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Definition of Moral hazard
The risk that the existence of a contract will change the behavior of one or both parties to the
An alteration in the accounting methodology or estimates used in
A bond covenant that specifies certain actions the firm must take.
Requirement that none of an order be executed unless all of it can be executed at the specified price.
An arrangement whereby a security issue is canceled if the underwriter is unable
The second-largest stock exchange in the United States. It trades
The amount of total risk that can be eliminated by diversification by
An option is at-the-money if the strike price of the option is equal to the market price of the
The risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk.
The uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for
risk of a firm measured from the standpoint of an investor who holds a highly diversified portfolio.
General term for a document demanding payment.
A guaranteed investment contract purchased with a single (one-shot) premium. Related:
The risk that the cash flow of an issuer will be impaired because of adverse economic
Also called the broker loan rate , the interest rate that banks charge brokers to finance
The combination of cash flow uncertainty and reinvestment risk introduced by a call provision.
Cash settlement contracts
Futures contracts, such as stock index futures, that settle for cash, not involving
Change in Accounting Estimate
A change in accounting that occurs as the result of new information
Change in Accounting Estimate
A change in the implementation of an existing accounting
Change in Accounting Principle
A change from one generally accepted accounting principle to another generally accepted accounting principle—for example, a change from capitalizing expenditures
Change in Reporting Entity
A change in the scope of the entities included in a set of, typically, consolidated financial statements.
Changes in Financial Position
Sources of funds internally provided from operations that alter a company's
Chicago Mercantile Exchange (CME)
A not-for-profit corporation owned by its members. Its primary
The risk that a foreign debtor will be unable to pay its debts because of business events,
Commodities Exchange Center (CEC)
The location of five New York futures exchanges: Commodity
Related: Unsystematic risk
See asset-specific risk
A contract accounting method that recognizes contract revenue
The risk that a project will not be brought into operation successfully.
Raw materials or subassemblies used to make either finished goods
Conditional sales contracts
Similar to equipment trust certificates except that the lender is either the
he written statement that follows any "trade" in the securities markets. Confirmation is issued
A term of reference describing a unit of trading for a financial or commodity future. Also, the actual
A formal written statement of the rights and obligations of each party to a transaction.
Method of accounting for sales or service agreements where completion
an external party that has been granted an outsourcing contract to produce a part or component for an entity
The month in which futures contracts may be satisfied by making or accepting a delivery.
an external party that has been granted an
Contract Work Hours and Safety Standards Act
A federal Act requiring federal contractors to pay overtime for hours worked exceeding 40 per week.
Convertible exchangeable preferred stock
Convertible preferred stock that may be exchanged, at the
a contract in which the customer agrees
The parties to an interest rate swap.
The risk that the other party to an agreement will default. In an options contract, the risk
Country financial risk
The ability of the national economy to generate enough foreign exchange to meet
Country risk General
Level of political and economic uncertainty in a country affecting the value of loans or
The risk that an issuer of debt securities or a borrower may default on his obligations, or that the
Financial and moral risk that an obligation will not be paid and a loss will result.
Refers to the volatility of returns on international investments caused by events associated
Cumulative Effect of a Change in Accounting Principle
The change in earnings of previous years
Cumulative Effect of Accounting Change
The change in earnings of previous years assuming
Related: Exchange rate risk
Currency risk sharing
An agreement by the parties to a transaction to share the currency risk associated with
Also referred to as credit risk (as gauged by commercial rating companies), the risk that an
Related: unsystematic risk.
Dow Jones industrial average
This is the best known U.S.index of stocks. It contains 30 stocks that trade on
Dow Jones Industrial Average
Index of the investment performance of a portfolio of 30 “blue-chip” stocks.
economic components model
Abrams’ model for calculating DLOM based on the interaction of discounts from four economic components.
In project financing, the risk that the project's output will not be salable at a price that will
Effective Exchange Rate
The weighted average of several exchange rates, where the weights are determined by the extent of our trade done with each country.
Electronic data interchange (EDI)
The exchange of information electronically, directly from one firm's
electronic data interchange (EDI)
the computer-to-computer transfer of information in virtual real time using standardized formats developed by the American National Standards Institute
Embodied Technical Change
Technical change that can be used only when new capital embodying this technical change is produced.
A change to a product’s specifications as issued by the engineering
engineering change order (ECO)
a business mandate that changes the way in which a product is manufactured or a
Equation of Exchange
The quantity theory equation Mv = PQ.
Equilibrium market price of risk
The slope of the capital market line (CML). Since the CML represents the
European Monetary System (EMS)
An exchange arrangement formed in 1979 that involves the currencies
The risk that the ability of an issuer to make interest and principal payments will change because
The marketplace in which shares, options and futures on stocks, bonds, commodities and indices
Governmental restrictions on the purchase of foreign currencies by domestic citizens or
Exchange of assets
Acquisition of another company by purchase of its assets in exchange for cash or stock.
Exchange of stock
Acquisition of another company by purchase of its stock in exchange for cash or shares.
An offer by the firm to give one security, such as a bond or preferred stock, in exchange for
The price of one country's currency expressed in another country's currency.
Amount of one currency needed to purchase one unit of another.
Exchange Rate Mechanism (ERM)
The methodology by which members of the EMS maintain their
Exchange Rate, Nominal
The price of one currency in terms of another, in this book defined as number of units of foreign currency per dollar.
Exchange Rate, Real
The nominal exchange rate corrected for price level differences.
Exchange rate risk
Also called currency risk, the risk of an investment's value changing because of currency
The variability of a firm's value that results from unexpected exchange rate changes or the
Security that grants the security holder the right to exchange the security for the
expectations theory of exchange rates
Theory that expected spot exchange rate equals the forward rate.
A type of mortgage pipeline risk that is generally created when the terms of the loan to be
Fiat Money is paper currency made legal tender by law or fiat. It is not backed by gold or silver and is not necessarily redeemable in coin. This practice has had widespread use for about the last 70 years. If governments produce too much of it, there is a loss of confidence. Even so, governments print it routinely when they need it. The value of fiat money is dependent upon the performance of the economy of the country which issued it. Canada's currency falls into this category.
The risk that the cash flow of an issuer will not be adequate to meet its financial obligations.
risk to shareholders resulting from the use of debt.
Refers to an order to buy or sell that can be executed without confirmation for some fixed period. Also,
Firm commitment underwriting
An undewriting in which an investment banking firm commits to buy the
Firm's net value of debt
Total firm value minus total firm debt.
See:diversifiable risk or unsystematic risk.
A country's decision to tie the value of its currency to another country's currency, gold
Fixed Exchange Rate
An exchange rate held constant by a government promise to buy or sell dollars at the fixed rate on the foreign exchange market.
Flat price risk
Taking a position either long or short that does not involve spreading.
Flexible Exchange Rate
An exchange rate whose value is determined by the forces of supply and demand on the foreign exchange market.
Floating exchange rate
A country's decision to allow its currency value to freely change. The currency is not
Floating Exchange Rate
See flexible exchange rate.
A guaranteed investment contract where the credit rating is tied to some variable
Force majeure risk
The risk that there will be an interruption of operations for a prolonged period after a
Currency from another country.
The currency of a foreign country.
Foreign exchange controls
Various forms of controls imposed by a government on the purchase/sale of
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