Abbreviation for Chicago Board of Options Exchange, the world's largest marketplace for listed

options. It specialises in equity options.

A strategy that involves the simultaneous sale and purchase of two options that differ only in their
maturity dates. Both would be calls or puts and have the same strike price. Also known as a
calendar or time spread or horizontal spread

Interest-bearing deposits callable or repayable on demand, normally within 24 hours

An option that gives the holder or buyer the right but not the obligation to buy an underlying
instrument at an agreed price or strike price within a specified time. The seller or writer has the
obligation to sell the underlying instrument if the holder exercises the option.

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Measure of the financial soundness of a bank, usually calculated as a ratio of its capital to its assets.
Capital adequacy rules are designed to ensure that there is sufficient capital to absorb likely losses.
It was agreed at the Basel I Accord in 1988 that the minimum ratio of capital to risk-adjusted assets
for international banks should be 8 per cent.

A trade where money is borrowed at a low interest rate or yield to finance the purchase of a security
or instrument with a higher one. For example, until the credit crisis took hold in 2008 the carry trade
was very popular on foreign exchange markets. Investors borrowed funds in a low yielding
currency, usually the yen or the Swiss franc, and invested in high yielding currencies such as
sterling or the Australian or New Zealand dollar. During the crisis, its popularity waned when
market volatility soared, turmoil in the banking system led to widespread risk aversion and the
general decline in official interest rates caused by the global recession narrowed the gap between
low and high yielding currencies

Cash settlement is the settlement of a futures or options transaction with a cash payment rather than
making or taking delivery of a physical commodity or other underlying asset. Used in futures and
options contracts where the underlying instrument, such as an index, cannot be delivered.

Also known as basis trading or buying the basis, a cash and carry trade is an arbitrage position made
up of a long cash position together with a short position in the corresponding futures contract. For
example, a trader buys a cash or physical commodity, such as coffee, and also sells a futures
contract for the same quantity. This will make a profit as long as the cash price, plus the cost of
storing and insuring the coffee (the cost of carry) until the futures contract falls due, is less than the
money received for selling the futures contract

An option for which the holder only pays the premium if the option is exercised. Contingent options
are zero-cost unless exercised

Counterparty risk is the risk associated with the financial stability of the party on the other side of a
contract, trade or investment. Forward contracts leave open the possibility that one party may
default. Futures contracts traded on a recognised market are guaranteed against default by the
clearing house.

The interest paid on a bond expressed as a percentage of the face value. If a bond carries a fixed
coupon the interest is usually paid on an annual or semi-annual basis. The term also refers to the
detachable certificate entitling the bearer to the interest payment coupon

The possibility that a bond issuer or other borrower will default and fail to pay the principal and
interest when due. Credit risk plays a major part in setting the interest rate on a loan; the longer the
term and the lower the credit rating of the borrower the higher the interest rate

Herstatt risk, also known as cross-currency settlement risk or foreign exchange risk is the risk that a
party to a trade fails to make payment even though it has been paid by its counterparty. It is named
after the German bank Herstatt whose license was withdrawn by regulators on June 26, 1974 due to
its inability to cover its liabilities. This forced the bank into liquidation and it ceased operating.
Because of time zone differences this meant that Herstatt was unable to pay some New York banks
for foreign exchange it had received before it ceased operating. Cross currency risk

A measure of the return to a bondholder, calculated as a ratio of the coupon to the market price. It is
the annual coupon rate divided by the clean price of the bond.

The exchange rate between two currencies where neither is the U.S. dollar, for
example euro/yen. Cross rates are sometimes derived from their exchange rates
against the dollar.