Risk Management and Financial Institutions, + Web Site, 3rd Edition

Glossary

ABS     See Asset-Backed Security.

ABS CDO     Security created from the tranches of different ABSs.

Accrued Interest     The interest earned on a bond since the last coupon payment date.

Additional Tier 1 Capital     Items such as non-cumulative preferred stock that do not qualify as Tier 1 equity capital.

Add-On Factor     When the credit equivalent amount for a derivatives transaction is being calculated, this is the percentage of principal added to the current exposure to allow for possible future changes in the value of the derivative.

Advanced Measurement Approach     The way in which the most sophisticated banks will be allowed to calculate regulatory capital for operational risk under Basel II.

Adverse Selection     The phenomenon that, if an insurance company offers the same premiums to everyone, it tends to end up providing coverage for the worst risks.

Agency Costs     Costs in a business relationship where the interests of the two parties are not perfectly aligned.

Alpha     Return earned on a portfolio in excess of that predicted by the capital asset pricing model.

Alternative Investments     See Hedge Funds.

American Option     An option that can be exercised at any time during its life.

Analytic Result     Result where the answer is in the form of an equation.

Arbitrage     A trading strategy that takes advantage of two or more securities being mispriced relative to each other.

Arbitrage Pricing Theory     A theory where the return from an investment is ...