Glossary

Asset-backed securities enable depository institutions, finance companies, and other corporations to "liquefy" their balance sheets (i.e. raise cash by borrowing against assets) and develop new sources of capital. Pooling the assets such as credit cards, automobile loans, student loans and home equity loans into financial instruments allows them to be sold to general investors.
This is a double gain activity. On one hand, bankers reduce their risk of default of payment (securisation process), and on the other, this allow higher returns by larger investment in the financial sector.

The return that an asset achieves over a period of time. This measure simply looks at the appreciation
or depreciation (expressed as a percentage) that an asset – usually a stock or a mutual
fund – faces over a period of time. Absolute return differs from relative return because it is concerned
with the return of the asset being looked at and does not compare it to any other measure.
Absolute return funds look to make positive returns whether the overall market is up or down,
while index tracking funds try to beat the index they are tracking.

Usually refers to investments in hedge funds. Many hedge funds pursue strategies that are uncommon relative to mutual funds. Examples of alternative investment strategies are: long—short equity, event driven, statistical arbitrage, fixed income arbitrage, convertible arbitrage, short bias, global macro, and equity market neutral.

Autorité des marchés financiers, French Securities supervisor

Asset stripping is the practice of buying a company in order to sell its assets individually at a profit.

The reduction in staff and employees in a company through normal means, such as retirement and resignation. This is natural in any business and industry.

German securities supervisor

A statement summarizing the economic transactions between the residents of a country and nonresidents during a specific period, usually a year. The BOP includes transactions in goods, services, income, transfers and financial assets and liabilities. Generally, the BOP is divided into two major components: the current account and the capital and financial account (source: IMF).

The Basel Committee on Banking Supervision is an institution created by the central bank Governors of the Group of Ten nations. It was created in 1974 and meets regularly four times a year. Its membership is now composed of senior representatives of bank supervisory authorities and central banks from the G-10 countries (Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States), and representatives from Luxembourg and Spain. It usually meets at the Bank for International Settlements in Basel, where its 12 member permanent Secretariat is located.
The Basel Committee formulates broad supervisory standards and guidelines and recommends statements of best practice in banking supervision (see bank regulation or Basel II, for example) in the expectation that member authorities and other nation’s authorities will take steps to implement them through their own national systems, whether in statutory form or otherwise.

Ben Bernanke (Ben Shalom Bernanke) est le président de la Réserve fédérale des Etats-Unis (FED). Il est le successeur d'Alan Greenspan.

A debt investment with which the investor loans money to an entity (company or government) that borrows the funds for a defined period of time at a specified interest rate.

A standard component of the balance of payments accounts, usually a shortened term for the capital and financial account, which refers to (i) capital transfers and acquisition/disposal of non-produced, nonfinancial assets and (ii) financial assets and liabilities (source: IMF).

Activité consistant à financer en capitaux propres ou quasi capitaux propres des entreprises nouvellement créées. Cette activité se distingue généralement du capital-investissement qui consiste à racheter des entreprises industrielles plus mûres (ou leverage buy-out). Cette segmentation entre capital risque et capital investissement distingue largement l’Europe des Etats-Unis du fait de la prédominance en Europe du capital-investissement et de la faiblesse relative du capital risque.

A bonus entitlement accruing to an investment fund manager company or individual members of the fund management team. Carried interest (typically up to 20% of the profits of the fund) are payable once the investor have achieved repayment of their original investment in the fund plus a defined hurdle rate.

They are structured Asset Backed Securities*. They are obtained through a re-securisation of ABS.

They are financial contracts. They have been compared with insurance because the buyer pays a premium and in return, receives a sum of money if one of the events specified on the contract occurs.

Committee of European Securities Regulators

A measure of a country's general level of prices based on the cost of a typical basket of consumer goods and services (source: IMF).

Outstanding financial liabilities arising from past borrowing. Debt may be owed to external or domestic creditors and typically, debt financing is in the form of loans or bonds. The debtor may be either a public (government) or private sector entity (source: IMF).

Agreements by creditors to lessen the debt burden of debtor countries by either rescheduling interest and principal payments falling due over a specified time period, sometimes on a concessional basis, or by partially or fully cancelling debt service payments falling due during a specified period of time (source: IMF).

In finance, default is the term used when a party is unwilling or unable to pay their debt obligations. This can occur with all debt obligations including bonds, debentures, mortgages, loans, and notes. Default can also occur with sovereign bonds, that is, governments can default on their payments to creditors. In corporate finance, a default is typically a prelude to bankruptcy. With most loans the total amount owed becomes immediately payable on the first instance of a default of payment (source: IMF).

Security, such as an option or futures contract, whose value depends on the performance of an underlying security or asset. Futures contracts, forward contracts, options, and swaps are the most common types of derivatives. Derivatives are generally used by institutional investors to increase overall portfolio return or to hedge portfolio risk.

Distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. The amount of a dividend is quoted in the amount each share receives or in other words dividends per share.

Earnings Before Interest, Taxes, Depreciation, and Amortization. An indicator of a company’s financial performance calculated as: Revenue – Expenses (excluding tax, interest, depreciation, and amortization). EBITDA can be used to analyze the profitability between companies and industries, because it eliminates the effects of financing and accounting decisions.

European Central Bank

The capital markets of developing countries that have liberalized their financial systems to promote capital flows with nonresidents and are broadly accessible to foreign investors (source: IMF).

The financial markets of developing economies or industries.

A type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings. There are two main types of stock: common and preferred. Common stock usually entitles the owner the right to vote at shareholder meetings and to receive dividends that the company has declared. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock receive dividends before common shareholders and have priority in the event a company goes bankrupt and is liquidated.

The price of one currency in terms of another. Most commonly, exchange rates are expressed as the number of units of domestic currency that will purchase one unit of foreign currency (e.g. units of currency per U.S. dollar). An exchange rate may also be defined as the inverse: the number of units of foreign currency that one unit of domestic currency will purchase (source: IMF).

Foreign Direct Investment (FDI)

The acquisition of at least ten percent of the ordinary shares or voting power in a public or private enterprise by nonresident investors. Direct investment involves a lasting interest in the management of an enterprise and includes reinvestment of profits (source: IMF).

The FED is the central banking system of the United States. The Federal Reserve System is a quasi-governmental banking system composed of (1) a presidentially-appointed Board of Governors of the Federal Reserve System in Washington, D.C.; (2) the Federal Open Market Committee; (3) twelve regional Federal Reserve Banks located in major cities throughout the nation; and (4) numerous private member banks, which own varying amounts of stock in the regional Federal Reserve Banks.

FEPS is the new European progressive foundation. Close to the Party of European Socialists (PES) but nevertheless independent, FEPS embodies a new way of thinking on the social democratic, socialist and labour European scene.
http://www.feps-europe.eu/

La FEPS est la nouvelle fondation européenne progressiste. Proche du Parti socialiste européen (PSE) dont elle est néanmoins indépendante, la FEPS incarne un nouveau mode de réflexion sur la scène social-démocrate, socialiste et travailliste européenne.
http://www.feps-europe.eu/

Financial Services Authority, UK

A financial contract that obligates the buyer (seller) to purchase (sell and deliver) financial instruments or physical commodities at a future date, unless the holder’s position is closed prior to expiration. Futures are often used by mutual funds and large institutions to hedge their positions when the markets are rocky, preventing large losses in value. The primary difference between options and futures is that options provide the holder the right to buy or sell the underlying asset at expiration, while futures contracts holders are obligated to fulfil the terms of their contract.

Georges Soros est un financier milliardaire américain, devenu célèbre par ses activités de spéculation sur les devises et son soutien philanthrope

Gross Domestic Product (GDP)

Gross domestic product is the most commonly used single measure of a country's overall economic activity. It represents the total value of final goods and services produced within a country during a specified time period, such as one year (source: IMF).

Gross national product was formerly used as a measure of a country's overall economic activity, equal to GDP less compensation of employees and property income payable to the rest of the world plus the corresponding items receivable from the rest of the world; GNP has been renamed gross national income (GNI) in the System of National Accounts (source: IMF).

Fund whose manager receive performance-related fees and can freely use various active investment strategies to achieve positive absolute returns, involving any combination of leverage, long and short positions in securities or any other assets in a wide range of markets.

A takeover attempt that is strongly resisted by the target firm.

In economics, a household is a person or a group of people living in the same residence.

A rate of return that must be achieved before the manager becomes entitled to carried interest payments from a fund

A sustained increase in the general price level, often measured by an index of consumer prices. The rate of inflation is the percentage change in the price level in a given period (source: IMF).

The Information Ratio is a commonly used statistic by the long only industry’s (UCITS) practitioners in order to measure the efficiency of an investment policy, considering not only the excess of return versus the adopted benchmark, but also the risk assumed against it. Under a purely technical viewpoint the Information Ratio is the ratio between the annualized excess of return over the benchmark attained by the manager along a given timeframe and the fund’s Tracking Error. In the tables of this paragraph we assumed as hypothetical benchmark for the different categories of hedge funds the JP Morgan US bond index.

A non-bank person or organization that trades securities in large enough share quantities or dollar amounts that they qualify for preferential treatment and lower commissions. Institutional investors face less protective regulations because it is assumed that they are more knowledgeable and better able to protect themselves.

Scheduled payments made to a creditor in return for the use of borrowed money and which will be determined by the interest rate, the amount borrowed (principal) and the duration of the loan (source: IMF).

The fixed charge or return, usually expressed on an annual basis, on a financial asset expressed as a percentage of the price of the asset (source: IMF).

Organization established by international treaty in 1945 to promote monetary cooperation among its members. Its statutory purposes include promoting the balanced growth of international trade, stability of exchange rates and the maintenance of orderly exchange arrangements among members. The IMF monitors global economic and financial developments and gives policy advice, lends to member countries with balance of payments problems, and provides technical assistance in its areas of expertise (source: IMF).

Investment from the perspective of the domestic economy is the purchase of capital equipment, e.g., machines and computers, and the construction of fixed capital, e.g., factories, roads, housing, that serve to raise the level of output in the future. From the perspective of an individual, investment is expenditure, usually on a financial asset, designed to increase the individual's future wealth (source: IMF).

This term is used very broadly. It refers to anyplace you can put your money. For example: stocks, bonds, mutual funds, options, futures, etc. You’ll often hear it used in sentences like this: Mutual funds are a good investment vehicle for beginning investors who aren’t confident enough to pick stocks themselves.

The International Organization of Securities Commissions
http://www.iosco.org/

A company’s first sale of stock to the public. Securities offered in an IPO are often, but not always, those of young, small companies seeking outside equity capital and a public market for their stock. Investors purchasing stock in IPOs generally must be prepared to accept considerable risks for the possibility of large gains. IPOs by investment companies (closed-end funds) usually include underwriting fees that represent a load to buyers.

Leverage is the fact increasing the profitability of an investment thanks to the use of indebtedness.
Let consider an asset whose value is 100 with a profit of 10. Its gross profitability is 10%. Let now suppose that a financial actor is paying 20 with his own capital (equity capital) and borrows 80. The financial profitability will now be evaluated not against the total value of the asset (100), but against the amount invested by the financial actor under consideration only (20). However, the financial actor has to pay the interest on his loan (5% of 80), 4. The net profit is therefore 10 – 4 = 6. The Return on Equity (ROE) is 6/20 = 30%.
For the same asset, leverage allows to depart from a gross profitability of 10% to a Return on Equity of 30%. If the market interest rate is higher than the gross profitability, the leverage effect goes in the opposite direction (losses).

Simple opérateur de marché à la base, Jérôme Kerviel est l'accusé d'une perte pour la Société Générale de 4,82 milliards d'euros en 2008

The leverage effect explains a company’s return on equity in terms of its return on capital employed and cost of debt. The leverage effect is the difference between return on equity and return on capital employed. Leverage effect explains how it is possible for a company to deliver a return on equity exceeding the rate of return on all the capital invested in the business, i.e. its return on capital employed. When a company raises debt and invests the funds it has borrowed in its industrial and commercial activities, it generates operating profit that normally exceeds the
interest expense due on its borrowings. The company generates a surplus consisting of the difference between the return on capital employed and the cost of debt related to the borrowing.
This surplus is attributable to shareholders and is added to shareholders’ equity. The leverage effect of debt thus increases the return on equity. If the return on capital employed falls below the cost of debt, then the leverage effect of debt shifts into reverse and reduces the return on equity, which in turn falls below return on capital employed.

LIBOR stands for the London Interbank Offered Rate and is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale (or "interbank") money market (source: IMF).

Limited partners or investors are the private suppliers of capital for private equity or venture capital funds. Most limited partners are pension funds, banks, insurance companies, and funds of funds.

The ability to convert an asset to cash quickly. It is safer to invest in liquid assets than illiquid ones because it is easier for you to get your money out of the investment. Examples of assets that are easily converted into cash include blue chip and money market securities. Also known as “marketability”.

Compensation received by a private equity fund manager company. This annual management charge is equal to a certain percentage of the investors’ commitments to the fund.

This term designates most of the time the forces of demand and supply. In mainstream economics (the one defending neo-liberal economic policies), it is assumed that producers produce with decreasing marginal productivity and consumers consume with decreasing marginal utility. On the production side, this means that mainstream economics is unable to take into account economies of scale. On the consumption side, it means that the more one consume of one good the less he is satisfied, and the less he is inclined to pay high price for that good. Graphically:
Price Supply curve

P*
Demand curve
Quantity
Q*

If the price is higher than the equilibrium price (p*), producers will not be able to sell all the products and will decrease their production up to the point where all the products will be sold i.e. Q*. If market price is below equilibrium price, part of the demand at that price is not satisfied, producers will increase their production. They will increase production until Q*, sold at a price p*.

The same applies to the labour market. In this theory, labour is a normal good as all the other. Workers offers their work force, they are on the supply side, and producers demand work. As said for the definition of neo-liberal economic policies*, a wage which would be set higher than the equilibrium one would create unemployment (the supply of work would be higher than the demand). This is not the Keynesian involuntary unemployment. The Keynesian one is a feature of capitalism, not an accident brought by political intervention in the economic sphere. For orthodox economists, the ones not working at the equilibrium level do so because of their preferences and are not involuntary unemployed.

Another fundamental market force is competition. Capitalists, by transferring capital from the less profitable sectors of production to the most profitable ones complete the scheme explained above, and should insure that the economy can reach a state of equilibrium, defined as equality between supply and demand on all markets, and, in consequence, characterized by equal rate of profit between sectors.

The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock.

The Markets in Financial Instruments Directive – MiFID. With the Directives a single market and regulatory regime for investment services across the 25 member states of the European Union was introduced. The key objectives behind the Directive are threefold: 1) to complete the EU single market for investment services and 2) to respond to changes/innovations in the securities markets and 3) to protect investors.

Anything that is generally accepted in exchange as payment for goods and services. While the key function of money is to act as a medium of exchange, money also serves as a store of value, unit of account, and standard of deferred payment (source: IMF).

In general, a feature of insurance that arises when the provision of insurance increases the probability of the occurrence of the event being insured against, usually because the insurance diminishes the incentives for the insured party to take preventive actions. For example, banks may lend for riskier ventures than they otherwise would if they expect losses to be effectively covered by the government through deposit insurance or otherwise. On an international level, recourse to IMF financing may generate moral hazard on the part of both borrowers and lenders, leading to less due diligence by private lenders, and allowing borrowing governments to incur larger debts and get by with weaker policies and institutions. Hence, the availability of IMF financing, while offering a cushion to countries in times of financial crises, may increase the likelihood of such crises occurring (source: IMF).

A security that gives small investors access to a well-diversified portfolio of equities, bonds and other securities. Each shareholder participates in the gain or loss of the fund. Shares are issued and can be redeemed as needed.

The policies classified under this title could be distinguished on the fact that they are based on the belief that the economy, through the intermediation of the markets only, could reach a state of rest satisfying individual desires. For the defenders of such a vision, unemployment, for instance, is always caused by an external intervention i.e. political, in the economic system (minimum wages, unemployment benefits…). If such obstacles would be lifted, the ones not working would act in that way voluntarily given their preferences (for higher wages, for less painful work…). There would not be involuntary unemployment. For the defenders of such a vision, the normal functioning of the capitalist system does not exhibit involuntary unemployment, only voluntary. In the field of financial markets, public authorities should not intervene either, because it would distort the relative price system in a way which does not reflect agents’ desires and would in consequence misguide investments, or because it would prevent the economy to be the most efficient because the ones able to pay the more (given their preference for consumers or their techniques of production for producers) would not necessarily be the ones buying the product. It means that, on the consumption side, the ones consuming the good are not necessarily the ones who enjoy the most to have it. On the production side, it means that the ones able to use this production factor in the most profitable way will not necessarily be the ones who will use this factor.
In the field of education, health, energy or environment, for instance, these arguments are devastating. If an optimal allocation of capital (characterised by a uniform rate of profit between sectors) can only be achieved through the intermediation of markets, there should be no ground for public services, providing goods and services on different bases than economic profitability.

Located or based outside of one’s national boundaries. The term offshore is used to describe foreign banks, corporations, investments, and deposits. A company may move offshore for the purpose of tax avoidance or relaxed regulations.

A special group of services that many brokerages give to special clients. The services provided under prime brokering are securities lending, leveraged trade executions, and cash management, among other things. Prime brokerage services are provided by most of the large brokers, such as Goldman Sachs, Paine Webber, and Morgan Stanley Dean Witter.

A private equity investment fund is a vehicle for enabling pool investment by a number of investors in equity and equity-related securities of companies. They are generally private companies whose shares are not quoted on a stock exchange. The fund can take either the form of a company or of an unincorporated arrangement such as a Limited partnership.

Restructuring a company’s debt and equity mixture often with the aim of making a company’s capital structure more stable.

A federal agency that regulates the US financial markets. The SEC also oversees the securities industry and promotes full disclosure in order to protect the investing public against malpractice in the securities markets.

Refer to the concept that the primary goal for a company is to enrich its shareholders (owners) by paying dividends and/or causing the stock price to increase.

The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short. Selling short is the opposite of going long. That is, short sellers make money if the stock goes down in price.

Voir Vente à découvert.

À l’instar de Bâle pour les banques, l’Union européenne a établi un nouveau code réglementaire pour la gestion des risques des compagnies d’assurances. La version définitive de Solvency II (Solvabilité II) devrait être arrêtée en 2007 pour une application en 2010. Par rapport à la directive Solvency I actuellement en place, Solvency II a généralisé la mesure du risque opérationnel, introduit le Solvency Capital Requirement et entraînera un contrôle accru du régulateur.

An individual’s right to purchase a share at a fixed price. Stock options are a widely used form of employee incentive and compensation. The employee is given an option to purchase shares at a certain price (at or below the market price at the time the option is granted) for a specified period of years.

A simulation technique used on asset and liability portfolios to determine their reactions to different financial situations. Stress-testing is a useful method of determining how a portfolio will fare during a period of financial crisis. The Monte Carlo simulation is one of the most widely used methods of stress testing.

A systemic risk represents the threat of the collapse of the entire economic system. It is a chain process.
When a financial actor cannot pay its debt or when any contracting party is unable to deliver its promise, the other part can encounter financial difficulties. This will, in turn, have consequences of the possibility, for this financial actor, to deliver its promise for other contracts. In this process, one can see that leverage* plays a significant role in increasing systemic risk.

Le coût de l'argent, soit pour emprunter, soit pour prêter (taux d'intérêt) ou pour échanger une monnaie contre une autre (taux de change).

Le prix auquel une monnaie peut-être convertie en une autre.

(1) Le taux auquel l’intérêt est dû sur n’importe quelle obligation, ou est payé sur des actifs porteurs d’intérêts.

(2) Les intérêts que les clients d’une banque paient pour l’opportunité qu’ils ont d’emprunter de l’argent d’autres personnes. Inversément, ce sont les intérêts payés aux clients d’une banque, l’ accord qu’ils ont donné de prêter leur argent à quelqu’un d’autre.

Un taux d'intérêt basé sur un taux d'intérêt variable de référence, tel qu'un rendement d'un bon du trésor pour une échéance déterminée. Une marge fixe est habituellement ajoutée à un tel taux de référence.

A fund structure or a vehicle is transparent when the fund itself is not subject to taxation and the investment in an underlying company is treated as if it would be a direct investment for the initial investor (the limited partner) who is taxed only when the investment structure distributes its gains and revenues.

The Tracking Error is a commonly used statistic by the long only industry’s (UCITS) practitioners in order to measure the volatility of a portfolio / fund versus its benchmark. Under a purely technical viewpoint the Tracking Error is the annualized standard deviation of the difference between the periodic returns of a portfolio and those of its benchmark on a given timeframe. In the tables of this paragraph we assumed as hypothetical benchmark for the different categories of hedge funds the JP Morgan US bond index.”

Transactions, sur devises ou prêts, effectuées entre banques, à l’opposé de celles conclues entre les banques et leurs clients non-bancaires.

Undertakings for the Collective Investment of Transferable Securities – UCITS. A public limited company that coordinates the distribution and management of unit trusts amongst countries within the European Union.

Value at Risk model – VaR model. Procedure for estimating the probability of portfolio losses exceeding some specified proportion based on a statistical analysis of historical market price trends, correlations, and volatilities.

Voir Vente à découvert

Le short selling ou vente à découvert (ou à crédit) est une pratique très répandue de certains acteurs des marchés financiers, qui vendent des actions qu’ils n’ont pas, à un investisseur ou à un autre acteur financier. Voilà comment ils s'y prennent: Le hedge funds emprunte un titre à Monsieur X contre le versement d'un intérêt. Ensuite, il le vend puis attends la baisse effective du court de cette action. Une fois que la valeur du titre a baissé, il le rachte (à un prix bien plus bas que le prix auquel il l'a vendu). Il empoche la différence entre le prix de vente et le prix d'achat, et rend le titre à son prêteur - Monsieur X- en ayant donc réalisé un profit. Cela consiste donc à parier que le prix d'une action va baisser.

Dans certains pays, cette pratique est règlementée, dans d'autre non. En fait, c'est au niveau européen que le short selling devrait être réglementé, mais il n'y a malheureusement pour l'instant aucune proposition qui aille dans ce sens.

The providing of equity or equity equivalents to start-ups and recently established companies. In other words, money provided by investors to startup firms and small businesses with perceived, long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets and typically entails high risk for the investor but has the potential for above-average returns.

The World Bank includes two development institutions owned by 184 member countries: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The IBRD is concerned with middle income and creditworthy poor countries, while the IDA focuses on alleviating poverty in the poorest countries in the world. Both institutions provide low-interest loans, interest-free credit and grants to developing countries for projects and programs to, for example, build schools and health centers, provide water and electricity, fight disease, and protect the environment. World Bank assistance is funded both by member country contributions and through bond issuance (source: IMF).