Arbitrage is the simultaneous purchase and sale of the same asset in different markets in order to profit from a difference in its price.

Arbitrage is the simultaneous purchase and sale of the same asset in different markets in order to profit from tiny differences in the asset's listed price. The stock of Company X is trading at $20 on the New York Stock Exchange (NYSE) while, at the same moment, it is trading for $20.05 on the London Stock Exchange (LSE).
A trader can buy the stock on the NYSE and immediately sell the same shares on the LSE, earning a profit of 5 cents per share. The standard definition of arbitrage involves buying and selling shares of stock, commodities, or currencies on multiple markets in order to profit from inevitable differences in their prices from minute to minute. Arbitrage is the simultaneous purchase and sale of the same asset in different markets in order to profit from tiny differences in the asset's listed price. In this case, the trader converts one currency into another at one bank, converts that second currency to another at a second bank, and finally converts the third currency back to the original currency at a third bank.

Arbitrage

An asset-backed security (ABS) is a debt security collateralized by a pool of assets.

Credit Card Asset-Backed Securities (ABS)

Table of Contents
What Is an Asset-Backed Security (ABS)?
Understanding Asset-Backed Securities (ABSs)
How an Asset-Backed Security Works
Special Considerations
Types of Asset-Backed Securities
What Is an Example of an Asset-Backed Security?
What Is Asset Backing?
What Does ABS Stand for in Accounting?
What Is the Difference Between MBS and ABS?
How Does Asset Securitization Work?
 Asset-backed securities (ABSs) are financial securities backed by income-generating assets such as credit card receivables, home equity loans, student loans, and auto loans. Table of Contents
What Is an Asset-Backed Security (ABS)?
Understanding Asset-Backed Securities (ABSs)
How an Asset-Backed Security Works
Special Considerations
Types of Asset-Backed Securities
What Is an Example of an Asset-Backed Security?
What Is Asset Backing?
What Does ABS Stand for in Accounting?
What Is the Difference Between MBS and ABS?
How Does Asset Securitization Work? An asset-backed security (ABS) is a type of financial investment that is collateralized by an underlying pool of assets—usually ones that generate a cash flow from debt, such as loans, leases, credit card balances, or receivables. The underlying assets of these pools may be home equity loans, automobile loans, credit card receivables, student loans, or other expected cash flows.

Asset-Backed Security (ABS)

A binary option is an option that either pays a fixed monetary amount or nothing at all, depending on whether it expires in the money.

A binary option is a financial product where the parties involved in the transaction are assigned one of two outcomes based on whether the option expires in the money. The binary option's entry price indicates the potential profit or loss, with all options expiring worth $100 or $0.
Let's assume stock Colgate-Palmolive is currently trading at $64.75. For example, selecting three contracts, in this case, would up the risk to $120, and increase the profit potential to $180.
Non-Nadex binary options are similar, except they typically aren't regulated in the U.S., often can't be exited before expiry, may not trade in $100 increments, and usually have fixed percentage payout for wins. Binary options occasionally trade on platforms regulated by the Securities and Exchange Commission (SEC) and other agencies, but most binary options trading occurs outside the United States and may not be regulated. A binary option automatically exercises, meaning the gain or loss on the trade is automatically credited or debited to the trader's account when the option expires.

Binary Option

Cash equivalents are investment securities that are convertible into cash and found on a company's balance sheet. 

Cash equivalents are investments securities that are meant for short-term investing; they have high credit quality and are highly liquid.
Cash equivalents, also known as "cash and equivalents," are one of the three main asset classes in financial investing, along with stocks and bonds. Cash equivalents are the total value of cash on hand that includes items that are similar to cash; cash and cash equivalents must be current assets. There are five types of cash equivalents: Treasury bills, commercial paper, marketable securities, money market funds, and short-term government bonds. Analysts can also estimate whether it is good to invest in a particular company through its ability to generate cash and cash equivalents since it reflects how a company is able to pay its bills throughout a short period of time. Having cash and cash equivalents on hand speaks to a company's health, as it reflects the firm's ability to pay its short-term debt.

Cash Equivalents

A collateralized debt obligation (CDO) is a complex financial product backed by a pool of loans and other assets and sold to institutional investors.

Asymmetric Information and the Death of ABS CDOs

Financial Crisis Inquiry Commission: The Financial Crisis Inquiry Report, 2011

A collateralized debt obligation (CDO) is a complex structured finance product that is backed by a pool of loans and other assets and sold to institutional investors. Collateralized debt obligations are complicated, and numerous professionals have a hand in creating them:
Securities firms, who approve the selection of collateral, structure the notes into tranches and sell them to investors
CDO managers, who select the collateral and often manage the CDO portfolios
Rating agencies, who assess the CDOs and assign them credit ratings
Financial guarantors, who promise to reimburse investors for any losses on the CDO tranches in exchange for premium payments
Investors such as pension funds and hedge funds Other types of CDOs include collateralized bond obligations (CBOs)—investment-grade bonds that are backed by a pool of high-yield but lower-rated bonds, and collateralized loan obligations (CLOs)—single securities that are backed by a pool of debt, that often contain corporate loans with a low credit rating. To create a collateralized debt obligation (CDO), investment banks gather cash flow-generating assets—such as mortgages, bonds, and other types of debt—and repackage them into discrete classes, or tranches based on the level of credit risk assumed by the investor. The tranches of CDOs are named to reflect their risk profiles; for example, senior debt, mezzanine debt, and junior debt—pictured in the sample below along with their Standard and Poor's (S&P) credit ratings.

Collateralized Debt Obligation (CDO)

Collateralized loan obligations (CLO) are securities backed by a pool of debt, usually loans to corporations with low credit ratings or private equity firms.

Understanding Collateralized Loan Obligations (CLOs)

Collateralized Loan Obligations (CLOs) Primer

A collateralized loan obligation (CLO) is a single security backed by a pool of debt. There are two main types of tranches used when selling a CLO: debt tranches and equity tranches. The company selling the CLO will purchase a large number of corporate loans from borrowers such as private companies and private equity firms, and will then package those loans into a single CLO security. With a CLO, the investor receives scheduled debt payments from the underlying loans, assuming most of the risk in the event that borrowers default. To fund the purchase of new debt, the CLO manager sells stakes in the CLO to outside investors in a structure called tranches.

Collateralized Loan Obligation (CLO)

A credit default swap (CDS) is a particular type of swap designed to transfer the credit exposure of fixed income products between two or more parties.

Quarterly Report on Bank Trading and Derivatives Activities: First Quarter 2020

A Look at Credit Default Swaps and Their Impact on the European Debt Crisis

A credit default swap (CDS) is a financial derivative or contract that allows an investor to "swap" or offset his or her credit risk with that of another investor. If the debt issuer does not default and if all goes well, the CDS buyer will end up losing money through the payments on the CDS, but the buyer stands to lose a much greater proportion of its investment if the issuer defaults and if it had not bought a CDS. Credit default swaps, or CDS, are credit derivative contracts that enable investors to swap credit risk on a company, country, or other entity with another counterparty. For example, the buyer of a credit default swap will be entitled to the par value of the contract by the seller of the swap, along with any unpaid interest, should the issuer default on payments. For example, if a CDS seller believes that the borrower is likely to default, the CDS seller can buy its own CDS from another institution or sell the contract to another bank in order to offset the risks.

Credit Default Swap (CDS)  & Example

A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date.

A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date. In this case, the financial institution that originated the forward contract is exposed to a greater degree of risk in the event of default or non-settlement by the client than if the contract were marked-to-market regularly. A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date. A forward contract is a customizable derivative contract between two parties to buy or sell an asset at a specified price on a future date. Settlement for the forward contract takes place at the end of the contract, while the futures contract settles on a daily basis.

Forward Contract

Forward rate agreements (FRA) are over-the-counter contracts between parties that determine the rate of interest to be paid on an agreed upon date in the future.

Table of Contents
What Is a Forward Rate Agreement?
Formula and Calculation for a Forward Rate Agreement 1:21
FRAP \= ( ( R − FRA ) × N P × P Y ) × ( 1 1 \+ R × ( P Y ) ) where: FRAP \= FRA payment FRA \= Forward rate agreement rate, or fixed interest rate that will be paid R \= Reference, or floating interest rate used in the contract N P \= Notional principal, or amount of the loan that interest is applied to P \= Period, or number of days in the contract period Y \= Number of days in the year based on the correct day-count convention for the contract \\begin{aligned} &\\text{FRAP} = \\left ( \\frac{ ( R - \\text{FRA} ) \\times NP \\times P }{ Y } \\right ) \\times \\left ( \\frac{ 1 }{ 1 + R \\times \\left (\\frac{ P }{ Y } \\right ) } \\right ) \\\\ &\\textbf{where:} \\\\ &\\text{FRAP} = \\text{FRA payment} \\\\ &\\text{FRA} = \\text{Forward rate agreement rate, or fixed interest} \\\\ &\\text{rate that will be paid} \\\\ &R = \\text{Reference, or floating interest rate used in} \\\\ &\\text{the contract} \\\\ &NP = \\text{Notional principal, or amount of the loan that} \\\\ &\\text{interest is applied to} \\\\ &P = \\text{Period, or number of days in the contract period} \\\\ &Y = \\text{Number of days in the year based on the correct} \\\\ &\\text{day-count convention for the contract} \\\\ \\end{aligned} ​FRAP\=(Y(R−FRA)×NP×P​)×(1+R×(YP​)1​)where:FRAP\=FRA paymentFRA\=Forward rate agreement rate, or fixed interestrate that will be paidR\=Reference, or floating interest rate used inthe contractNP\=Notional principal, or amount of the loan thatinterest is applied toP\=Period, or number of days in the contract periodY\=Number of days in the year based on the correctday-count convention for the contract​
1.  Calculate the difference between the forward rate and the floating rate or reference rate. They are:
FRA = the FRA rate
R = the reference rate
NP = the notional principal
P = the period, which is the number of days in the contract period
Y = the number of days in the year based on the correct day-count convention for the contract Forward Rate Agreements (FRA) vs. Forward Contracts (FWD)
Limitations of Forward Rate Agreements
Example of a Forward Rate Agreement
Forward rate agreements (FRA) are over-the-counter contracts between parties that determine the rate of interest to be paid on an agreed-upon date in the future. Company A enters into an FRA with Company B in which Company A will receive a fixed (reference) rate of 4% on a principal amount of $5 million in one half a year and the FRA rate will be set at 50 basis points less than that rate.

Forward Rate Agreement (FRA)

A holding company depository receipt (HOLDR) was a security that allowed investors to buy and sell a basket of stocks in a single transaction.

A holding company depository receipt (HOLDR) was a security that allowed investors to buy and sell a basket of stocks in a single transaction. A key difference between HOLDRs and ETFs was that investors in HOLDRs had direct ownership in the underlying stocks, which is not the case for ETFs, and as a result investors in HOLDRs had voting and dividend rights. A holding company depository receipt (HOLDR) was a diversified investment product offered by Merrill Lynch that gave investors access to several stocks in a certain industry or sector via a single holding. Unlike an ETF, each HOLDR represented individual ownership in the stocks underlying the HOLDR, with the value of the HOLDR fluctuating along with the changes in the value of the underlying stocks. Like exchange-traded funds (ETFs), HOLDRs allowed investors to trade stocks in a specific industry, sector, or group.

Holding Company Depository Receipt (HOLDR)

An interest rate swap is a forward contract in which one stream of future interest payments is exchanged for another based on a specified principal amount.

An interest rate swap is a forward contract in which one stream of future interest payments is exchanged for another based on a specified principal amount. Interest rate swaps usually involve the exchange of a fixed interest rate for a floating rate, or vice versa, to reduce or increase exposure to fluctuations in interest rates or to obtain a marginally lower interest rate than would have been possible without the swap. A fixed-to-floating swap involves one company receiving a fixed rate, and paying a floating rate since it believes that a floating rate will generate stronger cash flow. A company that does not have access to a fixed-rate loan may borrow at a floating rate and enter into a swap to achieve a fixed rate. A floating-to-fixed swap is where a company wishes to receive a fixed rate to hedge interest rate exposure, for example.

Interest Rate Swap

Non-marginable securities are not allowed to be purchased on margin at a particular brokerage and must be fully funded by the investor's cash.

Non-marginable securities are not allowed to be purchased on margin at a particular brokerage, or financial institution. Over-the-counter bulletin board stocks and penny stocks, which are stocks that generally trade per share for under $5 and are owned by small companies, are also non-marginable securities by decree of the Federal Reserve Board. The main goal of keeping some securities away from margin investors is to mitigate risk and control the administrative costs of excessive margin calls on what are usually volatile stocks with uncertain cash flows. The stocks with special margin requirements are marginable, but they have a higher margin requirement than typical stocks and the minimum required by brokers. The downside of marginable securities is that they can lead to margin calls, which in turn cause the liquidation of securities and financial loss.

Non-Marginable Securities

Spot secondary refers to the sale of a security that does not require SEC registration and is closed the next business day after the offering is made. 

Frequently Asked Questions About Exempt Offerings

A spot secondary offering is typically presented to institutional investors instead of the general public and is closed the next business day after it is made. But because the SEC has not condoned these offerings, spot secondary trades are generally limited to institutional investors, who presumably are more knowledgeable about the potential risks and rewards of such a transaction. Shares that are issued through a spot secondary offering are typically priced at a discount to institutional investors. But in the context of stock shares, secondary offerings can mean both third-party sales and sales by the original company after the initial public offering (IPO).

Spot Secondary

Spread betting refers to speculating on the direction of a financial market without actually owning the underlying security.

Table of Contents
What Is Spread Betting? A spread betting company quotes two prices, the bid and ask price (also called the spread), and investors bet whether the price of the underlying security will be lower than the bid or higher than the ask. Let’s assume that the price of ABC stock is $201.50 and a spread-betting company, with a fixed spread, is quoting the bid/ask at $200 / $203 for investors to transact on it. Spread betting should not be confused with spread trading, which involves taking offsetting positions in two (or more) different securities and profiting if the difference in price between the securities widens or narrows over time. The spread bettor does not actually own the underlying security in spread betting, they simply speculate on its price movement.

Spread Betting

A swap is a derivative contract through which two parties exchange financial instruments, such as interest rates, commodities, or foreign exchange.

China extends currency swap deal with Argentina

FOMC statement: Federal Reserve, European Central Bank, Bank of Canada, Bank of England, and Swiss National Bank announce reestablishment of temporary U.S. dollar liquidity swap facilities

Credit Default Swaps and the Credit Crisis

A swap is a derivative contract through which two parties exchange the cash flows or liabilities from two different financial instruments. Let's break down the calculation:
**Libor + 1.30%**
**Variable Interest Paid by XYZ to ABC**
**5% Interest Paid by ABC to XYZ**
**ABC's Gain**
**XYZ's Loss**
($15,000) For example, a company paying a variable rate of interest may swap its interest payments with another company that will then pay the first company a fixed rate. 1:30
In an interest rate swap, the parties exchange cash flows based on a notional principal amount (this amount is not actually exchanged) in order to hedge against interest rate risk or to speculate. **Year 1**
In this case, ABC would have been better off by not engaging in the swap because interest rates rose slowly.

Swap  & How to Calculate Gains

Trust preferred securities (TuPS) are issued by banks and have features similar to preferred stock but are treated as debt for tax purposes.

Trust Preferred Securities and the Capital Strength of Banking Organizations

Trust preferred securities (TruPS) were hybrid securities issued by large banks and bank holding companies (BHCs) included in regulatory tier 1 capital and whose dividend payments were tax deductible for the issuer. Phasing out or excluding trust preferred securities in the Tier 1 capital ratio increases funding requirements for banks and, in some cases, reducing the number of incentives for banks to issue trust preferred securities. The trust preferred security usually offers a higher periodic payment than a share of preferred stock and can have a maturity of up to 30 years due to the long maturity timeline of the debt used to fund the trust. Tier 1 capital treatment means that banks can use the money invested in their trust preferred securities to count towards their Tier 1 capital ratio, which is the money banks keep on hand to cover losses sustained due to bad debt. The bank would open a trust funded with debt; then, the bank would carve up shares of the trust and sold them to investors in the form of preferred stock.

Trust Preferred Securities (TruPS)

The Cboe Volatility Index, or VIX, is an index created by Cboe Global Markets, which shows the market's expectation of 30-day volatility.

The Cboe Volatility Index (VIX) is a real-time index that represents the market's expectations for the relative strength of near-term price changes of the S&P 500 index (SPX). Being a forward-looking index, it is constructed using the implied volatilities on S&P 500 index options (SPX) and represents the market's expectation of 30-day future volatility of the S&P 500 index which is considered the leading indicator of the broad U.S. stock market. For detailed calculations with an example, one can refer to the section “VIX Index Calculation: Step-by-Step” of the VIX whitepaper.
During its origin in 1993, VIX was calculated as a weighted measure of the implied volatility of eight S&P 100 at-the-money put and call options, when the derivatives market had limited activity and was in its growing stages. In the world of investments, volatility is an indicator of how big (or small) moves a stock price, a sector-specific index, or a market-level index makes, and it represents how much risk is associated with the particular security, sector, or market. Other similar indexes include the Cboe ShortTerm Volatility Index (VXSTSM), which reflects the nine-day expected volatility of the S&P 500 Index, the Cboe S&P 500 3-Month Volatility Index (VXVSM), and the Cboe S&P 500 6-Month Volatility Index (VXMTSM).

Cboe Volatility Index (VIX) : What Is It?

A derivative that gives the holder the right, but not the obligation, to buy or sell a security at a certain price before expiration.

Warrants are a derivative that give the right, but not the obligation, to buy or sell a security—most commonly an equity—at a certain price before expiration. Investors are attracted to warrants as a means of leveraging their positions in a security, hedging against downside (for example, by combining a put warrant with a long position in the underlying stock), or exploiting arbitrage opportunities.
Warrants are no longer common in the United States but are heavily traded in Hong Kong, Germany, and other countries.
Traditional warrants are issued in conjunction with bonds, which in turn are called warrant-linked bonds, as a sweetener that allows the issuer to offer a lower coupon rate. Covered warrants are issued by financial institutions rather than companies, so no new stock is issued when covered warrants are exercised. Warrants that give the right to buy a security are known as call warrants; those that give the right to sell a security are known as put warrants. Trading and finding information on warrants can be difficult and time-consuming as most warrants are not listed on major exchanges, and data on warrant issues is not readily available for free.

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