ACI Diploma flashcards
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32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Front-running
- Dealing ahead of a known client or firm order to profit from its anticipated price impact; a form of market abuse prohibited under MAR and equivalent regimes.
- Insider dealing
- Trading or tipping on precise, non-public, price-sensitive information; prohibited because it undermines market fairness and confidence.
- Chinese wall
- An information barrier separating teams (e.g., corporate finance and trading) to prevent the flow of confidential or inside information within a firm.
- Inducement
- A fee, commission, or non-monetary benefit paid to or by a firm that may impair its duty to act in the client's best interest; must be disclosed and justified.
- Wash trade
- A transaction where both buyer and seller are the same beneficial owner, creating false appearance of trading volume; a form of market manipulation.
- Spoofing
- Placing orders with no intent to execute, then cancelling them, to mislead other participants about supply or demand; prohibited market manipulation.
- Personal account dealing
- Staff trading in their own accounts; usually requires pre-clearance and is subject to blackout periods around client orders and research.
- Modified duration
- A measure of a bond's price sensitivity to a 1% change in yield: modified duration ≈ Macaulay duration / (1 + y/m); price change ≈ −modified duration × Δy.
- Convexity
- The second-order sensitivity of bond price to yield; captures curvature so that price changes are estimated more accurately than duration alone.
- Repo
- A sale of securities with an agreement to repurchase at a set price and date; economically a secured loan, with haircut protecting the cash lender.
- Option payoff at expiry
- Call payoff = max(S − K, 0); put payoff = max(K − S, 0); the buyer pays a premium upfront and has a right, not an obligation.
- ETF creation and redemption
- Authorised participants create or redeem ETF shares in exchange for the underlying basket, keeping the ETF price close to its net asset value.
- FX quotation convention
- Base/quote format (e.g., EUR/USD); a rise means the base currency appreciates against the quote currency. Spot, forward, swap, and option are main products.
- Money market instruments
- Short-dated, low-credit-risk instruments such as T-bills, commercial paper, certificates of deposit, and repo, quoted on a discount or yield basis.
- Best execution
- The duty to take all sufficient steps to obtain the best possible result for clients, considering price, cost, speed, likelihood of execution and settlement, size, and nature of the order.
- Limit order
- An order to buy or sell at a specified price or better; price is certain but execution is not, unlike a market order.
- Stop order
- An order that becomes a market order once a trigger price is reached; used to limit losses or enter on momentum, but execution price is uncertain.
- Effective spread
- A measure of actual trading cost: 2 × |trade price − midpoint|; captures both quoted spread and price improvement or impact.
- VWAP algorithm
- An execution algorithm that slices a large order to track the volume-weighted average price over a period, reducing market impact.
- Short selling
- Sale of borrowed securities with the aim of buying them back lower; requires a locate and carries recall risk; naked short selling is restricted in many markets.
- Settlement cycle
- The period between trade date and settlement date; T+2 for most equities and bonds in major markets, with FX spot typically T+2.
- Value at Risk (VaR)
- An estimate of the maximum loss over a given horizon at a stated confidence level; ignores losses beyond the threshold and is not sub-additive.
- Expected shortfall
- The average loss beyond the VaR threshold; a coherent risk measure that captures tail risk better than VaR and is used under Basel/FRTB.
- Expected loss formula
- Expected loss = PD × LGD × EAD, where PD is probability of default, LGD is loss given default, and EAD is exposure at default.
- Liquidity Coverage Ratio
- Basel ratio of high-quality liquid assets to net cash outflows over 30 days; must be at least 100% to ensure short-term funding resilience.
- Three lines of defence
- A governance model: business units (first), risk and compliance (second), and internal audit (third) provide independent oversight of risk.
- Wrong-way risk
- Arises when exposure to a counterparty increases at the same time as the value of collateral provided by that counterparty falls.
- Interest rate risk in banking book
- Risk from maturity and repricing mismatches; measured through repricing gaps, duration gaps, and sensitivity of EVE and NII to rate changes.
- Market Abuse Regulation (MAR)
- EU regime prohibiting insider dealing, unlawful disclosure, and market manipulation; requires insider lists, PDMR notifications, and suspicious transaction reports.
- MiFID II best execution
- Requires investment firms to take all sufficient steps to obtain the best possible result for clients, with execution policies and monitoring.
- EMIR
- EU regulation requiring reporting of derivatives to trade repositories, central clearing of standardised OTC derivatives, and margin for non-cleared trades.
- Volcker rule
- US Dodd-Frank provision restricting banks from proprietary trading and from owning or sponsoring certain hedge funds and private equity funds.