SD Glossary

25 delta butterfly 25 Delta butterfly is the measure of the option's convexity25 delta risk reversal 25 Delta risk reversal is the measure of the option's skew2-vol strangle A 2-vol strangle is simply a strangle...3-vol butterfly A 3-vol butterfly is a regular butterfly...Accreting swap An accreting swap is a swap in which the notional accretes (or increases) over the life...Accrual options An accrual (or floater) option is composed of a strip of ...Accumulator forward in one sided option An accumulator in one sided is an ...Accumulator forward in range optionAn accumulator in range is an accumulator...Accumulator forward out one sided optionAn accumulator out one sided is an ...Accumulator forward out range optionAn accumulator out range is an accumulator...Accumulator leverage forward The accumulating leverage forward is supported in the Single Option page in SD-FX. You...Accumulator options overview An accumulator option is a regular ...Accumulator with knock out An accumulator with knock out is a regular ...American style option An option that can be exercised at any point during the life of the contract up to and...American swaption An American swaption is a swaption that...Amortizing swap An amortizing swap is a swap in which the notional amortizes (or declines) over the life...Arbitrage Arbitrage is the ability to generate a profit without engaging in risk by taking...Asian An Asian can be priced in either pricing page. Its shortcut is aAsian strategy An Asian strategy is a combination of two of the four basic ...Asian strip An Asian strip can be priced in either pricing page. Its shortcut is asAsian strip strategy An Asian strip strategy is simply a series of ...Ask The ask price is the price at which the market maker is willing to sell an assetAsset class An asset class is a specific group of investments.ATM option An ATM (at-the-money) option is an option where the strike is the same as the current ...ATM volatility ATM volatility shows the calculated mid-rate volatility for an ...Average forward option In an average forward the payout is determined by the difference between the forward...Average life value <hr> <DIV ALIGN="RIGHT" WIDTH="100%"> <span...Average options overviewAn average option is a ...Average rate option An average rate option is a cash-settled option whose payout is calculated on the expiry...Average rate with knock in option An average rate with knock in option is an ...Average rate with knock out and rebate option An average rate with knock out option can...Average rate with knock out option An average rate with knock out option is an ...Average strike option In an average strike option the strike is not predefined. Rather it is calculated as an...Average strike with knock in option An average strike with knock in option is an ...Average strike with knock out option An average strike with knock out option is an ...Backwardation A market condition in the equity and commodity ...Barrier options overview A barrier option is a European style vanilla option that is activated (knocked in) or...BarrierAn agreed rate at which an event will occur, for example, an option is knocked in or out,...Basis point A basis point is a change in the yield of a security. One basis point is 1/100 of a...Basket options A basket option is a vanilla option which provides its holder with the right, but not the...Bear A bear is a person who expects market prices to fallBermudan style option A Bermudan style option is a mixture of European and American style options. It can...Bermudan swaption A Bermudan swaption is a swaption where...Best of option The Best Of/Worst Of option is composed of a bundle of call (put) options all with the...Bid The bid price is the price the market maker is willing to pay to buy an assetBid/ask spread The bid/ask spread is the difference between the bid (the price a market maker is...Bid/offer spread See bid/ask spreadBinary option overview (IR) See DigitalBinary options overview (FX, CM, EQ) A binary option (also known as an all or nothing option) is an option where a fixed...Black-Scholes model The Black-Scholes model (or Black-Scholes) is a mathematical formula for the theoretical...BMA index The BMA (Bond Market Association) Municipal Swap Index is a 7-day high-grade market index...BMA swap A BMA swap (or municipal interest rate swap) is an ...Bond A bond is a certificate of a debt that is usually issued by a government or large...Bonus forward A bonus forward is an option with a strike and a knock out trigger; if the trigger is...BoxA box option contains 2 triggers (T1 and T2) that define a range. It is basically a bet...Breakeven price The breakeven value is the level the spot has to reach in order for the user to make back...BRL futures option See Futures option for BRLBrownian motion Brownian motion is the pattern of random motion described by Robert BrownBull A bull is a person who expects market prices to riseButterfly A butterfly is a vanilla strategy. It is an out-of-the-money ...Butterfly spread This option strategy is built out of four options of the same option type (all calls or...CAC-40 index The CAC-40 Index is the benchmark tracking index for the Paris BourseCalendar spread <hr> <DIV ALIGN="RIGHT" WIDTH="100%"> <span...Call optionThe owner of a call option has the right to purchase and the writer has the obligation to...Call spread A call spread is a vanilla strategy. It is the simultaneous purchase and sale of a call...Callable (Bermuda) swap See Cancelable swap. Callable capped floater swap <hr> <DIV ALIGN="RIGHT" WIDTH="100%"> <span...Callable inverse floater note <hr> <DIV ALIGN="RIGHT" WIDTH="100%"> <span...Callable inverse floater swap <style type="text/css"> <!-- .bodytext {font-size: 12px; font-family:...Callable range accrual note <hr> <DIV ALIGN="RIGHT" WIDTH="100%"> <span...Callable range accrual swap <hr> <DIV ALIGN="RIGHT" WIDTH="100%"> <span...Callable zero coupon swap <hr> <DIV ALIGN="RIGHT" WIDTH="100%"> <span...Cancelable swap A cancelable swap is a vanilla swap where...Cap A cap is synonymous with a call option, ensuring its buyer protection against a rise in...Cap/floor strategies You can select one of the following predefined strategies, each of which uses ...Cash flow trade This topic will be available shortlyCash settlementIf a contract is cash settled, on the delivery date instead of actual physical delivery...CBOE Chicago Board Options Exchange (CBOE) is an options exchange in the United StatesCBOT The Chicago Board of Trade (CBOT) NYSE: BOT is the oldest futures and options exchange,...CDO See Collateralized debt obligationCDS See Credit default swapCDS index <hr> <DIV ALIGN="RIGHT" WIDTH="100%"> <span...CFTC CFTC is the Commodity Futures Trading Commission. It was created by the Commodity Futures...Choice price The price of an option is usually presented as a bid/ask price. However, for a strategy...Chooser option The central feature of a chooser option is that although you have to decide its strike...Clearing A term used on futures and options exchanges which refers to the process of registration,...Cliquet options See Ratchet optionsCM swap In a CM swap, the two parties swap a fixed rate for a floating rate that is based on...CME The Chicago Mercantile Exchange (CME) is a futures exchange in the United States. The...CMS cap A CMS cap is similar to a regular cap in...CMS floor A CMS floor is similar to a regular floor...CMS range accrual swap A CMS range accrual swap (cmsra) is similar to a range accrual swap (ras), the only...CMS spread option A CMS spread option is similar to a regular cap/floor option. The difference is that...CMS spread swap A CMS spread swap is an interest rate swap where one leg is usually set by reference to a...CMS swap A CMS (constant maturity swap) is an interest rate swap where at least one of the legs is...CMS total return index swap <hr> <DIV ALIGN="RIGHT" WIDTH="100%"> <span...Collar In the commodity and equity markets, a risk reversal is known as a collar. For more...Collateralized debt obligation <hr> <DIV ALIGN="RIGHT" WIDTH="100%"> <span...Commodity swap <hr> <DIV ALIGN="RIGHT" WIDTH="100%"> <span...Compound option A compound option is an option on an option. That is, you can buy an option that gives...Contango The usual market condition in the equity and commodity ...Contingent premium In a contract with a contingent premium the premium is deferred to expiration and is only...ConvexityConvexity generally describes a second order risk sensitivity of a financial derivativeCorrelation Correlation is a statistical measure of how much the movement of two separate currency...Covered call A covered call involves selling a call on an underlying that you already own. That is,...Covered put A covered put involves selling a put on an underlying that you already own. That is, you...Crack option <hr> <DIV ALIGN="RIGHT" WIDTH="100%"> <span...Credit default swap (CDS) What is a credit default swap? A credit default swap (CDS) is a form of...Credit derivative indexes Credit derivative indices are indices designed to track the performance of various...Credit derivatives A credit derivative is an OTC ...Credit linked notes A credit linked note is a debt instrument with an embedded credit derivative. It lets the...Credit risk Credit risk is the risk of loss due to a counterparty defaulting on a contract. This risk...Cross asset barrier <hr> <DIV ALIGN="RIGHT" WIDTH="100%"> <span...Cross currency swap A cross currency swap is similar to a ...Currency pairs A currency pair depicts the price of one currency (the base currency) in terms of another...Day count convention Day count conventions are used to determine the number of days between two coupon dates....dDelta/dVol dDelta/dVol is the change in delta for a 1% change in volatilityDelivery date The delivery date (or value date) is the date on which the actual underlying asset must...Delta neutralDelta neutral refers to an option (or portfolio) that has been hedged to neutralize the...DeltaThe delta displays the change in an option's price for a small change in the underlyingDeposit Notes The basic aim of a deposit note is to enable the trader or hedger to enhance the return...Deposit rate The deposit rate shows the rate you receive for deposits in the bankDerivative A derivative instrument (or simply derivative) is a financial instrument which derives...Digital cap A digital cap is a regular cap with the...Digital floor A digital floor is a regular floor with...Digital overview A digital option is an option where a fixed payout is made under the conditions specified...Digital range cap/floor A digital range cap/floor is a digital...Digital swap What is a digital swap? A digital swap is the second in...Dividend Dividend is a part of net income distributed in cash to a company's shareholdersDMU SuperDerivatives runs a 24-hour Data Management Unit (DMU) which, similar to the...Double average option A double average option is a combination of an ...Double knock in option A double knock in is a European vanilla option with two American barriers, one of which...Double knock out option A double knock out is a European vanilla with two Amercian barriers, one of which is set...Double no touch option The double no touch (also known as a range binary) is an option with two American...Double one touch option The double one touch (also known as a range binary) is an option with two American...Dual currency deposit noteIn a dual currency deposit the investor receives a yield higher than the regular deposit...Dual currency European digital <hr> <DIV ALIGN="RIGHT" WIDTH="100%"> <span...Duration Duration is the measure of the price sensitivity of an interest rate derivative to...dVega/dSpot dVega/dSpot displays a percentage change in vega for a 1% change in the spot rate based...dVega/dVol dVega/dVol displays the percentage change in the vega for a 1% change in volatility based...Dynamic hedgingA dynamic hedge is taken out by the hedger with a view to having to continually adjust...EKO participating forward strip What is an EKO participating forward strip? An EKO participating forward...EONIA EONIA (Euro Overnight Index Average) is an effective overnight rate computed as a...Equity derivatives An equity derivative is a an OTC or ...Equity swap An equity swap involves the exchange of future cash payment streams...Eurex Eurex is an electronic exchange for futures and options, dealing mainly with...EURIBOR EURIBOR (Euro Interbank Offered Rate) is a ...Eurobond A Eurobond does not refer to the Euro currency nor to the European bond market. Rather,...Euronext.liffe Euronext.liffe is an exchange that offers futures and options contracts on short-term...European digital option A European digital is an option with a European barrier. For this option, you simply...European digital options overviewA European digital option is an option where a fixed payout is made under the conditions...European digital with double knock out option An eddko is a European digital option with...European digital with European knock in <hr> <DIV ALIGN="RIGHT" WIDTH="100%"> <span...European digital with knock in option A European digital with knock in option is a ...European digital with knock out option A European digital with knock out option is a ...European knock in option A European knock in is a vanilla option with a European barrier. That is, it only...European knock out option A European knock out is a vanilla option with a European barrier. That is, it only...European range bet option A European range bet is an option with two European barriers. For this option, you set...European style option An option that can only be exercised on its expiry dateEuropean-American knock out option (barrier)A European-American knock out is a vanilla option with these two barriersExchange rate The price of one currency in terms of another currency. That is, the number of units of...Exchange-traded options Options that are traded on a regulated exchange rather than OTCExerciseWhen the option holder invokes the right to buy or sell the underlying asset as agreed in...ExoticAny option that is not a vanilla optionExpiry dateA trade's expiry date (or maturity) is the last date on which the rights (whether to buy...Extrinsic value An option's extrinsic value (also known as its time value or time premium) is the...Fade in one sided A fade in one sided is a fader option...Fade in range A fade in range is a fader option where...Fade in/out one sided/range with knock outA fader with knock out option is a regular ...Fade out one sided A fade out one sided is a fader option...Fade out range A fade out range is a fader option where...Fader options overview A fader is a regular vanilla option where...Fixing date This topic will be available shortlyFlippable cross-currency swap A flippable cross-currency swap is a ...Floor option A floor is synonymous with a put option, ensuring its buyer protection from a drop in the...Forward contract A forward contract (or outright forward) is the most basic derivativeForward ExtraA forward extra is an asymmetrical forward deal which consists of buying...Forward Knock In A forward knock in is a regular ...Forward Knock outA forward knock out is a regular ...Forward rate The forward rate is the agreed upon price of an asset in a ...Forward rate agreement An FRA (forward rate agreement) is a cash-settled forward on a short-term loan. It is...Forward start option A forward start is a vanilla option (it can...Forward Structures The forward structures on SD-FX consist of ...Free format The free format (or two-leg vanilla as it is called in the CM and EQ markets) is a...Futures contract What is a futures contract? A futures contract is a standardized...Futures contract for BRL A BRL futures contract as supported in SD-IR is similar to a discount bondFutures option What is a futures option? A futures option is an option on a futures...Futures option for BRL A BRL futures option is an exchange-traded option on a futures contract. The underlying...FX swap In an FX swap on the trade date the two counterparties enter into the following two tradesGammaGamma displays the percentage change in delta for a 1% move in the underlyingGated knock out A gated knock out option is a vanilla option where the notional is not known on the trade...General cap/floor A general cap/floor is similar to a regular cap/floor with one main difference: there is...General swap A general swap is similar to a vanilla swap with one main difference: for the general...GreeksThe Greeks are a set of measures that indicate an option or portfolio’s exposure to risk....Hedge funds This topic will be available shortlyHedgeHedging is the use of derivatives to reduce the risk to existing trades from market...Holder The holder of an option is the buyer or owner of an optionICE IntercontinentalExchange (ICE) enables the trading of energy commodity futures and OTC...Illiquid market An illiquid market is one in which assets cannot easily be converted into cashImproverAn improver option is a vanilla option with...In arrears payment An in-arrears payment refers to one of the available methods of fixing the floating rate...In strikeThe barrier at which an option will knock inIndex An index is a compilation of a number of stock prices into a single number, for example,...Inflation swap An inflation swap is an interest rate swap whereby the floating leg of the swap is set by...Interest rate Interest rates are defined as the cost of borrowing money, usually expressed as an annual...Interest rate guarantee An interest rate guarantee (IRG) is essentially a 1-period cap, that is, a cap with a...Interest rate swaps Interest rate swaps are the most common type of swapIn-the-money (ITM) An option is said to be in-the-money when it has ...Intrinsic valueAn option's intrinsic value is calculated as the difference between the strike price and...Inverse floater An inverse floater swap is similar to a vanilla swap in that one of the legs can be based...ISE The International Securities Exchange (ISE) NYSE: ISE is a fully electronic securities...Junk bond A junk bond (or high-yield bond) is a bond with a poor credit rating, as issued by...Knock in & knock out option A knock in & knock out option is a European vanilla with two American barriers, one a...Knock in & knock out with rebate option A knock in & knock out option can also...Knock in cap A knock-in cap is a regular cap option...Knock in CMS cap <hr> <DIV ALIGN="RIGHT" WIDTH="100%"> <span...Knock in CMS floor <hr> <DIV ALIGN="RIGHT" WIDTH="100%"> <span...Knock in floor A knock-in floor is a floor with the...Knock in knock out deposit In a kiko deposit note, the investor receives a higher yield than the regular deposit...Knock in option A knock in is a European vanilla with an American barrier. The barrier can only be hit...Knock in swap A knock-in swap is a regular ...Knock in swaption This topic will be available shortlyKnock out cap A knock-out cap is a cap with the addition...Knock out CMS cap <hr> <DIV ALIGN="RIGHT" WIDTH="100%"> <span...Knock out CMS floor <hr> <DIV ALIGN="RIGHT" WIDTH="100%"> <span...Knock out floor A knock-out floor is a floor with the...Knock out option A knock out is a European vanilla with an American barrier. Knock out swaption This topic will be available shortlyKnock out with rebate A knock put option can also be priced with...Last day payout chart A last day payout chart graphically displays the value of the selected option (or...Leg A leg is an option in a spread or a...LIBOR LIBOR (London Interbank Offered Rate) is a ...Liquid market A market is said to be liquid when it has high ...Liquidity The term liquidity relates to the ease in which something can be converted into cash in...Loan related KIKO The loan KIKO lets the customer hedge a loan related foreign exchange exposure by...Long If you are long, you have bought a trade to establish a market position and have not yet...Lookback option A lookback option is a ...Lot In the commodities market, a lot is a predefined unit of a commodity of uniform grade. It...Margin When trading on an exchange, the margin is the amount of money or collateral that must...Market forward rate The market forward rate is simply the forward rate, i.e., the rate at which two...Market maker A dealer who makes a market in a specific over-the-counter asset. That is, the dealer...Market risk Market risk is the risk that the value of your investment will decrease due to moves in...Mark-to-market The revaluation (or reval) of a position to reflect its true value using current market...MaturitySee Expiry dateMid price The mid price is the average price of the bid and offer. So if the bid/offer spread is...Multi period barriersA multi period barrier option is a series of non-contingent partial barriers. <p...Multi period one sided fader This topic will be available shortlyMulti period range fader This topic will be available shortlyNaked optionA naked option is when you buy or sell an option without executing a hedgeNet present value (NPV) This topic will be available shortlyNo touch option A no touch is an option with an American barrier.No touch with knock in option The no touch with knock in option is a ...NotionalThe notional refers to the amount of the underlying that is being bought or soldOffset To offset a position is to neutralize or...One touch option A one touch is an option with an American barrier. If at any time during the option's...One touch with knock out option The one touch with knock out option is a ...One-sided accrual option In a one sided accrual, a fixed payout is...Option An option is a contract that conveys to its owner the right but not the obligation to buy...OTC spread option <hr> <DIV ALIGN="RIGHT" WIDTH="100%"> <span...OTCOTC (over-the-counter) is the term used to describe any transaction that is not conducted...OTMAn option is said to be OTM (out-the-money) when the current underlying (such as the spot...Out strikeThe barrier at which an option will knock outOutright forwardSee Forward contractOvernight indexed swap The overnight indexed swap (OIS) is an interest rate swap where the OIS floating leg is...Partial barrier double knock in A partial barrier double knock in is a ...Partial barrier double knock out A partial barrier double knock out is a ...Partial barrier double no touch A partial barrier double no touch is a ...Partial barrier double one touch A partial barrier double one touch is a ...Partial barrier knock in A partial barrier knock in is a knock in...Partial barrier knock in & knock out A partial barrier knock in & knock out is a ...Partial barrier knock out A partial barrier knock out is a knock out...Partial barrier no touch A partial barrier no touch is a no touch ...Partial barrier no touch with knock in A partial barrier no touch with knock in is a ...Partial barrier no touch with knock in A partial barrier no touch with knock in is a ...Partial barrier one touch A partial barrier one touch is a ...Partial barrier one touch with knock out A partial barrier one touch with knock out is a ...Partial barrier optionsThis section includes both the following option types, whose behavior is modified by the...Participating forward A participating forward is a vanilla strategy. It is a ...Path dependent option A path dependent option is an exotic option whose payout is dependant on the value of the...Payer The party in an interest rate swap that pays a fixed rate and receive the floating ratePayer swaption A payer swaption gives the holder of the ...Payout currencyThe currency in which the payout is madePayoutThe payout refers to the value of the option at maturityPhysical settlement If a contract is physically settled, on the delivery date the underlying asset is...Pips Referring to the smallest unit tradeable, it is one ten thousandth (0.0001) of a currency...Position Your position is the net amount of your commitments in the given ...PremiumIt is calculated as the market price * notional amount.Prime broker A prime broker is a brokerage firm (such as an investment bank) that provides bundled...Put optionA put option gives its buyer the right to sell (and its seller the obligation to buy) the...Put spread A put spread is a vanilla strategy. It is the simultaneous purchase and sale of a put...Put-call parity The put-call parity describes the relationship between the prices of a European call...Puttable swap See Cancelable swap. Quanto basket A quanto basket is where one or more of the assets of the basket are traded in a currency...Quanto cap/floor A quanto cap/floor is similar to a regular ...Quanto option FX Quanto <hr> <DIV ALIGN="RIGHT" WIDTH="100%"> Supported in:   SD-FX | SD-IR | SD-CM | SD-EQ |    </DIV> In SD-FX in the Single Option page you can price the following quanto options: <ul class="bodytext"> <li>Quanto vanilla</li> <li>Quanto barrier options </li> <li>Quanto binary options</li> <li>Quanto European digital options </li> </ul> What is a quanto option? A quanto is an option in which the underlying is denominated in one currency, but the payout is settled in another currency using a predefined rate. This lets the investor take a view on the path of a foreign currency pair or investment without worrying about the translation of any future profits back into the domestic currency. The investor can have exposure to a foreign asset, but without the corresponding exchange rate risk. For example, a speculator domiciled in the UK may believe there is big upside potential for the USD/JPY spot rate. Using a quanto, the speculator can take a bullish position on USD/JPY and quanto this into GBP. This fixes the exchange rate to GBP, thus isolating the exposure to USD/JPY. The pricing of a quanto option takes into account all of the following (all of whose inputs can be edited in the Single Option page): <ul class="bodytext"> <li>The market data of the Quanto's underlying currency pair (i.e., that of the base currency/term currency) </li> <li>The market data of the currency pair created as a result of the payout currency (i.e., that of the <base currency of underlying currency pair>/payout currency) Note Using the Flip button you can choose instead to see this market data displayed instead for the <term currency of the underlying currency pair>/payout currency. This feature is simply for display purposes. It does not change the pricing of the quanto (which still uses the market data of the <base currency of underlying currency pair>/payout currency), it simply lets you change the market data in a different format. Once you have changed the market data for the <term currency of the underlying currency pair>/payout currency, SD-FX automatically updates the market data for the <base currency of the underlying currency pair>/payout currency accordingly, and then uses that data to price the resultant quanto. For example, if you have a EUR/JPY quanto with a payout in USD, instead of changing the EUR/USD market data, you change the USD/JPY market data. SD-FX then automatically uses any changes you make to update the EUR/USD market data, which is subsequently used in pricing the quanto. The Flip button is not available when pricing a <a href="#selfquanto">self quanto</a>, as in such a case only one currency pair is involved. </li> <li>The correlation between the underlying currency pair and the currency pair created as a result of the payout currency (i.e, that of the <base currency of underlying currency pair>/payout currency). </li> </ul> In the Results area, the quanto risk factors are displayed in two separate columns. <ul class="bodytext"> <li>A heading above the Greeks indicates the risk factor for which the results are displayed. In the example shown below, the risk factor is changes to the USD/JPY currency pair. </li> <li> The first two columns show the sensitivity to the base/term currency risk factors. The results are usually displayed in the base currency of the underlying currency pair, unless you use the Flip button. Then the results are seen in the term currency of the underlying currency pair. </li> <li>The second two columns show the sensitivity to the base/payout currency risk factors. Labels make it clear that these results are for the base/payout currency risk factors. Note The base/payout currency pair does not have sensitivity to delta or gamma; this is a characteristic of the Quanto option. </li> </ul> <a name="selfquanto">Understanding the difference between a regular quanto and a self quanto</a> When pricing a quanto you can set the payout currency to either of the following: <ul class="bodytext"> <li>A third currency, i.e., neither the base currency nor the term currency. This is a regular quanto.</li> <li>The base currency. This makes the quanto into a self quanto.</li> </ul> Why enter into a self quanto? In a vanilla quanto where the payout currency is a third currency, the exchange rate between the term and payout currency is fixed at the start of the trade, so no matter how the exchange rate between the term and payout currency changes, the investor is only exposed to changes in the exchange rate between the base and term currencies. In a self quanto, the exchange rate between the term currency and the payout (and of course the base) currency is fixed at the start of the trade. Subsequently at expiry, the payout is calculated in terms of the term currency, and then converted to the payout (base) currency using the fixed rate, and not the spot rate at expiry. Self quantos are often used instead of vanilla options. The buyer of a self quanto may see the self quanto as an option that returns the percentage movement in the currency exchange rate, in the base currency. EQ Quanto <hr> <DIV ALIGN="RIGHT" WIDTH="100%"> Supported in:   SD-FX | SD-IR | SD-CM | SD-EQ |    </DIV> In SD-EQ you can price quanto versions of all options classes supported by SD-EQ. What is a quanto option? In the Equity market, a quanto is an option in which the underlying stock or index is traded in one currency, but the payout is settled in another currency using a predefined rate. This lets the investor take a view on the path of a stock or index without worrying about the translation of any future profits back into the domestic currency. For example, a speculator domiciled in the UK may believe there is big upside potential for the CAC 40 index. If the speculator were to buy a vanilla option on that index, the payout received would be in Euro and the speculator would then have to convert the payout to GBP. The speculator is therefore exposed to the FX fluctuations—if the Euro weakened against the GBP, the final amount in GBP would be lowered. Using a quanto, the speculator can take a bullish position on the CAC 40 index and quanto this into GBP. This fixes the EUR/GBP exchange rate, thus isolating the exposure to the CAC 40 index only. Regardless of the EUR/GBP exchange rate at the time of payout, the predefined exchange rate is used to determine the payout in GBP. The pricing of a quanto option takes into account all of the following: <ul> <li>The market data of the underlying stock or index</li> <li>The market data of the currency pair created as a result of the payout currency (the currency of underlying equity/payout currency) </li> <li>The correlation between the price of the underlying equity and the exchange rate of the original payout currency/quanto payout currency.</li> </ul> Accordingly, in the results area: <ul><li>The following pricing results are displayed in the payout currency: <ul><li>Price per Unit</li> <li>Market Premium </li> <li>Market Price %</li> <li>BS price per Unit</li></ul> </li> <li>The Greeks are also displayed in the payout currency.</li></ul> How is the payout calculated? When pricing quantos, SD-EQ sets the fixed exchange rate between the original and payout currencies to be 1. At expiry, the payout of an equity vanilla quanto option, for example, is calculated as Max[Notional in units * (Spot – Strike), 0]. So for example, you are pricing a vanilla call quanto option in which the underlying is a stock traded in USD and you set the payout currency to JPY. If the spot price of the asset at expiry is 100 USD, the strike is 90 USD and you set the notional to 1,000 units, the payout is calculated as 1,000 * (100 USD – 90 USD) * 1 JPY/USD = 10,000 JPY. Why use a quanto option? Quanto options are useful for investors who wish to have exposure to a foreign asset, but without the corresponding exchange rate risk. For example, a European investor who purchases an option on an American stock, denominated in USD, would typically purchase a quanto option to hedge the EUR/USD exchange risk. To price a quanto: <ol><li>In the Single Option page, from the Option class dropdown list, select the option class to price.</li> <li>From the Underlying Asset dropdown list, define the underlying asset. The Payout currency field is automatically set to the default currency in which the asset is normally traded.</li> <li>From the Payout Currency dropdown list, select the currency in which you want the payout to be received. As soon as you select a currency which is not the default currency in which the payout is usually received, the Quanto radio buttons are displayed. </li> <li>Click the Yes radio button.</li> <li>Specify the remaining fields. Note that: <ul><li>All fields within the pricing page, such as the Reference Spot and the Strike, are specified in the original currency. Only the notional, when specified in currency and not units, is specified in the payout currency.</li> <li>For quantos only, the Corr. field displays the correlation between the price of the asset and the exchange rate of the original payout currency/quanto payout currency, as shown below. <img src="Feature_images/sdeq_quant_2.jpg"> </li> <li>The ATM Vol (%) field displays the volatility of the exchange rate between the original payout currency/quanto payout currency, as shown below. <img src="Feature_images/sdeq_quant_3.jpg"> </li></ul> </li> <li>Click Calculate.</li></ol>A quanto is an option in which the underlying is denominated in one currency, but the...Range accrual double knock out A range accrual knock out option is a regular range ...Range accrual knock out A range accrual knock out option is a regular range ...Range accrual option In a range accrual, a fixed payout is made...Range accrual swap A range accrual swap is similar to an interest rate swap, where the interest rate paid by...Range currency deposit noteIn a range currency deposit option (rcd) the investor is taking a bet that the spot of...Ratchet options This topic will be available shortlyRate of return The rate of return measures an investment's profitability. It measures the income that...Ratio spread A ratio call (put) spread is a spread in which the call (put) options are not bought and...Ratio strip Another name for the ratio strip is the ...Rebate option A rebate option is an option where you recieve a fixed amount (the rebate) if it would...Receiver The party in an interest rate swap that pays the floating rate and receives the fixed rateReceiver swaption A receiver swaption gives the holder of the ...Reference rate A reference rate is a number published by independent market forces. Although it is often...Reset Forward A reset forward is a forward contract...Reverse knock in option A reverse knock in is a European vanilla with an American barrier. The barrier can only...Reverse knock out option A reverse knock out is a European vanilla with an American barrier. The barrier can only...Rho Rho displays the change in an option's value in relation to changes in interest ratesRisk The concept of risk contains both of the followingRisk management This topic will be available shortlyRisk reversal Although a risk reversal has slightly different meaning in various markets, it broadly...Risk reversal knock outA risk reversal knock out is a ...Seagull The seagull is comprised of a risk reversal plus an additional option.SEC SEC is the Securities and Exchange Commission.Settlement date See delivery dateShort If you are short, you have sold a trade to establish a market position and have not yet...Single expiry digital This topic will be available shortlySingle expiry digital range This topic will be available shortlySnowball <hr> <DIV ALIGN="RIGHT" WIDTH="100%"> <span...Speculation Speculation involves buying, holding, and selling assets in order to profit from a...Spot date The spot date is the delivery date for immediate deliverySpot hedgeA spot hedge is a spot trade executed immediately after an option has been traded. The...Spot rate The spot rate is the current price at which an asset can be bought or sold for immediate...Spread (bid/ask) See bid/ask spreadSpread (type of option strategy) A spread is normally the purchase of one option and the simultaneous sale of a related...Static hedgeA static hedge is a one-time fixed strategy created to hedge an existing option or...Stealth The stealth (or digital height)Step premiumThe step premium option is a vanilla option...Straddle A straddle is a vanilla strategy. It can be either of the following: Strangle A strangle is a vanilla strategy. It can be either of the followingStrikeThe strike (or exercise price) is the price at which the option holder has the right to...Structured productsStructured products are synthetic investment instruments specially created to meet needs...Swaps overview A swap is an OTC derivative which involves the exchange of cash payment streams between...Swaption A swaption gives its owner the right but not the obligation to enter into an interest...Swaption strategies You can select one of the following predefined strategies, each of which uses payer and...Tapo A tapo lets you duplicate a series of vanilla options all with the same strikeTARN In the Single Option page you can now enter and price two different TARN...Theoretical valueThe theoretical price (or theoretical value) is the mid-rate value of the deal (or...ThetaTheta is the rate of change in an option's price with respect to the time to expiryThree-leg vanilla This vanilla strategy lets traders easily price some of the more popular strategies in...TIIE The TIIE (Tasa de Interes Interbancario de Equilibrio or Interbank Equilibrium Interest...Total return swap A total return swap is an agreement where the two counterparties swap periodic payments...Trade date The day of the agreement between buyer and seller to buy and sell a tradeTriggerSee BarrierTwo-leg In the commodity and equity markets, a free format vanilla strategy is known as a...UDI swap <hr> <DIV ALIGN="RIGHT" WIDTH="100%"> <span...UF swap <hr> <DIV ALIGN="RIGHT" WIDTH="100%"> <span...Underlying The underlying is the asset (currency, stock, commodity or index, etc.) whose value...Unhedged object See Naked optionValue dateSee delivery dateValue in 25d butterfly This value provides an indication of how much it would cost in cash (i.e., basis points)...Value in 25d risk reversal This value provides an indication of how much it would cost in cash (i.e., basis points)...Vanilla option The vanilla option is the simplest type of option, with a fixed strike, expiry date and...Vanilla strategyA vanilla strategy is a combination of two of the four basic vanilla options (long call,...Vanilla strip A strip lets you duplicate a series of vanilla options (a series of puts...Vanilla swap A vanilla or interest rate swap (IRS) lets you swap the interest rate basis of an asset...Variance Variance is the mathematical square of ...Variance swap The variance swap is a forward contract in...Vega neutralThis refers to an option or portfolio that has been hedged to neutralize the risk...VegaVega displays the percentage change in the option's value for a small change in...Volatility smile The volatility smile is the graphical shape that results from plotting the strike and...Volatility surfaceThe volatility surface is a three-dimensional graph indicating mid-market implied...Volatility swap in EQ This page describes the volatility swap supported in SD-EQ. For information on the...Volatility swap in FX This page describes the volatility swap supported in SD-FX. For information on the...VolatilityVolatility denotes the extent to which the underlying is expected to fluctuate in a given...Worst Of option The Best Of/Worst Of option is composed of a bundle of call (put) options all with the...Writer The seller of an option. Yield A measure of the annual return on an investment. It is expressed as a percentageZero cost strategy Any structure or strategy that costs nothing to implement. It can be constructed in many...Zero coupon inflation swap For more information see the inflation swapZero coupon swap A zero coupon swap is similar to a vanilla interest rate swap. The key difference is...ZetaZeta is the % difference between the mid-rate market price and the mid-rate ...

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