Financial Terms
European Currency Unit (ECU)

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Definition of European Currency Unit (ECU)

European Currency Unit (ECU) Image 1

European Currency Unit (ECU)

An index of foreign exchange consisting of about 10 european currencies,
originally devised in 1979.

Related Terms:

Asian currency units (ACUs)

Dollar deposits held in Singapore or other Asian centers.

Asset-backed security

A security that is collateralized by loans, leases, receivables, or installment contracts
on personal property, not real estate.

Blocked currency

A currency that is not freely convertible to other currencies due to exchange controls.

Book-entry securities

The Treasury and federal agencies are moving to a book-entry system in which securities are not represented by engraved pieces of paper but are maintained in computerized records at the
Fed in the names of member banks, which in turn keep records of the securities they own as well as those they
are holding for customers. In the case of other securities where a book-entry has developed, engraved
securities do exist somewhere in quite a few cases. These securities do not move from holder to holder but are
usually kept in a central clearinghouse or by another agent.

Convertible security

A security that can be converted into common stock at the option of the security holder,
including convertible bonds and convertible preferred stock.



Currency arbitrage

Taking advantage of divergences in exchange rates in different money markets by
buying a currency in one market and selling it in another market.

European Currency Unit (ECU) Image 2

Currency basket

The value of a portfolio of specific amounts of individual currencies, used as the basis for
setting the market value of another currency. It is also referred to as a currency cocktail.

Currency future

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

Currency option

An option to buy or sell a foreign currency.

Currency risk

Related: Exchange rate risk

Currency risk sharing

An agreement by the parties to a transaction to share the currency risk associated with
the transaction. The arrangement involves a customized hedge contract embedded in the underlying

Currency selection

Asset allocation in which the investor chooses among investments denominated in
different currencies.

Currency swap

An agreement to swap a series of specified payment obligations denominated in one currency
for a series of specified payment obligations denominated in a different currency.

Debt securities

IOUs created through loan-type transactions - commercial paper, bank CDs, bills, bonds, and
other instruments.

Derivative security

A financial security, such as an option, or future, whose value is derived in part from the
value and characteristics of another security, the underlying security.

European Currency Unit (ECU) Image 3

Devaluation A decrease in the spot price of the currency

Discount securities

Non-interest-bearing money market instruments that are issued at a discount and
redeemed at maturity for full face value, e.g. U.S. Treasury bills.

Doctrine of sovereign immunity

Doctrine that says a nation may not be tried in the courts of another country
without its consent.

Dual-currency issues

Eurobonds that pay coupon interest in one currency but pay the principal in a different

Eurocurrency deposit

A short-term fixed rate time deposit denominated in a currency other than the local
currency (i.e. US$ deposited in a London bank).

Eurocurrency market

The money market for borrowing and lending currencies that are held in the form of
deposits in banks located outside the countries of the currencies issued as legal tender.

European Monetary System (EMS)

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

European option

Option that may be exercised only at the expiration date. Related: american option.

European Union (EU)

An economic association of european countries founded by the Treaty of Rome in
1957 as a common market for six nations. It was known as the european Community before 1993 and is
comprised of 15 european countries. Its goals are a single market for goods and services without any
economic barriers and a common currency with one monetary authority. The EU was known as the european
Community until January 1, 1994.

European-style option

An option contract that can only be exercised on the expiration date.

Exchangeable Security

Security that grants the security holder the right to exchange the security for the
common stock of a firm other than the issuer of the security.

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The process of completing an order to buy or sell securities. Once a trade is executed, it is reported
by a Confirmation Report; settlement (payment and transfer of ownership) occurs in the U.S. between 1
(mutual funds) and 5 (stocks) days after an order is executed. Settlement times for exchange listed stocks are
in the process of being reduced to three days in the U. S.

Execution costs

The difference between the execution price of a security and the price that would have
existed in the absence of a trade, which can be further divided into market impact costs and market timing

Exempt securities

Instruments exempt from the registration requirements of the Securities Act of 1933 or the
margin requirements of the SEC Act of 1934. Such securities include government bonds, agencies, munis,
commercial paper, and private placements.

Federal agency securities

Securities issued by corporations and agencies created by the U.S. government,
such as the Federal Home Loan Bank Board and Ginnie Mae.

Fixed-dollar security

A nonnegotiable debt security that can be redeemed at some fixed price or according to
some schedule of fixed values, e.g., bank deposits and government savings bonds.

Foreign currency

Foreign money.

Foreign currency option

An option that conveys the right to buy or sell a specified amount of foreign
currency at a specified price within a specified time period.

Foreign currency translation

The process of restating foreign currency accounts of subsidiaries into the
reporting currency of the parent company in order to prepare consolidated financial statements.

Future investment opportunities

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

Government securities

Negotiable U.S. Treasury securities.

Growth opportunity

Opportunity to invest in profitable projects.

Hard currency

A freely convertible currency that is not expected to depreciate in value in the foreseeable future.

Host security

The security to which a warrant is attached.

Hybrid security

A convertible security whose optioned common stock is trading in a middle range, causing
the convertible security to trade with the characteristics of both a fixed-income security and a common stock

Manufactured housing securities (MHSs)

Loans on manufactured homes - that is, factory-built or
prefabricated housing, including mobile homes.

Monthly income preferred security (MIP)

Preferred stock issued by a subsidiary located in a tax haven.
The subsidiary relends the money to the parent.

Mortgage pass-through security

Also called a passthrough, a security created when one or more mortgage
holders form a collection (pool) of mortgages sells shares or participation certificates in the pool. The cash
flow from the collateral pool is "passed through" to the security holder as monthly payments of principal,
interest, and prepayments. This is the predominant type of MBS traded in the secondary market.

Mortgage-Backed Securities Clearing Corporation

A wholly owned subsidiary of the Midwest Stock
Exchange that operates a clearing service for the comparison, netting, and margining of agency-guaranteed
MBSs transacted for forward delivery.

Mortgage-backed securities

Securities backed by a pool of mortgage loans.

Multicurrency clause

Such a clause on a Euro loan permits the borrower to switch from one currency to
another currency on a rollover date.

Multicurrency loans

Give the borrower the possibility of drawing a loan in different currencies.

Net present value of growth opportunities

A model valuing a firm in which net present value of new
investment opportunities is explicitly examined.

Opportunity cost of capital

Expected return that is foregone by investing in a project rather than in
comparable financial securities.

Opportunity costs

The difference in the performance of an actual investment and a desired investment
adjusted for fixed costs and execution costs. The performance differential is a consequence of not being able
to implement all desired trades. Most valuable alternative that is given up.

Opportunity set

The possible expected return and standard deviation pairs of all portfolios that can be
constructed from a given set of assets.

Pass-through securities

A pool of fixed-income securities backed by a package of assets (i.e. mortgages)
where the holder receives the principal and interest payments. Related: mortgage pass-through security

Portfolio opportunity set

The expected return/standard deviation pairs of all portfolios that can be
constructed from a given set of assets.

Present value of growth opportunities (NPV)

Net present value of investments the firm is expected to make
in the future.

Primitive security

An instrument such as a stock or bond for which payments depend only on the financial
status of the issuer.

Project loan securities

Securities backed by a variety of FHA-insured loan types - primarily multi-family
apartment buildings, hospitals, and nursing homes.

Public Securities Administration (PSA)

The trade association for primary dealers in U.S. government
securities, including MBSs.

Reporting currency

The currency in which the parent firm prepares its own financial statements; that is, U.S.
dollars for a U.S. company.

Reserve currency

A foreign currency held by a central bank or monetary authority for the purposes of
exchange intervention and the settlement of inter-governmental claims.

Secured debt

Debt that, in the event of default, has first claim on specified assets.

Securities & Exchange Commission

The SEC is a federal agency that regulates the markets.

Securities analysts

Related:financial analysts


The process of creating a passthrough, such as the mortgage pass-through security, by which
the pooled assets become standard securities backed by those assets. Also, refers to the replacement of
nonmarketable loans and/or cash flows provided by financial intermediaries with negotiable securities issued
in the public capital markets.


Piece of paper that proves ownership of stocks, bonds and other investments.

Security characteristic line

A plot of the excess return on a security over the risk-free rate as a function of
the excess return on the market.

Security deposit (initial)

Synonymous with the term margin. A cash amount of funds that must be deposited
with the broker for each contract as a guarantee of fulfillment of the futures contract. It is not considered as
part payment or purchase. Related: margin

Security deposit (maintenance)

Related: Maintenance margin security market line (SML). A description of
the risk return relationship for individual securities, expressed in a form similar to the capital market line.

Security market line

Line representing the relationship between expected return and market risk.
Security market plane A plane that shows the equilibrium between expected return and the beta coefficient
of more than one factor.
Security selection
See: security selection decision.

Security selection decision

Choosing the particular securities to include in a portfolio.

Soft currency

A currency that is expected to drop in value relative to other currencies.

Speculative demand (for money)

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

Speculative grade bond

Bond rated Ba or lower by Moody's, or BB or lower by S&P, or an unrated bond.

Speculative motive

A desire to hold cash for the purpose of being in a position to exploit any attractive
investment opportunity requiring a cash expenditure that might arise.


One, who attempts to anticipate price changes and, through buying and selling contracts, aims to
make profits. A speculator does not use the market in connection with the production, processing, marketing
or handling of a product.
See: trader.

Stripped mortgage-backed securities (SMBSs)

Securities that redistribute the cash flows from the
underlying generic MBS collateral into the principal and interest components of the MBS to enhance their use
in meeting special needs of investors.

Treasury securities

Securities issued by the U.S. Department of the Treasury.

Underlying security

Options: the security subject to being purchased or sold upon exercise of an option
contract. For example, IBM stock is the underlying security to IBM options. Depository receipts: The class,
series and number of the foreign shares represented by the depository receipt.

Unit benefit formula

Method used to determine a participant's benefits in a defined benefit plan by
multiplying years of service by the percentage of salary.

Unit investment trust

Money invested in a portfolio whose composition is fixed for the life of the fund.
Shares in a unit trust are called redeemable trust certificates, and they are sold at a premium above net asset value.

Unsecured debt

Debt that does not identify specific assets that can be taken over by the debtholder in case of default.

Variable price security

A security, such as stocks or bonds, that sells at a fluctuating, market-determined price.

Virtual currency option

A new option contract introduced by the PHLX in 1994 that is settled in US$ rather
than in the underlying currency. These options are also called 3-Ds (dollar denominated delivery).


A depreciation method that relates a machine’s depreciation to the number of units it makes each
accounting period. The method requires that someone record the machine’s output each year.

Opportunity cost

The lost opportunity of not doing something, which may be financial or non-financial, e.g. time.

Securities and Exchange Commission (SEC)

The federal agency that
oversees the issuance of and trading in securities of public businesses.
The SEC has broad powers and can suspend the trading in securities of a
business. The SEC also has primary jurisdiction in making accounting
and financial reporting rules, but over the years it has largely deferred to
the private sector for the development of generally accepted accounting
principles (GAAP).

unit margin

The profit per unit sold of a product after deducting product
cost and variable expenses of selling the product from the sales price of
the product. unit margin equals profit before fixed operating expenses
are considered and before interest and income tax are deducted. unit
margin is one of the key variables in a profit model for decision-making

unit-driven expenses

Expenses that vary in close proportion to changes
in total sales volume (total quantities of sales). Examples of these types of
expenses are delivery costs, packaging costs, and other costs that depend
mainly on the number of products sold or the number of customers
served. These expenses are one of the key factors in a profit model for
decision-making analysis. Segregating these expenses from other types
of expenses that behave differently is essential for management decisionmaking
analysis. The cost-of-goods-sold expense depends on sales volume
and is a unit-driven expense. But product cost (i.e., the cost of
goods sold) is such a dominant expense that it is treated separately from
other unit-driven operating expenses.

Security Market Line

A graph illustrating the equilibrium relationship between the
expected rate of return on securities and their risk as measured by
the beta coefficient

defective unit

a unit that has been rejected at a control inspection
point for failure to meet appropriate standards of
quality or designated product specifications; can be economically
reworked and sold through normal distribution channels

equivalent units of production (EUP)

an approximation of the number of whole units of output that could have been
produced during a period from the actual effort expended
during that period; used in process costing systems to assign
costs to production

European Union (EU)

an economic alliance originally created
in 1957 as the european Economic Community by
France, Germany, Italy, Belgium, the Netherlands, and Luxembourg
and later joined by the united Kingdom, Ireland,
Denmark, Spain, Portugal, and Greece; prior to the Maastricht
Treaty of 1993 was called the european Community;
has eliminated virtually all barriers to the flow of capital,
labor, goods, and services among member nations

opportunity cost

a potential benefit that is foregone because
one course of action is chosen over another

opportunity cost of capital

the highest rate of return that
could be earned by using capital for the most attractive alternative
project(s) available

spoiled unit

a unit that is rejected at a control inspection
point for failure to meet appropriate standards of quality
or designated product specifications; it cannot be economically
reworked to be brought up to standard

total units to account for

the sum of the beginning inventory
units and units started during the current period

unit-level cost

a cost caused by the production or acquisition
of a single unit of product or the delivery of a single
unit of service

units started and completed

the difference between the number of units completed for the period and the units in beginning inventory; it can also be computed as the number of units started during the period minus the units in ending inventory

European option

An option that can be exercised only on its expiration date.
Contrast with American option.







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