Synthetic Definition.

A synthetic definition is a type of options trading strategy that involves combining two or more options contracts to replicate the payoff of another options contract. The most common synthetic definition is a call spread, which is created by buying a call option and selling a call option with a higher strike price. Can you … Read more

Understanding an Out of the Money (OTM) Option.

An out of the money (OTM) option is an option that has no intrinsic value. This means that the option is not currently in-the-money and, if exercised, would result in a net cash outflow to the option holder. OTM options are typically cheaper than their in-the-money or at-the-money counterparts because they have a lower probability … Read more

What Is Transaction Risk?

Transaction risk is the risk that a security’s price will move adversely between the time an order is placed and the time it is executed. This type of risk is often referred to as market risk. For example, if a stock is trading at $50 per share and an investor places an order to buy … Read more

What Is Warrant Coverage?

Warrant coverage is a term used to describe the number of warrants that are outstanding in relation to the number of shares of a particular stock. For example, if a company has 1,000 shares of common stock outstanding and 100 warrants outstanding, the warrant coverage would be 10%. Warrant coverage can be an important factor … Read more

Value Date Definition.

The value date of a financial instrument is the date on which the instrument’s value is determined. For example, the value date of a foreign currency note is the date on which the note is exchanged for the foreign currency. The value date of a futures contract is the date on which the contract expires. … Read more

Understanding Forward Rates.

When trading options and derivatives, it is important to understand forward rates. The forward rate is the rate at which a particular currency is expected to trade at some point in the future. This rate is determined by the spot rate, which is the current market rate, and the interest rate differential between the two … Read more

Forward Margin Definition.

The forward margin definition is the minimum amount of funds that must be deposited in order to open a forward contract. This margin is set by the exchanges and must be posted by both the buyer and the seller. How does forward make money? Forward contracts are derivative instruments that allow two parties to agree … Read more

What Is a Range Accrual?

A range accrual is a type of interest rate swap in which the floating leg of the swap pays periodic interest payments based on a underlying reference rate, less a predetermined spread, while the fixed leg pays a fixed rate of interest. The payments on the floating leg are based on the difference between the … Read more