Hedging and Derivatives Glossary
Abandonment
The process where an Option is allowed to expire or remain unexercised by either party.
Accreting Swap
A swap where the notional principal increases over the life of the trade. Typically used when there is a staggered but predictable drawdown of debtor where risk increases over time. Can also be applied to Caps, Collars, Floors and Swaptions. Opposite of an Amortizing Swap.
Accrual Option
An option which is composed of a series of European digital options.
Adherence
The process by which a party signs-up to an ISDA or other market protocol.
Aggregation
The netting of positive and negative values of swaps affected by early termination.
American Option
An option which can be exercised at a specified strike price at any time before its expiry date. See also Asian option, Bermudan option and European option.
American Swaption
An option granting its owner the right, but not the obligation, to enter into an underlying swap at a specified strike price at any time before its expiry date.
Amortising Swap
A swap where the notional principal decreases over the life of the trade. Typically used to hedge transactions where the principal reduces over time. The rate of decrease will be determined by the amortisation schedule or, in some cases, an index. Can also be applied to Caps, Collars, Floors and Swaptions. Opposite of an Accreting Swap.
Asian Option
An option where the amount to be repaid is determined by the average price of the underlying asset over the life of the option, not a set strike price. May have a lower premium because the volatility of an average is lower. See also American option, Bermudan option and European option.
Asian Strip
A series of Asian options, all with the same strike price but each with a different expiry date.
Asset Swap
A structure involving the sale of an asset and an interest rate swap packaged as a single transaction. For example could be a fixed rate bond with a swap into floating, thereby creating a synthetic floating rate exposure for the life of the swap.
Assignment
For an option, the notice to an option writer that the option has been exercised.
As-you-like-it Option
An option which, on a specified date, can be exercised as either a call or a put.
