JSE FX Trader flashcards

34 cards. Read the term and the definition here. The deck at the top of this page is optional.

Dividend discount model

Prices a share as the present value of expected future dividends. In Gordon growth form, P0 = D1 divided by (r minus g), requiring the growth rate g to stay below the required return r.

Ex-dividend date

The date from which a buyer of shares no longer receives the declared dividend. On this date the share price usually falls by roughly the dividend amount, all else equal.

Rights issue pricing

New shares are offered below market to existing holders. Theoretical ex-rights price equals total value of old and new shares divided by total shares after the issue, so wealth is unchanged.

Earnings yield

Earnings per share divided by share price, the reciprocal of the price-to-earnings ratio. It expresses earnings as a percentage return and allows comparison with bond yields.

Interest rate parity

Forward divided by spot equals the ratio of interest rates for the two currencies over the same period. The higher-yielding currency trades at a forward discount, removing arbitrage profit.

Cross rate calculation

Derives a rate between two currencies from their quotes against a common third currency. Chain the quotes so the intermediate currency cancels, multiplying or inverting as needed.

Bid-offer spread

Difference between the price at which a market maker sells and buys a currency. Clients buy at the offer and sell at the bid, so the spread is an immediate transaction cost.

Purchasing power parity

Long-run proposition that exchange rates adjust so identical goods cost the same across countries. Inflation differentials drive currency movements, though deviations persist over shorter horizons.

Cumulative preference shares

Preference shares whose unpaid dividends accumulate as arrears. All arrears must be settled before the company may pay any dividend to ordinary shareholders.

Perpetual preference valuation

A non-redeemable preference share paying a fixed dividend is valued as a perpetuity: dividend divided by required return. Price falls when the required return rises.

Participating preference shares

Preference shares entitled to the stated fixed dividend plus a share of residual profits beyond a defined threshold, alongside ordinary shareholders, after the fixed dividend is paid.

Convertible preference shares

Preference shares that holders may convert into ordinary shares at a preset ratio. Their value includes an option premium, so they yield less than straight preference shares.

Correlation coefficient

Covariance of two variables divided by the product of their standard deviations. It ranges from minus one to plus one and measures only linear association, not causation.

Standard error of mean

Standard deviation of the sample divided by the square root of sample size. It measures precision of the sample mean and shrinks as the sample grows.

Portfolio variance two assets

Weighted sum of individual variances plus twice the weighted covariance term. Lower correlation between assets reduces total portfolio variance for the same expected return.

Skewness and kurtosis

Skewness measures distribution asymmetry; positive values indicate a long right tail. Kurtosis measures tail heaviness, with high values signalling more extreme outcomes than normal.

ETF creation and redemption

Authorised participants exchange baskets of underlying securities for new ETF shares, or redeem shares for securities. This arbitrage mechanism keeps the market price close to net asset value.

Tracking difference versus error

Tracking difference is the cumulative return gap between fund and index. Tracking error is the volatility of that gap, showing how consistently the fund follows its benchmark.

Synthetic ETF

A fund gaining index exposure through derivatives such as total return swaps rather than holding the underlying securities. It introduces counterparty risk but can cut transaction costs.

Leveraged ETF daily reset

Leveraged and inverse funds rebalance exposure each day. Over longer periods, compounding causes returns to diverge from a simple multiple of the index return, especially in volatile markets.

Modified duration

Macaulay duration divided by one plus yield per period. It approximates the percentage price change for a one percent change in yield, holding cash flows constant.

Accrued interest

Interest earned by the seller since the last coupon date. The buyer pays the dirty price, being clean price plus accrued interest, and receives the full next coupon.

Bond convexity

Measures how duration changes as yield changes, capturing price-yield curvature. Positive convexity means price gains from yield falls exceed losses from equal yield rises.

Credit spread

Excess yield of a corporate bond over a comparable government bond. It compensates investors for default probability, recovery uncertainty, and reduced liquidity.

Price-weighted index

An index averaging constituent share prices, so high-priced stocks dominate regardless of company size. A divisor is adjusted for splits to keep the index level continuous.

Float-adjusted weighting

Index weights based only on shares available to outside investors, excluding strategic and locked-up holdings. It better reflects the investable universe and reduces concentration distortion.

Index divisor

A scaling factor keeping an index level continuous when constituents change, shares are issued, or corporate actions occur. It is recalculated so the index value is unchanged at adjustment.

Total return index

An index that reinvests constituent dividends, so it exceeds the corresponding price index over time. The gap approximates the dividend yield compounded over the holding period.

Stop order mechanics

An order that becomes a market order once a trigger price is reached. Execution price is not guaranteed, so slippage can occur in fast-moving or illiquid markets.

Maintenance margin

Minimum equity proportion a leveraged position must retain. Falling below it triggers a margin call requiring deposit of funds or liquidation of the position.

Warrant gearing

Share price divided by warrant price, showing how many warrants one share price buys. Effective gearing multiplies this by delta to measure sensitivity to the underlying.

Warrant time value

The part of a warrant price above intrinsic value, reflecting remaining time and volatility. It decays as expiry approaches, faster for out-of-the-money warrants.

Contango and backwardation

Contango means futures trade above spot, usually when storage costs exceed convenience yield. Backwardation means futures trade below spot, typically when nearby supply is tight.

Commodity roll yield

Return from rolling expiring futures into later contracts. It is positive for long positions in backwardation and negative in contango, independent of spot price movement.