Financial Derivative Terms - S

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

Scale Factor: A percentage usually applied (similar to a spread but multiplied) to a parameter such as volatility, forward rates etc. and is particularly useful when cash flow payments are based on a percentage of a parameter (such as Percentage of LIBOR swaptions where a scale factor is applied to the floating leg).
Scenario: A set of paths that hypothetical risk factors such as interest rates may take at the during a specified time period. For example interest rates may increase, stay the same, or decrease one month from now.
Scenario Analysis: An examination of how an investment performs using scenarios to predict what will happen under each path taken by the applicable risk factor such as interest rates, volatility, exchange rates etc. Read more about Portfolio Scenario Analysis
Seagull: An FX option strategy using three options structured by the purchase of a call spread which is financed with the sale of an out-of-the-money put in equal amounts and normally priced at zero cost premium. This strategy is designed to hedge against increases in currency.
Seasonal Swap: A swap in which the principal alternates between zero and some notional principal amount. The principal amount of the swap is designed to hedge the seasonal borrowing needs of a company. For example retail companies might use such swaps to fix rates on loans required only on a seasonal basis for building up inventory.
Secondary Market: A financial market where all trades other than the first sale of a financial instrument is sold usually through some form of financial intermediary such as a bank.
Secured Bond: A bond that is backed by assets which can be considered as a form of collateral on the loan so that if a default occurs, the bond issuer will pass the title of the asset on to the investor. Usually these bonds provide lower returns to the investor as compared to unsecured bonds.
Secured Debt: Similar to a secured bond, this is debt backed by an asset to reduce the risk of the loan. An example is a residential mortgage where the house is considered to be collateral, so if the borrower misses a payment, the lending institution (bank) can seize the house and sell it using the proceeds to pay back the debt.
Securitization: The process of grouping assets or debt together in order to convert them into marketable securities. Usually the underlying assets cannot be marketed by themselves. For example mortgages can be pooled together (and divided into tranches) to form mortgage backed securities or collateralized mortgage obligations. Asset backed securities are examples of pooled non-mortgage assets such as car loans.
Security: A financial contract which is given a value and traded in the financial market that can represent ownership (stock), debt (bond) or the rights to ownership in an underlying asset (derivative). Some securities lack a ready market.
Sensitivity: A measure of a financial instrument's degree of response to changes in a particular common factor; for example changes in interest rates in relation to changes in bond prices.
Serial Bond: A bond, usually tax-exempt, which is made up of many bonds with different maturities. They are issued on the same date. This structure helps the issuer to spread out the debt service and make approximately equal annual principal payments. For example, bonds may mature each year for twenty years after the date of issue of the series. Each maturity can pay a different coupon rate - usually the longer the maturity the higher the coupon. In addition, most tax-exempt issues are callable.
Settlement Date: The date after a security has been traded for transferring funds to complete a transaction. For example, the date on which the buyer must deliver cash to the seller and the seller must deliver the security to the buyer.
Settlement Price: The daily valuation of a security which is calculated by the exchange at both the open and close of each trading day to determine a gain or a loss on the contract.
Short Position: A type of trade involving the sale of a security by an investor who does not actually own it, but rather has borrowed it with the intention of buying the security at a lower price at a later date thereby earning a profit.
Short Rate Model: An interest rate model that defines a yield curve by describing the future evolution of short (usually overnight market) rates. The short rate, usually written rt is the compounded interest rate at which an entity can borrow money for an infinitesimally (very small) short period of time from time.
Simple Interest: The return that is earned is only on the original amount of money left on deposit and not on any of the return left on deposit. This rarely happens after 1 year to amounts left on deposit.
Single Barrier Option: Options that depend not only on the final asset value but also on whether a certain barrier level was touched at some time during the life of the option. There are four types of single barrier options (each may be either a call or a put and have either European or American exercise features): an up-and-in Barrier option, a down-and-in Barrier option, an up-and-out- Barrier option and a down-and-out Barrier option
Skewness: A parameter describing an asymmetrical probability distribution curve. If the curve skews to the right, it is a positive distribution, but if the curve skews to the left, it is negative.
Soft Call Provision: A feature added to convertible fixed-income and debt securities to increase their attractiveness, a soft call provision dictates that a premium will be paid by the issuer should the issue be redeemed early.
Soft Commodity: A good such as coffee, cocoa, sugar and fruit which are grown, rather than mined. These goods are used both by farmers (to lock in prices of crops) and speculators in the futures market.
Spot Commodity: A good traded on the spot market as opposed to the futures market with the expectation of actual delivery.
Spot Curve: Also called a zero-coupon curve, it is a graphical representation of spot interest rates for a variety of maturities.
Spot Market: Also called the cash market, it is the buying and selling of an asset which involves immediate delivery of the asset for cash.
Spot Price: The quoted price of an asset for immediate delivery.
Spot Rate: The rate of interest on a security that accumulates interest to maturity.
Spread: The difference between two associated values of a price or rate variable. For example, the bid-ask spread for a security is the difference between the bid price and the ask price. When structuring a swap, the pay-variable leg could be based on a floating rate, plus a spread (LIBOR + 20 basis points for example).
Spread Options: An option whose value is derived from the difference between the values of two or more underlying assets.
Spread Rate: The difference between the index rate or reference rate such as LIBOR and the rate charged on a security.
Spreadlock Swap: A swap in which one payment stream is referenced at a fixed spread over a benchmark rate such as US treasuries.
Standard American Options: Call and put options which can be exercised at any time during the life of the option.
Standard Deviation: A measurement that is applied to the annual rate of return of an investment to determine how spread out the set of returns are from the mean over a specific time period. The more the returns deviate from the mean, the higher the volatility of the investment.
Standard European Options: Call and put options which can be exercised only on the expiry date.
Standard Rate Cap/Floor: A rate cap is an agreement between two parties providing the purchaser, who pays a premium, an interest rate ceiling or 'cap'. This financial instrument is primarily used by borrowers of floating rate debt in situations where short term interest rates are expected to increase. Rate caps can be viewed as insurance, ensuring that the maximum borrowing rate never exceeds the specified cap level.; An interest rate floor on the other hand, guarantees the purchaser, who pays a premium, a lower bound for the rate of interest received on an investment. This may be used in conjunction with a floating rate note (FRN) to ensure a minimum return on investment. Floors are used in times of decreasing short term interest rates by money managers trying to obtain higher cash returns on floating rate investments.
Statistic List: A set of return values that includes the value and risk measures of a specific security.
Stochastic Process: A set of results based on uncertain relationships between parameters that provides a range of probable outcomes. Monte Carlo models of interest rate risk are examples of stochastic measures.
Stochastic Volatility: How much the price of a security randomly fluctuates from the mean level. Stochastic volatility models such as the Hull-White model have been developed to explain how volatility appears to vary over time, demonstrated by the volatility smile, in a random not constant fashion.
Stock: A type of investment that purchases ownership rights to claim a residual share of the corporation's assets and earnings secondary to debtholder claims.
Stock Market: A financial market in which shares in stock are issued and traded either through exchanges or over-the-counter. New shares are issued in the primary market then subsequently traded in the secondary market.
Storage Cost: The cost incurred when storing a physical commodity for the same term as a corresponding forward or futures contract. Storage cost is quoted on the same price basis as that of the forward contract. For example, if the price of a copper futures contract is quoted in cents per pound, then storage cost is on a cents per pound basis for the term of the forward contract.
Straddle: An option strategy comprised of a long call and a long put, having the same strike price (usually at-the-money) and the same expiry date. This strategy is used when a stock's price is expected to fluctuate considerably in either direction.
Straddle vs. Call: An option strategy comprised of a long call and a long put having the same strike price as well as a short call usually, but not always having a higher strike price.
Straddle vs. Put: An option strategy comprised of a long call and a long put having the same strike price as well as a short put usually, but not always having a lower strike price.
Strangle: An option strategy comprised of a long put and a long call with the same expiry date and underlying asset where the call strike price is greater than the put strike price
Strike (exercise) Price: The price at which an asset will be bought (call) or sold (put) under an option contract. The exercise price is determined at the time the option contract is formed.
Strip (Separate Trading of Registered Interest and Principal Securities): The process of removing the coupons from the bond principal so they may be sold to different investors as zero coupon bonds.
Stripped Bond: A debt instrument (bond) in which the coupons (interest payments) have been separated from the principal amount of the bond and sold separately at a discount.
Structured Product: A security created by combining underlying instruments such as shares or bonds with derivatives. The resulting product is designed to choose the most acceptable risk level and return requirements for the investor. Examples include Mortgage Backed Securities (MBS), Collateralized Mortgage Obligations (CMO), Asset Backed Securities (ABS) and Collateralized Debt Obligations (CDO).
Stub Periods: See Odd Dates.
Swap: A derivative of the bond market, an agreement between two parties to exchange cash flow payments in which their present values are equal at issue but have different characteristics based on a notional principal amount.
Swap Curve: A graphical representation of the relationship between swap rates with varying maturities from 1 week to 30 years.
Swap Deposits: (also known as FX swaps, cash management swaps or investment swaps) Investments are purchased in a foreign currency at the current spot rate, invested for a specified period and converted or 'swapped' back into domestic funds at a designated forward price.
Swap Rate: The rate of interest for the fixed leg of the swap that causes the swap to have zero net present value. See also Par Swap Rate.
Swap Spread: The difference between the swap rate for a specific maturity and the yield on a Treasury with the same maturity
Swaplet: A swap having only one payment.
Swaption: An option to enter into an interest rate swap which provides the purchaser the right to either pay or receive a fixed rate. If the buyer exercises the option, the writer of the swaption be comes the counterparty to the swap. Read more about Swaptions at FINCAD WIKI
Synthetic: An artificially created financial instrument that imitates characteristics of another instrument by using combined features of a collection of other instruments and/or assets
Synthetic Collateralized Debt Obligations (CDOs): A security that is backed by or linked to a diversified pool of credit and are synthesized (put together) through basic credit derivatives, mostly credit default swaps (CDSs) and credit-linked notes (CLNs). The payoffs of most synthetic CDOs are only affected by credit events, e.g., defaults, of the reference entities and are not related to the actual cash flows of the pool.
Synthetic Forward: An option strategy comprised of a long call and a short put both having the same strike price.
Synthetic Option: An option created by trading the underlying asset. For example, a synthetic (long) call option is created by buying a stock then buying a put option on it at the same time. This the same as buying a call option on the stock so it is â€œsynthetic" as the two instruments put together act as a different investment.

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