• Financial engineering

    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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