Vocabulary

beta

amount of systematic risk an asset or portfolio has with respect to the market

call option

agreement that allows the buyer to purchase an underlying asset at the strike price before contract expiration

cover

buyback action of the put option

derivative

contract allowing for the transfer of an underlying asset without actually transferring the asset

distressed debt hedge strategy

purchase of a troubled company's devalued debt with the expectation that the company will recover

diversification

practice of investing a portfolio's funds in multiple assets to reduce the total risk

equity hedge

strategy used by managers to control the investment's exposure to the equity market

global macro hedge

investment tactic that is based on making predictions on the growth or decay of a particular nation's economy

hedge fund

limited partnership formed by a small group of investors who combine capital to invest in assets in order to maximize gains while mitigating risk

hedging

investment strategy that attempts to lower the risk of unexpected events

long hedge

investment strategy that secures the price of an asset in anticipation that the asset's price will increase in the future

market neutral strategy

strategy that secures an equal portion of assets in long and short positions, making the market exposure equal to zero

merger arbitrage strategy

tactic that capitalizes on acquisitions, liquidations, and mergers

natural hedge

phenomenon of two assets with opposite risk profiles that cancel out each other's risk

option

derivative with a contract that allows, but does not obligate, the purchase or sale of an asset

perfect hedge

investment strategy that results in equal gains and losses

premium

when stock has been sold for a price that is more than its par value

put option

option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price and within a specified time frame

short hedge

investment strategy that secures the price in anticipation of the price or value of an asset diminishing

speculating

financial action that carries a risk of total loss of value but has the prospect of large gains that offset the risk of loss

strike price

value at which a call or put option may be implemented until the expiration date

swap

agreement to trade financial instruments; often included as terms of a loan

systematic risk

volatility that affects assets on a macroeconomic scale

total portfolio risk

sum of systematic and unsystematic risks

underlying asset

object by which the derivative's value is determined

unsystematic risk

uncertainty associated with an individual company or sector