Macaulay Duration
A measure of the sensitivity of a financial instrument's value to a change in its yield. The weighted average term to maturity of the cash flows where the weight of each cash flow is calculated by dividing the present value of the cash flow by the price of the instrument. It is a measure of price volatility with respect to interest rates.
Macro Hedging
The process of eliminating the risk for an entire portfolio of assets.
Main Credit Indices
The most commonly traded credit indices (e.g. CDX NA IG, CDX NA HY, iTraxx Europe, iTraxx Europe Crossover, etc.).
Maintenance Margin
The minimum amount of money that must be kept in a margin account. A margin account is defined as a brokerage account in which the broker lends a buyer the cash to purchase securities.
Managed CDO
A CDO in which a portfolio manager is paid a fee to monitor the basket of credits and, if necessary, update the pool of credits to protect from the loss in credit quality of the portfolio.
Management Buyout
When the management of a company purchases the outstanding shares of the company to make it a private entity.
Marche a Terme International de France (MATIF)
An exchange based in Paris, which trades futures and options on interest rate products and commodities.
Marche des Options Negociables de Paris (MONEP)
An exchange based in Paris, which trades futures and options on equity and index futures.
Margin
Collateral kept in an account to cover losses on the positions in a portfolio.
Margin Call
A request from a broker for additional funds to cover the value loss of a portfolio such that minimum balance requirements are maintained.
Mark-to-market Valuation
The fair value of a financial asset or portfolio of assets using current market prices.
Market Exposure
The exposure of a portfolio to particular type of security and/or market sector which is usually expressed as a percentage of the total portfolio.
Market Risk
The potential to experience portfolio valuation losses due to changes in market prices and rates (e.g. credit spreads, interest rates, equity prices, foreign exchange rates, commodity prices, etc.).
Market Standard Documentation
A set of credit derivative terms and conditions regarded as standard in the market for a specific reference entity (e.g. which credit events, debt seniority, restructuring type, etc. to apply to a contract).
Market Value
The current quoted price that can be obtained from the purchase or sell of an asset.
Market Value CDO
In a market value CDO, the overcollateralisation test is based on the ratio of the market value of the collateral to the size of the liabilities. Conversely, the overcollateralisation for a cashflow CDO is based on the ratio of the par value of assets to the size of the liabilities. Market value CDOs have less investment restrictions and as result are much more actively traded.
Market-Driven Instruments
A financial instrument who's value is determined by movements to prices and quotes in the market.
Market-Maker
A company, or individual, who quotes both a buy and a sell price of a financial instrument traded in a market.
Market-on-close-order
An order to purchase or sell a financial security as close to the closing price as possible.
Maturity Date
The final payment date of a financial instrument. The outstanding principal and interest are due on this date.
MCDS
A CDS contract where the underlying reference name is a municipality.
Mean Reversion
The statistical tendency in a time series of data to move towards an average or mean value.
Merton Model
A financial model used for determining the credit risk of a company and measures the possibility of credit default. Named after Robert C. Merton, it was developed in the 1970s and establishes a link between credit and equity prices. Also known as firm-value or latent variable model, the Merton model predicts that a company will default when the value of its assets fall below the value of its debt.
Mezz-equity Trade
A short correlation credit strategy that involves selling protection on equity tranches and buying protection on the mezzanine tranches. It was a common trading strategy during the beginning of the correlation market.
Mezzanine Debt
A hybrid form of financing with features of both debt an equity. It is usually unsecured by assets and in the event of a default is less likely to be repaid in full after senior obligations have been satisfied.
Mezzanine Tranches
For asset-backed securities and CDOs, mezzanine tranches are based in the middle of the capital structure, above the equity tranches and below triple A. 3-6% or 3-7% index tranches are usually described as junior mezzanine and 6-9% or 7-10% tranches are called senior mezzanine.
Micro Hedging
A strategy to eliminate the risk of a single asset, usually by taking an offsetting position.
Middle-market Loan (Mid-market Loan)
A loan issued by a relatively small company with an EBITDA of less than $50 million. The loans are usually large enough (in the $100 million range) to be syndicated across multiple banks.
Minority Interests
The portion of a subsidiary company's stock that is not owned by the parent company, but rather the affiliated companies or investors. It is always less than 50% of the company's outstanding shares.
Model Risk
The risk of loss due to the limitations or a lack of understanding of the financial models that are used for the valuation and risk management of financial instruments.
Modified Duration
A measure of a change in a financial instrument's value to a change in interest rates. It represents the instrument's sensitivity t0 interest rates or its yield.
Modified Modified Restricting (mod mod R)
A type of restructuring credit event used for a credit default swap that is written on European companies (i.e. when a company restructures its debt). The official name used in credit derivatives documentation is modified restructuring maturity limitation and conditionally transferable obligation. It has two different characteristics from modified restructuring. One is that the restructuring maturity date is set to 60 months after the restructuring event, not 30 months. The second is that it allows obligations to be delivered if they are only 'conditionally transferable' and not fully transferable. This definition allows consent-required loans, which are common in European markets, to be delivered, provided they include a clause stating that consent may not be unreasonably detained.
Modified Restructuring (mod R)
A type of the restructuring credit event used for credit default swaps written on North American and Australian companies (i.e. when a company restructures its debt). The official name used in credit derivatives documentation is restructuring maturity limitation and fully transferable obligation. It is similar to old R in that the same events can trigger credit events for mod R trades. The difference is that no all obligations can be delivered with mod R following a credit event. Obligations with a maturity date after the restructuring maturity limitation date can not be delivered. This date is defined as the earlier of the longest maturity of any restructured debt and 30 months after the date of the restructuring event. This limitation is intended to reduce the ability for a protection buyer to deliver bonds with long maturities that usually trade at a discount. The other difference is that for mod R trades, deliverable obligations must be 'fully transferable' (i.e. no restrictions on who can hold the obligation and no requirement for the issuer to approve the buyer). This requirement is included to prevent the delivery of non fully transferrable bonds since they are usually traded at a discount.
Monoline Insurer
An insurance company that provides credit insurance to debt issuers. They take on credit risk by providing guarantees on bonds and selling protection on ABS and CDO tranches.
Monoline Reinsurer
An insurance company that takes on credit risk by providing credit insurance to monoline insurers. Reinsurers can also act as direct monoline insurers.
Monte Carlo Simulation
Monte Carlo methods rely on random sampling and probability distributions to calculate results. Allowing for the construction of stochastic or probabilistic financial models, it is often used to determine the value of complex financial instruments by simulating the various inputs to pricing models (e.g. interest rates, prices, and indexes).
Mortgage-backed Securities (MBS)
MBS are asset-backed securities which represent a pool of securitized mortgage loans. The payout corresponds to the cashflows on the underlying mortgage loans. Residential mortgage-backed securities are known as RMBS and commercial mortgage-backed securities are known as CMBS.
Multi-index Option
Also called an outperformance option, the investor has the right to buy the asset that performs best out of a number of assets.
Multilateral Trading
Financial trading in which parties observe all prices and execute all trades in the market place.
Naked Call
The act of writing or selling an option without owning the underlying.
Nearby
The nearest active trading month for a corresponding futures or options contract (i.e. the contract month with the closest delivery or expiration date.)
Negative Basis Trade
A strategy consisting of buying a bond and CDS protection on the same reference name. The basis for this trade is considered negative when the CDS spread is less than the bond spread. In this scenario, the investor receives a spread without incurring default risk.
Net Income Attributable to Minority Interests
The part of net income that is not attributable to the shareholders but to other third parties who hold shares in associated entities.
Netting
When positive and negative cashflows occurring between the same two counterparties are consolidated into one net payment between the two counterparties. Netting reduces settlement risk.
Netting Agreement
A bilateral agreement between two counterparties that allow the positive and negative cashflows between the two counterparties to be consolidated into one net payment, reducing settlement risk and credit exposure.
Non-compensation Ratio
The total non-interest expenses excluding compensation and other benefits as a percentage of the total net revenues. Total net revenues is defined as the net interest income before credit losses plus non-interest income.
Normal Backwardation
The case when the futures price is less than the expected future spot price. Since the futures price must converge to the expected future spot price on expiration, normal backwardation implies that futures prices will increase over time.
Normal Contango
The case when the futures price is greater than the expected future spot price. Since the futures price must converge to the expected future spot price on expiration, normal contango implies that futures prices will fall over time.
Normalization
The standardization of data obtained from different sources at different periods through comparison against the objectives of data collection. Variable distribution and shape can be described by measures such as average, standard deviation, and skewness. In mathematics and finance, many variables can be represented by the standard bell-shaped or Normal distribution (i.e. Gaussian distribution). Normalization is the transformation of a non Normal distributed variable to a Normal distribution.
Notice of Physical Settlement (Nops)
A binding legal document indicating that the protection seller must provide for the physical settlement of a credit derivative as a result of a credit event.
Notional Amount
A notional amount or notional principal is the face amount of a financial instrument that is used as the basis for calculating an interest amount or other payment obligation.
Novation
It is also called assignment and is the transferring of an outstanding derivative contract from one counterparty to another. It is commonly used to unwind trades from a portfolio.
Novations Protocol
Created in September 2005, it is an ISDA document that defines the correct protocols for novating or assigning OTC derivative contracts to make the process more efficient.
Nth-to-default Basket
A credit derivative in which the payout of the instrument is linked to the Nth default within a basket of underlying names.