Midterm

A transaction involving the delayed delivery of two currencies on an agreed future date, at an agreed price. Forward contracts are generally not traded on organized exchanges, and their contractual terms are not standardized.

A contract between two parties to exchange sequences of payments during a specified period, where each sequence is tied to a different currency.

A financial theory stating that the forward exchange rate between two currencies should equal the spot exchange rate adjusted for the interest rate differential between the two currencies. It ensures no arbitrage opportunities exist.

A transaction involving the exchange of two currencies at a rate agreed on the date of the contract for settlement in two business days or less.

A transaction involving the actual exchange of two currencies on a specific date at a rate agreed at the time of the conclusion of the contract, and a reverse exchange of the same two currencies at a date further in the future at a rate agreed at the time of the contract.

The price of a base currency in terms of the quote currency. Spot transactions have immediate delivery, while forward transactions have future delivery.

A financial theory stating that the expected return from investing in different currencies should be equal, implying that the change in the nominal exchange rate should exactly compensate for any difference in interest rates.

A portfolio that is long high-interest rate currencies and short low-interest rate currencies, used to explain the cross-section of currency returns through exposure to global risk factors.

An investment strategy that involves borrowing in low-interest rate currencies and investing in high-interest rate currencies to profit from the interest rate differential.

A market condition where futures prices are below the expected spot prices, often due to the desire of commodity producers to hedge against future price fluctuations.

A market condition where futures prices are above the expected spot prices, often due to consumers hedging against future price increases.

The return generated from rolling over futures contracts as they approach maturity, particularly when the price of the contract being sold is higher than the price of the contract being purchased.

A global decentralized market for trading currencies, with a daily trading volume exceeding $7 trillion, higher than global stock markets and GDP.

Financial instruments whose value is derived from the exchange rates of two currencies. Examples include forwards, futures, options, and swaps.

The risk that one party will fail to deliver the terms of a contract with another party at the time of settlement.

The current exchange rate at which a currency pair can be bought or sold. It involves immediate delivery.

The agreed-upon exchange rate for a currency pair to be exchanged at a future date.

The natural logarithm of the spot exchange rate, often used in financial models to simplify calculations.

The natural logarithm of the forward exchange rate, used in financial models to predict future exchange rates.

The theoretical return on an investment with zero risk, typically represented by government bonds.

A condition where the forward exchange rate eliminates arbitrage opportunities by equating the returns on domestic and foreign investments.

A theory stating that the difference in interest rates between two countries is equal to the expected change in exchange rates between the countries' currencies.

The simultaneous purchase and sale of an asset to profit from a difference in the price in different markets.

A statistical method used to examine the relationship between variables, often used to test financial theories like UIP.

An investment strategy that involves borrowing in a currency with a low interest rate and investing in a currency with a high interest rate.

The potential loss in value of an investment, particularly in adverse market conditions.

Essential raw materials from the primary sector, such as agriculture and mining, including energy, metals, and agricultural products.

Standardized contracts to buy or sell a specific commodity at a future date at a predetermined price.

A market condition where futures prices are below the expected spot prices, often due to producers hedging against future price fluctuations.

A market condition where futures prices are above the expected spot prices, often due to consumers hedging against future price increases.

The return generated from rolling over futures contracts as they approach maturity, particularly when the price of the contract being sold is higher than the price of the contract being purchased.

A security issued by a debtor to its creditors promising a certain repayment structure

The average return assuming reinvestment of coupons at this average return

A measure of the sensitivity of a bond's price to changes in its yield

The extra return required by investors for holding long-term bonds

The priority a claim receives in default, with more senior claims paid first

Contractual arrangements to mitigate the bondholder-shareholder conflict

A bond that the issuer can buy back at a pre-specified price

A bond that the investor can sell back to the issuer at a pre-specified price

A bond that can be converted into shares of company stock

The extra yield on a corporate bond relative to a comparable government bond

An independent opinion on the creditworthiness of an issuer or specific issue

A financial contract that hedges against credit risk by paying an annuity premium

The extra yield required by investors for holding less liquid bonds

A bond that has been downgraded from investment grade to non-investment grade

The variation in returns across different bonds or securities

The percentage of a bond's value recovered in the event of default

A matrix showing the probability of a bond moving from one rating to another over time

A model that uses option pricing theory to value corporate debt

The theoretical return on an investment with zero risk, typically represented by government bonds

The likelihood that a bond issuer will fail to make the required payments

The product of the default probability and the loss given default

The extra yield required by investors for bearing credit risk

The extra yield required by investors for holding less liquid assets

The impact of taxes on the yield and pricing of bonds

The preferences of investors for certain types of bonds, such as green bonds

The conflict of interest between bondholders and shareholders

The movement of a bond's rating from one category to another

The number of standard deviations that firm value is away from the default point

A model that maps the distance-to-default to an expected default rate using historical data

The difference between the CDS spread and the bond yield spread

A measure of the transitory component of observed bond prices

The low prices at which bonds are sold when investors are forced to sell

A model that explains the cross-section of bond returns using multiple factors

An equity market factor that predicts bond returns

An equity market factor that predicts bond returns

An equity market factor that predicts bond returns

A portfolio optimization technique that requires high-quality input estimates for expected returns, volatilities, and correlations

The difference between the true and the estimated value of a parameter

A portfolio that minimizes risk for a given level of expected return

An investment strategy that allocates capital based on the risk contribution of each asset

An investment strategy that allocates capital based on the reciprocal values of assets' volatilities

Portfolio weights based on the market capitalization of assets

Techniques that emphasize the worst outcome within the uncertainty set

Simulating scenarios, optimizing, and averaging allocations across scenarios

Spreading investments across different assets to reduce risk

Adjusting portfolio allocations back to target weights to maintain diversification

Taking offsetting positions to reduce risk

Paying an upfront cost to limit specific downside risks

Strategies that adjust the portfolio based on market conditions to control risk

Selling risky assets when the portfolio value hits a predetermined floor

Combining a long position in a risky asset with a protective put to guarantee a minimum wealth level

Investing a fixed multiplier of the cushion (difference between portfolio value and protection level) in risky assets

Adjusting positions in risky assets based on estimated volatility to enhance returns