Partial Matches:
ACCRETING
A description, applicable to a variety of instruments, denoting that the notional principal increases successively over the life of the instrument, e.g., caps, collars, swaps and swaptions. If the increase takes place in increments, the instrument may be known as a step-up.
See also
amortizing
AMORTISING
A description, applicable to a variety of instruments, denoting that the notional principal decreases successively over the life of an instrument, e.g., amortizing swap, index amortizing rate swap, amortizing cap, amortizing collar, amortizing swaption. If the decrease takes place in increments, the instrument may be known as a step-down. Mortgage-style amortization refers to an amortizing swap such that the principal amortization plus interest is the same amount in each interest period.
See also
accreting
ESCALATING RATE SWAP
Also known as a step-up coupon swap. A swap in which the fixed-rate payments increase over time. For example, a company that expects its income to increase can pay a fixed rate that increases incrementally.
EXPLODED TREE
A tree (binomial or trinomial) in which an up step followed by a down step gives a different outcome to a down step followed by an up step. Consequently, the number of nodes increases exponentially, compared with a recombining tree, in which the number increases quadratically. This makes their evaluation exceptionally computer-intensive. The advantage is that they can be used to price path-dependent options and they are important for modeling interest rate options. See binomial+tree for diagram.
HISTORICAL SIMULATION
A method of calculating value-at-risk which uses historical data to assess the impact of market moves on a portfolio. The first step is to record the changes in the relevant market factors over a given historical period, where each change occurs over a constant holding period. The next step is to revalue the portfolio for each change in market factors, as if such change were to occur in the future. The result is a distribution of possible profits and losses on the portfolio over the holding period, from which it is possible to calculate the maximum loss at a given confidence level. An advantage of historical simulation is that because it uses real data, it captures outlying events and correlations which would not necessarily be predicted by a theoretical model.
MINI-PREMIUM OPTION
The purchaser of a mini-premium option (also known as a step-payment or installment option) pays no initial premium. Instead, a fixed premium becomes payable if the market spot rate subsequently trades through each of a number of predetermined trigger levels for the spot rate. While this offers hedgers protection at zero cost, the total premium paid if all the triggers are activated will be greater than the premium for the equivalent plain vanilla option. However, in this case, the spot rate would have moved in favor of the hedger’s underlying position.
See also
binary option,
contingent premium option
RANDOM WALK
The series of values taken by a random variable with the progress of some parameter such as time. Each new value (each new step in the walk) is selected randomly and describes the path taken by the underlying variable.
See also
geometric Brownian motion,
stochastic process
STEP PAYMENT OPTION
See
mini-premium option
STEP-DOWN SWAP
1. See amortizing swap
2. The opposite of an escalating rate swap; i.e., the fixed rate decreases in increments over the life of the swap
STEP-UP COUPON SWAP
See
escalating rate swap
STEP-UP SWAP
See
accreting,
escalating rate swap
STEP-UP/DOWN RANGE FORWARD
A self-adjusting range forward structure which is particularly suitable for hedging purposes. If the strike level of the long put option is breached, the strike automatically adjusts up or down (according to exposure) to a new, more favorable, level.
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.