Leverage

<body onLoad="MM_checkPlugin('Shockwave Flash','','http://www.riskglossary.com/default_nofl.htm',false);return document.MM_returnValue" stylesrc="../_private/template.htm" bgcolor="#FFFFFF" link="#669933" vlink="#000000" alink="#000000"> <div align="left"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table1"> <tr> <td width="740"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" height="37" id="table2"> <tr> <td height="35" width="100%"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" id="table3"> <tr> <td width="100%" align="left" valign="top"> <p class="header_gold">Leverage</td> <td width="45" align="right" valign="bottom"> <map name="FPMap6"> <area href="http://www.contingencyanalysis.com" shape="rect" coords="1, 0, 44, 11" target="_top"> </map> <img border="0" src="../images/home.gif" usemap="#FPMap6" width="45" height="12"></td> </tr> </table> </td> </tr> <tr> <td width="100%" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td width="0%" valign="top" bgcolor="#FFFFCC"> <table border="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" cellspacing="1" id="table4"> <tr> <td width="0%" align="left" valign="top"> <p class="header2_black">Explained:<br> <img border="0" src="../images/blank_1x100.gif" width="100" height="1"></td> <td width="0%" align="left" valign="top"><p class="word_list"> <a href="#Leverage">Leverage</a><br> <img border="0" src="../images/blank_1x160.gif" width="160" height="1"></td> <td width="100%" align="left" valign="top"><p class="word_list"> <br> <img border="0" src="../images/blank_1x160.gif" width="160" height="1"></td> </tr> </table> </td> </tr> </table> <table border="0" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111" width="310" align="right" id="table5"> <tr> <td align="right" width="9" height="14"></td> <td width="300" height="14"> <font size="2"> </font><font size="4"> </font></td> </tr> <tr> <td align="right" width="9"> </td> <td width="300"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script>  </td> </tr> </table> <p class="body" style="margin-top: 24"><b><a name="Leverage">Leverage</a></b> is a notion whose meaning has evolved as a result of financial innovation during recent decades. Traditionally, leverage related to the relative proportions of debt and <a href="../articles/common_stock.htm">equity</a> funding a venture. The higher the proportion of debt, the more leverage. A leveraged venture entailed more <a href="../articles/risk.htm">risk</a> and potential reward for equity holders.</p> <p class="body" style="margin-top: 20; margin-bottom: 32">Consider a stylized example. A <a href="../articles/corporation.htm">corporation</a> is established by ten investors. Each puts up <a href="../articles/currency_codes.htm">USD</a> 100 in equity. There is no debt. After one year, the corporation will be liquidated. At that time, if its net assets are worth USD 900, each equity investor will realize a –10% <a href="../articles/return.htm">return</a>. If assets are worth USD 1100, each investor will realize a 10% return. This is summarized in Exhibit 1.</p> <div align="center"> <center> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="425" cellpadding="0" id="table6"> <tr> <td> <p class="exhibit_header"><span class="exhibit_header">Example: Unleveraged Corporation</span><br> <span class="exhibit_subheader">Exhibit 1</span></td> </tr> <tr> <td bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" bgcolor="#FFFFCC" id="table7"> <tr> <td width="275" class="explanatory_text" height="20" style="border-bottom: 1px solid #CC9966"> <p style="margin-top: 3; margin-bottom: 3"> </td> <td width="75" class="explanatory_text" height="20" style="border-bottom: 1px solid #CC9966"> <p style="margin-top: 3; margin-bottom: 3"><b>Case A</b></td> <td width="75" class="explanatory_text" height="20" style="border-bottom: 1px solid #CC9966"> <p style="margin-top: 3; margin-bottom: 3"><b>Case B</b></td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b>Initial equity investment</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">1000</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">1000</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b> Investment per equity investor</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">100</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">100</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b>Initial debt investment</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">0</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">0</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b> Investment per debt investor</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">–</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">–</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b> Corporation's end-of-year asset value</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">900</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">1100</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b>Cost of paying off debt investors</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">0</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">0</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b>Residual value for equity investors</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">900</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">1100</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b>Residual value per equity investor</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">90</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">110</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b>Return realized by each equity investor</b></td> <td width="75" class="explanatory_text" height="20" align="right"> –10%</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 3">10%</td> </tr> </table> </td> </tr> <tr> <td style="border-top: 2px solid #CC9966"> <p class="exhibit_legend">Without any debt financing, equity investors receive returns in proportion to the corporation's overall performance.</td> </tr> </table> </center> </div> <p class="body">Now consider the same corporation, but financed differently. The same ten investors each put up USD 100, but only five of them hold equity. The other five hold debt. Debt holders are guaranteed to receive USD 105. At the end of the year, if the corporation's assets are worth USD 900, there will be USD 375 left over after paying debt holders. Each equity investor will realize a –25% <a href="../articles/return.htm">return</a>. If, on the other hand, the corporation's assets are worth 1100 at year end, there will be USD 575 left over after paying debt holders. Each equity investor will realize a 15% return. </p> <div align="center"> <center> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="425" cellpadding="0" id="table8"> <tr> <td> <p class="exhibit_header"><span class="exhibit_header">Example: Leveraged Corporation</span><br> <span class="exhibit_subheader">Exhibit 2</span></td> </tr> <tr> <td bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" bgcolor="#FFFFCC" id="table9"> <tr> <td width="275" class="explanatory_text" height="20" style="border-bottom: 1px solid #CC9966"> <p style="margin-top: 3; margin-bottom: 3"> </td> <td width="75" class="explanatory_text" height="20" style="border-bottom: 1px solid #CC9966"> <p style="margin-top: 3; margin-bottom: 3"><b>Case A</b></td> <td width="75" class="explanatory_text" height="20" style="border-bottom: 1px solid #CC9966"> <p style="margin-top: 3; margin-bottom: 3"><b>Case B</b></td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b>Initial equity investment</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">500</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">500</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b> Investment per equity investor</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">100</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">100</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b>Initial debt investment</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">500</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">500</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b> Investment per debt investor</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">100</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">100</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b> Corporation's end-of-year asset value</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">900</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">1100</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b>Cost of paying off debt investors</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">525</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">525</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b>Residual value for equity investors</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">375</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">575</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b>Residual value per equity investor</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">75</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">115</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b>Return realized by each equity investor</b></td> <td width="75" class="explanatory_text" height="20" align="right"> –25%</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 3">15%</td> </tr> </table> </td> </tr> <tr> <td style="border-top: 2px solid #CC9966"> <p class="exhibit_legend">With debt financing, equity investors receive returns out of proportion to the corporation's overall performance. The returns are "leveraged."</td> </tr> </table> </center> </div> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="345" align="left" id="table10"> <tr> <td width="336" height="10"><font size="2"> </font></td> <td width="9" height="10"></td> </tr> <tr> <td width="336"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script>  </td> <td width="9"> </td> </tr> </table> <p class="body">As the examples illustrate, debt financing magnifies the risk as well as the possible reward for equity holders. Traditionally, the word "leverage" referred to the use of debt financing. In recent decades, that meaning has shifted to encompass any technique that similarly magnifies risk and reward for an investor.</p> <p class="body">Consider a <a href="../articles/option.htm">call option</a>. It offers a leveraged alternative to taking an outright position in an underlier. Let's compare the risk-reward characteristics of an outright position vs. a call option position.</p> <p class="body">Suppose <a href="../articles/common_stock.htm">shares</a> of XYZ corporation are trading at USD 100 and currently pay no <a href="../articles/common_stock.htm">dividends</a>. An investor pays USD1000 to buy 10 shares. She holds the position for three months. If, at the end of that period, XYZ is trading at USD 92, the investor will realize a –8% return. If it is trading at USD 108, the return will be 8%. See Exhibit 3.</p> <div align="center"> <center> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="425" cellpadding="0" id="table11"> <tr> <td> <p class="exhibit_header"><span class="exhibit_header">Example: Unleveraged Equity Position</span><br> <span class="exhibit_subheader">Exhibit 3</span></td> </tr> <tr> <td bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" height="120" bgcolor="#FFFFCC" id="table12"> <tr> <td width="275" class="explanatory_text" height="20" style="border-bottom: 1px solid #CC9966"> <p style="margin-top: 3; margin-bottom: 3"> </td> <td width="75" class="explanatory_text" height="20" style="border-bottom: 1px solid #CC9966"> <p style="margin-top: 3; margin-bottom: 3"><b>Case A</b></td> <td width="75" class="explanatory_text" height="20" style="border-bottom: 1px solid #CC9966"> <p style="margin-top: 3; margin-bottom: 3"><b>Case B</b></td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b>Purchase price per share</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">100</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">100</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b>Number of shares purchased</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">10</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">10</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b>Total investment</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">1000</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">1000</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b>Stock price after three months</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">92</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">108</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b> Total value after three months</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">920</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">1080</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b>Return</b></td> <td width="75" class="explanatory_text" height="20" align="right"> –8%</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 3">8%</td> </tr> </table> </td> </tr> <tr> <td style="border-top: 2px solid #CC9966"> <p class="exhibit_legend">Direct investment in a company's stock offers returns directly proportional to the stock's performance.</td> </tr> </table> </center> </div> <p class="body">Now suppose, instead of taking an outright position in XYZ <a href="../articles/common_stock.htm">stock</a>, the investor purchases 3-month call options struck at the money. These are trading at USD 5, so the investor spends USD 1000 to buy 200 options. If, at the end of three months, XYZ is trading at USD 92, the options will expire worthless. The investor's return will be –100%. If the stock is trading at USD 110, her return will be 60%. See Exhibit 4.</p> <div align="center"> <center> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="425" cellpadding="0" id="table13"> <tr> <td> <p class="exhibit_header"><span class="exhibit_header">Example: Leverage with Call Options</span><br> <span class="exhibit_subheader">Exhibit 4</span></td> </tr> <tr> <td bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" height="120" bgcolor="#FFFFCC" id="table14"> <tr> <td width="275" class="explanatory_text" height="20" style="border-bottom: 1px solid #CC9966"> <p style="margin-top: 3; margin-bottom: 3"> </td> <td width="75" class="explanatory_text" height="20" style="border-bottom: 1px solid #CC9966"> <p style="margin-top: 3; margin-bottom: 3"><b>Case A</b></td> <td width="75" class="explanatory_text" height="20" style="border-bottom: 1px solid #CC9966"> <p style="margin-top: 3; margin-bottom: 3"><b>Case B</b></td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b>Purchase price per option</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">5</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">5</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b>Number of options purchased</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">200</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">200</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b>Total investment</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">1000</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">1000</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b>Stock price at expiration</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">92</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">108</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b>Option value at expiration</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">0</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">8</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b>Total value at expiration</b></td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 12">0</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 15">1600</td> </tr> <tr> <td width="275" class="explanatory_text" height="20"> <p style="margin-left: 5"><b>Return</b></td> <td width="75" class="explanatory_text" height="20" align="right"> –100%</td> <td width="75" class="explanatory_text" height="20" align="right"> <p style="margin-right: 3">60%</td> </tr> </table> </td> </tr> <tr> <td style="border-top: 2px solid #CC9966"> <p class="exhibit_legend">Call options are leverage. They magnify risk and reward compared to a direct purchase of the underlier.</td> </tr> </table> </center> </div> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="345" align="right" id="table15"> <tr> <td align="right" width="9" height="10"></td> <td width="336" height="10"> <font size="2"> </font></td> </tr> <tr> <td align="right" width="9"> </td> <td width="336">  <p style="margin-top: 0; margin-bottom: 2" class="ad_legend"> <a target="_top" href="http://www.riskexpertise.com/link/advertising.htm"> <font color="#000000">Ads by Contingency Analysis</font></a></p> <p style="margin-top: 0; margin-bottom: 0"> <iframe src="http://servedbyadbutler.com/adserve/;ID=147917;size=336x265;setID=82402;type=iframe" style="margin: 0px; padding: 0px; border-width: 0px" width="336" height="265" frameborder="0" marginwidth="0" marginheight="0" scrolling="no" name="I1"> <![if lt IE 4]> <script src="http://servedbyadbutler.com/adserve/;ID=147917;size=336x265;setID=82402;type=js" type="text/javascript"> </script> <noscript> <a href="http://servedbyadbutler.com/go2/;ID=147917;size=336x265;setID=82402"> <img src="http://servedbyadbutler.com/adserve.ibs/;ID=147917;size=336x265;setID=82402;type=img" border="0" height="265" width="336" alt=""></a> </noscript><![endif]></iframe>   </td> </tr> </table> <p class="body">Today, similar opportunities for leverage abound. Essentially all <a href="../articles/derivative_instrument.htm"> derivatives</a>—including <a href="../articles/future.htm">futures</a>, <a href="../articles/forward.htm">forwards</a>, <a href="../articles/swap.htm">swaps</a>, <a href="../articles/option.htm"> vanilla options</a> and <a href="../articles/derivative_instrument.htm"> exotics</a>—provide leveraged. They offer indirect interest in an <a href="../articles/derivative_instrument.htm">underlier</a> for an initial investment that is less than the value of that underlier. With some derivatives, such as forwards or swaps, no initial investment is required. <a href="../articles/securities_lending.htm">Securities lending</a> and <a href="../articles/repo.htm">repurchase agreements</a> can be used to leverage a portfolio. In essence, they represent secured borrowing. <a href="../articles/short_sale.htm">Short selling</a> offers leverage—proceeds of a short sale are not a loan, but they can be invested just the same. Even traditional debt-base leverage has evolved, with <a href="../articles/junk_bond.htm">junk bonds</a> emerging in the 1970s as a legitimate asset class in their own right. </p> <p class="body">The widespread proliferation of leverage during the latter half of the 20th century is perhaps the primary motivation for modern <a href="../articles/risk_management.htm">financial risk management</a>.</p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table16"> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">Related Internal Links</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC" colspan="2"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="6" id="table17"> <tr> <td width="100%"> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/asset_liability_management.htm">asset-liability management</a> <strong style="font-weight: 400">Techniques for protecting a firm's solvency in the context of accrual accounting.</strong></p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/derivative_instrument.htm">derivative instrument</a> An instrument which derives value from the value of some commodity, energy, or other financial instrument.<p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/risk_management.htm">financial risk management</a> Practices by which a firm optimizes the manner in which it takes financial risk.<p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/hedging_and_diversification.htm">hedging and diversification</a> Techniques for reducing risk.<p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/hedge_fund.htm">hedge fund</a> A largely unregulated investment fund that specializes in taking leveraged speculative positions.<p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/junk_bond.htm">junk bond</a> A bond whose credit rating is below BBB-.<p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/liquidity_risk.htm">liquidity risk</a> Risk due to uncertain liquidity.</p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/repo.htm">repurchase agreement</a> An agreement to sell and subsequently repurchase a security.</p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/risk.htm">risk</a> Comprises two components: uncertainty and exposure.</p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/securities_lending.htm">securities lending</a> The lending of securities, usually for a fee.</td> </tr> </table> </td> </tr> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">Sponsored Links</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC" width="75"> <img border="0" src="../images/ad_side_banner_1.jpg" width="103" height="285"></td> <td bgcolor="#FFFFCC" width="99%"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> 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