Glossary

47 terms, defined the way they are used on this site.

At the money (ATM): An option whose strike equals the current price of the underlying.
Autocall: Early redemption of a product when the underlying is at or above a trigger on an observation date. The investor receives the nominal plus the coupon due; later coupons are lost.
Barrier: A price level that switches an option on (knock-in) or off (knock-out) when it is touched. Continuous barriers are observed throughout the term; European barriers only at the final fixing.
Bonus level: The minimum redemption of a bonus certificate as long as the barrier was never touched.
Building block: One of the simple instruments a structured product is assembled from: zero bond, underlying, call, put, digital, credit default swap. Their payoffs add up to the product payoff.
Call: The right to buy the underlying at the strike. Worth max(underlying − strike, 0) at maturity.
Cap: The level above which the investor no longer takes part in gains. Created by selling a call at the cap.
Capital protection: Repayment of at least the protection level at maturity, provided the issuer can pay. It does not apply before maturity.
Cash-or-nothing option: A digital option that pays a fixed amount if the underlying is beyond the strike at maturity and nothing otherwise.
Conditional coupon: A coupon paid only if a condition is met on the observation date, typically the underlying at or above a coupon trigger.
Constant leverage: A fixed multiple of the daily return of the underlying, re-levered every day. The result over several days depends on the path.
Coupon: A periodic payment. In this site coupons are shown as if paid at maturity together with the nominal.
Credit default swap (CDS): A contract in which one party sells protection against the default of a reference entity and receives a premium. The investor in a credit linked note is the protection seller.
Credit event: A default, restructuring or similar failure of the reference entity as defined in the product terms. It triggers the CDS leg.
Digital option: An option with an all-or-nothing payoff. Used for coupons and rebates.
Discount: The amount by which the purchase price of a discount certificate is below the price of the underlying. It is the premium of the sold call.
Down-and-in put: A put that only becomes active once the underlying has touched a barrier below the current price. Sold by the investor in a barrier reverse convertible.
Down-and-out put: A put that is cancelled once the underlying touches a barrier below the current price. Bought by the investor in a bonus certificate.
Financing level: The part of the underlying price that the issuer finances in a mini-future. The value of the mini-future is the distance between the underlying and the financing level.
Implied volatility: The volatility priced into options. Rising implied volatility makes bought options more valuable and sold options more expensive to buy back.
In the money (ITM): An option that would have a positive payoff if exercised now.
Issuer: The bank or special-purpose vehicle that issues the product and owes the redemption. Its creditworthiness is a risk in every structured product.
Key information document (KID): The standardised document that describes a product’s risks, costs and scenarios. Together with the term sheet it is the binding description.
Knock-in: A barrier event that activates an option.
Knock-out: A barrier event that cancels an option or ends a product.
Leverage: Exposure that is a multiple of the capital invested.
Nominal: The face amount of an investment product, usually 1,000 or 10,000 in the product currency. Redemption is quoted in percent of the nominal.
Out of the money (OTM): An option that would have no payoff if exercised now.
Participation: The rate at which the product takes part in moves of the underlying above (or below) the strike. 150 % means 1.5 % for every 1 %.
Path dependent: A payoff that depends on the route the underlying took, not only on where it ended. Barriers, autocalls and constant leverage are path dependent.
Payoff diagram: The redemption at maturity plotted against the level of the underlying at maturity. The folded line that gives this site its name.
Protection level: The minimum redemption of a capital protection product at maturity, in percent of the nominal.
Put: The right to sell the underlying at the strike. Worth max(strike − underlying, 0) at maturity.
Put–call parity: Underlying + put = zero bond + call, for the same strike and maturity. It explains why a discount certificate can be built two ways.
Rebate: A fixed amount paid when a barrier is touched, as compensation for the knocked-out option.
Recovery value: What a defaulted bond is worth after the credit event, in percent of its nominal.
Reference entity: The company or state whose credit risk is embedded in a product with additional credit risk.
Reverse level: The level at which a bear tracker is worth zero, typically twice the initial level.
Short position: An instrument the investor has sold. Its payoff enters the sum with a negative sign.
Stop-loss: The level at which a mini-future is closed by the issuer. A residual value is paid.
Strike: The price at which an option can be exercised; the kink in the payoff line.
Synthetic reference bond: A zero bond plus a sold credit default swap: economically a bond of the reference entity.
Term sheet: The legal document that defines a specific product. It overrides any general description, including everything on this site.
Time value: The part of an option price above its intrinsic value. It decays to zero at expiry.
Underlying: The share, index, basket, commodity, currency or rate the product refers to.
Zero bond: A bond without coupons that is bought below its face value and repays the face value at maturity. The foundation of every capital-protected product.
Zero-strike call: A call with a strike of zero, worth exactly the underlying. The way a tracker holds its underlying.