Glossary

  • Table top

    Similar to a ratio spread, except that the purchase of an option is financed by sales of the same option at two different strike prices.

  • Tactical asset allocation

    The distribution of investment funds in response to short-term expectations of market opportunity or threat.

  • Theta

    This measures the effect on an option's price of a one-day decrease in the time to expiration. The more the market and strike prices diverge, the less effect theta has on a vanilla option's price. Theta is also non-linear for vanilla options, meaning that its value decreases faster as the option is closer to maturity. Positive gamma is generally associated with negative theta and vice versa.

  • Time value

    The value of an option, other than its intrinsic value. The time value therefore includes cost of carry and the probability that the option will be exercised (which in turn depends on its volatility).

  • Total return option

    A total return option is a put option on debt. An investor that has a risky corporate bond and is worried about default can buy a total return option that allows him to sell the bond at par if the corporation defaults.

  • Total return swap

    A bilateral financial contract in which one party (the total return payer) makes floating payments to the other party (the total return receiver) equal to the total return on a specified asset or index (including interest or dividend payments and net price appreciation) in exchange for amounts that generally equal the total return payer's cost of holding the specified asset on its balance sheet. Price appreciation or depreciation may be calculated and exchanged at maturity or on an interim basis. A total (rate of ) return swap is a form of credit derivative, but is distinct from a credit default swap in that floating payments are based on the total economic performance of a specified asset and are not contingent upon the occurrence of a credit event.

  • Tracking error

    Refers to the difference between the performance of a portfolio of stocks and a broad-based index with which they are being compared.

  • Tranche product

    A tranche product is one that is open for subscription for only a limited period, as opposed to open-ended products, which accept investments for an unlimited period. Most structured products are tranche products, and the offer period is usually four to eight weeks.

  • Translation risk

    An accounting/financial reporting risk where the earnings of a company can be adversely affected due to its method of accounting for foreign operations.

  • Treasury lock

    A rate agreement based on the yield or equivalent market price of a reference US Treasury security. These can be settled based on yield differential for a full tenor, or can be price-settled based on the exact characteristics of a specific security.

  • Trigger

    Many path-dependent options have payouts that depend on the underlying asset or index or coupons paid/payable reaching a specified level before the expiry date. This level is the trigger. Some options have more than one trigger level, in which case the payouts are conditional or increase with the number of triggers activated or the order in which they are activated.

  • Trigger condition

    Path-dependent derivatives such as barrier options and binary options have payouts which depend in some way on a market variable satisfying a specific condition during the derivative's life. If this "trigger condition" is met, the derivative may pay out immediately (early exercise) or at some other specified time (such as expiry). Alternatively, the option may only become effective (be knocked-in) or be de-activated (knocked out) when the trigger condition is met.

    The most common condition is that the spot rate or price of the underlying must breach a specified level, meaning that it must trade through the barrier, either from above or below. Many other trigger conditions are possible, however. Some examples include:

    • The spot must breach the trigger, and remain above/below it for a specified time;
    • The spot trades at the trigger level at a specified time (eg, expiry) or at any time during the option_and_rsquo;s life;
    • The spot trades within or breaks out of a range (for example, range binaries);
    • There is more than one trigger level, with the payout conditional upon or increasing with the number of triggers activated and possibly the order in which they are activated (for example, a mini-premium option);
    • Some combination of these. 
  • Trigger forward

    The trigger forward is primarily designed for trading purposes, although it can also be used as an alternative hedge. It is usually a zero-cost structure, whereby the purchaser enters into an outright forward transaction at a rate significantly more attractive than the prevailing market rate, but where the whole structure will be knocked out if a predetermined trigger level is reached at any time before the expiry date.

  • Trinomial tree

    Similar to a binomial tree, a trinomial tree is a discrete-time model describing the distribution of assets. After each time step in the trinomial tree there are three possible outcomes; an up move, a down move or no move in the asset value. This gives additional degrees of freedom, which enhance the computational power of the lattice model.

  • Turbo

    A type of path-dependent option, usually embedded in warrants. A barrier is set at the same level as the strike price, and if the underlying ever touches the barrier at any point during the life of the turbo option, this will immediately cause the warrant to expire worthless. If the underlying never reaches the strike during the option's life, the payout will be similar to a vanilla warrant.

  • Two-factor model

    Any model or description of a system that assumes two sources of uncertainty or variables; for example, an asset price and its volatility (a stochastic volatility model), or interest rate levels and curve steepness (a stochastic interest rate model). Two-factor models model interest rate curve movements more realistically than one-factor models.

  • Two-name exposure

    Credit exposure that the protection buyer has to the protection seller, which is contingent on the performance of the reference credit. If the protection seller defaults, the buyer must find alternative protection and will be exposed to changes in replacement cost due to changes in credit spreads since the inception of the original swap. More seriously, if the protection seller defaults and the reference entity defaults, the buyer is unlikely to recover the full default payment due, although the final recovery rate on the position will benefit from any positive recovery rate on obligations of both the reference entity and the protection seller.

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