Glossary of Terms

Value-Added Bank.

Pensions.
The whole package of economic and demographic assumptions used in the preparation of an actuarial valuation.

The effective date for an actuarial valuation of a pension scheme.

1. Funds transfer.
The moment when funds cease to be useable to the originating party and instead become useable funds to the beneficiary in the sense that they can reduce overdraft balances, earn interest or can be withdrawn.

2. More generally, the term 'value' refers broadly to what something is worth. The value of something is related to - but not necessarily always the same as - its price.

(VaR). Value at risk analysis quantifies the risk of a position by estimating the maximum likely loss from changes in market prices, within a specified time period, with a specified level of confidence.

For example if weekly VaR is assessed as €250,000 at a 95% level of confidence, it means we are 95% confident that cumulative net losses for any one week will not exceed €250,000. So the probability that weekly losses will exceed €250,000 is 5%, according to the VaR assessment.

The specified time period is commonly the planned holding period, or else the time lag before the holder of the position could normally respond to close out their loss-making position.

1. The predetermined date on which settlement of a market deal is made - for example by an exchange of currencies - at the price or rate agreed on the deal date.

2. In relation to a bank account, the date on which value is recognised for the benefit of the account holder. This will commonly be later than the date on which funds were deposited into the account.

A technique employed by banks in some jurisdictions to obtain compensation for services provided to their customers.

An investment philosophy of buying shares or other assets which are currently trading cheaply in the market in comparison with their values determined by fundamental analysis of the underlying business.

1. Economics.
Opinions which evoke normative statements. For example, what should be done to reduce unemployment levels.

2. More loosely, any assessment incorporating non-numerical information to support a decision or conclusion.

(VAB). A bank that provides Value-added network (VAN) services for information related to payments as well as non-financial Electronic data interchange (EDI) services.

(VAN). A communications intermediary that provides various services to users of electronic commerce.

Value-Added Network.

Near enough the same as Plain vanilla.

Value at Risk.

1. Broadly, the same as volatility.

2. More specifically, volatility as measured by the standard deviation.

A cost which increases as the level of production (or other activity) increases, because it is incurred as a consequence of the production or other activity.

The variable currency in a foreign exchange quotation is the currency which there is a variable number of.
For example in the quotation 1 GBP = 1.4600 USD, the variable currency is USD; meaning the variable number 1.4600 US dollars is exchanged for one British pound.

Also known as the Terms currency.

1. A statistical measure of the spread of given data around their mean.
The greater the variance, the greater the spread. The variance is calculated from the mean as the average of the squared differences of each data point from the mean.
Sampling may be used to estimate the variance of an underlying parent population from the variance of a sample selected from the parent population. The estimated variance of the parent population is greater than the variance of the sample by a factor of n/[n-1]
(where n = the number of items in the sample).

2. More generally, the degree of variability in an item, especially the degree of variabilty over time.
Variance in this wider sense may be quantified in a number of different ways (which can include the stricter statistical measure of variance, as defined in 1. above).

3. More generally still, any difference, especially a difference between two related financial variables.
For example in management accounting, the difference between the actual cost of an item and the budgeted cost.

Near enough the same as Delta-normal method.

In futures markets, an amount payable by a 'losing' market participant, to protect other participants in the market against the risk of a default.
If the market price were subsequently to change in favour of the participant, the variation margin would be refunded.

Value Added Tax.
A tax added to the price of most goods and services in the European Union.

A group of companies which can provide goods and services to one another without accounting for VAT on the transactions.

VAT.
The form which must be sent to Her Majesty's Revenue & Customs (HMRC) normally on a quarterly basis.

UK Tax.
Venture Capital Trust.

Options analysis.
The rate of change of an option’s value with respect to changes in the volatility of the returns on the underlying asset. The first derivative of option value with respect to the underlying asset's volatility.

Also known as Epsilon, Kappa or Tau.

The hedging of an option position against changes in the volatility of the market price of the underlying asset.
A vega hedge is established by buying or selling an appropriate amount of another derivative instrument, for example other options.

A vega neutral option position is one which is fully hedged against changes in the volatility of the market price of the underlying asset.

Company law.
A term used to describe the distinction between a company as a separate legal person and its shareholders.

The allotment of shares as consideration to the vendor, usually the vendor of a business.
The placing is usually accompanied by an agreement for the vendor to sell the allotted shares thereby leaving the vendor with cash.

Capital supplied (by venture capitalists) as high risk equity investment with the expectation of a high return commensurate with the risk taken.
Typically, if the investment is unsuccessful, all of the investment will be lost.

Pensions.
The process by which members of a Defined Benefit pension scheme become entitled to benefits whether or not they remain an active member of the scheme.

The report of the UK's Independent Commission on Banking, named after the Commission's chairman Sir John Vickers.

The report's main recommendations include the identification - and partial separation - of:
(i) Retail banking (including retail deposit taking and small business lending); and
(ii) Riskier trading activities in the capital markets (sometimes also known as investment banking).

The partial separation proposed in the report would be implemented by a "ringfencing" structure within the large banks currently undertaking both types of activity.
Under the ringfencing proposals the capital and the stability of the retail banks would be protected from the claims of creditors of the banks' riskier trading activities. The intention of the proposals is that the retail banks should not require public (taxpayer) rescue again, following any future failures of banks' riskier trading activities.

In simple terms the proposals - if effective - would prevent banks from speculating with retail deposits (and from jeopardising their future ability to make small and medium-sized business loans).

The proposals of the Vickers Report are more moderate than a full separation of ownership (as required - for example - under the former US Glass-Steagall Act).

Economics.
The net of imports and exports of goods reported in the balance of payments.

A volatility index calculated and published by the Chicago Board Options Exchange.
It provides a measure of average market expectations about the size - but not the direction - of future changes in stock prices.
It is calculated as the average implied volatility in the prices of options over the S&P 500 index.

An invalid contract.

A contract that may be rejected by either of the parties.

1.
The degree of variability of any financial or other variable over time.
For example an asset price, a foreign exchange rate, or a periodic rate of return.
It is often quantified as the annualised standard deviation of the variable.

2.
In relation to bond price sensitivity (to changes in market yields) volatility means the same as modified duration.

3.
In relation to options, volatility refers to the expected variability of the returns from investing in the underlying asset at its prevailing market price, over the remaining maturity of the option.

This is sometimes known as the underlying volatility or the underlying asset volatility.

By convention, volatility in the context of options valuation is quantified as the annualised standard deviation of the natural logs of [1 + periodic return] for the number of periods for which the return is considered.

In relation to options, volatility of the underlying asset price can be estimated from:
(i) Historical underlying asset price data, or
(ii) As implied volatility in the current market price of the option, if all of the other drivers of the current market price of the option (including the risk-free rate of return) are known.

An index designed to provide a measure of average market expectations about the size - but not the direction - of future changes in market prices.

Sometimes known as a 'fear index', because the greater the collective fear of market participants, the greater the volatility of related market prices.

A view that the probabilities of very large market movements - positive or negative - are greater than predicted by a simple random walk model of market prices.
In other words, the view that market shows trending behaviour in relation to large market movements: 'Both panic and over-exuberance are contagious'.

This view is reflected in deeply out-of-the money options having greater implied volatilities (calculated from their greater traded values) than at-the-money options.

This view is also a potential explanation for leptokurtic frequency distributions.

Members of the company decide to put the company into liquidation.

Correspondent banking.
Vostro account.

An account held by a domestic bank on behalf of a (different) foreign bank, when the account balance stands in favour of the foreign bank.
The term 'vostro' is derived from Latin, meaning 'in your favour'.

Also known as a Loro account.