Financial DT Test flashcards

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

Preferred stock

Equity security with a stated dividend and priority over common stock in dividends and liquidation, but subordinated to debt; often callable and may be convertible.

Interest rate swap

Agreement to exchange fixed and floating interest payments on a notional principal over a set period; used to hedge or take duration exposure without transferring principal.

Put-call parity

For European options on a non-dividend stock, C − P = S − K·e^(−rT); deviation implies an arbitrage opportunity when transaction costs are ignored.

Modified duration

Percentage price change of a bond for a 1% change in yield; approximately equals Macaulay duration divided by (1 + yield/k) for k compounding periods.

Limit order

Order to buy or sell only at a specified price or better; provides price certainty but no execution certainty, and may remain unfilled in an illiquid market.

Effective spread

Twice the absolute difference between the trade price and the midpoint at the time of the trade; captures actual execution cost including price improvement.

Circuit breaker

Market-wide or security-specific mechanism that pauses or halts trading after a large price move, intended to restore order flow and limit panic-driven volatility.

Dark pool

Alternative trading venue where orders are matched without pre-trade transparency; used to reduce market impact on large orders, subject to post-trade reporting rules.

Expected shortfall

Average loss conditional on losses exceeding the VaR threshold; a coherent risk measure that captures tail severity and is subadditive, unlike VaR.

Look-ahead bias

Backtest error caused by using information that was not available at the decision time, producing unrealistically favorable historical performance.

Sharpe ratio

Excess return over the risk-free rate divided by the standard deviation of returns; measures risk-adjusted return per unit of total volatility.

Point-in-time data

Data stored as it was known on each historical date, including restatements; prevents look-ahead bias in backtests and risk models.

Recovery time objective

Maximum acceptable time to restore a service after disruption; drives architecture choices such as active-active or warm standby for critical trading systems.

OAuth 2.0

Delegated authorization framework issuing access tokens so third-party applications can call APIs on a user's behalf without sharing credentials.

HSM

Hardware security module that generates and stores cryptographic keys and performs encryption or signing inside a tamper-resistant boundary; used for key management.

Tokenization

Representing a real-world or financial asset as a digital token on a distributed ledger; requires legal enforceability of on-ledger ownership and transfer.

Liquidity coverage ratio

High-quality liquid assets divided by net cash outflows over 30 days; must be at least 100% under Basel III to ensure short-term liquidity resilience.

Best execution

Duty to take all sufficient steps to obtain the best possible result for clients considering price, cost, speed, likelihood of execution, and size.

Beneficial ownership

The natural persons who ultimately own or control a legal entity or account; must be identified under AML/KYC rules, often above a 25% threshold.

FRTB

Basel fundamental review of the trading book: replaces internal-model VaR with expected shortfall, adds liquidity horizons, and imposes P&L attribution tests.

Suitability

Requirement that a recommendation fits the client's objectives, risk tolerance, time horizon, liquidity needs, and knowledge and experience.

Fiduciary duty

Legal obligation to act in the client's best interest, comprising duties of loyalty (managing conflicts) and care (prudence and competence).

Risk tolerance

Combination of a client's financial capacity to bear loss and psychological willingness to accept risk; the lower of the two sets the mandate limit.

GIPS

Global Investment Performance Standards requiring fair representation, full disclosure, and consistent composite-based reporting of investment performance.

Central counterparty

Entity that interposes itself between trade counterparties through novation, collecting margin and mutualizing default risk in cleared markets.

Settlement fail

Failure to deliver securities or cash by the settlement date; remedies include buy-in, cash compensation, and regulatory penalties such as CSDR cash penalties.

Straight-through processing

Automated end-to-end processing of trades from execution to settlement without manual re-keying, reducing errors and operational risk.

Variation margin

Collateral exchanged daily to reflect changes in the mark-to-market value of a cleared position, distinct from initial margin held against future exposure.

Repo haircut

Percentage discount applied to collateral value in a repurchase agreement, protecting the cash lender against price declines and liquidation costs.

Call auction

Matching mechanism that batches orders and executes them at a single clearing price maximizing traded volume, often used at market open or close.

Survivorship bias

Distortion from analyzing only instruments that survived to the present, omitting delisted or failed ones and overstating historical returns.

Segregation of client assets

Holding client securities and cash separately from firm assets at a custodian, protecting clients in insolvency and preventing reuse of client property.