The design and construction of investment products to achieve specified
goals.
Flexible option
A flexible option (also known as a flexible exchange or flex option) is a
customisable exchange-traded option, which allows the buyer to customise
contract terms such as expiry date and contract size in addition to the strike
price. Flexible options with single stock, index, or even currency underlyings
are traded on several major exchanges.
Floor fund
Also known as a ratchet fund. A particular type of structured product that
aims to deliver minimum returns, which usually are at least equal to the sum
invested, plus some additional upside based on the performance of the stock
market. However, unlike guaranteed funds, very few floor funds come with a
contractual guarantee. Many floor funds are managed using the technique of
constant proportion portfolio insurance (CPPI).
Floortion
An option on a floor. The purchaser has the right, but not the obligation, to
buy or sell a floor at a predetermined price on a predetermined date.
Forward rate agreement
A forward rate agreement (FRA) allows purchasers/sellers to fix the interest
rate for a specified period in advance. One party pays fixed, the other an
agreed variable rate. Maturities are generally out to two years and are priced
off the underlying yield curve. The transaction is done on a nominal amount and
only the difference between contracted and actual rates is paid. If rates have
risen by the time of the agreement's maturity, the purchaser receives the
difference in rates from the seller and vice versa. A swap is therefore a strip
of FRAs. FRAs are off-balance sheet; there are no up-front or margin payments
and the credit risk is limited to the mark-to-market value of the transactions.
Unlike interest rate swaps, FRAs settle at the beginning of the interest period,
two business days after the calculation date.
Forward start option
An option that gives the purchaser the right to receive, after a specified
time, a standard put or call option. The option's strike price is set at the
time the option is activated, rather than when it is purchased. The strike level
is usually set at a certain fixed percentage in or out-of the-money relative to
the prevailing spot rate at the time the strike is activated.
Forward swap
A swap in which rates are fixed before the start date. If a company expects
rates to rise soon but only needs funds later, it may enter into a forward swap.
Future
A future is a contract to buy or sell a standard quantity of a given
instrument, at an agreed price, on a given date. A future is similar to a
forward contract and differs from an option in that both parties are obliged to
abide by the transaction. Futures are traded on a range of underlying
instruments including commodities, bonds, currencies and stock indexes. The most
important difference between futures and forwards is that futures are almost
always traded on an exchange and cleared by a clearing house, whereas forwards
are over-the-counter instruments. Furthermore, futures, unlike forwards, have
standard delivery dates and trading units. Most futures contracts expire on a
quarterly basis. Contracts specify either physical delivery of the underlying
instrument or cash settlement at expiry. Cash settlement involves the company
paying or being paid the difference between the price struck at the outset and
the expiry price of the contract.
Futures option
An option, either a put or a call, on any futures contract. Also known as an
option on a future.
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