The process of providing a market for a security. Normally, this refers to bids and offers made for large blocks of securities, such as those traded by institutions. Listed options may be used to offset part of the risk assumed by the trader who is facilitating the large block order. See also: Hedge ratio.
The return attributable to a particular
common factor. We decompose assetreturns into common factor components, based on the asset's exposures to common factors times the
factor returns, and a specific return.
The equilibrium price for futures contracts. Also called the theoretical futures price, which equals the spot pricecontinuously compounded at the cost of carry rate for some time interval. In the context of corporate goverance, Fair-Price provisions limit the range of prices a bidder can pay in two-tier offers. They typically require a bidder to pay to all shareholders the highest price paid to any shareholder during a specified period of time before the commencement of a tender offer and do not apply if the deal is approved by the board of directors or a supermajority of the target's shareholders. The goal of this provision is to prevent pressure on the target's shareholders to tender their shares in the front end of a two-tiered tender offer, and they have the result of making such an acquisition more expensive. A majority of states have fair price laws.
A proposal to change the federal tax laws in the United States from current tax system to a single national consumption tax on retail sales. The plan was introduced to the Congress as the Fair Tax Act for the first time in July 1999. The Act gained additional visibility in 2008.
Refers to accounting for the value of an asset or liabiliy based on the current market price instead of book value.
This term was started by Professor Matt Holden of UNLV. Fair value accounting has been a part of GAAP since 1990s.
See: mark to market accounting
U.S. accounting standard that requires US firms to translate their foreign
affiliates' accounts by the temporal
method; that is, reporting gains and losses from currencyfluctuations in current income. It was in effect between 1975 and 1981 and
became the most controversial accounting standard in the US. It was replaced
by FASB No. 52 in 1981.
Advisory group made up of one representative (in most cases a banker) from each of the 12 Federal Reserve districts. Established by the Federal Reserve Act, the council meets periodically with the Board of Governors to discuss business and financial conditions and make recommendations.
A Federal Funds Transaction is an unsecured loan of U.S. dollars to a "borrower" or "purchaser" that is a Depository Institution from a "lender" or "seller" that is a Depository Institution, foreign bank, government-sponsored enterprise or other eligible entity. Note that Fed Funds liabilities are not subject to reserve requirements.
The daily federal funds effective rate (FFER), calculated by the Federal
Reserve Bank of New York (New York Fed), is one measure of the overnight fed funds rate. The FFER is based on data voluntarily provided to the New York Fed by major fed funds brokers, and is a weighted-average rate of all overnight fed funds transactions arranged through these brokers each business day. This rateoften points to the direction of US interest
rates. The most sensitive indicator
of the direction of interest rates,
since it is set daily by the market, unlike the prime
rate and the discount rate.
The body that is responsible for setting the interest rates and credit policies of the Federal Reserve System. The FOMC sets a target level for the overnight fed funds rate, as the fed funds market has historically facilitated the transfer of the most liquid funds among depository institutions. The New York Fed then uses open market operations to change the supply of reserves in the system which, in conjunction with IOER, influence overnight fed funds to trade around this policy target rate or within the target rate range.
Float is checkbook money that appears on the books of both the check writer (the payor) and the check receiver (the payee) while a check is being processed. Federal Reserve float is float present during the Federal Reserve's check collection process. To promote efficiency in the payments system and provide certainty about the date that deposited funds will become available to the receiving depository institutions (and the payee), the Federal Reserve credits the reserve accounts of banks that deposit checks according to a fixed schedule. However, processing certain checks and collecting funds from the banks on which these checks are written may take more time than the schedule allows. Therefore, the accounts of some banks may be credited before the Federal Reserve is able to collect payment from other banks, resulting in Federal Reserve float.
An independent federal agency consisting of a five-member board, whose goal is to create economic competition by promoting consumer protection and prevent illegal business practices. The FTC was created in 1914 to battle monopolisitctrusts, and has since been granted the abilities to prohibit anti-competitive and illegal business practices and enforce industry-wide regulations.
A fixed amount or a percentage of an underwriting or principal paid to the underwriter for its services. Also, the charge a mutual fund holder pays for expenses incurred in management and administration of the fund. Also, the rate an account holder pays to a portfolio manager for management of a discretionary account.
Payment to a financial adviser of a set hourly rate, or an agreed-upon percentage of assets under management, for a financial plan. Under this arrangement, the adviser receives no commissions on any transactions to implement the plan.
An equation where the output becomes the input in the next iteration. This is
much like a public address system where the microphone is placed next to the speakers
generating feedback as the signal is looped through the PA system.
Has various definitions. 1) On some exchanges, a market
or limited price order that
is to be executed in its entirety as soon
as it is represented in the trading crowd, and, if not so executed, is to
be treated as canceled. In this context, no partial fills are accepted, and the FOK order is treated as an IOC, AON order. 2) On other exchanges, a market or limit order that is to be executed by filling the number of shares made available by the first bid or offer, and then canceling any unfilled balance. In this context, a FOK order is treated as an instruction to fill what can be filled by hitting the first bid or offer, and cancel the rest. In this case partial fills are possible, and the FOK order is treated as an IOC, Any Part order.
Because of the prevalence of interlisted stocks, the ability of a broker’s trading desk to direct trades to one exchange or another, and the different interpretations the order can have depending on which exchange the order is routed to, use of this type or order is discouraged. Instead, either an IOC AON, or an IOC Any Part, order will get the desired result regardless of the exchange.
An agreement where the lessor receives lease payments to cover its ownership costs. The lessee is responsible for maintenance, insurance, and taxes. Some finance leases are conditional sales or hire purchase agreements.
A regulatory body that resulted from merging the NASD and the NYSE regulatory committees. From the 2011 FINRA website, "The Financial Industry Regulatory Authority (FINRA) is the largest independent regulator for all securities firms doing business in the United States. FINRA’s mission is to protect America’s investors by making sure the securities industry operates fairly and honestly. All told, FINRA oversees nearly 4,535 brokerage firms, about 163,620 branch offices and approximately 631,640 registered securities representatives. FINRA touches virtually every aspect of the securities business—from registering and educating industry participants to examining securities firms; writing rules; enforcing those rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and registered firms. We also perform market regulation under contract for the major U.S. stock markets, including the New York Stock Exchange, NYSE Arca, NYSE Amex, The NASDAQ Stock Market and the International Securities Exchange."
Institutions that provide the market function of matching borrowers and lenders or traders. Financial intermediaries facilitate transactions between those with excess cash in relation to current requirements (suppliers of capital) and those with insufficient cash in relation to current requirements (users of capital) for mutual benefit.
A model that represents the financial operations or financial statements of a company in terms of its business parameters and forecasts future financial performance. Models are used for risk management by examining different economic scenarios for the future. Financial models are also used to provide valuations of individual assets that might not be actively traded in a secondary market.
Evaluating the investing and financing options available to a firm. Planning includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in the form of a financial plan, and then comparing future performance against that plan.
A risk structure that spreadsinvestor's risks across low-, medium-, and high-risk vehicles. The bulk of the assets are in safe, low-risk investments that provide a predictable return (base of the pyramid). At the top of the pyramid are a few high-risk ventures that have a modest chance of success.
A council established under the Dodd-Frank Act within U.S. Department of the Treasury to provide comprehensive monitoring to ensure the stability of national financial system. The Council is made up of ten voting members - nine federal financial regulatory agencies and an independent member with insurance expertise - and five nonvoting members.
Share price indexes for U.K. companies The denominator in the index
formula is the market capitalization at the base date, adjusted for all capital changes affecting the particular index since the base date. See: Footsie
(FTSE) (pronounced footsie).
Services performed by the Federal Reserve Banks for the U.S. government. These include maintaining deposit accounts for the Treasury Department, paying U.S. government checks drawn on the Treasury, and issuing and redeeming savings bonds and other government securities.
Accounting period covering 12 consecutive months over which a company determines earnings and profits. The fiscal year serves as a period of reference for the company and does not necessarily correspond to the calendar year.
The matching of the investor's requirements and needs such as risk tolerance and growth potential preference with a specific investment. Also, how well or how poorly a regression line represents the data points it is based on. A good ‘fit’ indicates a high correlation coefficient.
For this type of index, the value in any specific time period is based on the value in the initial time period and this base remains unchanged throughout the index. This is different from a chain base index in which values in any period are based on the preceding time period. See: Base period, Chain base index, Index number
A measure of a firm's ability to meet its fixed-charge obligations: the ratio of (Earnings before interest, depreciation and amortization minus unfunded capital expenditures and distributions) divided by
total debt service (annual principal and interest payments). Notice that lease payments are sometimes included in the calculations.
Exchange traded equity or index options, where the investor can specify within certain limits the terms of the options, such as exercise priceExpiration date, exercise type, and settlement calculation.
A country's decision to allow its currency value to change freely. The currency is not constrained by central bank intervention and does not have to maintain its relationship with another currency in a narrow band. The currency value is determined by trading in the foreign exchange market.
Purchase or sale of the currencies of other nations by a central bank for the purpose of influencing foreign exchange rates or maintaining orderly foreign exchange markets. Also called foreign-exchange market intervention.
The area of a stock exchange where activetrading occurs. Also the price at which a stop order is activated (when the price drops low enough
to activate such an order). In context of interest rates, a level which an interest rate or currency is structured not to go below. In context of OTC interest rate options, a series of interest rate put options, where the buyer of the floor guarantees a minimum interest income
Used by companies that are in such bad shape that there is no other way to get financing. This instrument is
similar to a convertible bond, but convertible at a discount to the share price at issuance and for a fixed dollar amount rather than a specific number of shares. The further the stock falls, the more shares you get. Popular in the mid to late 1990s. Also known as toxic convertibles or death spiral convertibles.
Events outside the control of the parties. These events are acts of
man, nature, governments and regulators, or impersonal events. Contract performance is forgiven or extended by the period of force majeure.
Central governments of foreign countries, including all departments and agencies of national governments; central banks, exchange authorities, and all fiscal agents of foreign national governments that undertake activities similar to those of a treasury, central bank, or stabilization fund; diplomatic and consular establishments of foreign national governments; and any international or regional organization, including subordinate and affiliateagencies, created by treaty or convention between sovereign states.
Foreign official institutions; the corporations and agencies of foreign central governments, including development banks and institutions, and other agencies that are majority owned by the central government or its departments; and state, provincial and local governments of foreign countries and their departments and agencies.
All institutions and individuals living outside the United States, including
US citizens living abroad, and branches, subsidiaries, and other affiliates
abroad of US banks and business concerns; also central governments, central banks, and other official institutions of countries other than the United
States, and international and regional organizations, wherever located. Also
refers to persons in the United States to the extent that they are known by
reporting institutions to be acting for foreigners.
A shorter form of registration statement than the Form S-1 that can be used by certain already-public companies to sell additional shares. It is also the form most often used to cover resales of restricted securities by selling stockholders.
The purchase in the cash market of the difference between what you are obligated to deliver in a forward contract and the amount of the asset you own. For example, if you agreed to sell 100,000 bushels of corn in September in a forward contract, but you only have 60,000, you need to purchase 40,000 to cover your obligation.
A type of foreign exchange transaction whereby a contract is made to exchange one currency for another at a fixed date in the future at a specified exchange rate. By buying or selling forward exchange, businesses protect themselves against a decrease in the value of a currency they plan to sell at a future date.
A projection of future interest rates calculated from either spot rates or the yield curve. For example, suppose the one-year government bond was yielding 2% and the two-year bond was yielding 4%. The one year forward rate represents the one-year interest rate one year from now. You would solve the formula (1.04)^2=(1.02)(1+F). F is 6.03%.
Calculate the one-year forward rate. For example, suppose the one-year government bond was yielding 2% and the two-year bond was yielding 4%. The one year forward rate represents the one-year interest rate one year from now. You would solve the formula (1.04)^2=(1.02)(1+F1). F is 6.03%. Now calculate the two-year forward rate one year from now. For example, suppose again the one-year bond is yielding 2% and the three-year bond was yielding 5% (annual basis). (1.05)^3=(1.02)(1+F2)^2. F2=6.53% Continue this exercise for all maturities and you have the one-year forward yield curve. The yield curve graph is usually yield (y-axis) against maturity (x-axis).
Acts as a travel agent for cargo. A forwarder specializes in arranging the transport and completing required shipping documentation. Some are affiliated with NVOCC services. In the United States they are licensed by the Federal Maritime Commission.
Under section 401(K) of the Internal Revenue Code, a deferred compensation plan set up by an employer so that employees can set aside money for retirement on a pre-tax basis. Employers may match a percentage of the amount that employees contribute to the plan. Contributions by both employees and employers, as well as investment earnings and interest, are not taxed until the employee withdraws the money; if the employee withdraws the money before retirement age, he or she pays an early withdrawal penalty tax. Currently, employees are allowed to annually contribute up to 15 percent of their salary but no more than $11,000 ($12,000 for people 50 or older). Many employers now offer these deferred compensation plans in lieu of or in addition to pensions.
Under section 403(b) of Internal Revenue Code, 403(b) plan is a tax-advantaged retirement savings plan for public education organizations, cooperative hospital service organizations, and some non-profit employers. Tax treatment is similar to that of 401(K) plan.
An object in which the parts are in some way related to the whole. That is,
the individual components are "self-similar." An example is the branching
network in a tree. While each branch, and each successive smaller branching is different,
they are qualitatively similar to the structure of the whole tree.
A number that quantitatively describes how an object fills its space. In Euclidean, or Plane geometry, objects are solid
and continuous. That is, they have no holes or gaps. As such, they have integer
dimensions. Fractals are rough and often
discontinuous, like a wiffle ball, and so have fractional, or fractal dimensions.
The fractal market hypothesis states that (1) a market consists of many investors with different investment horizons, and (2)
the information set that is important to each investment horizon is different. As long as
the market maintains this fractal structure, with
no characteristic time scale, the market remains
stable. When the market's investment horizon
becomes uniform, the market becomes unstable because everyone is trading based upon
the same information set. Theory due to Ed Peters.
An Incoterm (FAS) that means the seller is responsible for the cost of transporting and delivering goods alongside a vessel in a port in his or her country. Since the buyer has responsibility for export clearance under FAS, it is not a practical Incoterm for U.S. exports. FAS should be used only for ocean shipments since risk and responsibility shift from seller to buyer when the goods are placed within the reach of the ship's tackle (crane).
Sales (Revenues from operations)
- COGS (Cost of goods sold-labor, material, book depreciation) - SG&A (Selling, general administrative costs)
EBIT (Earnings before interest and taxes or Operating Earnings) - Taxes (Cash taxes)
EBIAT (Earnings before interest after taxes)
+ DEP (Book depreciation)
- CAPX (Capital expenditures) - ChgWC (Change in working capital)
C (Free cash flows)
There is an issue as to whether you want to define the FCFs to the firm as a whole (the cash
flow to all of its security holders), or the FCFs only to the firm's equity holders. For firm valuation, you want the former; for stock valuation you want the
To value the firm, calculate the stream of FCFs to the firm and discount this stream
by the firm's WACC (Weighted average cost of capital). This will give you the value
of a levered firm, including the tax benefits of debt financing. Alternatively, you
can discount the firm's FCFs by its unlevered cost of capital and add separately the
present value of the tax benefits.
To value the firm's equity, you can either take the above number and subtract the
market value of all outstandingdebt (liabilities) or you can
calculate the FCFs to the firm's equity holders and discount this stream by the
firm's levered equity cost of capital.
Notice that changes in working capital have the same effect on free cash flows as do changes
in physical capital, i.e., capital expenditures. For example, suppose you had
to spend $XX to increase the capacity of your plant. This expenditure would be
a reduction in free cash flow in the year it was made. Likewise, if you had to
increase the level of your cash balance, inventory or receivables by $XX to
accommodate greater sales, then this too would result in a like reduction in
free cash flows in the year the level of working capital was increased.
[Definition and discussion courtesy of Professor Michael Bradley.]
Usually refers to indices constructed by Morgan Stanley Capital International such that the market capitalization weights reflect the degree to which a stock is investible by foreigners. For example, if a stock has $700 million capitalization but government restrictions only allow up to 50% to be held by foreigners, then the weight in the Free index would by $350 million. The Standard and Poors/International Finance Corporation indices call their
equivalent indices Investible Indices (IFCI).
The Act was signed by President Lyndon B. Johnson on September 6, 1966. This act allows for the full or partial disclosure of previously unreleased information and documents controlled by the US Government.
"stickiness" involved in making transactions; the total process including time, effort, money, and tax effects of gathering information and making a transaction such as buying a stock or borrowingmoney.
The person whose responsibility it is to oversee the allocation of the pool of moneyinvested in a particular mutual fund. The fund manager is charged with investing the money to attain returns consistent with the level of risk outlined in the mutual fund prospectus.
A legally binding agreement to buy or sell a commodity or financial instrument in a designated future month at a price agreed upon at the initiation of the contract by the buyer and seller. Futures contracts are standardized according to the quality, quantity, and delivery time and location for each commodity. A futures contract differs from an option in that an option gives one of the counterparties a right and the other an obligation to buy or sell, while a futures contract is the represents an obligation to both counterparties, one to deliver and the other to accept delivery. A future is part of a class of securities called derivatives, so named because such securities derive their value from the worth of an underlying investment.
A system which mathematically models complex relationships which are
usually handled in a vague manner by language. Under the title of "Fuzzy
Logic" falls formal fuzzy logic (a multi-valued form of logic), and fuzzy sets. Fuzzy
sets measure the similarity between an object and a group of objects. A member of a
fuzzy set can belong to both the set, and its complement. Fuzzy sets can more closely
approximate human reasoning than traditional "crisp" sets. See: Crisp sets.