Building-block approach: a method for measuring price risk which disaggregates risk specific to a security/issuer and general market risk.

Convertible bond: a bond which gives the investor the option to switch into equity at a fixed conversion price.

Counterparty risk: the risk that the counterparty to a financial contract will not meet the terms of the contract.

Currency swap: a transaction involving an initial exchange of principal of two different currencies. Interest payments are exchanged over the life of the contract and the principal amounts are repaid either at maturity or according to a predetermined amortisation schedule.

Delta: the expected change of an option's price as a proportion of a small change in the price of the underlying instrument. An option whose price changes by $1 for every $2 change in the price of the underlying has a delta of O.5. The delta rises toward 1.O for options that are deep in-the-money and approaches O for deep out-of-the-money options.

Delta hedging: a method option traders use to hedge risk exposure of options by the purchase or sale of the underlying asset in proportion to the delta. A delta-neutral position is established when the option trader strictly delta-hedges so as to leave the combined financial position in options and underlying instruments unaffected by small changes in the price of the underlying.

Duration: a mathematical concept designed to measure the price sensitivity of debt securities to small parallel changes in interest rates. Specifically, duration is the weighted average maturity of all payments of a security, coupons plus principal, where the weights are the discounted present values of the payments. Modified duration is duration divided by a factor of one plus the interest rate.

Exercise price (also Strike price): the fixed price at which an option holder has the right to buy, in the case of a call option, or to sell, in the case of a put option, the financial instrument covered by the option.

Forward rate agreement (FRA): a contract in which two counterparties agree on the interest rate to be paid on a notional deposit of specified maturity at a specific future time. Normally, no principal exchanges are involved, and the difference between the contracted rate and the prevailing rate is settled in cash.

Futures contract: an exchange-traded contract generally calling for delivery of a specified amount of a particular grade of commodity or financial instrument at a fixed date in the future.

General market risk: the risk of a general market movement arising from, for example, a change in interest rates or official policy.

Holding period: the length of time that a financial institution is assumed to hold a given financial instrument for the purpose of calculating price volatility.

Interest rate swap: a transaction in which two counterparties exchange interest payment streams of differing character based on an underlying notional principal amount. The three main type are coupon swaps (fixed rate to floating rate in the same currency), basis swaps (one floating rate index to another floating rate index in the same currency) and cross-currency interest rate swaps (fixed rate in one currency to floating rate in another).

In-the-money: option contracts are in the money when there is a net financial benefit to be derived from exercising the option immediately. A call option is in the money when the price of the underlying instrument is above the exercise price and a put option is in the money when the price of the underlying is below the exercise price.

Investment-grade securities which are rated at or above Baa by Moody's Investors Services or BBB by Standard & Poor's Corporation.

Lock-in clause: a clause in a subordinated loan contract stipulating that neither principal nor interest may be paid. even at maturity, if such payment would bring the issuer's capital below a given regulatory level.

Long option position: the position of a trader who has purchased an option regardless of whether it is a put or a call.

Off-balance-sheet activities: banks' business that does not generally involve booking assets or liabilities. Examples include trading in swaps, options, futures and foreign exchange forwards, and the granting of standby commitments and letters of credit. ³³

Option: the contractual right. but not the obligation, to buy or sell a specified amount of a given financial instrument at a fixed price before or at a designated future date. A call option confers on the holder the right to buy the financial instrument. A put option involves the right to sell the financial instrument.

OTC (over-the-counter) trading in financial instruments transacted off organised exchanges. Generally the parties negotiate all details of the transactions, or agree to certain simplifying market conventions.

Out-of-the-money: an option contract is out of the money when there is no benefit to be derived from exercising the option immediately. A call option is out of the money when the price of the underlying is below the option's exercise price. A put option is out of the money when the price of the underlying is above the option's exercise price.

Settlement risk: the risk that a counterparty to whom a firm has mate a delivery of assets or money defaults before the amounts due or assets have been received; may also in certain contexts refer to the risk that technical difficulties interrupt delivery or settlement even if the counterparties are able to perform.

Short option position: the position of a trader who has sold or written an option. The writer's maximum potential profit is the premium received.

Simulation: a mathematical technique for measuring the likely performance of a given portfolio for changes in certain parameters such as market interest rates or foreign exchange rates.

Specific risk: the risk that the price of a given instrument will move out of line with similar instruments, due principally to factors related to its issuer.

Subordinated loans: debt issued by financial institutions which in liquidation is subordinated to claims by general creditors but which ranks above ordinary and preferred shares.

Swap: a financial transaction in which two counterparties agree to exchange streams of payments over time according to a predetermined rule.

Writer: the party that sells an option. The is required to carry out the terms of the option at the choice of the holder.