, a reﬂection of interest rate differentials between two currencies). If an exchange rate is ‘at a discount’ (without specifying towhich of the two currencies this refers), this means in London (butgenerally not elsewhere) that the variable currency is at a discount.See Premium.To discount a future cashﬂow means to calculate its present value.The interest rate used is known as the rate of discount. This is notthe same as a discount rate.
Discount instrumentAn instrument which pays no coupon and is therefore always worthless than its face value unless interest rates are negative.
Discount rateThe method of market quotation for certain securities (US and UKtreasury bills, for example), expressing the return on the security asa proportion of the face value of the security received at maturity – asopposed to a yield which expresses the return as a proportion of theoriginal investment. See also Discount.
DraweeThe person to whom a bill of exchange is addressed, and who owesthe money.
DrawerThe originator of a bill of exchange.
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Dual rateA system of two or more exchange rates for a currency, each used fora different type of transaction.
DvPSee Delivery versus payment.
Economic exposureA company’s exposure to currency movements other than transaction exposure and translation exposure.
ECUSee European currency unit.
Effective dateThe start date of the forward period to which an FRA relates.
Effective exchange rateAn index of a currency’s value against a basket of other currencies,weighted by trade importance to the country.
Effective rate(Or annual equivalent rate). An effective interest rate is the ratewhich, earned as simple interest over 1 year, gives the same returnas interest paid more frequently than once per year and thencompounded. See Nominal rate.
Eligible billA bankers’ acceptance which the Bank of England is willing topurchase because it has been accepted by an eligible bank.
EMSSee European monetary system.
EMUSee European monetary union.
End-endA foreign exchange swap or money-market deal commencing on thelast working day of a month and lasting for a whole number of months,maturing on the last working day of the corresponding month.
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301
Equivalent rateThe rate of interest which would be equivalent to the nominalrate quoted, after compounding at a different frequency of interestpayment.
ERASee Exchange rate agreement.
ERMSee Exchange rate mechanism.
EUEuropean Union.
EURIBORThe reference offered interest rate for the euro at 11:00 a.m. Europeantime published for the purpose of providing a benchmark to ﬁx aninterest payment such as on an FRA settlement.
EuroThe name for the single currency of the European monetary union.
EurocurrencyA currency owned by a non-resident of the country in which thecurrency is legal tender.
EuromarketThe international market in which Eurocurrencies are traded.
European currency unit(Or ECU). The former basket of EU currencies which was replaced bythe euro.
European monetary systemA former grouping of EU currencies.
European monetary unionThe formation of a single currency, the euro, for a group of EUcountries.
Exchange controlsRegulations restricting the free convertibility of a currency into othercurrencies.
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Exchange rate agreement(Or ERA). A contract for differences based on the movement ina forward-forward foreign exchange swap price. It does not takeaccount of the effect of spot rate changes as an FXA does. SeeSAFE.
Exchange rate mechanismThat part of the European monetary system which controlled theexchange rates of its member currencies.
Exchange-tradedInstruments such as futures which are traded on a recognizedexchange, as opposed to forward deals which are OTC.
ExposureRisk.
Face value(Or nominal value). The principal amount of a security, generallyrepaid (’redeemed’) all at maturity, but sometimes repaid in stages,on which the coupon amounts are calculated.
FEERSee Fundamental equilibrium exchange rate.
FigureWhen the last two digits in a foreign exchange price are zero. Forexample, a price of 1.7895/00 would be ‘‘One seventy-eight ninetyﬁve, ﬁgure’’.
Fixed deposit(Or time deposit or term deposit or clean deposit). A non-negotiabledeposit for a speciﬁc term.
Fixed-rate regimeManagement of a currency at a ﬁxed exchange rate against anothercurrency or basket of currencies.
Flat yield curveA yield curve where rates are similar for all maturities.
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303
Floating rate CD(Or FRCD). CD on which the rate of interest payable is reﬁxed in linewith market conditions at regular intervals (usually 6 months).
Floating rateIn interest rates, an instrument paying a ﬂoating rate is one wherethe rate of interest is reﬁxed in line with market conditions at regularintervals such as every 3 or 6 months. See also Floating-rate regime.
Floating-rate noteA security where the coupon is reﬁxed at regular intervals accordingto an index such as LIBOR.
Floating-rate regimeAllowing a currency to ﬁnd its own free-market level against othercurrencies, with no government intervention.
ForwardIn general, a deal for value later than the normal value date for thatparticular commodity or instrument. In the foreign exchange market,a forward price is the price quoted for the purchase or sale of onecurrency against another where the value date is at least one monthafter the spot date. See Short date.
Forward exchange agreement(Or FXA). A contract for differences designed to create exactly thesame economic result as a foreign exchange cash forward-forwarddeal. See ERA, SAFE.
Forward-forwardAn FX swap, loan or other interest-rate agreement starting on oneforward date and ending on another.
Forward rate agreement(Or FRA). A contract for differences based on a forward-forwardinterest rate.
FRASee Forward rate agreement.
FRCDSee Floating rate CD.
FRNSee Floating rate note.
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Front ofﬁceThe trading department of the bank.
Fundamental Equilibrium Exchange Rate(Or FEER). The exchange rate necessary to achieve a sustainablebalance in the country’s external current account. See Purchasingpower parity.
Fundamental analysis(Or judgemental analysis). An approach to forecasting based onexternal factors such as economics, government policy and politicalevents. See Technical analysis.
FundsThe USD/CAD exchange rate for value on the next business day(standard practice for USD/CAD, in preference to spot).
FungibleAble to be combined indistinguishably with an existing position inthe same instrument.
Future valueThe amount of money achieved in the future, including interest, byinvesting a given amount of money now. See Time value of money,Present value.
Futures contractA deal to buy or sell some ﬁnancial instrument or commodity for valueon a future date. Unlike a forward deal, futures contracts are tradedonly on an exchange (rather than OTC), have standardized contractsizes and value dates, and are often only contracts for differencesrather than deliverable.
FXForeign exchange.
FXASee Forward exchange agreement.
Gap analysisAnalysis of the difference in exposures to interest rates in differentperiods.
Glossary
305
General riskIn measuring position risk for capital adequacy purposes, the riskarising from the market position held by the bank. See Speciﬁc risk.
GMRAGlobal Master Repo Agreement, a master agreement for repos andbuy/sell-backs.
HedgeProtect against the risks arising from potential market movements inexchange rates, interest rates or other variables. See Cover, Arbitrage, Speculation.
Herstatt riskSame as settlement risk in FX.
Historic rate rolloverA forward swap in FX where the settlement exchange rate for thenear date is based on a historic off-market rate rather than thecurrent market rate. This is prohibited by many regulators.
Historic VaRA method of calculating VaR by applying historic price movements tothe current portfolio of instruments. See Monte Carlo simulation,Variance/covariance.
HitTo hit a bid is to deal on the bid price quoted by someone.
IFEMAInternational Foreign Exchange Master Agreement, a master agreement for foreign exchange spot and forward deals.
IMMSee International Monetary Market.
IndirectAn exchange rate quotation against the US dollar in which the dollaris the base currency and the other currency is the variable currency.
Initial marginSee Margin.
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Foreign exchange and money markets
InterbankAn interbank transaction is one between two banks, as opposed toone between a bank and an end-user.
International Monetary MarketThe ﬁnancial sector of the Chicago Mercantile Exchange.
InterpolationThe process of estimating a price or rate for value on a particular dateby comparing the prices actually quoted for value dates either side.
InterventionPurchases or sales of currencies in the market by central banks inan attempt to reduce exchange rate ﬂuctuations or to maintain thevalue of a currency within a particular band, or at a particular level.Similarly, central bank operations in the money markets to maintaininterest rates at a certain level.
Inverted yield curveSee Negative yield curve.
ISDA master agreementInternational Swaps and Derivatives Association master agreementfor FRAs, swaps, options and other transactions.
Judgemental analysisSee Fundamental analysis.
Large exposure riskThe requirement to allocate more capital for capital adequacypurposes if the total exposure to any one counterparty is a particularlylarge proportion of the bank’s total.
Legacy currency(Or national currency unit). One of the former national currencieswhich became a unit of the euro.
Legal riskThe risk that the bank’s business is affected by changes in laws andregulations, or by existing laws and regulations which it had notproperly taken into account.
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307
LIBIDSee LIBOR.
LIBORLondon inter-bank offered rate, the rate at which banks are willingto lend to other banks of top creditworthiness. The term is usedboth generally to mean the interest rate at any time, and speciﬁcallyto mean the reference rate at 11:00 a.m., published by the BritishBankers’ Association, for the purpose of providing a benchmark to ﬁxan interest payment such as on an FRA settlement. LIBID is similarlyLondon inter-bank bid rate. LIMEAN is the average between LIBIDand LIBOR.
LIFFELondon International Financial Futures and Options Exchange.
LiftTo lift an offer is to deal on the offered price quoted by someone.
LIMEANSee LIBOR.
LiquidA liquid market is one where it is easy to ﬁnd buyers and sellers atgood prices. A liquid investment is one which can easily be turnedinto cash because there is a liquid market in that instrument.
LiquiditySee Liquid.
Liquidity riskThe risk of being unable to ﬁnd a liquid market for a particularinstrument.
LocalsPrivate traders on a futures exchange dealing for their own account.
LongA long position is a surplus of purchases over sales of a given currencyor asset, or a situation which naturally gives rise to an organizationbeneﬁting from a strengthening of that currency or asset. To a moneymarket dealer, however, a long position is a surplus of borrowings
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taken in over money lent out, (which gives rise to a beneﬁt if thatcurrency weakens rather than strengthens). See Short.
Managed ﬂoatingSame as dirty ﬂoating.
MappingIn the variance/covariance approach to VaR, the process of representing a position in terms of other standardized instruments.
Margin callA call by one party in a transaction for variation margin to betransferred by the other.
Margin transferThe transfer of a margin call.
MarginInitial margin is collateral placed by one party with a counterpartyat the time of a deal, against the possibility that the market price willmove against the ﬁrst party, thereby leaving the counterparty with acredit risk.Variation margin is a payment made, or extra collateral transferred,subsequently from one party to the other because the market pricehas moved. Variation margin payment is either in effect a settlementof proﬁt/loss (for example, in the case of a futures contract) or thereduction of credit exposure (for example, in the case of a repo).In a loan, margin is the extra interest above a benchmark (e.g. amargin of 0.5% over LIBOR) required by a lender to compensate forthe credit risk of that particular borrower.
Market riskThe risk that the value of a position falls due to changes in marketrates or prices.
Mark-to-marketThe process of revaluing a position at current market rates.
MeanAverage.
Glossary
309
Mine‘‘I buy the base currency.’’ For example, if someone who has askedfor and received a price says ‘‘5 mine!’’ he means ‘‘I buy 5 millionunits of the base currency’’. See Yours.
Model riskThe risk that the computer model used to price and value an instrument is wrong.
Modiﬁed durationA factor measuring the sensitivity of a position to changes in interestrates.
Modiﬁed followingThe convention that if a value date in the future falls on a nonbusiness day, the value date will be moved to the next followingbusiness day, unless this moves the value date to the next month, inwhich case the value date is moved back to the last previous businessday.
Money marketShort-term market (generally up to 1 year) for ﬁnancial instruments.See Capital market.
Money-market basisAn interest rate quoted on an ACT/360 basis is said to be on amoney-market basis. See Bond basis.
Monte Carlo simulationA method of calculating VaR by generating a very large numberof random prices, applying these to the current portfolio of instruments and measuring the net effect. See Historic VaR, Variance/covariance.
Multilateral nettingObligation netting between more than two parties.
My riskIf someone who has asked for a price says ‘‘my risk’’, he is acknowledging that the price may change before he has accepted it.
National currency unitSee Legacy currency.
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Foreign exchange and money markets
NDFSee Non-deliverable forward.
Negative skewnessA greater probability of a large downward movement than of a largeupward movement.
Negative yield curve(Or inverted yield curve). A downward-sloping yield curve. See Positive yield curve.
NegotiableA security which can be bought and sold in a secondary market isnegotiable.
Net present value(Or NPV). The net present value of a series of cashﬂows is the sumof the present values of each cashﬂow (some or all of which may benegative).
NettingObligation netting is the payment, in the normal course of business,of one net amount from one party to another instead of a grosspayment in each direction.Close-out netting allows, in the event of a default, the non-defaultingparty to terminate all outstanding transactions and settle them witha single net payment or receipt.
Nominal amountSame as face value of a security.
Nominal rateA rate of interest as quoted, rather than the effective rate to which itis equivalent.
Non-deliverable forwardA forward outright where the two parties settle only the change invalue between the forward rate dealt and the spot rate 2 working daysbefore maturity, based on a notional principal amount.
Glossary
311
Normal probability functionA particular probability density, with the formula1√
2πe
x22
Normal yield curve(Or positive yield curve). An upward-sloping yield curve. See Negative yield curve.
NotionalContracts for differences require a notional principal amount onwhich settlement can be calculated.
NPVSee Net present value.
O/NSee Overnight.
Obligation nettingSee Netting.
Odd dateSee Broken date.
OffIf a market maker says ‘‘Off!’’ he means ‘‘The price that I last quotedis no longer valid’’.
Off-balance sheetAn instrument where the principal amount is either not transferred,or is transferred simultaneously in both directions.
Offer(Or ask). In general, the price at which the dealer quoting a priceis prepared to sell or lend. The offered price of a foreign exchangequotation is the rate at which the dealer will sell the base currencyand buy the variable currency. The offered rate in a deposit quotationis the interest rate at which the dealer will lend the currency involved.The offered rate in a repo is the interest rate at which the dealer willlend the collateral and borrow the cash. See Bid.
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Foreign exchange and money markets
Off-marketA rate which is not the current market rate.
Open outcryTrading face-to-face on a physical exchange.
Operational riskThe risk of losses due to failures in the bank’s operations generally.
Option forwardSee Time option.
OTCSee Over the counter.
OutrightAn outright is the sale or purchase of one foreign currency againstanother for value on any date other than spot. See Spot, Swap,Forward, Short date.
Over the counter(Or OTC). An OTC transaction is one dealt privately between anytwo parties, with all details agreed between them, as opposed to onedealt on an exchange – for example, a forward deal as opposed to afutures contract. See Exchange-traded.
OverborrowedA position in which a dealer’s liabilities (borrowings taken in) are oflonger maturity than the assets (loans out). See Overlent.
OverlentA position in which a dealer’s assets (loans out) are of longer maturitythan the liabilities (borrowings taken in). See Overborrowed.
Overnight(Or O/N or today/tomorrow). A deal from today until the next workingday (’tomorrow’).
Overnight limitThe maximum size of a position which a dealer is allowed to takeovernight.
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313
Own fundsA bank’s available capital and reserves for the purposes of capitaladequacy rules.
ParIn foreign exchange, when the outright and spot exchange rates areequal, the forward swap is zero or par.When the price of a security is equal to the face value, usuallyexpressed as 100, it is said to be trading at par.
Par valueSee Parity.
ParityThe exchange rate for a currency against another currency or basketof currencies, considered by the government as its ofﬁcial ﬁxed rate,central rate or target rate.
PayeeThe person to whom something is payable (for example, a bill ofexchange).
Payment versus payment(Or PvP). Method for the settlement of a FX transaction, whereby apayment from Bank A to Bank B is made only if, and at the sametime as, the corresponding payment is made from Bank B to Bank A.
PipsSee Points.
Points(Or pips). The last two decimal places in an exchange rate. Forexample, when USD/CHF is 1.7510/1.7520, the points are 10/20.See Big ﬁgure.
Position riskSame as market risk, used particularly in capital adequacy calculations.
Positive yield curveSee Normal yield curve.
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PPPSee Purchasing power parity.
PremiumThe amount by which a currency is more expensive, in terms ofanother currency, for future delivery than for spot, is the forwardpremium (in general, a reﬂection of interest rate differentials betweentwo currencies). If an exchange rate is ‘at a premium’ (without specifying to which of the two currencies this refers), this means inLondon (but generally not elsewhere) that the variable currency is ata premium. See Discount.
Present valueThe amount of money which needs to be invested now to achieve agiven amount in the future when interest is added. Hence, the valueof future cashﬂow. See Time value of money, Future value.
Primary marketThe primary market for a security refers to its original issue. SeeSecondary market.
Probability densityA description of how likely any one of a series of numbers is to occur.
Probability distributionSee Cumulative probability distribution.
ProduceTo produce dollars (for example, via covered interest arbitrage) generally means effectively to borrow dollars.
Promissory noteA written promise to pay.
Public order memberA member of a futures exchange able to enter into transactions onbehalf of customers.
Purchasing power parityThe idea that a currency’s exchange rate must move, in the longterm, to adjust for inﬂation differentials against other countries. SeeFundamental equilibrium exchange rate.
Glossary
315
PvPSee Payment versus payment.
Real effective exchange rateAn effective exchange rate adjusted for inﬂation differentials between countries.
Reciprocal rateAn exchange rate quoted in such a way that the base currency andvariable currency are reversed.
RedeemA security is said to be redeemed when the principal is repaid.
Registered securityA security where ownership for the purpose of paying coupons andprincipal is determined by whoever is recorded centrally as the owner.There might or might not also be a physical piece of paper evidencingownership. See Bearer security.
Replacement riskThe risk of losing an unrealized proﬁt because the counterpartydefaults.
Repo(Or RP). Usually refers in particular to classic repo. Also used as ageneral term to include classic repos, buy/sell-backs and securitieslending.
Repurchase agreementSee Repo.
Reputational riskThe risk of damage to a bank’s reputation.
RevaluationAn ofﬁcial one-off increase in the value of a currency in terms of othercurrencies. See Devaluation.
Reverse repo(Or reverse). The opposite of a repo.
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Foreign exchange and money markets
ReverseSee Reverse repo.
Risk asset ratioThe ratio of a bank’s own funds to its risk-weighted assets.
RiskmetricsA variance/covariance model for VaR, made available by JP Morgan.
Risk-weighted assetsThe money which a bank has put at risk for the purposes of capitaladequacy rules.
RolloverSee Tom-next. Also refers to renewal of a loan.
RPSee Repo.
S/NSee Spot-next.
S/WSee spot-a-week.
SAFESee Synthetic agreement for forward exchange.
SDRSee Special drawing right.
Secondary marketThe market for buying and selling a security after it has been issued.See Primary market.
SecuredCollateralized.
SecurityA ﬁnancial asset sold initially for cash by a borrowing organization(the issuer). The security is often negotiable and usually has amaturity date when it is redeemed.Same as collateral.
Glossary
317
Sell/buy-backSimultaneous spot sale and forward purchase of something, with theforward price calculated to achieve an effect equivalent to a classicrepo.
Serial monthsAdditional futures delivery months added to the regular cycle, so thatthe three nearest possible months are always available.
Settlement riskThe risk that the counterparty does not deliver its side of the dealafter we have irrevocably paid or delivered our side.
Short dateA deal for value on a date other than spot but less than one monthafter spot.
ShortA short position is a surplus of sales over purchases of a givencurrency or asset, or a situation which naturally gives rise to anorganization beneﬁting from a weakening of that currency or asset.To a money market dealer, however, a short position is a surplus ofmoney lent out over borrowings taken in (which gives rise to a beneﬁtif that currency strengthens rather than weakens). See Long.
Simple interestWhen interest on an investment is paid all at maturity or not reinvested to earn interest-on-interest, the interest is said to be simple.See Compound interest.
Special drawing right(Or SDR). The artiﬁcial basket currency of the IMF.
Speciﬁc riskIn measuring position risk for capital adequacy purposes, the riskarising from the issuer of a particular security held by the bank. SeeGeneral risk.
SpeculationA deal undertaken because the dealer expects prices to move in hisfavor, as opposed to a hedge or arbitrage.
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SpotA deal to be settled on the customary value date for that particularmarket. In the foreign exchange market, this is for value in 2 workingdays’ time.
Spot-a-week(Or S/W). A transaction from spot until a week later.
Spot-next(Or S/N). A transaction from spot until the next working day.
SpreadThe difference between the bid and offer prices in a quotation.A strategy in which a particular instrument is purchased and asimilar instrument is sold, such as a futures spread, in which onefutures contract is purchased and another is sold.
SquareA position in which sales exactly match purchases, or in which assetsexactly match liabilities. See Long, Short.
Standard deviationA measure of how spread out a series of numbers is around its mean.
STIR futuresShort-term interest rate futures contract.
Stop-lossA price or rate which, if touched in the market, will trigger the closingof a position in order to avoid any further loss. See take proﬁt.
STPSee Straight-through processing.
Straight-through processing(Or STP). The computerization of operational tasks in such a way thateach process feeds automatically to the next.
StripA strip of FRAs is a series of FRAs covering consecutive periods, whichtogether create the effect of a longer-term instrument (for example,
Glossary
319
4 consecutive 3-month FRAs have an effect similar to a 1 year FRA).A strip of futures is similar.
SwapA foreign exchange swap is the purchase of one currency againstanother for delivery on one date, with a simultaneous sale to reversethe transaction on another value date.
SWIFTSociety for Worldwide Interbank Financial Transfers, the system forinternational payments between banks.
Synthetic agreement for forward exchange(or SAFE). A generic term for ERAs and FXAs.
System riskThe risk of losses due to failures in the bank’s computer systems.
Systemic riskThe risk of failure in the entire payment clearing system or bankingsystem of which the bank is a part.
T/NSee Tom-next.
TailThe exposure to interest rates over a forward-forward period arisingfrom a mismatched position (such as a 2-month borrowing against a3-month loan).A forward foreign exchange dealer’s exposure to spot movements.The extreme left- and right-hand ends of a probability distribution.
Take-proﬁtA price or rate which, if touched in the market, will trigger the closingof a position in order to ensure that an existing proﬁt is captured.See Stop-loss.
Technical analysis(Or charting). An approach to forecasting which considers only pastprice movements. See Fundamental forecasting.
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TenorThe tenor of a security is the length of time until its maturity.
TermThe time between the beginning and end of a deal or investment.
Term depositSame as ﬁxed deposit.
TickThe minimum allowed price movement on a futures contract.
Tick valueThe value of a one tick price change on one futures contract.
Time depositSame as ﬁxed deposit.
Time option(Or option forward). A forward currency deal in which the value dateis set to be within a period rather than on a particular day. Thecustomer sets the exact date 2 working days before settlement.
Time value of moneyThe concept that a future cashﬂow can be valued as the amount ofmoney which it is necessary to invest now in order to achieve thatcashﬂow in the future. See Present value, Future value.
Today–tomorrowSee Overnight.
Tom-next(Or T/N or rollover). A transaction from the next working day(‘tomorrow’) until the working day after (‘next’ day – i.e. spot in theforeign exchange market.)
Trading bookFor the purposes of capital adequacy, that part of a bank’s businesswhich broadly involves its trading department.
Transaction exposureThe risk to currency movements arising from a deﬁnite, or closelyforecast, transaction.
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321
Translation exposure(Or balance sheet exposure). The risk to currency movements arisingfrom an asset or liability on the balance sheet which is denominatedin a foreign currency.
Treasury billA short-term security issued by a government, generally with a zerocoupon.
True yieldThe yield which is equivalent to the quoted discount rate (for a USor UK treasury bill, for example).
Two-wayA two-way price includes both bid and offer sides of the price.
Under referenceIf a market-maker or his broker says that a price he has quotedis ‘‘under reference’’, he means that the price must be reconﬁrmedbefore a counterparty can deal on it.
UnderlyingThe underlying of a futures contract is the commodity or ﬁnancialinstrument on which the contract depends.
US-style repoSame as classic repo.
Value at risk(Or VaR). The maximum potential loss which an organization mightsuffer on its positions over a given time period, estimated within agiven conﬁdence level.
Value basisThe theoretical futures price, less the actual futures price.
Value date(Or settlement date or maturity date). The date on which a deal is tobe consummated.
VaRSee Value-at-risk.
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Variable currency(Or counter currency). Exchange rates are quoted in terms ofthe number of units of one currency (the variable or countercurrency) which corresponds to 1 unit of the other currency (thebase currency).
VarianceThe square of the standard deviation of a series of numbers.
Variance/covarianceA method of calculating VaR which applies assumed variances andcovariances to a probability distribution which is generally takenas normal. See Historic VaR, Monte Carlo simulation.
Variation marginSee Margin.
YardOne American billion – i.e. 1,000,000,000.
YieldThe interest rate which can be earned on an investment, currentlyquoted by the market or implied by the current market price forthe investment – as opposed to the coupon paid by an issuer on asecurity, which is based on the coupon rate and the face value.
Yield curveA graph showing the current interest rate for each maturity.
Yours‘‘I sell the base currency’’. For example, if someone who has askedfor and received a price says ‘‘5 yours!’’, he means ‘‘I sell 5 millionunits of the base currency’’. See Mine.
Zero-couponA zero-coupon security is one that does not pay a coupon. Its priceis correspondingly less to compensate for this.
IndexAcceptor, 34, 291Accrued coupon, 44, 291ACT/360, 9–11, 12, 291ACT/365, 9–11, 12, 291Adjustable peg system, 184, 291Appreciation, 292Arbitrage, 4, 26, 88, 145, 292covered interest arbitrage, 150,161–7, 283, 297Around par (A/P), 116, 292Back ofﬁce, 209, 292Backtesting, 224, 292Balance sheet exposure, 231Bank for International Settlements(BIS), 224, 294Bank risk management, 195–229business risk, 210–11capital adequacy requirements,224–9future developments, 229own funds, 225risk asset ratio, 224–5, 316risk-weighted assets, 225–9credit risk, 201–7, 298controls, 203–4netting, 204–7, 310fraud, 209legal and regulatory risk, 210market risk, 195–201, 308basis risk, 197–8controls, 199–201foreign exchange, 196gap analysis, 200–1interest rates, 196–7limits, 199–200liquidity risk, 198–9risk measurement, 199operational risk, 207–9, 312controls, 209
segregation of responsibilities, 209systemic risk, 210value at risk (VaR), 211–24, 321approaches, 219–22BIS recommendations, 223–4overview, 218–19problems with calculations, 222stress-testing, 222–3Bankers’ acceptance (BA), 34, 