ASCOT: An Asset Swapped Convertible Option Transaction; an option on a convertible bond used to separate its interest flows from the equity component contained in the convertible bond.
Asymmetry: Lack of equality or equivalence between parts or areas of an entity such as an historic price curve.
Bond Floor: A convertible bond, offering an option to purchase equity, has a value which is a combination of a straight bond and the conversion value of an underlying equity. When equity prices are high the convertible price is determined by the option conversion value and, when they are low, by the straight bond value of the convertible. In effect the straight bond value is the bond floor
Credit Spread: A yield difference between bonds of the same maturity but different levels of quality. Credit quality can improve or deteriorate during the life of a bond as a result of events impacting the financial position of an issuer or of comparable credits.
Delta and Delta Adjusted: Delta (Greek) is one of the risk measures used in option pricing. Delta measures the degree to which an option is exposed to changes in the price of an underlying asset (values of options range from 0 to 1 for a ‘long’ option and -1 to 0 for a ‘short’ option). The Delta adjusted notional value of an option portfolio can be calculated by adding together the delta for each individual option.
Gearing: Not to be confused with leverage, ie., borrowing. Gearing in the case of options is the ratio of the underlying equity price to the option price. If the gearing is 5 times then the investment cost of such an option is 1/5 of the underlying equity.
Implied Volatility: The Implied Volatility of an option is an important factor in determining the price of an option. Options that give a buyer an opportunity to buy or sell an asset at a specific price during a pre-determined period have higher premiums at higher levels of implied volatility and vice versa.
Net Asset Value (NAV): The NAV of an investment fund is the value of the entity’s assets minus the value of its liabilities. Shares in such a fund are redeemed at their net asset value.
Nikkei 225 and the Topix: These are two indexes that mirror baskets of Japanese equities. The Nikkei 225 is determined by an average of stock prices and the broader Topix by the capitalisation weight of the domestic common stocks listed on the Tokyo Stock Exchange’s first section.
Notional, or Face, Value: Notional value is the total value of an option contract’s underlying asset.
Premium: A conversion premium on a convertible bond is the amount by which the current price of conversion into the equity exceeds the current market value of the equity to which it relates.
Reversal: A reversal is a change in the direction of a price trend, which can be positive or negative, against the prevailing trend.