Securitisation is the process of creating liquid securities (such as ABS or CDO) from a pool of illiquid assets (mainly loans). An entity, generally a bank, sells assets to an special purpose vehicle (SPV) which issues securities whose risk and returns are linked to the sold assets. Securitisation is usually combined with the mechanism of tranching to enable the issuance of low risk securities.
The Sharpe Ratio measures the risk-reward of an investment. It corresponds to the relative portfolio performance over the risk-free rate, divided by the volatility of the portfolio.
A short squeeze is a market situation where the lack of supply of an underlying asset drives prices upwards. This situation is often amplified by short sales or short positions built through derivatives contracts. In these cases, the parties will start buying to cover their losses and, ultimately, will accept to buy the underlying at any price to avoid defaulting on their obligations (which has damaging consequences) pushing the prices higher. Short squeezes are often the result of market manipulation. A famous short squeeze occurred in October 2008 on Volkswagen stocks, which increased by more than 300% in two days.
A socially responsible investment (SRI) is an investment in companies based on social and environmental criteria. The investment is considered socially responsible according to the nature of the business, favouring companies engaging in environmental sustainability and clean energy for instance, and avoiding companies promoting addictive substances such as alcohol or tobacco.
A special purpose entity (SPE) or a special purpose vehicle (SPV) is a legal entity created by a company (the sponsor) to perform specific tasks.
SPEs/SPVs are widely used in securitisation to enable the issuance of securities backed by a pool of loans.
The key principles of an SPE/SPV are:
A spot price is a price settled for the delivery of an asset occurring two trading days after the trade date. The spot price is the opposite of the forward price.
A long straddle strategy involves the purchase of a put and a call at the same strike. A buyer of a straddle will thus benefit from a large change in the underlying price, either upwards or downwards.
A long strangle strategy involves the purchase of a put and the purchase of a call at the higher strike price. The buyer of a strangle will thus benefit from a large change in the underlying price, either upwards or downwards. Less costly than a straddle, a strangle however, requires a larger price variation to be profitable.
A fund that combines fixed income securities and equities to protect investors’ capital while at the same time providing the potential for capital appreciation
A subordinated bond is a bond for which reimbursement is subordinated to more senior instruments (loans, senior bonds, deposits) in case of liquidation of the issuer. However, these bonds provide higher interest rates. Subordinated bonds are traditionally issued by banks as they benefit from favourable treatment in terms of capital requirement.
In Islamic finance, sukuk are Islamic securities traded in the form of documents or certificates which represent the value of these assets. Often described as Islamic bonds, sukuk can technically refer to securities, notes, paper or certificates, with the features of liquidity and tradeability.
A swap is an arrangement between two entities who agree to exchange streams of cash flows on different dates with a specified term. Cash flows can be certain or optional, amounts can be known in advance or variable, payment currencies can be multiple. Examples of swaps:
A swaption is an option to enter into a swap transaction at a specified date and a pre-defined price. For example, a 5-year, 3% fixed receiver swaption, maturity June 2014 refers to an option where the holder would have the right to receive 3% against payment of floating rate, for 5 years starting in June 2014.