Financial Derivative Terms - F

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

Face Value: The dollar value of a security without including interest or fees. For stocks, it is the original cost of the stock and for bonds, it is the amount of principal payable at maturity.
Factor Model: A model that assumes that one or more indices affect the return of a security.
Fair Basis: Basis is the difference between the spot price and the price of a futures or forward contract on the same underlying asset. A 'fair basis' is one where no arbitrage opportunities exist between the two.
Fair Benchmark Price: The fixed price for a commodity or index swap that renders the present value of the fixed leg equal to that of the floating leg.
Fair Quoted Futures Price: The fair total futures price less futures accrued interest from the previous coupon payment to the futures expiration date.
Fair Total Futures Price: The market price of the bond discounted at the repo rate for the term of the futures contract less the future value at the futures expiration date of the coupons received by holding the bond.
Fair Value: The price of a financial instrument that a buyer would be willing to pay and a seller would be willing to accept on the open market. The estimate of fair value should take into account prices for similar assets and valuation results such as the present value of all expected future cash flows of a security.
Fair Value Hedge: A hedge that bases its periodic settlements on changes in value of an asset or liability. This type of hedge is most often used to offset the price risk of a realized asset or liability or an unrealized firm commitment.
Financial Instrument: A contract between two parties that involves a monetary exchange for some type of debt or asset.
Financial Market: Also known as a security market, this is a medium designed to bring buyers and sellers of financial instruments together.
Fixed for Fixed Swap: A foreign exchange currency swap where both counterparties pay a fixed interest rate by using domestic funds to buy foreign funds where interest rates may be cheaper in order to finance a foreign project.
Fixed for Floating Swap: An arrangement between counterparties in which one party, the fixed rate payer, making fixed payments and the other party, the floating rate payer, making payments which depend on the level of future interest rates.
Fixed Income Security: A financial instrument that pays consistent payments over the life of the investment and the principal amount at its maturity date. Payment amounts are determined at the time of purchase and are known by both parties to the transaction.
Fixed Leg: A series of payments calculated by applying a constant rate of interest to a notional principal amount
Fixed Rate: Interest rate payments that are constant over the life of the loan or asset.
Fixed Rate Bond: A bond whose interest rate payments (coupon) on the par value remain constant until maturity
Flexible Forward: See Range Forward.
Floating/Floating Swap: See Basis Swap.
Floating Leg: A series of payments calculated by applying a variable rate of interest to a notional principal amount
Floating Rate: An interest rate which, under the terms of a transaction, is periodically reset (can increase or decrease over the life of the asset) according to the then current level of a pre-defined reference rate â€“ often LIBOR.
Floating Rate Note (FRN): Bonds and other debt instruments which accrue and pay a variable rate of interest, based upon an underlying benchmark spot rate such as the London Inter-Bank Offered Rate (LIBOR) or some other benchmark. The interest rate adjustments are usually made every six months.
Floor: An agreement between two parties providing the purchaser (who pays a premium) a guarantee that if interest rates fall below an agreed level, the seller (floor writer) makes compensatory payments to the floor buyer. Floors are used in times of decreasing short term interest rates by money managers trying to preserve certain returns on floating rate investments. Floors are similar to caps, but from the opposite perspective. Floors consist of the sum of individual floorlets.
Floorlet: One of the interim dates of floors each with an expiry date generally on the date which the forward rate is set in a multiple period floor agreement. A floor is not a continuous guarantee which means claims can only be made on specified dates selected by the purchaser.
Foreign Exchange: See FX.
Forward: An over-the-counter contract between two counterparties where the price is determined at the outset, but the payment and delivery takes place at an agreed future date.
Forward Curve: A graphical representation of forward rates having the same maturity but with different forward periods. This curve changes constantly due to many factors such as supply and demand, regulatory requirements, prices etc.
Forward Exchange Agreement: A synthetic agreement for forward exchange. It is settled by reference to the spot rate as well as the forward premium or discount.
Forward Intrinsic Value: The intrinsic value (see Intrinsic Value) of an option plus the fair value of the underlying forward.
Forward Price: The agreed price of the forward contract upon delivery in the future.
Forward Rate: An interest rate calculated today that will be paid on money to be borrowed at a specific future date based on current (spot) rates and will be repaid at an even later date in the future.
Forward Rate Agreement: An over-the-counter agreement between two parties to protect themselves against future increases or decreases in interest rates by locking in an interest rate (usually based on LIBOR) for a stated period of time beginning at some future start date based on a specified notional principal amount. The notional amount is not exchanged at maturity, but rather the difference will be paid by the party that gains from the interest rate movement to the party that loses until the agreed rate is reached.
Forward Rate Curve: A graph which plots the forward rates of securities with the same maturity but different forward periods.
Forward-start Option: An option which is paid for now, but will start at some prespecified date in the future. This date is called the issue date. At the issue date, a call or put option is issued with the strike price being determined by the spot price of the underlying on this date. Generally such options are issued at the money.
Forward-start Swap: An agreement where the counterparties agree to enter into a swap at a specified future date at a prearranged price.
Forward Spread Agreement: The counterparties of a forward spread agreement contract into a spread between two forward rate agreement rates applied to a nominal amount of one currency. The settlement amount will be the spread between the reference rate minus the contracted spread.
Forward Swap: A swap in which the fixed coupon is set before the start date. If a company expects rates to rise soon but only needs funds later, it may enter into a forward swap. Also known as a forward start swap.
Future: A transferable, exchange-traded contract to buy or sell a standard quantity of a specific commodity, financial instrument, or currency at a future date at a price agreed between the two parties. Payment is made on the delivery date.
Future Value of Coupons: The future value at the futures expiration date of the coupons received by holding the bond.
Futures Accrued Interest: The interest the bond will accrue from the previous coupon payment date until the futures expiration date.
Futures Price: The agreed-upon price for delivery on a futures contract at the settlement date.
FX: An abbreviation for foreign exchange. A foreign country's currency.
FX Forward Contract: A transaction in which counterparties agree to exchange a specified amount of different currencies at some future date, with the exchange rate being set at the time the contract is entered into. These are used to minimize foreign exchange risk.
FX Forward Swap: An agreement in which one currency is purchased at the spot rate and sold at the forward rate against another currency purchased at the forward rate and sold at the spot rate at one or more future dates.
FX Market: A market where one currency is exchanged for another.
FX Option: An option which gives the holder the right to buy or sell a specified amount of one currency against another at the agreed strike price. Foreign exchange options are an alternative to forward contracts when hedging an FX exposure because options allow the company to benefit from favorable FX rate movements, while a forward contract locks in the FX rate for a future transaction.
FX Swap: An agreement where the one leg's cashflows are paid in one currency while the other leg's cashflows are paid in another currency. An FX swap can either be a fixed for floating, a floating for floating or a fixed for fixed swap.

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