GLOSSARY

Often referred to as hedge funds, absolute return funds operate a flexible, unconstrained investment strategy, which may include the use of gearing, derivatives and short selling to enhance returns. These attributes tend to give absolute return funds a higher risk profile than total return funds, while it is also important to remember that the majority of absolute funds are unregulated within the UK market.
There are many different investment strategies for absolute return funds, but the two most common are called market neutral and market directional. Market neutral funds aim to totally remove any general market volatility (often referred to as beta) by matching long positions (those they believe will rise in value) against short positions (those that they think will fall in price). Once this has been achieved they create returns by picking a handful of investments they are convinced will rise in value. In contrast, market directional funds actively bet on market movements in addition to trying to make returns from stock selection. They use derivatives to lessen the impact of falling markets.

Absolute return funds may outperform total return funds in a sustained falling equity market as they are able to reduce their equity exposure to zero, or profit from equities falling, in the case of market directional funds. However their complex nature, lack of transparency and higher charges can put off less sophisticated investors.

Alpha is used to measure the performance of a fund in relation to its benchmark. An alpha that measures 2.0 indicates a fund has achieved a return 2% better than could have been expected from its benchmark.

An approach to risk management combining capital markets, reinsurance and investment banking techniques that allows a party to either free itself from risks not easily transferred via traditional insurance, or alternatively cover such risks in a non-traditional way – by using the capital markets for example.

A guaranteed or riskless profit from simultaneously buying and selling instruments that are perfect equivalents, the first being cheaper than the second.

The distribution of investment funds within a single asset class or across a number of asset classes (such as equities, bonds and commodities) with the aim of diversifying risk or adding value to a portfolio. See also overlay.

A package of a cash credit instrument and a corresponding swap that transforms the cash flows of the non-par instrument (bond or loan), into a par (floating interest rate) structure. Asset swaps typically transform fixed-rate bonds into par floaters, bearing a net coupon of Libor plus a spread, although cross-currency asset swaps, transforming cashflows from one currency to another are also common.

The practice of matching the term structure and cashflows of an organisation’s asset and liability portfolios in order to maximise returns and minimise risk. An institutional example of this would be a bank converting a fixedrate loan (asset) by utilising a fixed-forfloating interest rate swap to match its floating rate funding (deposits).

1. The beta of an instrument is its standardised covariance with its class of instruments as a whole. Thus the beta of a stock is the extent to which that stock follows movements in the overall market.

2. Beta trading is used by currency traders if they take the volatility risk of one currency in another. For example, rather than hedge a sterling/yen option with another sterling/yen option, a trader, either because of liquidity constraints or because of lower volatility, might hedge with euro/yen options. The beta risk indicates the likelihood of the two currencies’ volatilities diverging.

Companies or governments issue bonds as a means of raising capital. The bond purchaser is in effect making a loan to the issuer, and unlike with shares investors at no point hold a stake in the company.

See option

A structured product that provides capital protection offers an amount that at least matches a given proportion of the investor’s original capital input at maturity. Can also be referred to as principal-protected.

A fund management technique that aims to provide maximum exposure to risky assets while still protecting investors’ capital. The technique requires the manager to dynamically rebalance the portfolio between risky assets (such as equities) and safe assets (such as bonds) according to a quantitative model. The level of risky assets is managed such that at all times, in the event of a market crash, the remaining NAV of the fund is still sufficient to meet the stated protection level. Generally the proportion of Risky Assets in the fund is increased when these perform well and decreased when these perform poorly. The capital protection level may be fixed, or rachet up (reset) according to a certain percentage of the fund NAV achieved during the fund term.

Correlation is a measure of the degree to which changes in two variables are related. It is normally expressed as a coefficient between plus one, which means variables are perfectly correlated (in that they move in the same direction to the same degree) and minus one, which means they are perfectly negatively correlated (in that they move in opposite directions to the same degree). In financial markets correlation is important in three areas:

1. The model used for global asset allocation decisions, Sharpe’s capital asset pricing model (CAPM), has, as its linchpin, a covariance matrix that measures correlations between markets.

2. Correlation is also central to the pricing of some options, where two-factor or multi-factor models are used. For spread options, yield curve options and crosscurrency caps, estimating the correlation between the underlying assets is of primary importance, the degree of correlation between them having a direct influence on the option price. For quantos such as guaranteed exchange rate options, or differential swaps, the correlation effect is the extent to which there is a relationship between movements in the underlying and movements in the exchange rate, which has a secondary effect on the price of the option.

3. Correlation between markets is also used to offset an option position in one market against another with similar direction and volatility. Such a strategy might be used to reduce cost – to avoid hedging the positions separately, or because implied volatility in the second market is lower – or because hedging is difficult in the first market. Correlation can be estimated historically (like volatility) but tends to be unstable, and historic estimations may be poor predictors of future realised correlations.

An instrument that allows an investor to take financial exposure on a set of correlations.

The delta of an option describes its premium’s sensitivity to changes in the price of the underlying. In other words, an option’s delta will be the amount of the underlying necessary to hedge changes in the option price for small movements in the underlying. The delta of an option changes with changes in the price of the underlying. An at-the-money option will have a delta of close to 50%. It falls for out-of-the-money options and increases for in-the-money options, but the change is non-linear: it changes much faster when the option is close-to-the-money. The rate of change of delta is an option’s gamma.

A derivative instrument or product is one whose value changes with changes in one or more underlying market variables, such as equity or commodity prices, interest rates or foreign exchange rates. Basic derivatives include: forwards, futures, swaps, options,warrants and convertible bonds. In mathematical models of financial markets, derivatives are known as contingent claims.

A swap in which the total or price return on an equity index, equity basket or single equity is exchanged for a stream of cashflows based on a short-term interest rate index (or another index).
Equity swaps are a convenient structure for switching into or out of equity markets, particularly for those that prefer to avoid, or are not allowed to use, stock index futures. Like futures, the price of the swap is directly related to the cost of carry, although there may also be tax considerations.

See Trackers

See option

Any option with a more complicated payout structure than a plain vanilla put or call option. The payout of a plain vanilla option is simply the difference between the strike price of the option and the spot price of the underlying at the time of exercise. For a European-style option, the exercise time is always the expiry date; other option styles offer greater flexibility. There are a number of ways in which an option payout can differ from that of a plain vanilla. The payout could also be a function of:

• the difference between a strike and an average rate for the underlying (average options)
• the difference between prices for two different underlyings (difference options, exchange options), the same underlying at different times (highlow options)
• the correlation between two or more underlyings (outperformance options, outside barrier options)
• the difference between a strike and the spot rate at some time other than expiry (deferred payout options, shout options, lookback options, cliquet options, ladder options)
• fixed amount (binary options)

Alternatively, or additionally, a payout may be conditional on certain trigger conditions being met. For example, barrier options are activated or nullified if a spot rate falls or rises through a predetermined trigger level. Multiple trigger conditions are possible (as in the case of corridor or mini-premium options).

Formula-based funds allow investors to combine exposure to an underlying asset and guaranteed income or capital on expiry together with maximum flexibility. This return is achieved by using derivative instruments "that aim to deliver conditional performance by a predefined strike date based on the performance of an index, a basket of indices or assets, or a combination of these indices or assets.

This guaranteed performance (the "formula") is also the object of a guarantee provided by a third party, whereby the fund manager may not invest in its own funds on behalf of the investor" (as defined by AMF, the French financial markets regulatory authority).

Building on this basic structure, there are various types of underlyings and types of structures. They consist of a trade matrix which combines the type of underlying used with the type of index used. These new structures do not necessarily guarantee the capital invested on maturity.

Also known as a ratchet fund. A particular type of structured product that aims to deliver minimum returns, which usually are at least equal to the sum invested, plus some additional upside based on the performance of the stock market.

However, unlike guaranteed funds, very few floor funds come with a contractual guarantee. Many floor funds are managed using the technique of constant proportion portfolio insurance (CPPI).

The rate of change in the delta of an option for a small change in the underlying. The rate of change is greatest when an option is at-the-money and decreases as the price of the underlying moves further away from the strike price in either direction. A long gamma position is one in which a trader is long options. For a position that is short gamma, the opposite holds. Gamma can be hedged by mirroring the options position. Alternatively, a trader may choose to adjust the position in the underlying continually in order to maintain delta neutrality.

A guaranteed fund comes with a promise by the guarantor to repay a portion, usually 100% of the principal at maturity. Guaranteed funds can also incorporate guaranteed coupons payable regardless of the underlying performance and/or non-guaranteed coupons linked to the performance of underlying assets, often a stock index or basket of stocks. ‘Guaranteed’ does not mean the investment is riskfree. The guarantee on principal repayment usually holds only when the product is held to maturity, and is subject to credit risk of the guarantor. Investors who redeem early are usually repaid at net asset value and thus subject to market risk. A guaranteed fund is constructed by investing part of the proceeds in a zero-coupon bond or other fixed income instrument – which underwrites the guaranteed payment at maturity – and the rest of the money in an embedded call or put option on the underlying for additional returns. Hence, investors also run counterparty risk in relation to the option strategy. A guaranteed structure can also take the form of a guaranteed note or guaranteed bond.

Generally, any structured product with a promise to return 100% of the principal invested at maturity can be considered a guaranteed product.

Any instrument (usually a structured note) which guarantees investors a minimum return on their investment. This can be achieved by combining a debt issue with a structure, such as a collar or cylinder, which locks gains into a range. This means that the investor gains protection from an adverse market move by limiting participation in any favourable move.

To hedge is to reduce risk by making transactions that reduce exposure to market fluctuations; for example, an investor with a long equity position might compensate by buying put options to protect against a fall in equity prices. A hedge is also the term for the transactions made to effect this reduction.

Hedge funds are speculative funds that seek to achieve high returns. They make abundant use of derivative products, in particular options, and rely heavily on the leverage effect, which is defined as the ability to commit a volume of capital that is several times higher or lower than the actual capital holdings of the fund. Hedge funds are a good way of adding an element of diversification to a "classic" portfolio since, in theory, their returns are decorrelated (i.e. disconnected) from the performance of the equity and bond markets.

Each hedge fund on the Lyxor Platform is investable on a stand-alone basis through direct investments. They represent ideal tools to design efficient Fund of Hedge Fund portfolios and representative indices.

The Lyxor Platform has become a reference in its industry with an unequalled track record. Its business model aims at removing the main sources of risks investors are typically exposed to when investing directly into hedge funds while restitute the performance of alternative investment.

This platform covers all main strategies and represents a diversified investment universe combining a high level of transparency, risk control and liquidity (weekly).

Each hedge fund on the Lyxor Platform is investable on a stand-alone basis through direct investments. Its business model aims at removing the main sources of risks investors are typically exposed to when investing directly into hedge funds while restitute the performance of alternative investment.

See Implied Volatility

The value of volatility embedded in an option price. All things being equal, higher implied volatility will lead to higher vanilla option prices and vice versa. The effect of changes in volatility on an option’s price is known as vega. If an option’s premium is known, its implied volatility can be derived by inputting all the known factors into an option pricing model (the current price of the underlying, interest rates, the time to maturity and the strike price). The model will then calculate the volatility assumed in the option price, which will be the market’s best estimate of the future volatility of the underlying. See also option

The risk associated with transactions made in illiquid markets. Such markets are characterised by wide bid/offer spreads, lack of transparency and large movements in price after a deal of any size. A firm wishing to unwind a portfolio of illiquid instruments (for example, highly tailored structured notes) may find it has to sell them at prices far below their fair values, exacerbating the problems that prompted the decision to unwind.

See warrant, option

The risk run by a firm that its internal practices, policies and systems are not rigorous or sophisticated enough to cope with untoward market conditions or human or technological errors. Although operational risk is not as easy to identify or quantify as market or credit risk, it has been implicated as a major factor in many of the highly-publicised derivatives losses of recent years. Sources of operational risk include: failure to correctly measure or report risk; lack of controls to prevent unauthorised or inappropriate transactions being made (the so-called ‘rogue trader’ syndrome); and lack of understanding or awareness among key staff.

A contract that gives the purchaser the right, but not the obligation, to buy or sell an underlying at a certain price (the exercise, or strike price) on or before an agreed date (the exercise period). For this right, the purchaser pays a premium to the seller. The seller (writer) of an option has a duty to buy or sell at the strike price, should the purchaser exercise his right. With European-style options, purchasers may take delivery of the underlying only at the end of the option’s life. American-style options may be exercised, for immediate delivery, at any time over the life of the option. Holders of semi-American-style or Bermudan options may be exercised on specified dates – typically on a monthly or quarterly basis.

Options can be bought on commodities, stocks, stock indexes, interest rates, bonds, currencies, etc. The trading terminology, though, may change according to the product. In most cases, the right to buy the underlying is known as a call, and the right to sell, a put. Options are traded on formal exchanges and in over-the-counter (OTC) markets.

The exchanges, such as the Hong Kong Stock Exchange, the SIMEX, or the ASX provide primarily standardised options; the OTC markets are able to provide tailored products to fit specific requirements. The choice between OTC and exchange-traded options will depend on the degree of tailoring required, the relative liquidity of both markets (this varies greatly according to the underlying) and credit concerns. Pricing models for simple or vanilla options have five major inputs: the option’s exercise or strike price; the time to expiration; the price of the underlying instrument; the risk-free interest rate on the underlying instrument, and the volatility of the underlying instrument. European-style options are usually priced off a closed-form analytical model first published by Fischer Black and Myron Scholes in 1973, which has subsequently been modified to fit different underlying. At maturity, an option’s value will depend on the value of the right to buy or sell a product. If an option is purchased giving the right to buy gold at $375 an ounce and at expiration the price is $400, the option is worth $25.

The extent to which an option is inthe- money (how far the strike price is below/above the current forward market price) is called its intrinsic value. Where the strike price is less favourable than the market price, the option is said to be outof- the-money, and where the two prices are the same it is at-the-money. At any time before maturity, an option’s price will be a combination of its intrinsic value (which is always either greater than, or equal to, zero) and its time value. The latter includes the cost of carry and the probability that the price of the underlying will move into or remain in the money. Options can broadly be used in two ways – for speculation, or for insurance. Their usefulness, both from a buyer’s and a seller’s point of view, derives from their payouts. In contrast to other types of hedge, options provide insurance against unfavourable moves in a product’s price and the opportunity to take advantage of favourable moves. Forwards and futures, for example, require buyers and sellers to lock into one rate.

In return for assuming this risk, sellers of options receive a premium, effectively a risk-taking fee. The payout of a purchased option means that the price risk of an option is limited to its premium – it is not as exposed to adverse movements as a position in the underlying. For speculators selling (writing) options, this often means taking a naked option position and therefore being exposed to adverse movements in the underlying.Hedgers may sell options to garner premium to offset any expected slight downturn in a market. Since option premiums are only a fraction of the cost of the underlying product, it is possible to achieve a much greater exposure to price changes of the underlying compared with a similar investment directly in the product – this is called leverage. See also implied volatility

A strategy to change the exposure of a portfolio using derivatives, while leaving the securities in the underlying portfolio unchanged. This has the advantage of cost and flexibility, as portfolio managers can adjust portfolio risk more quickly and cheaply with derivatives than by liquidating portfolio holdings. Another reason might be tactical – the adjustment may only be desired for a brief period of perceived market threat. A third reason might be to transform a portfolio risk; an international fund manager may wish to segregate the currency aspect of a portfolio and can do so with a currency overlay programme. See also asset allocation.

A general term used to describe the return provided by a structured product or an option. A lot of products pay a fixed coupon plus additional returns linked to performance of the underlying. If the embedded option is path-dependent, the returns will be a function of both the performance of the index and the payout formula. For example, the payout from a five-year quarterly Asian option with a 70% participation of the Dow Jones Euro Stoxx 50 Index is equal to 70% of the average of 20 different prices over five years, and not the level of the index at maturity.

Each hedge fund on the Lyxor Platform is investable on a stand-alone basis through direct investments. They represent ideal tools to design efficient Fund of Hedge Fund portfolios and representative indices. The Lyxor Platform has become a reference in its industry with an unequalled track record. Its business model aims at removing the main sources of risks investors are typically exposed to when investing directly into hedge funds while restitute the performance of alternative investment. This platform covers all main strategies and represents a diversified investment universe combining a high level of transparency, risk control and liquidity (weekly). Each hedge fund on the Lyxor Platform is investable on a stand-alone basis through direct investments. Its business model aims at removing the main sources of risks investors are typically exposed to when investing directly into hedge funds while restitute the performance of alternative investment.

A portfolio option is a multi-factor option that pays out the difference between the return from a portfolio of assets and a specified strike price.

See option

Lyxor Quantic funds are the first funds that take a multi-strategy approach. Each Quantic fund has a dozen or so different strategies at play whose decorrelated approaches enables investors to establish a solid track record. No matter what the prevailing conditions in the market, investors benefit from positive performance. The Quantic range of funds comprises three absolute return fund profiles, each with a different risk/return profile:

• QUANTIC LOW VOL, very low volatility, target return: 3M-Euribor + 150 bps
• QUANTIC PROGRESSIVE, target return: 3M-Euribor + 300 bps
• QUANTIC ADVANCED, target return: 3M-Euribor + 600 bps

To replicate the payout of an option by buying or selling other instruments. Creating a synthetic option in this way is always possible in a complete market. In the case of dynamic replication this involves dynamically buying or selling the underlying (or normally, because of cheaper transaction costs, futures) in proportion to an option’s delta. In the case of static replication the option (usually an exotic option) is hedged with a basket of standard options whose composition does not change with time – eg, an at-expiry digital option can be replicated with a call spread. See also synthetic asset.

Specific risk, also known as nonsystematic risk, represents the price variability of a security that is due to factors unique to that security, as opposed to that portion that is due to systematic risk, the generalised price variability of the related interest rate or equity market. As an example, a US Treasury note would have no specific risk, as it is deemed to have no risk other than movement in interest rates, while a corporate bond would have a degree of default risk as well as more generalised yield curve risk.

In the mid-1980s it was discovered that certain stock prices did to an extent exhibit autocorrelations – implying that earlier price changes could be used to forecast future changes. Statistical arbitrageurs seek to exploit these patterns in their trading strategies.

The technique of selling a futures contract on a stock index and buying the underlying stocks, via programme trading, or vice versa when the price of the futures contract is above or below its theoretical value. The ability to conduct such strategies depends on the efficiency of the futures and cash markets.

An option, either exchange-traded or over-the-counter, on a stock index.

An option, either exchange-traded or over-the-counter, on an individual equity.

The distribution of investment funds in response to long-term, fundamental expectations for markets.

To perform a stress test on a derivatives position is to stimulate an extreme market event and examine its behaviour under the ‘stress’ of that event.

A structured product is an investment that bundles up a portfolio of securities and other derivatives to create a single product. For example, a structured note can be a five-year bond that has an embedded equity or currency option in order to enhance its return. A structured product appeals to the investor who has a view on the market and a good idea of what his risk/reward appetite is.

See accreting, credit default swap, delayed reset swap, digital swap, dual currency swap, equity (index) swap, forward swap, high-coupon swap, index amortising swap, interest rate swap, mortgage swap, municipal swap, participating swap, periodic resetting swap, power swap, puttable swap, reverse index amortising swap, reversible swap, roller-coaster swap, seasonal swap, semi-fixed swap, spread-lock swap, step-down swap, variable notional swap, yield curve swap, zero coupon swap.

A synthetic asset is a combination of long and short positions in financial instruments, which has the same risk/reward profile as another instrument. For example, it is possible to replicate the payout and exposure of a short futures position by going short European-style call options and long European puts with identical strikes and expiries. Synthetic index options can be generated either through positions in the underlying and futures contracts, or with a basket of vanilla options. See also replication, static replication.

A bespoke fund tailored to specific risk/return profiles that integrates the constraints faced by each individual investor or distributor from the outset. It thus enables investors to define a customised return profile adapted to their individual earnings objectives and risk profile.

The distribution of investment funds in response to short-term expectations of market opportunity or threat.

A bilateral financial contract in which one party (the total return payer) makes floating payments to the other party (the total return receiver) equal to the total return on a specified asset or index (including interest or dividend payments and net price appreciation) in exchange for amounts that generally equal the total return payer’s cost of holding the specified asset on its balance sheet. Price appreciation or depreciation may be calculated and exchanged at maturity or on an interim basis. A total (rate of ) return swap is a form of credit derivative, but is distinct from a credit default swap in that floating payments are based on the total economic performance of a specified asset and are not contingent upon the occurrence of a credit event.

ETF Exchanges Traded Funds (ETFs) are simple and effective tools. In a single Stock Exchange transaction, they mirror the exact performance of your equity or bond benchmark index. They provide instant exposure to a basket of securities through a single investment tool, which is quoted continuously during local trading hours and therefore easily accessible to small or large size investors.

Investors will gain management efficiency by reducing the time and the cost spent on maintenance of core benchmarked exposure.

A dual objective Lyxor ETF ETFs are passively managed index funds that combine the characteristics of a listed security (simplicity, liquidity, continuous quotation, etc.) with those of a traditional fund to offer two major advantages :

• A simple and transparent instrument that tracks the performance of a basket of securities representative of a benchmark index,
• An efficient, easy tool to manage the equity or the bond portion of your assets, which can be traded at any time under optimal price conditions.

Refers to the difference between the performance of a portfolio of stocks or fund and a broad-based index with which they are being compared.

For Lyxor, transparency is a top priority - and the vital corollary of innovation.
Advanced monitoring tools give Lyxor a clear picture of the risks borne by investors. This, in turn, gives investors access to detailed reporting as well as complete transparency with regard to asset management processes and decisions.

The TURQUOISE fund (EUR), a feeder fund of the TURQUOISE MASTER fund, enables investors to achieve medium to long-term asset growth by exposing themselves to alternative management strategies within the scope of controlled volatility.

The TURQUOISE master fund is managed according to a solid management process that combines both “top-down” (allocation by strategy) and “bottom-up” (selection of funds) approaches.

The master fund benefits from the expertise of Société Générale in its capacity as investment fund advisor.

"The introduction of the UCITS Directive (85/611/EEC) in 1985 provided a common regulatory framework (including risk diversification limits) and a ‘passport’ for the ‘cross-border’ distribution of mutual funds. Since then, the growing market share of hedge funds as well as the increased diversity of tailor-made derivative products, have outdated the UCITS regulation and has led to an increasing gap between the traditional long-only funds (UCITS) and the hedge fund world.

What’s new under UCITS 3? By enlarging the use of derivatives, especially OTC-derivatives, the borders between benchmark driven long-only products and funds with a similar risk-return profile to hedge funds become increasingly blurred. In order to properly accommodate this evolution, the regulator has enhanced the risk spreading rules and introduced an overall risk management requirement.

‘Value-at-risk’ (‘VaR’) was recommended by the EU Commission as the preferred indicator to measure the ‘risk exposure’ and is the default risk indicator for ‘sophisticated’ UCITS throughout Europe. VaR indicates the maximum potential loss for a given investment over a certain period of time with a specified probability (level of confidence) under “normal” market conditions. The legal limit of VaR is set in absolute terms (% of NAV) or relative terms (compared to VaR of a benchmark), largely depending on the country of domicile of the UCITS. In general, we can distinguish three types of VaR: Parametrical, Historical and Monte-Carlo." © John Parkhouse, Partner, and Olivier Carré, Director Business review, 22 mars 2007.

The underlying of a structured product or option can be any asset class(equity index, stock basket, debtinstrument, interest rate, commodity or a combination of these) that is used to construct the product and whose performance is a key determinant of the payout. In some products, the underlying may be a basket of 20 stocks, but the redemption basket that is used to calculate the maturity payout may comprise only 10 of those stocks.

The cash payout of a variance swap is equal to notional multiplied by the difference between the realised variance of the underlying index over the life of the swap and the strike variance.

A measure of the variability (but not the direction) of the price of the underlying instrument. It is defined as the annualised standard deviation of the natural log of the ratio of two successive prices. Historical volatility is a measure of the standard deviation of the underlying instrument over a past period. Implied volatility is the volatility implied in the price of an option. All things being equal, higher volatility will lead to higher vanilla option prices. In traditional Black-Scholes models, volatility is assumed to be constant over the life of an option. Since traders mainly trade volatility, this is clearly unrealistic. New techniques have been developed to cope with volatility’s variability. The best known are stochastic volatility, Arch and Garch.

A strategy based on a view that future volatility in the underlying will be more or less than the implied volatility in the option price. Option market-makers are volatility traders. The most common way to buy/sell volatility is to buy/sell options, hedging the directional risk with the underlying. Volatility buyers make money if the underlying is more volatile than the implied volatility predicted. Sellers of volatility benefit if the opposite holds. Other methods of buying/selling volatility are to buy/sell combinations of options, the most usual being to buy/sell straddles or strangles. Other strategies take advantage of the difference between implied volatilities of differing maturity options, not between implied and actual volatility. For example, if implied volatility in short-term options is high and in longer options low, a trader can sell short-term options and buy longer ones.

An instrument giving the purchaser the right, but not the obligation, to purchase or sell a specified amount of an asset at a certain price over a specified period of time. Warrants differ from options only in that they are usually listed.Underlying assets include equity, debt, currencies and commodities.

A debt instrument issued at below par value. The bond pays no coupons; instead, it is redeemed at face value at maturity.