Financial Derivative Terms - B

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Backset Rate: A rate fixed at the end of an accrual period and paid on the same date.
Barrier Option: An option that pays off or ceases to exist if the underlying asset has reached or exceeded a specific price until exercise. This is a path dependent instrument.
Base Correlation: Implied correlations of tranches with an attachment point of zero (equity tranche). The base correlation number for a hypothetical tranche is created by combining multiple tranches.
Base Currency: This is also known as the primary currency of a foreign exchange transaction and is usually the domestic currency.
Basis: The price or rate difference between two similar or related financial instruments, usually the difference (spread) between the cash (spot) price and the futures price of a commodity.
Basis Point: One hundredth of one percent per annum, i.e. 1 bp = 0.01%. When applied to a price rather than a rate, the term is often expressed as annualized basis points.
Basis Point Value: The difference in the price of a security when the yield changes by 1 basis point. Sometimes also called a DV01.
Basis Risk: The risk that the relationship between the differences (spread) of the price or rates of two closely linked financial instruments will change over time.
Basis Swap: A swap (either a cross-currency basis swap or a simple basis swap) in which payments are on a different floating-rate basis, for example a three-month LIBOR versus a six-month LIBOR.
Basket Option: An option whose payoff depends on the value of a portfolio (or basket) of assets.
Bear Spread: See Put Spread.
Benchmark: A standard of comparison (usually a grouping of similar securities) used for judging the performance of a security.
Bermudan Option: Call or put option which can be exercised on pre-specified days during the life of the option. It is a hybrid between an American and European option.
Beta: A multiplier that measures the movement of an investment in relation to a movement of a benchmark. For example, if an investment has a beta of 1, then the investment will move in parallel to the index as any number times 1 is that number. However, if the beta is 1.5 and the index moves by 10%, then the investment should be expected to move by 15% as 10% times 1.5 is 15%.
Bid-Ask Spread: The difference between the price that an investor is willing to pay for a security and the price at which the investor is willing to sell the same security.
Binary Option: An option in which its payoff is a fixed amount if the underlying is at or above the strike price when it expires. The amount of payoff does not change by the amount of the difference between the underlying and the strike price.
Binomial Option Pricing Model: A method to calculate possible paths that might be followed by the underlying asset's price over the life of the option. The model works by dividing the time to expiration into a number of time intervals and over each time interval, the model assumes that the price of the underlying moves up or down to certain values. Then from the up or down prices at the next time step, the up and down price is calculated for each scenario until the expiry date. The magnitude of these moves is determined by the volatility of the underlying and the length of the time interval.
Black-Scholes Option Pricing Model: A method to calculate the price of a European style option (exercise on expiry date only) assuming that the underlying instrument pays a constant dividend, extraneous costs such as taxes are ignored, a constant risk-free interest rate, constant volatility and the price follows a probability distribution that is lognormal (a mathematical statistic: the logarithm of the price is normally distributed) until expiration. Although this model produces a theoretical value, it is considered the industry standard.
Bond: A loan given to an entity (e.g. a corporation or government) by another party (investor) where the entity agrees to pay a predetermined rate of return (Interest) and repay the loan amount (principal) at a predetermined future date.
Bond Basis: A day count method which assumes that each month has 30 days and each year consists of 360 days (30/360).
Bond Forwards or Futures: An agreement whereby the short position (seller) agrees to deliver pre-specified bonds to the long (buyer) at a set price and within a certain time frame. The forward contract is an agreement between two counterparties to exchange bonds at an agreed price and time in the future. The futures contract is typically traded on an exchange and the underlying bond is "standardized". "Standardized" means that it is a fictional bond.
Bond Option: Option to purchase or sell a particular debt security. Exchange traded options are usually on government bonds. Over the counter options are often embedded in corporate debt issues.
Bond Rating: An evaluation by a rating agency as to the probability that a particular bond issue is likely to default by examining the financial status of the issuer. Well known rating agencies consist of Standard and Poors, Moody's Investor Services, Fitch Investor's Service and Duff and Phelps. Ratings go from AAA, the highest quality, to D the lowest (default).
Bond Yield Curve: A graph showing returns of bonds with the same bond ratings but differing maturities over the same period of time.
Bond-equivalent Yield: A calculation that converts fixed income returns whose maturities are less than one year into annual returns for comparison between investments.
Book Value: The price that is paid for an investment when it is initially purchased (historical cost).
Bootstrap: A process to determine an interest rate or volatility at a particular time by plotting known rates on a graph to create a curve.
Box: An option strategy comprised of a long call and a short put with the same strike price as well as a long put and a short call having the same strike price that is higher than the first two options (long call and short put).
Brazilian Swap: A type of swap where the floating rate is calculated using the Average One-Day Interbank Deposit rate (aka CDI rate, or overnight DI rate) which is an annual rate and is calculated daily by the Central of Custody and Financial Settlement of Securities (CETIP). It represents the average rate of all inter-bank overnight transactions in Brazil. The swap has only one payment, which occurs at maturity.
Break-even Forward Rate: A forward rate that when combined with the yield earned from a short term deposit produces the same average return as a single long term deposit. This is referred to as the parity method of obtaining a forward rate.
Break Forward Contract: A forward contract that permits the holder to profit if the price of foreign exchange rises, but puts a floor on losses if it falls. This payoff profile can be obtained using both FX options and forward contracts. Also known as cancelable forward FX contract.
Bull Spread: See Call Spread.
Business Day Convention: Used to determine cash flow adjustments for business days. Several methods are used:; No date adjustment: Cycle dates are not adjusted for weekends or holidays and are forced to land within a cycle month.; Next good business day: Dates are adjusted for weekends and holidays to the next good business day.; Previous good business day: Dates are adjusted for weekends and holidays to the previous good business day.; Modified following business day: Dates are adjusted to the next good business day unless that day falls in the next calendar month in which case the date is adjusted to the previous good business day.; End of month - no adjustment: Dates are adjusted to land on last day of the month.
Business Days: A jurisdictional holiday list used to adjust reset and coupon dates.
Butterfly: An option strategy involving three call or put options with strike prices that are equally apart. Buy or sell the option with the lowest strike price, sell or buy twice the quantity at the central strike price and buy or sell the option at the highest strike price. The payoff diagram for this option strategy resembles a picture of a butterfly.

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