Glossary of Terms

1. Secured lending.
An amount deducted from the current market value of an asset used as collateral, to calculate the maximum amount of a loan secured against that asset.

For example, if the market value of the asset were £100,000 and the haircut was 2%, the maximum amount of the related secured loan would be £98,000 (= £100,000 LESS 2%).

2.
The amount of a loss (or an expected loss) on asset, as a percentage of the total value of the asset.

For example in this context a 50% haircut on Greek debt of EUR 200bn means a loss of EUR 100bn (= 50%) and a recovery of EUR 100bn.

3.
A fee or commission, expressed as a percentage of the total value of the related transaction.

(HS).
Freefloat-adjusted market capitalisation-weighted stock market index in Hong Kong.

A market is generally said to be hard if prices in the market are rising.

A strong form of protection for lenders/investors in securities, against the potentially adverse effects of call risk.
Hard call protection is simply a ban on any unilateral early redemption of the security by the borrower/issuer.
The agreement of the lender/investor is required before any early redemption, on whatever terms the lender/investor insists on for early redemption.

A currency in which international investors generally have confidence.
Hard currencies are general expected to retain their value or to strengthen in value, relative to other weaker currencies.

Historically, hard currencies have included the euro, US dollar, Japanese yen, Swiss franc and British pound.

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

See Tax haven.

A chart pattern which approximates to the shape of a person's head and shoulders, implying a fall in share prices.

1. Borrowing facilities.
The undrawn amount of a borrowing facility at any time is known as the headroom under that facility.
Note that headroom is a term that can have more than one meaning and - here as elsewhere - it is important to be clear about the definition in its particular context.
(i) Often when treasurers talk about headroom, they mean the total amount of undrawn committed facilities.
(ii) Sometimes they include uncommitted facilities as well.
(iii) They take different views on whether or not they add cash balances to their headroom figure.

Total sources of liquidity need to be sufficient to meet the cash needs of an organisation, taking into account any uncertainty over future cash requirements. For this reason a headroom target should be set to provide flexibility and to ensure the Directors are able to certify their company as being a Going Concern (under IFRS accounting guidelines) at the end of each financial reporting period.

2. Equity.
An amount of authorised but unissued equity shares.

3. Borrowings documentation.
The difference between the current level of a financial covenant measure and the level at which the covenant would be breached.

4. Trading limits.
The difference between the current level of a trading position and the trading limit.

5.
More generally, any measure of financial or operational flexibility, or safety margin.

Total sources of liquidity need to be sufficient to meet the cash needs of an organisation, taking into account any uncertainty over future cash requirements.

For this reason a headroom target should be set to provide flexibility and to ensure the Directors are able to certify their company as being a Going Concern (under IFRS accounting guidelines) at the end of each financial reporting period.

The UK airport operator formerly known as BAA.

Hedging.

A system of incorporating a financial hedge into the accounting system.

Under International Financial Reporting Standards (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.

The degree to which changes in the fair value or cash flows of a hedged item that are attributable to the hedged risk are offset by changes in the fair value or cash flows of the related hedging instrument.
Also known as Hedge efficiency.

In a situation where a hedge is ineffective (or inefficient) the ineffectiveness may arise from:
1. Basis risk or basis differences; or
2. Differences between the quantum of (i) the hedged item and (ii) the hedging instrument.

Hedge effectiveness.

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.

1.
Traditionally hedging refers to the process whereby a firm uses financial instruments (such as forward contracts, futures contracts or options) or other techniques to reduce the impact of fluctuations in such factors as the market price of credit, foreign exchange rates, or commodity prices on its profits or corporate value.

2.
More recently the application of hedging techniques has been extended to the management of many other risks including for example inflation and longevity risk arising in pension funds.

Accounting - financial instruments.
(HFT).
Assets or liabilities acquired or incurred for the purpose of generating a profit from short-term fluctuations in prices.
Held for trading financial assets and fiancial liabilities are an example of ALFVs (financial assets or financial liabilities accounted for at fair value through profit or loss).

Accounting - financial instruments.
(HTM).
Financial assets with fixed or determinable payments and fixed maturity that the entity has the positive intent and ability to hold to maturity.

UK Tax.
(HMRC). The merged UK government department responsible for the assessment and collection of direct and indirect taxes.

HMRC also administers certain state benefits and enforces and administers other related legislation.

Previously it was separately constituted as the Inland Revenue (IR) and HM Customs & Excise (HMCE).

Continuous linked settlement.

Describing an approach to problem solving which emphasises practical experience rather than theoretical explanations.

Accounting - financial instruments.
Held for trading.

High frequency trading.

Harmonised Index of Consumer Prices.

(HFT.) Trading activities using sophisticated technological tools and computer algorithms that generate a large number of daily trades at very fast speeds. Typically at the end of the day there is no open position in the market.

Characteristics attributed to HFT are:

1. extraordinarily high speed using sophisticated computer programs for generating, routing, and executing orders;

2. use of co-location services and individual data feeds offered by exchanges and others to minimize network and other types of time delays;

3. very short time-frames for establishing and liquidating positions;

4. the submission of numerous orders that are cancelled shortly after submission;

5. ending the trading day in as flat a position as possible.

A bond with a sub-investment (speculative) grade credit rating at the time of issue.

This type of bond is used particularly to finance leveraged buy-outs and to pay higher yields to investors than bonds with higher ratings do. The term, therefore increasingly refers to financial instruments with speculative credit ratings.

Also known as Junk bond.

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.

Measures based on actual past data, rather than forecast future data.

For example the historic dividend yield is normally based on the most recent past dividend.
(As opposed to the prospective dividend yield which is normally based on the next forecast future dividend.)

Another example is the historic Price to earnings ratio (PER) which is normally based on the earnings for the most recent past period.
(As opposed to the prospective PER which is normally based on the projected earnings for the nearest future forecast period.)

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.

The foreign currency exchange rate in effect on the date when an asset or liability was acquired.

In Value at risk 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.

SWIFT currency code for the Hong Kong Dollar.

UK Tax.
Her Majesty's Revenue & Customs.

UK Tax.
Her Majesty's Customs & Excise.
The former UK government department which was responsible for the assessment and collection of indirect taxes.
Now merged with the former Inland Revenue in Her Majesty's Revenue & Customs.

UK Tax.
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.

Sometimes known as a 'holdco'.

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.

Banking services which a retail customer of a financial institution can access using a telephone (either fixed-line or mobile), a television set, a terminal or a personal computer.

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

Alternative spelling of Homogeneous.

A takeover is considered hostile if the target company's board rejects the offer and is resisted strongly by the targeted company, but the bidder continues to pursue it, or the bidder makes the offer without informing the target company's board beforehand.

Speculative bank deposits that are moved around the international money market to take advantage of interest rate and currency movements.

Hang Seng.

Hongkong and Shanghai Banking Corporation.

Accounting - financial instruments.
Held-to-maturity.

HyperText Markup Language.

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.

(html).
The predominant markup language for web pages.

(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.

A statistical test which measures whether there is sufficient evidence to reject the null hypothesis (at the chosen significance level) in favour of the alternate hypothesis.

Also known as Significance testing.