1. Absolute Purchasing Power Parity (PPP) 2. Adaptive Expectations A model of price behavior in which expectations of the future spot price are formed from a weighted average of the current spot price and lagged expected prices. 3. Agency Theory A theory of firms that deals with the conflict of interest between managers and stockholders. 4. Agent Bank A bank appointed in a syndicated credit to oversee the loan. 5. Allocational Efficiency A state in which resource allocation is optimal and further rearrangement of resources would not improve economic welfare. 6. American Option An option that can be exercised at any time prior to the contract's expiration date. 7. Amortizing Swap A swap designed to allow a floating rate borrower with a pre-set amortization schedule to swap against fixed rate interest. 8. Announcement Day The day on which a new issue of bonds is publicly announced, with invitation faxes sent out to prospective underwriters and sellers. 9. Appreciation An increase in the market value of a currency with respect to a second currency or a real asset. The term is used in reference to a market price as opposed to an official price or par value. 10. Arbitrage The simultaneous purchase and sale or lending and borrowing of two assets in order to profit from a price disparity. 11. Arbitrage Pricing Theory (APT) A theory of asset pricing in which relative pricing on a set of assets adheres to a specific return-generating process. 12. Arm's Length Price The price that would prevail between unrelated parties. 13. Articles of Agreement Specify the powers and responsibilities vested in the International Monetary Fund by members of that international organization. 14. Asian Development Bank (ADB) A regional development bank for Asia formed in 1966 and located in Manila, the Philippines. 15. Asian Option See Average Rate Option. 16. Asian Currency Unit A trading department of a bank in Singapore that has received a license from the monetary authorities in Singapore to deal in external currency deposits. 17. Asked Price The price at which a market maker in an asset will sell the asset; the price sought by any prospective seller. See Offer Price. 18. Asset Allocation Determination of the optimal combination of stocks and bonds, domestic and international, in which to invest. 19. Assignment The transfer from one bank to another of the right to receive loan principal and interest from a borrower. 20. At-the-money option An option with a strike price equal to the current market price of the underlying asset. 21. Average-Rate Option Option on foreign exchange or commodity prices that pays off the difference between the option strike price and the average price of the underlying asset, this average calculated over the life of the option. Also called Asian Option. 22. Back Bond A Eurobond issued together with or at the same time as a warrant. 23. Backwardation A relationship in which spot or cash prices are higher than futures (or forward) prices. 24. Balance of Payments A financial statement prepared for a given country summarizing the flows of goods, services, and funds between the residents of that country and the residents of the rest of the world during a certain period of time. The balance of payments is prepared using the concept of double-entry bookkeeping, where the total of debits equals the total of credits. 25. Balance of Trade The net of imports and exports of goods and services reported in the balance of payments. 26. Baker Plan Policy proposed to reduce the exposure of commercial banks to the debt of less developed countries. 27. Bankers' Acceptances Drafts drawn on a bank and accepted by the bank, meaning that the bank will honor them at maturity. The maturity date is determined from that date of the acceptance or drawing of the draft plus the period of time indicated in the draft. 28. Basic Balance The net of the following accounts in the balance of payments: exports and imports of goods and services, unilateral transfers, and long-term capital flows. 29. Basis The difference between cash and futures prices for the same commodity. Specifically, the cash price minus the futures price of a specific futures contract. 30. Basis Point One-hundredth of one percent, or 0.0001. 31. Basis Rate Swap Similar to structure of interest rate swap except one floating rate is exchanged for a floating rate calculated on a different basis, eg., US dollar LIBOR for US commercial paper. 32. Bear Market A market in which prices are declining. 33. Bearer Instrument A negotiable instrument payable on demand to the individual who holds the instrument. Title passes by delivery without endorsement. 34. Basle Accord An agreement, reached under the auspices of the Bank for International Settlements (BIS) in Basle, among bank regulators that major banks' capital should be at least 8% of their risk-adjusted assets. 35. Beta A statistical measure of the risk associated with an individual stock or stock portfolio. The beta of a stock or stock portfolio is the volatility of that stock's or stock portfolio's return relative to the volatility of the overall market return. 36. Bid Price The price at which a market-maker in an asset will buy the asset; the price sought by any prospective buyer. 37. Big Bang The 1986 deregulation of British financial markets in which the stock exchange was opened to foreign investment banks and a competitive commission structure was introduced. 38. BIS (Bank for International Settlements) An international bank located in Basle, Switzerland, which serves as a forum for monetary cooperation among the major central banks of Europe, the United States, and Japan. It monitors and collects data on international banking activity and serves as a clearing agent for the European Monetary System. The bank was originally founded in 1930 to handle the payment of German reparations after World War I. 39. Black Market Any private market that operates in contravention of government restrictions. For example, such a market may involve the exchange of currencies or goods at prices that are outside government-mandated levels, the trading of prohibited goods, or trading between individuals and/or institutions that are not approved by the government. 40. Bond Warrant Gives holder the right to buy existing bond or new bond at a fixed price during life of warrant. 41. Bonds with Warrants Eurobonds are frequently issued with attached warrants that entitle the holder to engage in an additional financial transaction in the future. Some warrants can be exercised only by the bondholder, but others are detachable and separately tradeable at times during their lives. The conventional type of warrant entitles the holder to purchase additional bonds of the same issuer at the same issue price and yield as the host bond. 42. Bons du Tresor (French Treasury Bills) Short-term instruments traded in an interbank market. There are two types: BTF, fixed-rate discount paper with maturity of 13, 26, or 52 weeks, and BTAN, two-to five-year coupon securities. 43. Bonus Borrowers option for notes and underwritten standby (same as global note facility). 44. Bought Deal A procedure for a new bond issue whereby the lead manager or managers buy the entire issue from the borrower on previously agreed fixed terms, including coupon level and issue price. 45. Brady Plan A debt-reduction policy for less developed countries that entailed the conversion of bank loans into more acceptable assets. 46. Bretton Woods Agreement Agreement signed by forty-four nations at Bretton Woods, New Hampshire, in July 1944; basis of the post-World War II monetary system. Each participating nation declared a par value for its currency and agreed to intervene in foreign exchange markets to maintain the exchange rate with respect to the U.S. dollar within plus or minus 1 percent of the par value. The United States agreed to the obligation to convert dollars to gold at $35 per ounce. The Bretton Woods fixed exchange rate system broke down in 1971. 47. Bridge Financing Medium-term financing, usually at fluctuating interest rates, that customarily takes the form of renewable overdrafts or discounting facilities. It is used as a continuing source of funds while the borrower obtains medium- or long- term fixed-rate financing, usually from sources other than commercial banks. 48. Bulldog Bonds Sterling-denominated bonds issued in the United Kingdom by nonresidents. Many are available in either registered or bearer form and most were issued in partly paid form. As with gilts, bulldogs follow an actual/365 day-count convention and pay interest twice a year. 49. Bund Issues Debt obligations of the Federal Republic of Germany. Most have maturities of 10 years, but there have been some longer-term issues. Bunds are underwritten by a fixed syndicate led by the Bundesbank, which includes both West German institutions and foreign-owned banks. Members of the syndicate are allotted fixed shares of each issue, with 20 percent allotted to foreign-owned banks. 50. Call Protection Warrant (or Wedding Warrant) Warrant to give holder an option to buy otherwise identical non-callable bonds. During the first half of its life, to exercise the warrant the holder must sell an equal amount of the original bonds back to the borrower, during the remainder of its life, when the bonds become callable, the warrants can be exercised for cash against purchase of a new bond. 51. Cap A contract on a short-term interest rate under which the writer of the cap pays the cap buyer the increased borrowing cost for any interest period (occurring prior to cap expiration) in which the short-term rate is fixed at a level above the ceiling rate specified in the cap.