

ͻ Electronic markets ʹ Trading online

ͻ Telephonic markets ʹ Bonds

Types of markets


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The primary markets are where investors can get first crack at a new security issuance. The issuing
company or group receives cash proceeds from the sale, which is then used to fund operations or
expand the business. Exchanges have varying levels of requirements which must be met before a
security can be sold. Once the initial sale is complete, further trading is said to conduct on the
secondary market, which is where the bulk of exchange trading occurs each day. Primary markets
can see increased volatility over secondary markets because it is difficult to accurately gauge
investor demand for a new security until several days of trading have occurred.

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FPOs are popular methods for companies to raise additional equity capital in the capital markets
through a stock issue. Public companies can also take advantage of an FPO issuing an offer for sale to
investors, which are made through an offer document. FPOs should not be confused with IPOs, as
IPOs are the initial public offering of equity to the public while FPOs are supplementary issues made
after a company has been established on an exchange.

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The process by which investment bankers raise investment capital from investors on behalf of
corporations and governments that are issuing securities (both equity and debt).

c 
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The sale of securities to a relatively small number of select investors as a way of raising capital.
Investors involved in private placements are usually large banks, mutual funds, insurance companies
and pension funds. Private placement is the opposite of a public issue, in which securities are made
available for sale on the open market.

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A newly issued IPO will be considered a primary market trade when the shares are first purchased by
investors directly from the underwriting investment bank; after that any shares traded will be on the
secondary market, between investors themselves. In the primary market prices are often set
beforehand, whereas in the secondary market only basic forces like supply and demand determine
the price of the security.

BSE, NSE Stock Exchanges- NSE revolutionized trading in India.

!

c!c

c

An investment fund that holds the objective to earn interest for shareholders while maintaining a
net asset value of $1 per share. Mutual funds, brokerage firms and banks offer these funds.
Portfolios are comprised of short-term (less than one year) securities representing high-quality,
liquid debt and monetary instruments.

Examples ʹ T Bills, Commercial Paper, CD͛s, Call money

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The difference between these two market systems lies in what is displayed in the market in terms of
orders and bid and ask prices. The order driven market displays all of the bids and asks, while the
quote driven market focuses only on the bids and asks of market makers and other designated
parties.

An order driven market is one in which all of the orders of both buyers and sellers are displayed,
detailing the price at which they are willing to buy or sell a security and the amount of the security
that they are willing to buy or sell at that price. So, if you place an order for 100 shares of Microsoft
at $30 per share, your order will be displayed in the market and can be seen by people with access
to this level of information. The biggest advantage to this system is its transparency: it clearly shows
all of the market orders and what price people are willing to buy at or sell for. The drawback is that
in an order driven market, there is no guarantee of order execution - but, in the quote driven
market, there is that guarantee.

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A quote driven market only displays the bid and asks offers of designated market makers, dealers or
specialists. These market makers will post the bid and ask price that they are willing to accept at that
time. In this market, your order for 100 shares of Microsoft at $30 per share will not be seen in the
market. However, if there were one market maker for the stock, it would post its bid - say, $29.50 -
and its ask - say, $30.50. (This would be all that would be displayed in the market, unless there was
more than one market maker, in which case you could see more than one bid or ask offer.) This
would mean that you could buy shares of Microsoft for $30.50 and sell shares for $29.50. But, bear
in mind that the bid and ask will change constantly depending on the supply and demand in the
market.

Even though individual orders are not seen in a quote driven market, the market maker will either fill
your order from its own inventory or match you with another order. The major advantage of this
type of market is the liquidity it presents as the market makers are required to meet their quoted
prices either buying or selling. The major drawback of the quote driven market is that, unlike the
order driven market, it does not show transparency in the market. There are markets that combine
attributes from the two systems to form hybrid systems. For example, a market may show the
current bid and ask prices of the market makers but also allow people to view all of the limit orders
in the market.

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When money is put into the stock market, it is done with the aim of generating a return on the
capital invested. Many investors try not only to make a profitable return, but also to outperform, or
beat, the market.

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An investment theory that states it is impossible to "beat the market" because stock market
efficiency causes existing share prices to always incorporate and reflect all relevant information.
According to the EMH, stocks always trade at their fair value on stock exchanges, making it
impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As
such, it should be impossible to outperform the overall market through expert stock selection or
market timing, and that the only way an investor can possibly obtain higher returns is by purchasing
riskier investments.

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c - This is the strongest version, which states that all information in a market,
whether public or private, is accounted for in a stock price. Not even insider information could give
an investor an advantage.

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- This form of EMH implies that all public information is calculated into a
stock's current share price. Neither fundamental nor technical analysis can be used to achieve
superior gains.

3. ïc

- This type of EMH claims that all past prices of a stock are reflected in today's
stock price. Therefore, technical analysis cannot be used to predict and beat a market.

Key Takeaway͛s

´cTechnical analysis has limited value

´cFundamental analysis difficult to implement
´cInvesting in index funds is optimal
´cAccess to superior analysis can generate alpha
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A method of evaluating a security that entails attempting to measure its intrinsic value by examining
related economic, financial and other qualitative and quantitative factors. Fundamental analysts
attempt to study everything that can affect the security's value, including macroeconomic factors
(like the overall economy and industry conditions) and company-specific factors (like financial
condition and management). The end goal of performing fundamental analysis is to produce a value
that an investor can compare with the security's current price, with the aim of figuring out what sort
of position to take with that security (underpriced = buy, overpriced = sell or short).


 c

c

A method of evaluating securities by analyzing statistics generated by market activity, such as past
prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but
instead use charts and other tools to identify patterns that can suggest future activity.
c/c

Abnormal Excessive movement causing market to react very sharply in response to a situation
causing trade for a particular stock to cease for a while.

 cc

The term used to describe an investor who makes decisions regarding buy and sell trades without
the use of fundamental data. These investors generally have poor timing, follow trends, and over-
react to good and bad news. n reality, most people are considered to be noise traders, as very few
actually make investment decisions solely using fundamental analysis. Furthermore, technical
analysis is considered to be a part of noise trading because the data is unrelated to the
fundamentals of a company.

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Companies may decide to distribute stock to shareholders of record if the company's availability of
liquid cash is in short supply. These distributions are generally acknowledged in the form of fractions
paid per existing share. An example would be a company issuing a stock dividend of 0.05 shares for
each single share held.

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Investors who believe in active management do not follow the efficient market hypothesis. They
believe it is possible to profit from the stock market through any number of strategies that aim
to identify mispriced securities. c
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 is a function of security selection and market
timing factors. The portfolio manager of a diversified active fund, for instance, first selects securities
within the investable universe of stocks. The manager then buys and sells the securities on a
continual basis. The fund͛s objective is to generate higher returns than the benchmark index. Such
excess return is called alpha returns and is the reason why active funds charge higher management
fees compared with passive funds.

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Passive management typically refers to index funds. The portfolio manager of such a fund simply
takes exposure to pre-defined universe of securities constituting the index. Besides, the manager
does not engage in market timing. Passive management refers to those people who believe in the
efficient market hypothesis. It states that at all times markets incorporate and reflect all
information, rendering individual stock picking futile. As a result, the best investing strategy is to
invest in index funds, which, historically, have outperformed the majority of actively managed funds.

! c 
c

A method of analysis used by security analysts to gather information about a corporation. Mosaic
theory involves collecting public, non-public and non-material information about a company in order
to determine the underlying value of the company's securities and to enable the analyst to make
recommendations to clients based on that information.

 c

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A portfolio strategy used by some portfolio managers to achieve returns similar to those of their
benchmark index, without exactly replicating the index. A portfolio manager practicing closet
indexing might stick to an index in terms of weighting, industry sector or geography. A manager's
performance is usually compared to that of his or her benchmark index, so there is an incentive
for managers to gain returns that are at least similar to the index.

Closet indexing is often viewed negatively by investors because they could simply choose an index
fund and pay lower fees. Not surprisingly, "closet" indexing is so named because these practices are
often not publicly announced, but a close examination of a fund's prospectus can sometimes
uncover which funds are practicing closet indexing. Watch for funds with high MERs and holdings
that look quite similar to the fund's benchmark index.

-c/ c!c

The 4-box active-passive choice essentially separates the security selection and the market timing
factors.
c
- This Refers to active management (market timing) of active exposure (security
selection). Applying active-active decision for the satellite portfolio is suitable for aggressive
investors, as market timing is more risky than security selection.

 ʹ This decision refers to passive management of active exposure. That is, the investor
actively selects securities and holds the portfolio till the investment horizon.

 cc decision refers to active management of passive exposure, where the investor
actively engages in market-timing her index exposure.

c  ʹ This decision refers to passive management of passive exposure.

 -c

A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual
fund and compares its risk-adjusted performance to a benchmark index. The excess return of the
fund relative to the return of the benchmark index is a fund's alpha. The abnormal rate of return on
a security or portfolio in excess of what would be predicted by an equilibrium model like the capital
asset pricing model (CAPM). Alpha, in other words, is a zero-sum game. This means the excess
returns of all active managers add to zero, as some will outperform, some will underperform and
most will perform just as well as the benchmark index.

/c

It is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the

market as a whole. In finance, the beta (ɴ) of a stock or portfolio is a number describing the relation
of its returns with that of the financial market as a whole. An asset with a beta of 0 means that its
price is not at all correlated with the market. A positive beta means that the asset generally follows
the market. A negative beta shows that the asset inversely follows the market; the asset generally
decreases in value if the market goes up and vice versa.

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A portfolio generates beta returns because of its exposure to the market. In the portfolio theory, this
comes off the Capital Asset Pricing Model (CAPM), which states that investors can only expect to
earn market return if they assume market risk.

The portfolio͛s alpha returns refers to the excess return over the benchmark index that a portfolio
manager generates because of her skill. The manager͛s skill comes from security selection and,
sometimes, from market timing. All active managers charge higher fees than index funds do, with a
promise to deliver alpha returns. Suppose an active fund charges fees of 2.5 per cent. Further
suppose 90 per cent variation in fund returns can be explained by the change in the benchmark
index. The investor is then essentially paying alpha fees to the fund that largely (90 per cent)
generates beta returns.

What if the investor can buy index fund for the 90 per cent beta exposure and an active fund for the
10 per cent alpha exposure? That way, she can save on paying active fees on the entire portfolio.
This is rationale behind the alpha-beta separation.

The core-satellite framework is built on this alpha-beta separation. The  c portfolio is exposed
primarily to the benchmark risk and therefore earns the benchmark return (beta exposure). The
alpha portfolio is set-up to outperform the benchmark. Investors can construct the core portfolio
through low-cost beta exposure, typically in index funds and benchmark fixed-income securities. This
is believed to be an optimal strategy for all classes of individual investors- mass affluent, HNWIs and
Ultra-HNWIs. Typically, index funds benchmarked to a broad index such as the S&P CNX500 is
preferable.

The  c-   contains exposure to styles such active mid-cap funds, sector funds and direct
exposure to stocks. Investors should also consider exposure to alternative asset class such as
commodity through commodity futures. HNWIs and Ultra-HNWIs should consider alternative
strategies on existing asset classes such as private equity and hedge funds, as they are also good
alpha generators.

The   c -   framework is behaviourally optimal. A typical investor would like to
invest for the long-term but want to profit from short-term asset price movements. The core
portfolio takes care of the long-term investment objective while the satellite portfolio satisfies the
urge to have continual cash flow into the trading account.

!c
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The act of attempting to predict the future direction of the market, typically through the use of
technical indicators or economic data.

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A risk management technique that mixes a wide variety of investments within a portfolio. The
rationale behind this technique contends that a portfolio of different kinds of investments will, on
average, yield higher returns and pose a lower risk than any individual investment found within the
portfolio. Diversification strives to smooth out unsystematic risk events in a portfolio so that the
positive performance of some investments will neutralize the negative performance of others.
Therefore, the benefits of diversification will hold only if the securities in the portfolio are not
perfectly correlated.


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It states that companies prioritize their sources of financing (from internal financing to equity)
according to the Principle of least effort, or of least resistance, preferring to raise equity as a
financing means of last resort. Hence, internal funds are used first, and when that is depleted, debt
is issued, and when it is not sensible to issue any more debt, equity is issued. This theory maintains
that businesses adhere to a hierarchy of financing sources and prefer internal financing when
available, and debt is preferred over equity if external financing is required.

ùc

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An asset which has a certain future return. Treasuries (especially T-bills) are considered to be risk-
free because they are backed by the U.S. government. They do not have a reinvestment or a credit
risk.

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As interest rates rise (fall), the price of a fixed income security will fall (rise). For an investor who
plans to hold a fixed income security to maturity, the change in its price before maturity is not of
concern; however, for an investor who may have to sell the fixed income security before the
maturity date, an increase in interest rates will mean the realization of a capital loss. This risk is
referred to as cc c
c, which is by far the biggest risk faced by an investor
in the fixed income market.

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To control interest-rate risk, it is necessary to quantify it. The most commonly used measure of
interest-rate risk is duration. Duration is the approximate percentage change in the price of a bond
or bond portfolio due to a 100 basis point change in yields.

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c

Modified duration follows the concept that interest rates and bond prices move in opposite
directions. This formula is used to determine the effect that a 100-basis-point (1%) change in
interest rates will have on the price of a bond.

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cùc

The cash flows received from a security are usually (or are assumed to be) reinvested. The additional
income from such reinvestment, sometimes called interest-on-interest, depends on the prevailing
interest rate levels at the time of reinvestment, as well as on the reinvestment strategy. The
variability in the returns from reinvestment from a given strategy due to changes in market rates is
called reinvestment risk.

 
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c
This arises because of the variation in the value of cash flows from a security due to inflation, as
measured in terms of purchasing power. For example, if an investor purchases a five-year bond in
which he or she can realize a coupon rate of 7%, but the rate of inflation is 8%, then the purchasing
power of the cash flow has declined. For all but inflation-adjusted securities, and adjustable- or
floating-rate bonds, an investor is exposed to inflation risk because the interest rate the issuer
promises to make is fixed for the life of the security. To the extent that interest rates reflect the
expected inflation rate, floating-rate bonds have a lower level of inflation risk.

cùc

1. The risk that the issuer will default on its obligation (default risk).
2. The risk that the bond͛s value will decline and/or the bond͛s price performance will be worse than
that of other bonds against which the investor is compared because either (a) the market requires a
higher spread due to a perceived increase in the risk that the issuer will default or (b) companies
that assign ratings to bonds will lower a bond͛s rating.
c
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c
Liquidity risk is the risk that the investor will have to sell a bond below its true value where the true
value is indicated by a recent transaction. The primary measure of liquidity is the size of the spread
between the bid price and the ask price quoted by a dealer. The wider the bid-ask spread, the
greater is the liquidity risk.

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According to the theory, it's possible to construct an "efficient frontier" of optimal portfolios offering
the maximum possible expected return for a given level of risk. This theory was pioneered by Harry
Markowitz in his paper "Portfolio Selection," published in 1952 by the Journal of Finance.

There are four basic steps involved in portfolio construction:

-Security valuation
-Asset allocation
-Portfolio optimization
-Performance measurement

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c ! c

A portfolio optimization methodology that uses the downside risk of returns instead of the mean
variance of investment returns used by modern portfolio theory. The difference lies in each theory's
definition of risk, and how that risk influences expected returns. Post-Modern Portfolio Theory
(PMPT) uses the 
c 
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c c c c c , while modern
portfolio uses the standard deviation of all returns as a measure of risk.

ùc
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c)
cc  c

cc
c
1 day risk or 1 day volatility * square root of Time

If Minimal Accepted Risk is > than calculated risk then Risk is prevalent.

c c!
c

A key feature of any bond is its term-to-maturity, the number of years during which the borrower
has promised to meet the conditions of the debt (which are contained in the bond͛s indenture). A
bond͛s term-to-maturity is the date on which the debt will cease and the borrower will redeem the
issue by paying the face value, or principal.

/
c

A debt investment in which an investor loans money to an entity (corporate or governmental) that
borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies,
municipalities, states and U.S. and foreign governments to finance a variety of projects and
activities. Bonds are commonly referred to as fixed-income securities and are one of the three main
asset classes, along with stocks and cash equivalents.
ö c -
c/
c

A debt security that doesn't pay interest (a coupon) but is traded at a deep discount, rendering profit
at maturity when the bond is redeemed for its full face value.

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cùc

An interest rate that is allowed to move up and down with the rest of the market or along with an
index. This contrasts with a fixed interest rate, in which the interest rate of a debt obligation stays
constant for the duration of the agreement. A floating interest rate can also be referred to as a
variable interest rate because it can vary over the duration of the debt obligation.

1 cc

In many situations, a bond of a given maturity is used as an alternative to another bond of a

different maturity. An adjustment is made to account for the differential interest-rate risks in the
two bonds. However, this adjustment makes an assumption about how the interest rates (i.e.,
yields) at different maturities will move. To the extent that the yield movements deviate from this
assumption, there is yield-curve, or maturity, risk.
c
 c c c
c
Pull to Par is the effect in which the price of a bond converges to par value as time passes. At
maturity the price of a debt instrument in good standing should equal its par (or face value). Another
name for this effect is reduction of maturity. It results from the difference between market interest
rate and the nominal yield on the bond. The Pull to Par effect is one of two factors that influence the
market value of the bond and its volatility (the second one is the level of market interest rates).

1 c c!
c1!c

The rate of return anticipated on a bond if it is held until the maturity date. YTM is considered a
long-term bond yield expressed as an annual rate. The calculation of YTM takes into account the
current market price, par value, coupon interest rate and time to maturity. It is also assumed that all
coupons are reinvested at the same rate. Sometimes this is simply referred to as "yield" for short.

c1 cù 
-c

c
For any given bond, a graph of the relationship between price and yield is convex. This means that
the graph forms a curve rather than a straight-line (linear). The degree to which the graph is curved
shows how much a bond's yield changes in response to a change in price.
c

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http://www.investopedia.com/ask/answers/04/031904.asp

Bond Strategies

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c
A strategy for managing fixed-income investments by which the investor builds a ladder by dividing
his or her investment dollars evenly among bonds or CDs that mature at regular intervalssuch
as every six months, once a year or every two years.
c
c
/
c/ c

A bond investment strategy that concentrates holdings in both very short-term and extremely long-
term maturities. This is also known as the "dumbbell" or "barbelling."

/
c/ c

A no callable regular coupon paying debt instrument with a single repayment of principal on the
maturity date.

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#c

A trading system that utilizes very advanced mathematical models for making transaction decisions
in the financial markets. The strict rules built into the model attempt to determine the optimal time
for an order to be placed that will cause the least amount of impact on a stock's price. Large blocks
of shares are usually purchased by dividing the large share block into smaller lots and allowing the
complex algorithms to decide when the smaller blocks are to be purchased.

/c0cc c

The amount by which the ask price exceeds the bid. This is essentially the difference in price
between the highest price that a buyer is willing to pay for an asset and the lowest price for which a
seller is willing to sell it. For example, if the bid price is $20 and the ask price is $21 then the "bid-ask
spread" is $1.
c
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c)
c

c") c

A form of investing in which the main goal is to gain sufficient assets to meet all liabilities, both
current and future. This form of investing is most prominent with defined-benefit pension plans,
whose liabilities can often reach into the billions of dollars for the largest of plans.

)% %
c

The peak-to-trough decline during a specific record period of an investment, fund or commodity. A
drawdown is usually quoted as the percentage between the peak and the trough.

! c$
c

An investment vehicle that is made up of a pool of funds collected from many investors for the
purpose of investing in securities such as stocks, bonds, money marketinstruments and similar
assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to
produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and
maintained to match the investment objectives stated in its prospectus.
c
cc4 c
c
A mutual fund's price per share or exchange-traded fund's (ETF) per-share value. In both cases, the
per-share dollar amount of the fund is calculated by dividing the total value of all the securities in its
portfolio, less any liabilities, by the number of fund shares outstanding.
c
&-
c
c$
c

A type of mutual fund that does not have restrictions on the amount of shares the fund will issue. If
demand is high enough, the fund will continue to issue shares no matter how many investors there
are. Open-end funds also buy back shares when investors wish to sell.

 c+
c$
c

A mutual fund that has been closed - either temporarily or permanently - to new investors because
the investment advisor has determined that the fund's asset base is getting too large to effectively
execute its investing style.

+
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c$
c+$c

A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a
stock on an exchange. ETFs experience price changes throughout the day as they are bought and
sold. An ETF holds assets such as stocks or bonds and trades at approximately the same price as the
net asset value of its underlying assets over the course of the trading day. Most ETFs track an index,
such as the S&P 500 or MSCI EAFE. ETFs may be attractive as investments because of their low costs,
tax efficiency, and stock-like features. Only so-called authorized participants (typically, large
institutional investors) actually buy or sell shares of an ETF directly from/to the fund manager, and
then only in creation units, large blocks of tens of thousands of ETF shares, which are usually
exchanged in-kind with baskets of the underlying securities. Authorized participants may wish to
invest in the ETF shares long-term, but usually act as market makers on the open market, using their
ability to exchange creation units with their underlying securities to provide liquidity of the ETF
shares and help ensure that their intraday market price approximates to the net asset value of the
underlying assets.

c)#c

Defined for index funds as the cost of holding cash to deal with potential daily net redemptions.

%c$
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A security offering in which investors may purchase units of a closed-end mutual fund. A new fund
offer occurs when a mutual fund is launched, allowing the firm to raise capital for purchasing
securities.

c" 
c

Asset location is a tax minimization strategy that takes advantage of the fact that different types of
investments get different tax treatments. Using this strategy, an investor determines which
securities should be held in tax-deferred accounts and which securities should be held in taxable
accounts in order to maximize after-tax returns.

,#cc
Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge
consists of taking an offsetting position in a related security, such as a futures contract.

,#c
c

ͻ Invest in traditional asset classes

ͻ Absolute-returns strategies?
ͻ Extensive use of derivatives to structure payoffs
ͻ Not open to all investors

)c

A security whose price is dependent upon or derived from one or more underlying assets. The
derivative itself is merely a contract between two or more parties. Its value is determined by
fluctuations in the underlying asset. The most common underlying assets includestocks,
bonds, commodities, currencies, interest rates and market indexes. Most derivatives are
characterized by high leverage.
c
(c c

The price at which a specific derivative contract can be exercised. Strike prices are mostly used to
describe stock and index options, in which strike prices are fixed in the contract. For call options, the
strike price is where the security can be bought (up to the expiration date), while for put options the
strike price is the price at which shares can be sold. The difference between the underlying security's
current market price and the option's strike price represents the amount of profit per share gained
upon the exercise or the sale of the option. This is true for options that are in the money; the
maximum amount that can be lost is the premium paid.
c
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c
The selling of a security that the seller does not own, or any sale that is completed by the delivery of
a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a
lower amount than the price at which they sold short.
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A cash market transaction in which delivery of the commodity is deferred until after the contract has
been made. Although the delivery is made in the future, the price is determined on the initial trade
date.
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A contractual agreement, generally made on the trading floor of a futures exchange, to buy or sell a
particular commodity or financial instrument at a pre-determined price in the future. Futures
contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate
trading on a futures exchange. Some futures contracts may call for physical delivery of the asset,
while others are settled in cash.

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c
A financial derivative that represents a contract sold by one party (option writer) to another party
(option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell
(put) a security or other financial asset at an agreed-upon price (the strike price) during a certain
period of time or on a specific date (exercise date).

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The primary difference between options and futures is that options give the holder the right to buy
or sell the underlying asset at expiration, while the holder of a futures contract is obligated to fulfil
the terms of his/her contract.

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An option contract giving the owner the right (but not the obligation) to buy a specified amount of
an underlying security at a specified price within a specified time.

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An option contract giving the owner the right, but not the obligation, to sell a specified amount of an
underlying asset at a set price within a specified time. The buyer of a put option estimates that the
underlying asset will drop below the exercise price before the expiration date.

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When an individual purchases a put, they expect the underlying asset will decline in price. They
would then profit by either selling the put options at a profit, or by exercising the option. If an
individual writes a put contract, they are estimating the stock will not decline below the exercise
price, and will not fall significantly below the exercise price.

Consider if an investor purchased one put option contract for 100 shares of ABC Co. for $1, or $100
($1*100). The exercise price of the shares is $10 and the current ABC share price is $12. This contract
has given the investor the right, but not the obligation, to sell shares of ABC at $10.
If ABC shares drop to $8, the investor's put option is in-the-money and he can close his option
position by selling his contract on the open market. On the other hand, he can purchase 100 shares
of ABC at the existing market price of $8, and then exercise his contract to sell the shares for $10.
Excluding commissions, his total profit for this position would be $100 [100*($10 - $8 - $1)]. If the
investor already owned 100 shares of ABC, this is called a "married put" position and serves as a
hedge against a decline in share price.

 
c

The exchange of new debts or obligations for older existing ones.