Financial Derivative Terms - R

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

Rainbow Option: A European style spread option which is written on the best or worse of two or more underlying assets which have several of the same type of risk factors.
Random Walk Theory: A situation in which changes in the value of a random variable are independently and identically distributed. This idea suggests that stocks take a random and unpredictable path and at any time, they are as likely to move up as they are to move down such as the spin of a roulette wheel.
Range Forward: An FX collar using forward contracts that replicates the payoff profile of purchasing an in the money call and selling an in the money put. For example if the forward price for sterling is $1.50, a range forward can be produced by buying a forward contract to purchase sterling at $1.50, entering a forward contract where the buyer has the right to break the contract at a price of $1.43, and the seller of the forward contract has the right to break the contract at a price of $1.56.
Rate of Return: The percentage change over the initial cost of the investment. This is calculated as value now minus value at time of purchase (profit or loss) divided by the value at time of purchase (amount invested).
Rating Sensitive Note: Also called a credit-sensitive note, is a fixed or floating rate note with a coupon rate adjusted in the event of a change in the issuer’s credit rating.
Ratio Call Spread: A type of call spread option strategy comprised of any amount of short calls and another amount of long calls having the strike price higher than the short calls.
Ratio Put Spread: A type of put spread option strategy comprised of any amount of long puts and another amount of short puts having the strike price higher than the long puts.
Receiver Swaption: An agreement that gives the holder the right but not the obligation to enter into an interest rate swap where the holder has the right to receive fixed interest payments in exchange for floating. Because this is a type of option, the holder must pay a premium.
Recovery Rate: The percentage of the investment that is recouped through bankruptcy or settlement agreement in the event of default.
Redemption: The return of the security’s principal amount to the investor.
Redemption Price: Also known as the “call price", it is the price at which a bond can be bought back by the issuer. This price is determined at the time the security is issued.
REPO: See Repurchase Agreement.
Reporting Currency: The designated currency used in published reports and financial documents.
Repurchase Agreement(REPO): An agreement (classed as a money market instrument) between two parties where one party sells a government security to the other party for a specified price with the commitment to buy the security back at a later date (usually the next day) for another specified (higher) price. The purpose of the transaction is to raise short-term capital.
REPO Rate: A cost associated with short-selling the underlying asset.
Reset Days: Number of days that the reset rate is in effect.
Reset Margin: The difference (fixed spread) between the index on which the interest rate is based and the actual interest rate of the investment.
Reset Rate: An interest rate for floating or forward transaction payments which are adjusted from time to time at an agreed upon frequency or date. These rates are based on the value of an index such as LIBOR and are reset to reflect changes in this benchmark on a specified date.
Reset Rate Date: The point in time when the coupon rate for a variable rate or floating rate financial instrument is re-adjusted to reflect changes in a benchmark index. Usually, interest is paid at the end of a specific quarter based on the value of 3-month LIBOR two business days before the start of that quarter. The coupon rate is calculated as the reference rate (3-month LIBOR) plus a fixed spread. Reset dates are usually monthly, quarterly, semi-annual or annual.
Reset Rate Status: The time stage of the reset rate. ‘Implied’ status means that the future reset rates are derived from a curve. ‘Active’ status means that a reset rate has already occurred and should be used for proper valuation.
Reverse Floating Rate Loan: Combination of a conventional fixed rate loan and a swap to pay fixed and receive floating. Therefore, if floating rates rise, the net coupon payment falls.
Reverse Floating Swap: A swap in which the floating payments are inversely proportional to interest rates.
Reversible Swap: A swap in which one side has an option to alter the payment basis (fixed/floating) after a certain period. This is usually achieved by the use of a swaption, allowing the purchaser the opportunity to enter a swap with payment on the opposite basis. The swaption would be for twice the principal amount, one half of which nullifies the original swap.
Rho: The rate of change of the option fair value with respect to a small change in the risk free interest rate.
Rho of Holding Cost Rate: The rate of change in the fair value of the option per 1% change in the holding cost rate of an asset. This is the derivative of the option price with respect to the holding cost rate of the asset divided by 100.
Rho of Recovery Rate: The change in the fair value of a credit derivative per 1% change in the recovery rate.
Rho of Rate: The rate of change in the fair value of the option per 1% change in the risk-free rate. This is the derivative of the option price with respect to the risk-free rate, divided by 100.
Risk: The degree of uncertainty knowing what an investment’s returns will be as there is no way to predict the future. Risk is exposure to an uncertain situation.
Risk Factor: A set of common risks such as interest rates, inflation etc. that affect an investment’s returns.
Risk Management: The process of assessing and controlling various uncertainties in the financial market by selecting techniques to keep the risks within acceptable boundaries for the purpose of minimizing potential for loss.
Risk Reversal (Cylinder): An option strategy comprised of a long put and a short call having a higher strike price and the same expiry date.
Risk-free Rate: The rate of interest that can be earned from an absolutely sure investment where there is no possibility of loss over a specific period of time. There really is no such thing because even the safest investments still carry some risk. Therefore the risk free rate is usually defined as the interest rate on a three-month U.S. Treasury bill.
Roll Down Yield: A type of bond return which demonstrates over the passage of time the convergence of the market price of bond to its value at maturity.
Roller Coaster Swap: An interest rate swap where the principal amount on which its cashflows are based increases and decreases during its life according to a pre-agreed schedule.

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