treasury & fund management

8/3/2019 Treasury & Fund Management

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Forwardation:1. A term used in pricing futures contracts. Forwardation is a standard scenario in futures trading

whereby a future price of the underlying commodity would be more than the expected spot (or

immediate delivery) price. The increase in price can be justified or predicted based on

additional costs for hard or soft commodities such as delivery, insurance, storage, etc.

2. Forwardation can be more difficult to justify and/or calculate with financial instrument futures.3. Also referred to as "contango."4. Opposite of backwardation.

Over time the market will continually receive new information which it will use to adjust the future

and expected future spot price - the most rational future price - of a futures contract. More information

will typically have the effect of depressing, or lowering, the futures price. A market in forwardation

takes these variables into account to determine the futures price; however, the actual spot price will

often deviate from the expected price

Forward RateWhat Does Forward Rate Mean?The amount that it will cost to deliver a currency, commodity, or some other asset some time in thefuture.

The forward rate is the price used to determine the price of a futures contract. It accounts for holding

costs, appreciation and demand for the good.


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Forward SwapWhat Does Forward Swap Mean?A swap agreement created through the synthesis of two swaps differing in duration for the purpose of

fulfilling the specific time-frame needs of an investor. Also referred to as a "forward start swap,""delayed start swap," and a "deferred start swap."

For example, if an investor wants to hedge for a five-year duration beginning one year from today, this

investor can enter into both a one-year and six-year swap, creating the forward swap that meets the

needs of his or her portfolio. Sometimes swaps don't perfectly match the needs of investors wishing to

hedge certain risks.

Cut-Off ScoreWhat Does Cut-Off Score Mean?The lowest possible credit score one can have and still qualify for a loan. Anyone with a score below the

cut-off score is usually rejected. Of course, the lender can still approve the loan if it so desires with an

override approval. Anyone with a credit score above this level is usually approved.

The cut-off score will differ from one type of loan to another, as well as between lenders. Some home

loans require a minimum FICO score of 620, while others may accept scores less than 620 (subprime

territory). Cut-off scores are generally lower for credit card applications and other high-interest loans.


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Open Market Operations - OMOWhat Does Open Market Operations - OMO Mean?The buying and selling of government securities in the open market in order to expand or contract the

amount of money in the banking system. Purchases inject money into the banking system and stimulate

growth while sales of securities do the opposite.

Open market operations are the principal tools of monetary policy. (The discount rate and reserve

requirements are also used.) The U.S. Federal Reserve's goal in using this technique is to adjust the

federal funds rate--the rate at which banks borrow reserves from each other.

Open MarketWhat Does Open Market Mean?An economic system with no barriers to free market activity. An open market is characterized by the

absence of tariffs, taxes, licensing requirements, subsidies, unionization and any other regulations or

practices that interfere with the natural functioning of the free market. Anyone can participate in an

open market. There may be competitive barriers to entry, but there are no regulatory barriers to entry.

An open market is the opposite of a closed market - that is, a market one with a prohibitive number of

regulations restricting free market activity. Most markets are neither truly open nor truly closed, but fall

on a continuum somewhere between the two extremes. The United States would be considered to have a

relatively open market, while North Korea would be considered to have a relatively closed market.

Exchange TRADEA marketplace in which securities, commodities, derivatives and other financial instruments are

traded.

The core function of an exchange - such as a stock exchange - is to ensure fair and orderly

trading, as well as efficient dissemination of price information for any securities trading on that


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exchange. Exchanges give companies, governments and other groups a platform to sell

securities to the investing public.

An exchange may be a physical location where traders meet to conduct business or an

electronic platform.

May also be referred to as "share exchange" or "bourse" depending on geographical location.Exchanges are located all around the globe, with some of the more famous ones being the New

York Stock Exchange, Nasdaq and the Tokyo Stock Exchange. More and more trading is being

done on electronic exchanges as markets become more advanced and as the exchanges

themselves are able to ensure fair trading without requiring all members to be on the same

trading floor.

Over-The-Counter - OTCA security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, KSE

etc. The phrase "over-the-counter" can be used to refer to stocks that trade via a dealer network as

opposed to on a centralized exchange. It also refers to debt securities and other financial instruments

such as derivatives, which are traded through a dealer network.


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In general, the reason for which a stock is traded over-the-counter is usually because thecompany is small, making it unable to meet exchange listing requirements. Also known as

"unlisted stock", these securities are traded by broker-dealers who negotiate directly with one

another over computer networks and by phone.

Although Nasdaq operates as a dealer network, Nasdaq stocks are generally not classified asOTC because the Nasdaq is considered a stock exchange. As such, OTC stocks are generally

unlisted stocks which trade on the Over the Counter Bulletin Board (OTCBB) or on the pink

sheets. Be very wary of some OTC stocks, however; the OTCBB stocks are either penny stocks or

are offered by companies with bad credit records.

Instruments such as bonds do not trade on a formal exchange and are, therefore, also

considered OTC securities. Most debt instruments are traded by investment banks making

markets for specific issues. If an investor wants to buy or sell a bond, he or she must call the

bank that makes the market in that bond and asks for quotes.

SwapTraditionally, the exchange of one security for another to change the maturity (bonds), quality of issues

(stocks or bonds), or because investment objectives have changed is called Swap.

Recently, swaps have grown to include currency swaps and interest rate swaps.

If firms in separate countries have comparative advantages on interest rates, then a swap could

benefit both firms. For example, one firm may have a lower fixed interest rate, while another

has access to a lower floating interest rate. These firms could swap to take advantage of the

lower rates.

ForwardA cash market transaction in which delivery of the commodity is deferred until after the contract has

been made. Although the delivery is made in the future, the price is determined on the initial trade

date.

Most forward contracts don't have standards and aren't traded on exchanges.

A farmer would use a forward contract to "lock-in" a price for his grain for the upcoming fall

harvest.

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