Financial Derivative Terms - A


Accreting Swap
A swap agreement in which the underlying principal increases over the life of the swap. This allows an investor to match swap payments with its cash flow. For example, a construction company can use this type of swap to finance a project in stages and lock in their funding costs by increasing the notional amount for increased cash flows as more funding is needed for the next stage.
Accrual Factor
Represents the fraction of a year in a given period. There are two components that make up an accrual factor. The first component uses a day count convention to determine how many days fall in the accrual period, which will be the numerator in the calculation of the accrual factor. The second component is a day count convention to determine the number of days that make up a full period, which will be the denominator in the calculation of the accrual factor.
Accrual Method
See Day Count Convention.
Accrued Interest
The current value of the earned portion of the next coupon payment due (but not yet paid) on a transaction or, in other words, the interest that has accumulated on a bond since the last coupon payment at any point up to but not including the valuation date.
Accruing Curve
The interest rate curve used to determine expected coupon rates.
A set of steps used to solve a problem using a mathematical formula, e.g. a computer program.
American Style Option
A call or put option that may be exercised anytime prior to the date of expiry. (The name has nothing to do with location.)
Debt repayment by way of installments over a scheduled period. Each payment usually includes an interest payment as well as payment of the principal debt.
Amortizing Transaction
A transaction with cashflows based on a notional principal amount whereby the principal amount decreases over time per a scheduled arrangement.
The simultaneous purchase and sale of related products in two different markets in order to profit from a discrepancy between the purchase price (undervalued) and the sale price (overvalued), i.e. riskless profit.
Asset Back Securities (ABS)
A category of securities which are mostly created by consumer debt such as consumer installment or credit card loans but not mortgages. See also Collateralized Debt Obligations (CDOs).
Asset Class
A specific grouping of investments, such as stocks (equity), bonds (debt), cash (currency) and commodities. The investments in each of the four groups tend to react to risk (such as a rise in interest rates) in a similar way and are governed by the same regulatory requirements.
Asset Swap
In a typical asset swap, a dealer buys a bond from a customer at the market price and sells to the customer a floating rate note at par. The dealer then enters into a fixed-for-floating swap with another counterparty to offset the floating rate obligation and the bond cash flows.
Attachment/Detachment Level (Credit Derivatives)
The lower bound of the risk level of a tranche is the attachment point and the upper bound a detachment point.
At-the-money Option
An option with strike price equal or very close to the current price of the underlying asset. These options have the most time value.
Average Price (Asian) Option
Options that allow the buyer to buy (or sell) the underlying asset at the average price instead of the spot price. The payoff is the difference between the strike price and the average price of the underlying asset over a certain time period.
Average Rate Cap/Floor
Consists of a string of caplets (floorlets). The additional feature is that instead of the rate being based on one single reset rate, the caplet rate is the average of two or more reset rates.
Average Strike Option
Options that can assure that the average price paid (or received) for an asset over a certain time period is not greater than the final price. These are path dependent because the payoff is based on the difference between the spot price at expiration and an average strike price determined over the life of the option.


With respect to this document, FinancialCAD® Corporation ("FINCAD") makes no warranty either express or implied, including, but not limited to, any implied warranty of merchantability or fitness for a particular purpose. In no event shall FINCAD be liable to anyone for special, collateral, incidental, or consequential damages in connection with or arising out of the use of this document or the information contained in it. This document should not be relied on as a substitute for your own independent research or the advice of your professional financial, accounting or other advisors.

This information is subject to change without notice. FINCAD assumes no responsibility for any errors in this document or their consequences and reserves the right to make changes to this document without notice.