See profit and loss statement.
Far Eastern countries and markets bordering the Pacific area.
See Personal Accounts Delivery Authority.
Vehicle that invests across all European countries including the UK.
Parity (convertible bonds)
State in which the value of the equity (or other underlying security) is equivalent to the value of the bond on conversion.
See nominal value.
Investor who does not get closely involved with investee companies. Normally invests as a member of a syndicated deal or via a pooled fund.
Portfolio which aims to replicate a particular market index or benchmark fund and does not attempt to actively manage the portfolio. (See also active management, indexation.)
Peer group analysis
See league table.
Regular, periodic payment to an individual, usually following cessation of employment. This benefit will often be defined benefit or defined contribution in nature. (See also defined benefit,
Pension Protection Fund (PPF)
Independent body set up by the UK government in 2005 with the aim of providing financial assistance to the members of defined benefit pension schemes whose scheme sponsor becomes insolvent. The PPF is funded by a levy imposed on all defined benefit pension schemes. (See also defined benefit, scheme sponsor.)
Pensions Act 1995
Major piece of legislation that was introduced with effect from April 1997. The Act required trustees for the first time to produce and maintain a statement of investment principles (SIP) and introduced the minimum funding requirement (MFR).
Pensions Act 2004
Major piece of legislation following the Pensions Act 1995. Introduced a new statutory funding regime to replace the minimum funding requirement. Under this, pension funds are required to produce a statement of funding principles setting out how they intend to achieve/ maintain full funding. Also formally established the Pension Protection Fund (PPF). (See also Pension Protection Fund.)
P/E ratio (price earnings ratio)
Commonly used indicator of the value of a stock, calculated as a company’s current share price divided by its earnings per share. A high P/E ratio may be justified because a company is expected to increase its earnings per share or it may indicate simply that the company is expensive.
Relative ranking (in hundredths) of a particular portfolio (or manager) in a league table of returns. For example, a percentile ranking of 15 indicates that 14% of portfolios performed better and 85% produced a lower return.
Process which assigns over- or underperformance to the different steps taken in the investment management process, such as asset allocation, stock selection, currency management, etc. Used as a means to show where value has been added/lost.
Calculation of a fund’s historic return on its investments. This can be performed on total assets or on individual asset classes. For the purposes of analysing a manager’s performance relative to a benchmark, performance is calculated on a time- weighted rate of return basis which is unaffected by the size and incidence of external cash flows (which are outside the manager’s control).
Investment management fee determined by the degree of overperformance relative to an agreed benchmark.
Investments detailed in an investment management agreement in which a manager may invest.
Bond that is issued with no redemption or maturity date. The coupons on a perpetual bond are paid indefinitely.
Stream of cash flows that theoretically will last forever.
Personal Accounts Delivery Authority (PADA)
Public organisation responsible for setting up and managing a national trust-based pension scheme for low to moderate income earners. (See also National Employment Savings Trust.)
See private finance initiative.
Employer that sets up and funds a pension plan for its employees. Also called scheme sponsor.
Describes financial instruments, especially bonds and derivatives, in their most basic form or with standard features. Opposite of exotic.
Fraudulent investment scheme which provides returns to investors either by using the funds already paid into the scheme by investors or by using the funds paid in by subsequent investors. The returns provided to investors in a Ponzi scheme are usually abnormally high or consistent. A Ponzi scheme usually collapses since the scheme makes no actual investments and requires continuous inflows of new capital to ensure that the money going into the scheme exceeds the money being paid out of the scheme as investment returns. In 2008, a Ponzi scheme operated by Bernard Madoff for several years collapsed. As a result, Madoff was responsible for the largest financial fraud to be committed (allegedly) by a single individual.
Vehicle in which a number of investors (including pension schemes) pool their assets so that they can be managed on a collective basis. This usually suits small to medium-size investors wishing to invest in a broad spread of investments or larger investors wishing to gain exposure to a specialised sector. Shares in a pooled
fund are denominated in units that are repriced regularly to reflect changes in the underlying assets. This allows investors to value their holdings and provides a basis upon which transactions in units can take place. Unit trusts are examples of pooled funds.
See alpha transfer.
Block of assets generally managed under the same mandate.
Any one of several techniques used to change systematically an investment portfolio’s market exposure in response to prior market movements, with the objective of avoiding large losses and securing as much participation as possible in any favourable market movements. These techniques often feature a principal guarantee. (See also principal guarantee.)
See fund manager.
See Pension Protection Fund.
Practice of a bank assembling a position over a period of time prior to entering into a swap contract — this reduces the bank’s risk of hedging the swap position and is only legal when authorised by
Type of share which gives the holder an entitlement to a fixed rate of dividend that is paid before any dividends are paid to ordinary shareholders. In the event of a company wind-up, preference shareholders rank ahead of ordinary shareholders as creditors.
a.For securities selling above par, the difference between the price of a security and par.
b.Amount that must sometimes be paid above par in order to call an issue — that is, a call premium.
c.Occasionally used and interchangeable with margin or spread when the latter two refer to a percentage above a given amount or rate.
Risk which affects investors in CDOs and MBSs that the borrowers/writers of the underlying debt may choose to repay the loan early if interest rates fall, under conditions where investors are unable to reinvest the proceeds to achieve the redemption yield targeted at outset.
Value in today’s terms of future cash flows discounted at some appropriate rate of interest.
Price earnings ratio
See P/E ratio.
Comparison of a security’s market value with its book value, calculated by dividing the current closing price of a security by the latest published book value per share.
Market in which securities are sold at the time they are first issued. (See also secondary market.)
Describes a property investment that is highly regarded in terms of location, age and condition, quality of tenant, size, and lease structure.
Agent, usually an investment bank, offering a suite of services including securities lending, cash management and execution of leverage trades. The services of a prime broker are most often used by hedge fund investors in the interests of managing absolute return investments.
Minimum interest rate in the US that commercial banks will charge borrowers. (See also base rate.)
Capital element of a bond that is normally repaid at par value (usually 100) at the end of the term of the bond.
(See also nominal value.)
Feature of certain portfolio insurance products, usually achieved by investing part of the principal amount in a zero coupon bond that will eventually return the amount invested over the agreed period of the investment. (See also cushion, portfolio insurance.)
Category of investor (as required by the FSA), typically small companies/trusts, which, as one of the more vulnerable investor categories, are given significant protection under the conduct of business rule. (See also non-private customer.)
Shares in unquoted companies. Usually high risk, high return in nature.
Private finance initiative (PFI)
System for providing capital assets for the provision of public services. Typically, the private sector designs, builds and maintains infrastructure and other capital assets and then operates those assets to sell services to the public sector. In most cases, the capital assets are accounted for on the balance sheet of the private sector operator. The pricing basis for the services provided almost invariably includes an inflationary element.
Profit and loss statement
Summary of a company’s revenues and expenses over a specific period, which shows whether the company has made a profit or a loss. Also known as an income statement.
Computerised trading used primarily by institutional investors, typically for large volume trades, where orders from the trader’s computer are entered directly into the market’s computer system and executed automatically.
Property unit trust
Unit trust that invests in commercial properties on behalf of third parties, usually pension schemes and charities.
Legal document offering securities for sale. Provides potential investors with detailed information on the operations and business plans of the issuing company and their objectives or intentions for the use of the money.
Portfolio management technique by which an investment manager aims to protect the capital value of a portfolio through risk management techniques such as dynamic hedging.
Delegation of voting rights without attendance at a shareholders’ meeting.
Legal principle of “the prudent man” is a measure by which the decision making of the individual or organisation could be evaluated in comparison with what a reasonable person would have been expected to do.
Prudent man rule
Common rule pertaining to fiduciary duty in Anglo-Saxon countries. The OECD states the rule in terms of the following broad principle: “A fiduciary should discharge his or her duties with care, skill, prudence and diligence that a prudent person acting in a like capacity would use in the conduct of an enterprise of like character and aims.” Applications vary by country.
Prudential Regulation Authority (PRA)
Independent body formed as one of the successors to the Financial Services Authority (FSA), focusing on the prudential regulation and supervision of the financial services industry in the UK.
Offering for sale of a new issue of securities to the general investing public. Securities of such an offering will generally be placed through a syndicate, will have securities issued in small denominations and will be listed on a stock exchange. An IPO is the first public offering of a security.
Relationship that always exists between the price of a European put option and a European call option on the same underlying asset at the same strike price.
Option which gives the purchaser the right, but not the obligation, to sell an asset at an agreed price or an agreed date (European option) or before an agreed date (American option). (See
also call option.)
Bond that can be redeemed before maturity at the option of the bondholder.
The change in present value of an asset or liability for a 1 basis point change in the nominal yield curve used to value the asset or liability.
P&S (Purchase and Sale) Statement
A statement sent by a commission house to a customer when his futures or options on futures position has changed, showing the number of contracts bought or sold, the prices at which the contracts were bought or sold, the gross profit or loss, the commission charges, and the net profit or loss on the transactions.
The face value of a security. For example, a bond selling at par is worth the same dollar amount it was issued for or at which it will be redeemed at maturity.
Payment-In-Kind (PIK) Program
A government program in which farmers who comply with a voluntary acreage-control program and set aside an additional percentage of acreage specified by the government receive certificates that can be redeemed for government-owned stocks of grain.
Performance Bond Margin
The amount of money deposited by both a buyer and seller of a futures contract or an options seller to ensure performance of the term of the contract. Margin in commodities is not a payment of equity or down payment on the commodity itself, but rather it is a security deposit. See Customer Margin and Clearing Margin.
The area on the trading floor where futures and options on futures contracts are bought and sold. Pits are usually raised octagonal platforms with steps descending on the inside that permit buyers and sellers of contracts to see each other.
Normally meant to imply 1 basis point (0.0001).
Point-and-Figure Charts: Charts that show price changes of a minimum amount regardless of the time period involved.
A market commitment. A buyer of a futures contract is said to have a long position and, conversely, a seller of futures contracts is said to have a short position.
According to the Chicago Board of Trade rules, the first day in the process of making or taking
delivery of the actual commodity on a futures contract. The clearing firm representing the seller notifies the Board of Trade Clearing Corporation that its short customers want to deliver on a futures contract.
The maximum number of speculative futures contracts one can hold as determined by the Financial Services Commission and/or the exchange upon which the contract is traded. Also referred to as trading limit.
An approach to trading in which the trader either buys or sells contracts and holds them for an extended period of time.
Positive Yield Curve
See Yield Curve.
(1) The additional payment allowed by exchange regulation for delivery of higher-than-required standards or grades of a commodity against a futures contract. (2) In speaking of price relationships between different delivery months of a given commodity, one is said to be “”trading at a premium” over another when its price is greater than that of the other. (3) In financial instruments, the dollar amount by which a security trades above its principal value. See Option Premium.
The generation of information about “”future” cash market prices through the futures markets.
The maximum advance or decline from the previous day’s settlement price permitted for a contract in one trading session by the rules of the exchange. See also Variable Limit.
Price Limit Order
A customer order that specifies the price at which a trade can be executed.
A designation given by the Federal Reserve System to commercial banks or broker/dealers who meet specific criteria. Among the criteria are capital requirements and meaningful participation in the Treasury auctions.
Market of new issues of securities.
Interest rate charged by major banks to their most creditworthy customers.
Producer Price Index (PPI)
An index that shows the cost of resources needed to produce manufactured goods during the previous month.
A raised structure adjacent to, or in the center of, the pit or ring at a futures exchange where market reporters, employed by the exchange, record price changes as they occur in the trading pit.
Purchasing Hedge (or Long Hedge)
Buying futures contracts to protect against a possible price increase of cash commodities that will be purchased in the future. At the time the cash commodities are bought, the open futures position is closed by selling an equal number and type of futures contracts as those that were initially purchased. Also referred to as a buying hedge. See Hedging.
An option that gives the option buyer the right but not the obligation to sell (go “short”) the underlying futures contract at the strike price on or before the expiration date.