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Financial Glossary

Definitions of the FX, payments, and treasury terms used across Okoora.

A

  • American OptionAn American option is a derivative contract that gives the holder the right, but not the obligation, to buy or...
  • American TriggerA condition built into certain financial products-like barrier options-that can be activated or deactivated at...
  • Amortizing SwapDefinition: An Amortizing Swap is a financial derivative where the notional principal amount—used to calculate...
  • Analytical VaRDefinition: Analytical VaR, also known as Parametric VaR, is a statistical method used to estimate the potenti...
  • ArbitrageWhat Is Arbitrage? Arbitrage is a trading strategy that involves simultaneously buying and selling the same or...
  • Asian OptionAn Asian option is a type of exotic derivative where the payout is determined by the average price of the unde...
  • Ask PriceWhat Is An Ask Price? The Ask Price (also known as the " Offer Price ") is the lowest price at which a seller...
  • At The Money (ATM) OptionAn option where the strike price is exactly equal (or very close) to the current market price of the underlyin...
  • At The Money ForwardA currency option or forward contract where the strike price is set equal to the forward rate available in the...

B

  • Barrier OptionWhat is a Barrier Option? A barrier option is an exotic options contract whose existence, activation, or termi...
  • Basis RiskThe risk that arises when a hedge doesn’t move exactly in line with the exposure it’s meant to protect. Even w...
  • Basket OptionAn option based on a group-or "basket"-of multiple underlying assets or currencies. The option's value and pay...
  • BidWhat Is a Bid? The bid is the highest price a buyer—such as a bank, broker, or market maker—is willing to pay...
  • Bid-Ask SpreadThe difference between the Bid (selling price) and the Ask (buying price) of a currency. It’s one of the most...
  • Binary OptionAlso known as a digital option - a type of option that offers a simple yes-or-no outcome: it either pays a fix...

C

  • Call OptionWhat Is a Call Option? A call option is a type of financial derivative that grants the holder the right, but n...
  • Cash Flow HedgeA cash flow hedge is a risk management strategy that protects a business's future foreign-currency payments or...
  • Collar (Cylinder Strategy)A hedging structure that combines two options: buying one (usually a put or a call) and selling another, with...
  • Commodity RiskWhat Is Commodity Risk? Commodity risk is the exposure to financial loss caused by changes in the price of raw...
  • Compound OptionA n option on another option-it gives the holder the right, but not the obligation, to buy or sell a second op...
  • Contingent OptionA special type of option where the buyer only pays the premium if the option ends up in the money-meaning it f...
  • ConvexityWhat Is Convexity? Convexity in finance is a measure of how the duration of a bond or derivative changes as in...
  • Covered CallWhat Is A Covered Call? A Covered Call is an options strategy where an investor holds a long position in a sto...
  • Covered Interest ArbitrageWhat Is Covered Interest Arbitrage? Covered interest arbitrage is a strategy that profits from the interest ra...
  • Cross-Currency SwapA long-term agreement where two parties exchange principal and interest payments in different currencies. Thes...
  • Currency ForwardsPrivate agreements between two parties to exchange a specific amount of one currency for another at a fixed ex...
  • Currency FuturesAre standardized contracts that commit the buyer and seller to exchange a specific amount of currency at a set...
  • Currency OptionsWhat Are Currency Options? A currency option is a financial derivative that grants its holder the right, but n...
  • Currency OptionsWhat Are Currency Options? A currency option is a financial derivative that grants its holder the right, but n...
  • Currency OverlayWhen you invest in assets from another country, like stocks in Europe or bonds in Japan, you’re not just betti...
  • Currency RiskDefinition: Currency Risk, also known as exchange rate risk or foreign exchange risk, is the potential for fin...
  • Currency SwapWhat is a Currency Swap? A currency swap is a financial derivative agreement between two parties to exchange p...

D

  • Delivery in FinanceWhat is Delivery in Finance? Delivery in finance refers to the transfer of a financial instrument, commodity,...
  • DeltaWhat Is Delta? Delta is a financial metric used in options trading to measure how much an option's price is ex...
  • Delta HedgingA risk management strategy used to maintain a neutral position in an options portfolio by offsetting changes i...
  • DerivativesWhat Are Derivatives? Derivatives are financial contracts whose value is derived from the performance of an un...
  • Double No Touch OptionDefinition: A Double No Touch Option is an exotic options contract that pays a predetermined amount only if th...
  • Dynamic HedgingDefinition: Dynamic Hedging is a risk management strategy that involves continuously adjusting hedge positions...

E

  • Effective Exchange RateA measure of a currency’s overall strength, calculated as a weighted average of its value against a basket of...
  • Embedded FinanceDefinition Embedded finance is the integration of financial services—such as payments, lending, insurance, or...
  • Equity RiskWhat Is Equity Risk? Equity risk is the potential for financial loss from adverse movements in stock prices. I...
  • EurexDefinition: Eurex is Europe’s largest derivatives exchange and a key global marketplace for trading futures an...
  • European OptionDefinition: A European Option is a type of financial option contract that can only be exercised on its expirat...
  • European TriggerA contract feature that activates or cancels a financial product only on its expiration date, based on whether...
  • Exchange Rate RiskWhat Is Exchange Rate Risk? Exchange rate risk arises whenever a company or investor holds assets, liabilities...
  • Exotic OptionsExotic options are non-standard derivatives whose payoff structures, exercise conditions, or underlying mechan...
  • Expiry DateWhat Is the Expiry Date in Trading? In trading, an expiry date is the date on which a financial contract becom...

F

  • Foreign Exchange Swap (FX Swap)What is a Foreign Exchange Swap? A foreign exchange swap (FX swap) is a financial contract that involves the s...
  • Forward or Forward ContractWhat is a Forward Contract? A forward contract is a customized agreement between two parties to exchange curre...
  • Forward Rate Agreement (FRA)What is a Forward Rate Agreement? A Forward Rate Agreement (FRA) is an over-the-counter (OTC) contract between...
  • Futures ContractWhat Is A Futures Contract? Futures contracts are standardized agreements traded on regulated exchanges such a...

G

  • GammaWhat is Gamma in Finance? Gamma is a second-order Greek that measures how much an option's Delta changes for a...

H

  • Haircut (Collateral)A discount applied to the market value of collateral posted in financial transactions, such as margining, repo...
  • HedgeWhat Is Hedging? Hedging is a financial strategy used to reduce or mitigate risk by taking an offsetting posit...
  • Hedge RatioWhat is a Hedge Ratio? A hedge ratio is a risk management metric that represents the proportion of a position...
  • Historical VaRA method of measuring potential losses in a portfolio by analyzing actual past market movements. Unlike Analyt...
  • Historical VolatilityWhat Is Historical Volatility? Historical volatility (HV) is a backward-looking measure of how much an asset's...

I

  • Implied VolatilityWhat Is Implied Volatility? Implied Volatility (IV) represents the market’s forward-looking estimate of how mu...
  • In The Money OptionAn option that has positive intrinsic value, meaning it would be profitable if exercised immediately. The opti...
  • Interest Rate Parity (IRP)A financial theory that explains how differences in interest rates between two countries influence the forward...
  • Interest Rate RiskWhat Is Interest Rate Risk? Interest Rate Risk is the potential for financial losses or adverse impacts on ass...
  • Interest Rate Swap (IRS)A financial agreement between two parties to exchange interest payments on a notional principal amount over a...
  • Intrinsic ValueWhat Is Intrinsic Value? Intrinsic Value has two meanings in finance: (1) In options trading, it is the immedi...

K

L

  • Liquidity RiskWhat is Liquidity Risk? Liquidity risk is the potential that an individual, company, or financial institution...

M

  • MarginWhat Is Margin? Margin refers to the funds required to open and maintain positions in leveraged financial inst...
  • Margin CallWhat Is Margin Call? A margin call is a demand from a broker or clearinghouse requiring an investor or trader...
  • Mark-to-Market (MTM)The process of revaluing a financial position, such as a currency hedge, based on current market prices. It re...
  • Market RiskWhat Is Marketing Risk? Market Risk is the potential for financial loss arising from unfavorable movements in...
  • Mid PriceRepresents the average of the Bid and Ask prices quoted for a financial instrument. It is a notional price tha...
  • Monetary Policy ImpactThe effect of central bank actions, such as interest rate adjustments, open market operations, and forward gui...
  • Monte Carlo VaRA risk estimation method that uses stochastic (randomized) simulations to model potential future market condit...

N

  • Naked OptionWhat is a Naked Option? A naked option (also called an uncovered option) is an options trading strategy in whi...
  • Natural HedgeA method of reducing currency risk by aligning operational inflows and outflows in the same foreign currency....
  • Natural HedgingWhat Is Natural Hedging? Natural hedging reduces currency risk by structuring business operations so that fore...
  • No Touch OptionA type of binary option that pays a fixed return i f the underlying asset does not reach or “touch” a specifie...
  • Notional AmountDefinition Notional amount is the nominal or reference value used to calculate payments in derivative contract...

O

  • OfferWhat Is An Offer? An Offer (also known as the "ask price") is the price at which a seller or market maker is w...
  • One Touch OptionA type of binary option that provides a fixed payout if the underlying asset reaches or “touches” a predetermi...
  • Open PositionWhat is an Open Position? An open position refers to a financial exposure—such as a trade, currency holding, o...
  • Over The Counter (OTC)A method of trading financial instruments directly between two parties, outside of formal exchanges such as st...
  • Over-the-Counter (OTC) MarketA decentralized market structure where financial instruments, such as currency derivatives, forwards, swaps, a...

P

  • PipsWhat Are Pips in Forex Trading? A pip—short for "percentage in point" or "price interest point"—is the smalles...
  • Plain Vanilla OptionDefinition: A Plain Vanilla Option is a basic options contract that gives the holder the right, but not the ob...
  • Premium (Options)The cost paid by the buyer to acquire a currency option contract. This premium represents the upfront price of...
  • Put OptionWhat is a Put Option? A put option is a financial contract that gives the holder the right, but not the obliga...

R

  • ReconciliationDefinition Reconciliation is the process of ensuring that two sets of records—such as a company’s internal led...
  • Reverse Barrier OptionA type of exotic option in which the barrier feature activates or cancels the option only when it is already i...
  • RhoWhat Is Rho? Rho is an options Greek that measures an option's price sensitivity to changes in interest rates....
  • Risk ReversalWhat Is Risk Reversal? A risk reversal is an options structure that combines the simultaneous purchase of one...
  • Rolling HedgeThe practice of continuously extending or replacing expiring hedging contracts, such as forwards, options, or...

S

  • Settlement RiskDefinition Settlement risk is the risk that one party in a financial transaction will fail to deliver the agre...
  • Speculative HedgeA hedge executed not solely to reduce risk but also with the intent to profit from anticipated movements in cu...
  • Spot DateThe standard settlement date for a spot foreign exchange (FX) transaction, typically set at two business days...
  • Spot MarketWhat is a Spot Market? A spot market is a financial marketplace where assets such as commodities, currencies,...
  • Spot RateWhat is a Spot Rate? A spot rate is the current market price at which a financial instrument, currency, or com...
  • SpreadWhat Is Spread In Finance? A Spread refers to the difference between two related financial values, most common...
  • Strike PriceThe agreed-upon price at which the holder of an option contract has the right to buy (in a call option) or sel...
  • Strike Price (Exercise Price)What is a Strike Price? The strike price, also known as the exercise price, is the predetermined fixed price a...
  • Swap ContractWhat is a Swap Contract? A swap contract is a derivative agreement between two parties to exchange sequences o...
  • Synthetic StrategyA trading or hedging approach that uses a combination of financial instruments, such as options, forwards, and...

T

  • The GreeksWhat Are The Greeks? The Greeks are a set of risk metrics used in options trading that measure how an option's...
  • Theta (Time Decay)A measure of the rate at which an option’s value declines over time, assuming all other factors remain constan...
  • Time Value of MoneyDefinition: The Time Value of Money (TVM) is a foundational financial concept stating that money available tod...
  • Translation RiskThe risk that a company’s financial statements and reported earnings are affected by fluctuations in exchange...

V

  • Vanilla OptionA standardized currency option that provides the buyer with the right, but not the obligation, to buy (call) o...
  • VaR (Value at Risk)A statistical measure used to estimate the maximum potential loss of a portfolio, asset, or financial position...
  • VegaWhat Is Vega? Vega is an options Greek that measures an option's price sensitivity to changes in implied volat...
  • Virtual Bank AccountDefinition A virtual bank account is a non-physical bank account used primarily by businesses to manage and re...
  • VolatilityWhat Is Market Risk? Volatility refers to the degree of variation in the price of a financial instrument over...

Z

  • Zero Cost StrategyA hedging or trading approach that combines multiple financial instruments, typically options, in a way that t...
  • Zero-Cost CollarA hedging strategy that combines the purchase of a protective put option with the sale of a call option on the...