CAD Europe's 1993 Capital Adequacy Directive.

CAD II A 1998 update to CAD.

CAD III European regulation implementing the Basel II Accord.

calendar spread 1) the difference between the values of a single variable at two points in time—see spreads; 2) a long-short futures spread with both contracts on the same underlier but with different maturity months—see futures spread; and 3) An options spread with options expiring on different dates—see options spread.

call An option to purchase an asset.

call premium The difference between a callable security's call price and par value (or book value).

call price The price at which a callable security is redeemed.

call protection A provision that limits or disallows the calling of a security during its first few years.

call provision A feature of some securities providing for their early retirement ("call" or "redemption").

call schedule A schedule indicating call prices at which a callable security can be redeemed over time.

call spread An options spread comprising a long-short position in call options.

callable bond A bond that can be retired ("called" or redeemed") early.

callable preferred stock Preferred stock that can be called by the issuer.

callable security A security that can be retired ("called" or redeemed") early.

cap A type of derivative instrument that offers protection against rising interest rates.

capacity to contract Legal authority to enter into a given contract.

capital A firm's value—assets minus liabilities.

capital adequacy A condition where a financial institution or trading organization has sufficient capital for the risks it is taking.

capital allocation Formal allocation of capital charges to a firm's business lines or transactions.

capital asset pricing model A model for valuing financial assets based upon their systematic risk.

capital charge Capital required to support a given business line or transaction.

capital market line A line which describes the optimal relationship between risk and reward for an investment portfolio.

capital ratio The ratio of a firm's capital to its assets.

capital requirements A financial institution's or trading organization's requirements to hold capital for the specific risks it takes.

Capital structure arbitrage Any trading strategy that seeks to profit from inconsistencies in the relative pricing of a firm's debt and equity.

caplet One of a series of options that comprise an interest rate cap.

CAPM Capital Asset Pricing Model.

cartwheel An options spread that is long (short) a ratio call spread and short (long) a ratio put spread.

cash CDO A CDO whose collateral comprises cash positions in bonds, loans or other forms of debt.

cash-flow-at-risk A category of cash-flow risk measures.

cash flow CDO A CDO whose payments to investors are contingent on the adequacy of collateral cash flow.

cash flow matching Structuring a fixed income portfolio so each day's net cash flow is zero.

cash flow risk Risk due to uncertainty in future reported cash flows.

cash instrument An instrument whose value, unlike that of a derivative instrument, is determined directly by the markets.

cash loan A loan that commences immediately.

cash management T-bill A Treasury bill issued with a non-standard maturity.

cash matching Cash flow matching.

cash-or-nothing binary A type of binary option.

cash price The price at which trades for cash settlement transact.

cash settlement 1) in trading, settlement on the trade date—see settlement; 2) a derivative instrument has cash settlement if it settles for a cash payment in lieu of physical delivery of an underlier—see physical settlement, cash settlement.

cash trade A trade that settles on the trade date.

Cauchy distribution A bell-shaped distribution that is more peaked and has fatter tails than the normal distribution.

CBO Collateralized bond obligation.

CD Certificate of deposit.

CDO Collateralized debt obligation.

CDSC contingent deferred sales charge

central limit theorem A theorem that explains why the normal distribution plays such an important role in probability theory.

certificate of deposit A money market instrument issued by a depository institution as evidence of a time deposit.

CFaR Cash-flow-at-risk

CFTC Commodity Futures Trading Commission.

charter abuse An archaic practice of devoting a corporation to some purpose other than that specified in its charter.

chi-squared distribution A continuous probability distribution related to the normal distribution.

chief risk officer Head of risk management.

Cholesky algorithm A standard algorithm for calculating a positive definite matrix's Cholesky matrix.

Cholesky factorization A factorization of a positive definite matrix into the product of its Cholesky matrix and the transpose of the Cholesky matrix.

Cholesky matrix A lower-triangular matrix that acts as a matrix "square root" for a positive definite matrix.

chooser option A derivative that converts to a vanilla put or a vanilla call at the holder's choice.

Citron, Robert Treasurer of Orange County, California whose speculative activities lead to the county's 1994 bankruptcy.

clean price A bond price quoted without accrued interest.

cliquet option A ratchet option.

CLO Collateralized loan obligation.

closed-end fund Mutual fund with a fixed number of outstanding shares, which trade on a stock exchange.

closed-end mortgage bond A mortgage bond that protects the seniority of existing bondholders in the event that new bonds are issued.

closed form expression Closed form solution.

closed-form solution A formula that can be evaluated in a finite number of standard operations.

closed form VaR Linear VaR.

closeout netting The netting of obligations on derivative instruments that are terminated early.

CLS Continuous Linked Settlement.

CLS Bank International The special purpose bank that settles foreign exchange trades under Continuous Linked Settlement.

CMO collateralized mortgage obligation

COFI Cost of Funds Index.

collar An options spread comprising a long call and short put.

collateral Assets held to secure an obligation.

collateral arrangement An agreement between two parties for the ongoing collateralization of a repo, securities lending, derivative or other transaction.

collateralized bond obligation A securitized interest in a portfolio of bonds.

collateralized debt obligation A securitized interest in a portfolio of bonds, loans or other debt.

collateralized loan obligation A securitized interest in a portfolio of loans.

collateralized mortgage obligation A type of mortgage-backed security.

commercial bank A type of bank defined by US law that engages in lending and deposit taking businesses.

commercial paper Short-term promissory notes issued primarily by corporations.

Commodity Exchange Act US legislation passed in 1974 forming the Commodity Futures Trading Commission.

Commodity Futures Modernization Act US legislation passed in 2000 clarifying that OTC derivatives markets were to remain largely unregulated.

Commodity Futures Trading Commission The regulator of futures and options exchanges in the United States.

common stock Non-preferred stock.

companion bond A bond that takes most of the prepayment in a PAC CMO structure.

complex number A number of the form a + bi, where a and b are real, and i is the imaginary number .

complement The set of elements contained in one set but not another.

compound interest Any of several methods of crediting interest in which interest is earned on interest.

compound option An option on an option.

conditional heteroskedasticity A condition where a stochastic process has non-constant conditional second moments.

conditional homoskedasticity A condition where a stochastic process has constant conditional second moments.

conditional prepayment rate A metric of annual prepayment for mortgage-backed securities.

contango A condition where forward prices exceed spot prices.

contingent deferred sales charge Back-end sales load charged on a mutual fund, typically declining with the number of years the fund was held.

contingent premium option An option for which the premium is deferred to expiration and is paid only if the option expires in-the-money.

contingent voting Voting by preferred stockholders during a suspension of dividend payments.

continuous call A provision allowing a callable security to be called on any business day following its issuance or first call date.

continuous compound interest A limiting form of compound interest where the frequency with which interest is credited approaches infinity.

Continuous Linked Settlement A settlement system for foreign exchange trades.

continuous process A stochastic process that has a term associated with every real number.

continuous-time Refers to continuous stochastic processes.

contract formation Steps through which a legally enforceable contract is entered into.

contract frustration Invalidation of a contract by unforeseen circumstances.

contractarian theory of the firm The contracts theory of the firm.

contracts theory of the firm A theory that defines a firm as an aggregation of contracts.

control variates A technique of variance reduction for the Monte Carlo method.

conversion price The par value of a convertible security that is convertible into one share of common stock.

conversion ratio The number of shares of common stock into which a convertible security can be converted.

conversion value What the market value of a convertible security would be if it were immediately converted to common stock.

convertible Convertible security.

convertible arbitrage A market neutral trading strategy that exploits relative mispricings of a firm's convertible bonds.

convertible bond A bond that can be exchanged for (converted into) shares of common stock.

convertible preferred stock Preferred stock that can be exchanged for (converted into) shares of common stock.

convertible security A hybrid security that can or must be exchanged for some other security, usually the issuer's common stock.

convexity A factor sensitivities indicating a fixed income portfolio's second order (quadratic) sensitivity to the parallel shifts in the spot cure.

convexity bias A bias in Eurodollar futures rates that makes them slightly higher than corresponding forward rates.

Cornish-Fisher expansion A formula for approximating quintiles of a random variable based only on its first few cumulants.

corporate bond A bond issued by a corporation.

corporate governance movement Collectively, a number of initiatives to reform the governance of corporations, starting during the latter part of the 20th century.

corporate risk management Practices that serve to optimize risk taking in a context of book value accounting.

corporation 1) A group of people, such as a guild or city, with a legal collective identity. 2) A joint-stock, limited liability corporation.

correlation A parameter, related to covariance, that indicates the tendency for two random variables to "move together" of "co-vary."

correlation matrix A symmetric matrix indicating all the correlations of a random vector.

cost, insurance, freight A method for settling physical commodity trades.

Cost of Funds Index A yield index.

costless collar A collar whose strike prices are set so that the net cost of the collar is zero.

coupon An interest payment made by a bond.

coupon bond A bond that pays coupons.

coupon clipping date The date on which a coupon is to be clipped from a bearer bond.

coupon date The date on which a coupon is paid.

coupon leverage The amount by which the reference rate is multiplied to determine the floating rate payable by an inverse floater.

coupon strip A Treasury strip formed from a coupon of a Treasury security.

covariance A parameter, related to correlation, that indicates the tendency for two random variables to "move together" of "co-vary."

covariance matrix A symmetric matrix indicating all the covariances and variances of a random vector.

covariance stationarity A property of some stochastic processes.

Cowles, Alfred Early researcher of the random walk hypothesis.

CP rate An average commercial paper rate reported by the Federal Reserve.

CPR Conditional prepayment rate.

crack spread A spread between crude and refined oil prices.

crash of 1929 A famous stock market crash.

credit A counterparty that poses credit risk.

credit analysis Any process for assessing the credit quality of a counterparty.

credit analyst A professional who performs credit analysis.

credit default swap A type of credit derivative.

credit derivative A derivative instrument designed to transfer credit risk from one party to another.

credit enhancement Any methodology that reduces the credit risk of a transaction with a counterparty.

credit exposure The potential for loss in the event of a default.

credit insurance A form of insurance designed to protect against default by a debtor.

credit linked note A type of credit derivative.

credit quality encompasses both the likelihood of a counterparty defaulting as well as possible recovery rates in the event of a default.

credit rating A metric of the credit quality of either a counterparty or a specific obligating of a counterparty.

credit risk Risk due to uncertainty in a counterparty's ability to meet its obligations.

credit scoring a formulaic procedure for assessing credit quality.

credit spread A yield or interest rate spread due to credit risk.

cross correlation A correlation between one component of a stochastic process and another lagged by a certain period of time.

cross-currency derivative quanto

crude Monte Carlo estimator A Monte Carlo estimator implemented without variance reduction.

cubic spline A real function constructed by piecing together cubic polynomials on consecutive intervals.

cubic spline interpolation Any of several methods of interpolating with cubic splines.

cumulant A parameter of a random variable similar to a moment.

cumulative preferred stock Preferred stock whose dividends may be postponed but not cancelled.

currency code Any three letter code used to designate a particular currency.

currency swap A swap in which two loans in different currencies are exchanged.

current yield 1) A bond's yield calculated as annual coupon divided by clean price. 2) A stock's yield calculated as annual dividend divided by the stock's market price.

curse of dimensionality A tendency of certain computational techniques for their computational expense to increase exponentially with the dimensionality of the problem to be solved.

custodian An institution that holds securities for investors.

custody The safekeeping of securities and related services.

cylinder A type of derivatives hedge.

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