Finance Dictionary A – C

What does Arbitrage mean?

Arbitrage transactions exploits the price difference of identical assets, such as financial instruments, sold and purchased at different markets or in different forms. Arbitrage trade is possible due to market inefficiencies. When you engage in arbitrage trade between two or more markets, you carry out a combination of matching deals to quickly make a profit on the prize difference.

In academic use, arbitrage involves taking advantage of prize difference for a single asset or identical cash-flows. In every day speech, the term arbitrage is also used for similar assets, e.g. merger arbitrage.


What does Arbitrageur mean?

An individual, company or other entity or who engages in arbitrage transactions.


What does Asset Manager mean?

An individual, company or other entity who manages the assets of a third party.


What does Beta mean?

Beta is the second letter in the Greek alphabet. In finance, beta is a measure of investment portfolio risk. It is calculated as the covariance of the portfolio’s returns with its benchmark’s returns, divided by the variance of the benchmark’s returns. The beta of a portfolio is thus an assessment of its volatility, or systematic risk.

Example: This portfolio has a beta of 1.7. This means that for every 1% change in the value of the benchmark, the value of the portfolio changes by 1.7%.


What does Circuit Breaker mean?

A circuit breaker (also known as a collar) is a provision in the operation of an exchange designed to limit the maximum price change during a given period, limit the length of the trading period, or correct an order imbalance. A circuit breaker is thus a type of trading curb.

Stock exchanges typically install circuit breakers to prevent large sell-offs from causing panic selling. The circuit breaker is a point where the stock exchange will stop trading for a period of time in response to substantial drops in value.

Example: The New York Stock Exchange (NYSE) installed circuit breakers after Black Monday in an effort to prevent panic selling and give traders some time to contemplate and analyze. At the start of each quarter, the NYSE sets three circuit breakers based on the average closing price of the S&P 500 for the month preceding the start of the quarter. If the first level circuit breaker is activated, it results in an automatic 15 minute trading halt (unless it is after 3:25 pm). The same is true for the second level circuit breaker. If the third level circuit breaker is activated, trading is automatically suspended for the rest of the day.

In theory, a circuit breaker could be used to halt trading for a period of time in response to a substantial increase in value, but in reality no exchanges use circuit breakers in this manner. The circuit breaker, as it is used today, can therefore correctly be seen as a symptom of institutionalized bubble bias.


What does Clearinghouse mean?

In finance, a clearinghouse is a financial institution that provides clearing and settlement services for financial commodities derivatives and securities transactions. A clearinghouse stands between two clearing firms (also known as clearing participants). The main purpose of a clearinghouse is absorb or at least lower the risk of one or more clearing firms not honoring trade settlement obligations.

A clearinghouse will demand collateral deposits (margin deposits) from the clearing firms. A clearing house will also seek to minimize risk for the counterparts by continuously monitoring the credit worthiness of the clearing firms. In many cases, the clearinghouse will also have a guarantee fund that is used to cover losses caused by a defaulting clearing firm, when those losses exceed the value of the collateral deposit.


What does Closing Price mean?

The closing price is the price of a security at the close. The close is the officially designated end of the trading day.

In theory, the closing price represents the most up-to-date valuation of a security until trading starts again on the next trading day. In reality, many financial instruments are traded after hours and the closing price of a security may not be the same as its after-hours price. It should be noted however that the after-hours trade tend to be significantly smaller than the trade that takes place during the trading day. Because of this, closing prices are still regarded as a useful markers for investors.


What does Closing Range mean?

The closing range for a specific security is the band of prices that this security traded at in a specific period right before the market close.

When the market is stable, the closing range for a security will typically be narrow, i.e. the difference between top prize and bottom prize will not be large. During episodes of volatility, the closing range can be quite wide.


Futures: What does Contract Month mean?

In the futures market, contract month is the month in which a specific futurity contract may be implemented by making or taking delivery. The future expires in the contract month.