Glossary

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 stockfollows 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.