Financial Terms Actuary

Definition of Actuary

Actuary

One who uses statistical information to evaluate the probability of future events and prices insurance products.

Related Terms:

economic components model

Abramsâ€™ model for calculating DLOM based on the interaction of discounts from four economic compOnents.
This model consists of four compOnents: the measure of the economic impact of the delay-to-sale, monopsony power to buyers, and incremental transactions costs to both buyers and sellers.

All or none

Requirement that nOne of an order be executed unless all of it can be executed at the specified price.

All-or-none underwriting

An arrangement whereby a security issue is canceled if the underwriter is unable
to re-sell the entire issue.

Asymmetric information

information that is known to some people but not to other people.

At-the-money

An option is at-the-mOney if the strike price of the option is equal to the market price of the
underlying security. For example, if xyz stock is trading at 54, then the xyz 54 option is at-the-mOney.

Base probability of loss

The probability of not achieving a portfolio expected return.

Call money rate

Also called the broker loan rate , the interest rate that banks charge brokers to finance
margin loans to investors. The broker charges the investor the call mOney rate plus a service charge.

Coinsurance effect

Refers to the fact that the merger of two firms decreases the probability of default on
either firm's debt.

Cumulative probability distribution

A function that shows the probability that the random variable will
attain a value less than or equal to each value that the random variable can take on.

Currency future

A financial future contract for the delivery of a specified foreign currency.

Deferred futures

The most distant months of a futures contract. A bond that sells at a discount and does not
pay interest for an initial period, typically from three to seven years. Compare step-up bond and payment-inkind
bond.

Dow Jones industrial average

This is the best known U.S.index of stocks. It contains 30 stocks that trade on
the New York Stock Exchange. The Dow, as it is called, is a barometer of how shares of the largest
U.S.companies are performing. There are thousands of investment indexes around the world for stocks,
bonds, currencies and commodities.

European Monetary System (EMS)

An exchange arrangement formed in 1979 that involves the currencies
of European Union member countries.

Events of default

Contractually specified events that allow lenders to demand immediate repayment of a debt.

Expected future cash flows

Projected future cash flows associated with an asset of decision.

Expected future return

The return that is expected to be earned on an asset in the future. Also called the
expected return.

Expected value of perfect information

The expected value if the future uncertain outcomes could be known
minus the expected value with no additional information.

Extrapolative statistical models

Models that apply a formula to historical data and project results for a
future period. Such models include the simple linear trend model, the simple expOnential model, and the
simple autoregressive model.

Federal Deposit Insurance Corporation (FDIC)

A federal institution that insures bank deposits.

Financial future

A contract entered into now that provides for the delivery of a specified asset in exchange
for the selling price at some specified future date.

Future

A term used to designate all contracts covering the sale of financial instruments or physical
commodities for future delivery on a commodity exchange.

Future investment opportunities

The options to identify additional, more valuable investment opportunities
in the future that result from a current opportunity or operation.

Future value

The amount of cash at a specified date in the future that is equivalent in value to a specified
sum today.

Futures

A term used to designate all contracts covering the sale of financial instruments or physical
commodities for future delivery on a commodity exchange.

Futures commission merchant

A firm or person engaged in soliciting or accepting and handling orders for
the purchase or sale of futures contracts, subject to the rules of a futures exchange and, who, in connection
with such solicitation or acceptance of orders, accepts any mOney or securities to margin any resulting trades
or contracts. The FCM must be licensed by the CFTC. Related: commission house , omnibus account

Futures contract

Agreement to buy or sell a set number of shares of a specific stock in a designated future
month at a price agreed upon by the buyer and seller. The contracts themselves are often traded on the futures
market. A futures contract differs from an option because an option is the right to buy or sell, whereas a
futures contract is the promise to actually make a transaction. A future is part of a class of securities called
derivatives, so named because such securities derive their value from the worth of an underlying investment.

Futures contract multiple

A constant, set by an exchange, which when multiplied by the futures price gives
the dollar value of a stock index futures contract.

Futures market

A market in which contracts for future delivery of a commodity or a security are bought or sold.

Futures option

An option on a futures contract. Related: options on physicals.

Futures price

The price at which the parties to a futures contract agree to transact on the settlement date.

Guaranteed insurance contract

A contract promising a stated nominal interest rate over some specific time
period, usually several years.

Hot money

MOney that moves across country borders in response to interest rate differences and that moves
away when the interest rate differential disappears.

Information asymmetry

A situation involving information that is known to some, but not all, participants.

Information Coefficient (IC)

The correlation between predicted and actual stock returns, sometimes used to
measure the value of a financial analyst. An IC of 1.0 indicates a perfect linear relationship between predicted
and actual returns, while an IC of 0.0 indicates no linear relationship.

Information costs

Transaction costs that include the assessment of the investment merits of a financial asset.
Related: search costs.

Information services

Organizations that furnish investment and other types of information, such as
information that helps a firm monitor its cash position.

Information-content effect

The rise in the stock price following the dividend signal.

Informational efficiency

The speed and accuracy with which prices reflect new information.

Trades that are the result of either a reallocation of wealth or an implementation of an
investment strategy that only utilizes existing information.

Trades in which an investor believes he or she possesses pertinent
information not currently reflected in the stock's price.

Insider information

Relevant information about a company that has not yet been made public. It is illegal for
holders of this information to make trades based on it, however received.

Insurance principle

The law of averages. The average outcome for many independent trials of an experiment
will approach the expected value of the experiment.

International Monetary Fund

An organization founded in 1944 to oversee exchange arrangements of
member countries and to lend foreign currency reserves to members with short-term balance of payment
problems.

International Monetary Market (IMM)

A division of the CME established in 1972 for trading financial
futures. Related: Chicago Mercantile Exchange (CME).

In-the-money

A put option that has a strike price higher than the underlying futures price, or a call option
with a strike price lower than the underlying futures price. For example, if the March COMEX silver futures
contract is trading at \$6 an ounce, a March call with a strike price of \$5.50 would be considered in-the-mOney
by \$0.50 an ounce.
Related: put.

Law of one price

An economic rule stating that a given security must have the same price regardless of the
means by which One goes about creating that security. This implies that if the payoff of a security can be
synthetically created by a package of other securities, the price of the package and the price of the security
whose payoff it replicates must be equal.

London International Financial Futures Exchange (LIFFE)

A London exchange where Eurodollar futures
as well as futures-style options are traded.

London International Financial Futures Exchange (LIFFE)

London exchange where Eurodollar futures as well as futures-style options are traded.

Market prices

The amount of mOney that a willing buyer pays to acquire something from a willing seller,
when a buyer and seller are independent and when such an exchange is motivated by only commercial
consideration.

Monetary gold

Gold held by governmental authorities as a financial asset.

Monetary policy

Actions taken by the Board of Governors of the Federal Reserve System to influence the
mOney supply or interest rates.

Monetary / non-monetary method

Under this translation method, mOnetary items (e.g. cash, accounts
payable and receivable, and long-term debt) are translated at the current rate while non-mOnetary items (e.g.
inventory, fixed assets, and long-term investments) are translated at historical rates.

Money base

Composed of currency and coins outside the banking system plus liabilities to the deposit mOney banks.

Money center banks

Banks that raise most of their funds from the domestic and international mOney markets, relying less on depositors for funds.

Money management

Related: Investment management.

Money manager

Related: Investment manager.

Money market

MOney markets are for borrowing and lending mOney for three years or less. The securities in
a mOney market can be U.S.government bonds, treasury bills and commercial paper from banks and
companies.

Money market demand account

An account that pays interest based on short-term interest rates.

Money market fund

A mutual fund that invests only in short term securities, such as bankers' acceptances,
commercial paper, repurchase agreements and government bills. The net asset value per share is maintained at
\$1. 00. Such funds are not federally insured, although the portfolio may consist of guaranteed securities
and/or the fund may have private insurance protection.

Money market hedge

The use of borrowing and lending transactions in foreign currencies to lock in the
home currency value of a foreign currency transaction.

Money market notes

Publicly traded issues that may be collateralized by mortgages and MBSs.

Money purchase plan

A defined benefit contribution plan in which the participant contributes some part and
the firm contributes at the same or a different rate. Also called and individual account plan.

Money rate of return

Annual mOney return as a percentage of asset value.

Money supply

M1-A: Currency plus demand deposits
M1-B: M1-A plus other checkable deposits.
M2: M1-B plus overnight repos, mOney market funds, savings, and small (less than \$100M) time deposits.
M3: M-2 plus large time deposits and term repos.
L: M-3 plus other liquid assets.

Most distant futures contract

When several futures contracts are considered, the contract settling last.
Related: nearby futures contract

National Futures Association (NFA)

The futures industry self regulatory organization established in 1982.

Nearby futures contract

When several futures contracts are considered, the contract with the closest
settlement date is called the nearby futures contract. The next futures contract is the One that settles just after
the nearby futures contract. The contract farthest away in time from settlement is called the most distant
futures contract.

Net present value of future investments

The present value of the total sum of NPVs expected to result from
all of the firm's future investments.

New money

In a Treasury auction, the amount by which the par value of the securities offered exceeds that of
those maturing.

Next futures contract

The contract settling immediately after the nearby futures contract.

Normal probability distribution

A probability distribution for a continuous random variable that is forms a
symmetrical bell-shaped curve around the mean.

One man picture

The picture quoted by a broker is said to be a One-man picture if both the bid and offered
prices come from the same source.

One-factor APT

A special case of the arbitrage pricing theory that is derived from the One-factor model by
using diversification and arbitrage. It shows the expected return on any risky asset is a linear function of a
single factor.

One-way market

1) A market in which only One side, the bid or asked, is quoted or firm.
2) A market that is moving strongly in One direction.

Out-of-the-money option

A call option is out-of-the-mOney if the strike price is greater than the market price
of the underlying security. A put option is out-of-the-mOney if the strike price is less than the market price of
the underlying security.

Phone switching

In mutual funds, the ability to transfer shares between funds in the same family by
telephOne request. There may be a charge associated with these transfers. PhOne switching is also possible
among different fund families if the funds are held in street name by a participating broker/dealer.

Portfolio insurance

A strategy using a leveraged portfolio in the underlying stock to create a synthetic put
option. The strategy's goal is to ensure that the value of the portfolio does not fall below a certain level.

Postponement option

The option of postponing a project without eliminating the possibility of undertaking it.

Precautionary demand (for money)

The need to meet unexpected or extraordinary contingencies with a
buffer stock of cash.

Prices

Price of a share of common stock on the date shown. Highs and lows are based on the highest and

Probability

The relative likelihood of a particular outcome among all possible outcomes.

Probability density function

The probability function for a continuous random variable.

Probability distribution

Also called a probability function, a function that describes all the values that the random variable can
take and the probability associated with each.

Probability function

A function that assigns a probability to each and every possible outcome.

Risk prone

Willing to pay mOney to transfer risk from others.

Seasoned datings

Extended credit for customers who order goods in periods other than peak seasons.

Seasoned issue

Issue of a security for which there is an existing market. Related: UnseasOned issue.

Seasoned new issue

A new issue of stock after the company's securities have previously been issued. A
seasOned new issue of common stock can be made by using a cash offer or a rights offer.

SIMEX (Singapore International Monetary Exchange)

A leading futures and options exchange in Singapore.

Speculative demand (for money)

The need for cash to take advantage of investment opportunities that may arise.

Spot futures parity theorem

Describes the theoretically correct relationship between spot and futures prices.
Violation of the parity relationship gives rise to arbitrage opportunities.

Stand-alone principle

Investment principle that states a firm should accept or reject a project by comparing it
with securities in the same risk class.

Target zone arrangement

A mOnetary system under which countries pledge to maintain their exchange rates
within a specific margin around agreed-upon, fixed central exchange rates.

Term life insurance

A contract that provides a death benefit but no cash build-up or investment compOnent.
The premium remains constant only for a specified term of years, and the policy is usually renewable at the
end of each term.

Term insurance

Provides a death benefit only, no build-up of cash value.

Theoretical futures price

Also called the fair price, the equilibrium futures price.

Time value of money

The idea that a dollar today is worth more than a dollar in the future, because the dollar
received today can earn interest up until the time the future dollar is received.

Transaction demand (for money)

The need to accommodate a firm's expected cash transactions.