KERB
In the base metals market, specifically on the London Metal Exchange, the kerb refers to the brief trading period after the market settlement prices have been posted. This kerb period, during which all seven base metals can be simultaneously traded across the Ring, only lasts a few minutes. It derives its name from the early century practice of dealing members meeting along the roadside after the morning session to continue to trade.
KNOCK-IN FLOOR, ONE TOUCH
A floor which will be entered into at any reset date if the reference interest rate rises beyond a trigger level on or before that date. For example, a three-year floor struck at 5% for three-month Libor might have a knock-in level of 4%. If Libor was below 4% on one of the floor’s quarterly reset dates, the floor would be entered into, leaving the seller exposed to the lower rates.
KNOCK-IN FLOOR, PERIODIC
Similar to a one touch, except that only the current period is affected. The remainder of the structure remains intact.
KNOCK-OUT CAP, ONE TOUCH
A cap which can be cancelled at any reset date if the reference interest rate rises beyond a trigger level on or before that date. For example, a three-year cap struck at 5% for three-month Libor might have a knock-out level of 7%. If Libor was above 7% on one of the cap’s quarterly reset dates, the cap would be cancelled, leaving the holder exposed to the higher rates. This extinguishing feature of knock-out caps means they can be considerably cheaper than conventional caps. This makes them more useful in creating structures offering cheap protection than their vanilla analogues (for example, knock-out interest rate corridor).
KNOCK-OUT CAP, PERIODIC
Similar to a one touch, except that only the current period is affected. The remainder of the structure remains intact.
KNOCK-OUT INTEREST RATE CORRIDOR
A corridor in which a client purchases a standard cap with a lower strike and sells a knock-out cap with a higher strike (rather than selling a conventional cap). This means that the client is protected from an increase in interest rates up to the strike level for the knock-out cap, but exposed if rates rise beyond that level. However, the client is protected once again if the rates rise above the knock-out level, as the short knock-out cap will then be extinguished.
KNOCK-OUT OPTION
See
barrier option
KURTOSIS
A measure of how fast the tails or wings of a probability distribution approach zero, evaluated relative to a normal distribution. The tails are either fat-tailed (leptokurtic) or thin-tailed (platykurtic). Markets are generally leptokurtic. The fatter the tails, the greater the chance a variable will reach an extreme value, implying that models such as Black-Scholes – which assume perfect normal distribution – produce pricing biases for deep in- or out-of-the-money options.