Glossary of Terms

A currency in which international investors generally have confidence.
For example the euro, US dollar, Japanese yen, Swiss franc or British pound.

(HICP). HICP measures were originally developed in the EU to allow the European central bank to monitor inflation across EU countries.

See Hedging.

A system of incorporating a financial hedge into the accounting system. Under IFRS a hedge and the underlying transaction being hedged are accounted for separately. Hedge accounting ensures that both items receive similar accounting treatment. There are qualifications that must be satisfied in order that hedge accounting may be used, for example that the hedge can be shown to be effective.

A higher risk investment fund generally characterised by taking short positions as well as long positions.

The proportion of a hedging instrument required to hedge an underlying position, compared with the amount of the underlying position itself. So if four options are required to hedge a position of one unit of the underlying asset, the hedge ratio = ¼ = 0.25.

The process whereby a firm uses financial instruments (such as forward contracts or futures contracts) or other techniques to reduce the impact of fluctuations in the price of credit, foreign exchange, or commodities on its profits or corporate value.

(HMRC). The merged UK government department responsible for the collection of direct and indirect taxes. Previously the separately constituted Inland Revenue (IR) and HM Customs & Excise (HMCE).

Abbreviation for Harmonised Index of Consumer Prices.

Hire purchase is similar to a finance lease except that it contains a provision giving the hirer an option to acquire legal title to the asset (once certain contract provisions are fulfilled).
A mechanism for gaining the benefits of owning an asset without paying the whole of the purchase price at the outset, but over a period of time.

Statistics. A bar diagram that illustrates a frequency distribution, each bar is drawn so that its area is proportioned to the number of items in the interval it represents.

The usual basis of valuation in published financial statements, based on the orginal cost of assets to the reporting entity. Generally favoured because historical cost is an objective measure which can be relatively easily verified, for example by an auditor. The use of historical cost accounting can however be challenged on conceptual grounds, especially in times of high inflation.

In VaR analysis, a simplified variation of the Historical simulation method. For all practical purposes, the historical simulation method is to be preferred.

In Value at Risk analysis, an alternative to the Delta-normal method of calculating the underlying probability distribution.

This is conceptually the simplest alternative method to the delta-normal. There is no assumption about how markets operate. For any given portfolio held today, you calculate repeatedly its hypothetical value change as if it had been held for a one day period in the past, using the relevant market price changes and other market rate changes for each successive day.
At each step, you do a full valuation and calculate the ex-post or historical value changes over one day.
Finally, tabulate the empirical distribution of one-day value changes and identify the lower 95% point. This point is the one-day 95% VaR.

Her Majesty's Revenue and Customs.

See Her Majesty's Revenue & Customs.

Abbreviation for Her Majesty’s Revenue & Customs.

A person who has acquired possession of a negotiable instrument through proper negotiation for value, in good faith, and without notice of any defects to it.

A company that owns or controls others. In the narrow use of the expression, it also implies that the company does not actively trade itself but operates through various trading subsidiaries.

The total net return to an investor over a given holding period, taking account both of income from the investment and of any gains or losses in its capital value.

A homogeneous product has no distinguishing features, meaning that a consumer's preference is driven purely by price.

Same as Homogeneous.

Abbreviation for HyperText Markup Language.

Abbreviation for Hypertext Transfer Protocol, Secure.

The rate of return, normally the company's weighted average cost of capital, used for determining the viability of an investment or project.

A term used to describe a financial instrument which displays characteristics of both debt and equity. Such instruments might be designed to be an intermediate (or mezzanine) category of capital between equity and debt, or to have some of the risk absorbing characteristics of equity and, ideally, the tax efficiency of debt.

Either a pension scheme that offers both defined benefit and defined contribution elements, or a scheme that provides a benefit calculated as the better of two alternatives (for example on a defined benefit or defined contribution basis). Schemes of this type were once common in Australia.

(HTTPS). A protocol which provides a secure connection for transferring for documents over the web. HTTPS combines a normal HTTP interaction but with an additional encryption/authentication layer over an encrypted Secure Sockets Layer (SSL) or Transport Layer Security (TLS). HTTPS is widely used on the World Wide Web for security-sensitive communications such as payment transactions and corporate logons.