Glossary

0

2-week repo rate: Official interest rate set by the CNB. This is the rate at which banks borrow from the CNB. All other interest rates in the economy are derived from it. When the 2-week repo rate changes, all other interest rates will follow its lead in the same direction (including bank end interest rates for clients.)

A

Account churning: .
Forbidden conduct for a securities trader, who, when supplying investment services undertakes (unnecessary) transactions with the obvious aim to generate provision for the trader.
Account manager: Client service employee. A bank or other financial institution employee responsible for liaising with a particular client
Accrued Interest: Bonds are usually bought and sold in the period between the payment of two coupons. If, for instance, a bond is sold right in the middle of the period between the payment of the coupon, then the original owner – seller – becomes eligible to claim half of the next coupon. This accumulated claim is called accrued interest. Therefore, with the sale of a bond, the buyer pays not only the price, but also the relevant accrued interest.
Acquis communautaire: The accumulative legislation of the European member countries, which has been created and amended since the beginning of the European Union. Harmonising national legislations with acquis communautaire is one of the conditions for the entry into the European Union.
Acquisition: The taking over of a company by another company. Usually, the acquiring company becomes the successor company

Active employment policy: A summary of measures from state institutions (Ministry of Labour and Social Affairs and the unemployment office) directed at attaining maximum possible level of employment. This includes, for instance re-training, support for employing disabled persons, international programmes for employment, etc. By contrast, not included is unemployment benefits (= passive policy).
Active investment strategy: The effort to attain above-average yields for the price of undertaking above-average risk (i.e. undertaking high risk). We actively manage our investments, rebalancing our investment portfolio in such a way as to achieve higher yields.
ADR: See ‘American Depositary Receipts’.
Agent: A natural person, through whom a securities trader conducts business. He has to have expertise. He represents a securities trader, i.e. he conducts business on his behalf and on his account.
Aggressive investment strategy: The attempt to attain above-average returns whilst undertaking above-average risk (i.e. running a high risk of loss)
Alpha: Financial indicator used in the CAPM (Capital Asset Pricing Model). It represents the level of the non-systematic risk, or risk that is specific to the characteristics of a particular security (or other investment). This risk might be eliminated with an appropriate diversification of investments. However, as a rule, high risk also brings the possibility of higher return.

American auction: A form of auction, when auction participants submit their price bids and once the time limit has expired, the auction manager will designate a single price based on the evaluation of submitted offers, for which the subject of the auction (e.g. securities) is sold to interested parties. Dutch auction yields are usually lower than in the case of an American auction.
American Depository Receipts: (American Depository Receipt- ADR). It belongs to group of the securities termed GDR (see ‘Global Depository Receipts’), however these particular GDR are traded on the American market only.
American option: Option, which gives the option buyer the right to exercise the option with the seller at any point during its life prior to its maturity. By contrast, a European option offers this right only at the moment of the option’s maturity. For a further explanation on ‘option’, please see relevant entry.
Amortization: Used assets in monetary terms.
Annual Percentage Rate: (APR) It reflects the total cost of a loan, including fees, interest rates, the insurance of a property (if needed), life insurance (if needed), etc.
Annuity: The realisation of several identical payments (coupons) in a row.
APR: (Annual Percentage Rate) It reflects the total cost of a loan, including fees, interest rates, the insurance of a property (if needed), life insurance (if needed), etc.

Arbitrage: Process, which ensures that two securities or other investments, which carry the same risk, will be sold for the same price. If a security is sold on Market A for a price lower than on Market B, then it is expected that a number of investors will notice this and will buy the particular security on Market A (the higher demand will raise its price) and immediately sell it on Market B (higher demand will lower its price). The arbitrage will continue until prices are balanced. The possibility of arbitrage in today’s financial world is very rare and if allowed, it suggests low efficiency of the financial market.
Asset allocation: The distribution of assets (by which we mean investments) amongst individual investment instruments.
Assets: A financial and an accounting term for any item with economic value and which can be accounted for, recorded, valued and is owned by a natural person or legal entity
Auction: The most common form of government securities sale to interested parties. The Ministry of Finance will put government securities on sale through its executive agent (usually the central bank), mainly to financial institutions, which might retain them or subsequently sell them on to their clients. It might take the form of a Dutch or an American auction.

B

Back office: A department in a financial institution, which is responsible for processing, settlement and other administration of trades.
Balance of payment: The statistics record of all monetary flows into and out of a particular country. If there are more financial resources flowing into rather than out of the country, the currency of that particular country has a tendency to appreciate and vice versa.
Balance of payment capital account: Balance of payment, which is the statistical measure of all monetary flows into and out of a particular country, is separated into current and capital accounts. The current account deals mainly with monetary flows associated with the movement of goods, services and some other minor items (like transfers). The capital account deals mainly with monetary flows associated with the movement of capital (direct foreign investments, portfolio investments, etc). It is typical for the Czech Republic that the current account is in deficit over the long term, whilst the capital account is in surplus. If the capital account surplus is larger than the current account deficit, the crown has a tendency to appreciate and vice versa.
Balance of payment current account: Balance of payment, which is the statistical measure of all monetary flows into and out of a particular country, is separated into current and capital accounts. The current account deals mainly with monetary flows associated with the movement of goods, services and some other minor items (like transfers). The capital account deals mainly with monetary flows associated with the movement of capital (e.g. direct foreign investments, portfolio investments, etc). It is typical for the Czech Republic that the current account is in deficit over the long term, whilst the capital account is in surplus. If the capital account surplus is larger than the current account deficit, the crown has a tendency to appreciate and vice versa.
Balance of trade: The same as foreign trade balance. The balance of payment of a country is divided into current account and capital account. Current account is further divided into trade balance (foreign trade balance) and other items (such as services balance, transfers., etc.).
Balance sheet: Accounting statement of assets and the sources of their financing
Balance sheet total: The sum of all assets or the sum of all liabilities of a company, as listed in the balance sheet.
Balanced fund: See ‘Mixed fund‘.

Bank board: The highest executive body of a central bank, which makes decisions on operations, but mainly on the monetary policy of the central bank. Voting is usually undertaken on the basis of simple majority. The Czech National Bank’s board has seven members and the members are appointed by the president based on his own independent choice.
Barrel: A unit of volume used mainly with regard to oil. 1 barrel = 158.97 litres.
Basis point: The differential between hundredths of a percent, e.g. the differential between 3.20% and 3.25% is 5 basis points (not 5 hundredths of a percent).
Bear: An investor (especially on the stock market), who speculates on a price decline.
Bear market: Falling market. The term is used particularly in association with stocks.
Bearer shares: Shares issued without the registration of ownership for a particular person. The issuer will pay dividend to an owner on the basis of producing the share, rather than to a particular person.
Benchmark: Generally well-known price index or security, which is considered to be the average and typical representative of the market and which serves for other similar investments to measure against.
Beta: Financial indicator used in the CAPM (Capital Asset Pricing Model). It represents the level of the systematic risk, or the risk reflected in the characteristics of the whole market, not only of one particular security. For instance, emerging markets are traditionally considered to present more risk than developed markets, because there we expose ourselves to the risk of changeable legislation, etc. Therefore, it is not possible to avoid this risk when investing on the relevant market. However, high risk also brings the possibility of higher yields.
Bias: A term, which suggests a “deviation from” or “leaning towards” an opinion. Usually used in association with the central bank’s monetary policy and with the estimated future direction of this monetary policy.
Bid-ask spread: The spread between buying and selling. The differential between the bidding price at the time of purchase and the asking price at the time of sale of a financial asset (stock, rate, bank deposit, etc). The transaction is viewed from the stronger party’s point of view, so for instance in the relationship between bank and client, the buying and selling is understood from the bank’s perspective.

BIS: Bank for International Settlement, i.e. Bank for international clearing based in Basel.
Black economy: The untaxed part of the economy, which is also outside the boundaries of law.
Block trade: Market trading of large volumes of a single security.
Blue chips: The most liquid and best quality shares on the market. In the Czech Republic, the shares traded in the SPAD system on the Prague Exchange can be considered to be blue chips.
Bond: (Obligation) A security. By issuing and the sale of bonds, an issuer borrows money from bond buyers (creditors) in the amount of the bond’s price. With the purchase of a bond, the owner becomes eligible for a regular, usually annual payment of a certain amount (coupon) and the return of principal at the maturity of the bond. They are usually issued with maturities between 1 year and 50 years.
Bond: The same as obligation. It can be issued by the government, municipality or companies. Usually it is an investment instrument, which carries less risk than stocks.
Bond coupon: The issuer (government, company, municipality, etc.) will issue a bond with a certain nominal value, e.g. 10 000 CZK. It then is liable to repay this nominal value to the bond purchaser (investor) at the due date of the bond, which is usually several years (e.g. 5 years). Furthermore, the issuer is liable to pay the bond purchaser regular (usually annual) interest payments, which are known as coupons (e.g. 6% of the nominal value = 600 CZK). If the investor holds the bond to its maturity and if the issuer does not default in the meantime, the investor is guaranteed to be paid all coupons as well as the nominal value (so for 5 years he/she will get 600 CZK as a coupon and then will receive 10 000 CZK as the nominal value, i.e. overall 13 000 CZK). Please note, a coupon is different from a bond yield ( see ‘bond yield’)
Bond fund: A mutual or investment fund focused above all (but not exclusively) on investments in publicly traded bonds. It is a medium risk, as well as medium yielding investment.
Bond price: The issuer sells its bond to investors and takes on the obligation to pay the coupon every year and the nominal value when it reaches maturity. So it is clearly outlined what will be the income for investor from holding a bond. The investor will pay the issuer a certain price, which is derived from the current situation on the market environment. If demand is low, the price will be low and if demand is high, the price will also be high. When we compare how much an investor invested in the investment (the purchase price) and what will be the return (all the coupons plus nominal value), we will find what will the will be the percentage return on this bond investment (= bond yield). The less an investor pays initially for the bond purchase (the lower the price), the higher the percentage he/she will gain on the investment (the higher the yield). That is why when bond prices fall, their yields rise and vice versa.

Bond yield: An issuer sells its bond to an investor and falls under the obligation to pay him/her a coupon every year, plus the nominal value at its maturity. Thus, the income which the investor will obtain from holding a bond is exactly known. The investor pays the issuer a certain price for this bond. When we compare how much the investor paid for the investment (the purchase price) and what the returns will be (all coupons plus the nominal value), we will find out the percentage return from this investment into the bond (= bond yield). The less an investor pays initially for the purchase of the bond (the lower the price), the higher percentage return the investment will provide (i.e. the higher the yield). Thus, when bond prices fall, their yields increase and vice versa.
Book value: The value of a company’s equity.
Boom: The height of an economic cycle, when GDP rate growth attains highest levels.
Bps: An abbreviation for basis points. See ‘basis points’.
Breaking of levels: If a rate is falling/rising, it might occasionally stop at a certain level, which is significant for some psychological reason. It could be, for instance an all-time low, the level of the exchange rate where the central bank has previously intervened, or some “round level”, such as the exchange rate of 1 EUR = 1 USD, a price of stock for a 100 Czech crowns, etc. Usually, the rate fall/growth stops here, because due to psychological reasons, it is difficult to break this level. However, if the price does break this level, we speak about the breaking of a barrier. However, in order for the price movement to be considered barrier breaking, the rate has to move notably beyond the given level, or at least remain beyond it for a considerable time (with liquid currency pairs it must be at least a number of hours).
Broker: A natural person or a legal entity trading under its own name on the behalf of another party (as opposed to an agent or a dealer).
Bubble: See ‘Price bubble‘
Bull: An investor (especially on the stock market), who speculates on the growth of prices.
Bull market: A growing market. The term is used especially in association with stocks.
Bund: German government bond. The prices of Czech government bonds have a highly positive correlation to the price movement of bunds; therefore, it makes sense to track the development of bunds when forecasting the movement in prices of Czech bonds.
Buy / sell - back: See ‘Reverse Repo Operations’

C

Call option: A type of financial derivative. The call option owner has the right, but not the obligation, to buy some underlying asset. The counter-party is obligated to abide by his/her decisions. The call option owner pays the other party an option premium for the right.
Cap: A type of financial derivative based on the linking of several options in terms of its structure. From the buyer’s perspective, the objective of buying a cap is to ensure a ceiling for interest rates on a variable rate loan; the price for this security is the option premium paid by the cap buyer. The cap seller speculates to gain from the option premium.
Capital appreciation: An increase in the market price of an investment.
Capital gain: The differential between the market value of an investment (asset) and its initial purchase price.
Capital market: Part of the financial market, on which only instruments with a maturity greater than one year are traded.
Capital surplus: The differential between the issuing price of a stock and its nominal value (if the nominal value is higher, it is called disagio)
CAPM: (Capital Asset Pricing Model). It attempts to quantify and define the level of ratio between the level of risk and the potential yields (the higher the yield, the higher the risk).
Carry trades: Speculative trades conducted on the forex market. Speculators will borrow Currency A, which has a low interest rate. Instantly, they will exchange it for Currency B, which either has a high interest or is strengthening against most of the world’s currencies. (Currency A will weaken and Currency B will strengthen as a side effect). The speculator hopes that by holding Currency B, he/she will receive a high rate of interest or will gain from the exchange rate appreciation. After some time (usually several weeks or months), the speculator will end his speculation, exchange Currency B back for Currency A and will pay off the initial loan. (As a side effect, this will result in the appreciation of Currency A and weakening of Currency B). With a successful speculation, the yields of holding Currency B will be higher than the costs for the loan in Currency A. Low-interest Currency A is sometimes also called a reserve currency. The Czech crown is often the reserve currency.

Cartel: An informal and illegal grouping of companies, whose aim is to obtain advantages through anti-competitive practices (usually includes an agreement on a common pricing policy). The most prominent legal cartel is the oil exporting countries group OPEC.
Cash flow: The differential between inflow and outflow of cash resources (therefore not between revenues and costs, which are the bases for double-entry bookkeeping obligatory for legal entities).
CEO: (Chief Executive Officer).The highest ranking person in a company with executive power (Executive Manager/General Manager).
CFO: (Chief Financial Officer). The highest ranking person in company responsible for financial matters (Financial Director).
Clearing bank: A bank, which has a clearing account with the clearing department of the central bank, through which the non-banking members of the exchange execute the monetary settlement of securities.
Clearing house: A centre organized by the exchange, which physically settles negotiated securities trades. In the Czech Republic, it is the Univyc.
Click fund: (= guaranteed fund) A fund (mutual, investment), which guarantees that its net asset value (i.e. the participation certificate price) will not fall below a certain specified level, it can only be higher. However, this is usually compensated for by the fact that the price growth cannot be higher than a specified %. (So, as a rule, the price movement options are limited in both directions). It is suitable for conservative investors with a higher risk aversion. This guarantee is achieved by an appropriate combination of option strategies, or possibly with an investment in bonds held to maturity.
Closed fund: Mutual or investment fund, which issues a certain number of participation certificates (for mutual funds) or stocks (for investment funds), which are traded on the secondary market at their market price. The fund is not obliged to buy these securities back from investors. If the holder of such a security does not find a corresponding buyer for the security, it cannot exit the fund. The market price can be either above or below the market price of the corresponding participation of the fund portfolio.

CNB: Czech National (central) Bank
Collar: Contractual fixing of the maximum and minimum rate of interest for a floating interest rate. A collar is a linking of two financial instruments: cap and floor (see relevant entries).
Collateral: A pledge in the form of a security with high credit worthiness (most often a government bond), which is used with Buy/sell – back a Sell / buy back operations.
Collective investments: Depositing savings for investment with a professional administrator who receives money from a wide number of investors. The advantage lies in lowering risk when depositing savings with a professional facility, as well as investing in fields, where, under normal circumstances, an individual could not invest in, due to the small volume of his/her savings.
Commodity fund: Mutual or investment fund focused mainly on investment in commodities. It is one of the more risky, but potentially also high-yielding investments.
Communal bond: A bond issued by a municipality or other autonomous body.
Consumer Price Index: The index measures the rate of consumer inflation, which means the rate of price growth in the retail sector. it is known as CPI.
COO: (Chief Operating Officer). The highest ranking person in company responsible for operations (Operations Director).
Correction: The negation of a previous trend (in relation to the price of a stock, bond, currency, interest rate, etc.). We usually speak about a correction, when the turnaround of a trend is related to “a return to the correct levels”. However, it is often debatable whether it is possible to establish what such a correct level should be.

Coupon rate: The size of the bond coupon (see ‘entry bond coupon’), expressed as a percentage of the nominal value of the bond.
CPI: Consumer Price Index. An index that measures the level of consumer inflation, or the rate of retail price growth.
Crash: A dramatically rapid and sharp decline in prices on the market, usually following a period of very optimistic expectations and price growth.
Currency board: A special mode of foreign exchange rate management, when the exchange rate of a Currency A is pegged to the reference Currency B (e.g. the euro or the dollar). Currency A is exchanged for Currency B for a fixed rate. The exchange rate of Currency A moves against other currencies in absolutely the same way as the exchange rate of Currency B. (If the reference Currency B appreciates against the dollar, Currency A also appreciates against the dollar.) Forex operations with the currency are directly reflected in forex reserves of the country.
Currency policy: The same as monetary policy. The policy of the central bank with which the central bank influences the economy. Usually, the central bank tries to keep inflation low; sometimes it tries to influence the foreign exchange rate or economic growth. It uses instruments, such as the setting of official interest rates, intervention on the foreign exchange market and other measures.
Custodian: Client asset administrator.
Custody transaction: The transaction executed by the asset administrator of a particular client, in the name of this administrator and into the account of the particular client.

D

DAX: The main German stock index. It comes in several variants, e.g. as MDAX for medium-sized businesses, SDAX for small businesses or DAX 30 for the top 30 biggest companies.
Dealer: Natural person or legal entity, trading under its own name and on its own behalf (as opposed to an agent or a broker).
Debiting: Deducting money from the customer’s account.
Deflation: The opposite of inflation – a general decline in price levels. (retail prices fall constantly). Deflation is usually harmful if it continues for a long time.
Delta: A measure used in the pricing of options according to the Black-Scholes model. It shows the relationship between the option value and the change in price of underlying assets.
Depositary: A company (usually a bank), which oversees the administrator of a mutual or other fund, ensuring the administrator conducts trading with the fund’s assets in accordance with the law, as well as the pricing of these assets, observing limits for investments as outlined by the law, etc. (Fund’s assets are usually in the form of securities).
Depression: A type of deep economic recession (see the term ‘recession’), when the GDP falls by at least 10%. From a historical perspective, depressions are not that common; however, a classic example of a depression was the 1929 – 1933 depression in the USA, when GDP plummeted by nearly 33%.

Derivative: A financial instrument, which enables hedging of certain financial risks (e.g. a change in the forex rate, interest rates, etc.), or, by contrast, speculation. As a rule, all derivatives are based on the principle that the transaction and price is agreed today, however it will physically take place only later (at a previously agreed price, disregarding the fact that the current market price, at the time of the fulfilment might be different). We recognize derivatives such as forwards, futures, swaps, options and some other, more advanced instruments. As hedging instruments, derivatives are suitable for legal entities, as well as financial institutions. Derivative as a speculation is suitable for very experienced investors only.
Derivative fund: A mutual or investment fund focused above all (but not exclusively) on investments in financial derivatives (forwards, swaps, options, futures). It carries high risk, but is potentially very high yielding.
Direct taxes: Taxes associated with income and assets The higher the income of a an entity, the higher the taxes it pays, disregarding the fact how high is the consumption. It is, for instance, the income tax of a legal entity or a natural person or property tax.
Disagio: This is the term for a capital surplus (i.e. the differential between the issuing price of a stock and its face value) in a situation, when the face value is higher than the issuing price.
Discount: A discount on nominal value.

Discount bond: A situation, when market price of the bond is lower than its nominal value.
Diversification: Distribution (of investments) among different markets, countries, securities, etc. Thus decreasing the risk we are exposed to. The fact is we may presume that for instance a price fall of one investment may be compensated for by a price growth in another investment.
Dividend: A share of profit paid to shareholders by a joint-stock company.
Dividend fund: (= pension fund). A mutual or investment fund, which pays out profits with dividends and as such does not re-invest the profits. It is suitable for investors who prefer a regular income. Investors are responsible for recording the dividends for tax purposes.
Dividend yield: A dividend yield = (net dividends + tax) / (number of shares * their market price) = gross dividends / market capitalisation of company.
DJIA: (Dow Jones Industrial Average). The most well known global stock index founded as early as in the 19th century. Today, it lists the 30 most important companies in the USA.
Domestic fund: Mutual or investment fund focused on investments (mostly into securities) of the domestic market. Levels of risk and potential yields depend particularly on the type of investment instruments in which investments are made (stocks, bonds, money market, etc.). The advantage lies in the absence of exchange rate risk which stems from a possible investment in territory with other than local currency.

Dove: A central banker who prefers economic growth over low inflation. In practice, this usually demonstrates a preference for lower interest rates than the so-called hawks would prefer.
Dow Jones Industrial Average: (DJIA)The most well known global stock index was founded as early as in the 19th century. Today, it lists the 30 most important companies in the USA.
Dual listing: Trading with a single stock issue on several markets at once.
Due diligence: A very thorough review of a company with regard to accounts, as well as from the legal perspective. As a rule, it is undertaken at the issuance of new securities or at the acquisition of a company.
Duration: The average payback period to break even on an investment. The longer the duration (the higher the average payback period of the deposited funds), usually the higher the volatility of the particular financial instrument‘s price, therefore a higher risk carried by such an investment. This term is usually used with regard to bonds.
Dutch auction: A form of an auction, where the participants submit their price bids and after the time limit has run up, the auction manager will line up the submitted bids from the highest price to the lowest. The subject of the auction (e.g. securities) is subsequently sold to those parties which bid the highest price, for the exact prices bid. The yields from an American auction are usually higher than those in a Dutch auction.
DVP: (Delivery Versus Payment). Transfer of securities. The transfer consists of two operations: the transfer of funds and the transfer of securities. The opposite is FOP.

E

EBIT: (Earnings Before Interest and Taxes) Operational profit.
EBITDA: (Earnings Before Interest, Taxes, Depreciation and Amortization).
EBT: (Earnings Before Tax). Gross profit.
ECB: European central bank, the central bank of the eurozone. It is based in Frankurt.
Elasticity: The degree to which a particular (economic) variable reacts to a 1%change in another economic variable. The most typical example of elasticity is the price elasticity of demand, i.e. the level of sensitivity to consumer demand for certain goods to a 1% change in their prices. A wide variety of other economic elasticities are also tracked.
Emerging markets: A general term for the “newly developing” markets or economies. As a rule, these are the financial markets of countries which do not have a long history and have therefore not managed to fully develop to the degree of the Anglo-Saxon countries or the countries of Western Europe. This more recent development often carries the risk of more frequently changing laws, increased price volatility, etc., which is compensated for by higher returns when investing on these markets.

EONIA: (Euro OverNight Index Average) An interest rate with maturity date on the following day. It is computed as a weighted average of interbank interest rates with overnight maturity in the eurozone, quoted by banks included in the contributing panel. Similar to EURIBOR, it is a benchmark interest rate. (However, EURIBOR is set for maturities starting from one week).
EPS: (Earnings per share). The earnings of a company per share.
Equity: Common stock, which is the most widespread and which does not have any precedence rights when distributing profit (dividends).
Equity: An accounting term; the total of capital, retained earnings and current earnings.
Equity fund: A mutual or investment fund focused above all (but not exclusively) on investments in publicly traded stocks. One of the riskier, but potentially higher yielding ones.
Equity risk: The risk of a change in the price of equities. That means it is a risk of decline, as well as potential for price growth.
ERM II: An exchange rate mechanism. Before joining the eurozone, every country needs to remain in this mechanism for at least 2 years. The central parity or central rate is defined within the ERM II. The exchange rate may fluctuate around the central parity by +/- 15% (or some other percentage, if the particular party agrees on this with other authorities in the eurozone). The objective is to ensure relative stability of the foreign exchange rate of a candidate country before joining the eurozone.

EURIBID: (Euro Interbank Bid Rate) is an informal term for the counterpart to EURIBOR. It is the average interest rate, at which banks bid for loans in euros from other banks on the interbank money market (i.e. at which they are willing to borrow). Whilst EURIBOR is officially set as a reference rate by the European Central Bank, EURIBID does not officially exist and is only used informally.
Euribor: (Euro Interbank Offered Rate). It is a reference interest rate based on the average of interest rates, which banks offer loans in euros to other banks on the interbank money market. EURIBOR is used as a benchmark or reference rate, similar to e.g. LIBOR for deposits in the USD or GBP, or such as PRIBOR for deposits in the CZK. It is set daily at 11: 00 a.m. by the European Central Bank. It is set for maturities between 1 week and 1 year.
European option: An option, which gives the buyer the right to request the option seller to exercise the option only upon the option’s maturity. By contrast, an American option gives this right anytime during the life option until maturity. For a more detailed explanation of the term ‘option’, please see relevant entry.
European system for central banks: The European Central Bank (ECB) plus the national central banks of the European Union member states.
Euro system: The European Central Bank (ECB) plus other national central banks of the eurozone member states.

Eurozone: The territory of the member states of the European Union, which adopted euro as their common currency.
EVA: (Economic Value Added). An indicator measuring the financial performance of a company.
Exchange rate risk: The risk of losses due to changes in exchange rates. For instance, a company from the EU exports goods to the USA and is paid in dollars. It must then exchange the dollars for its domestic currency euros. In the event of the euro against the dollar rate being quite volatile, the company is running the danger that it will receive a different amount of euros for its dollars. In the case of the euro’s weakening, the company will get more euros for its dollars. As the euro appreciates, the company receives less and less euros. Exchange rate risk can be hedged through financial derivatives.
Expansionary policy: The policy of a central bank (monetary) or a government (fiscal), which usually leads to increased economic growth, reducing unemployment and increasing inflation. It is usually accompanied by interest rate cuts or a rise in state budget deficit

factoring: Short-term financing of a company through the sale of receivables to a third party (factoring company). The factoring company accepts all risks associated with the receivables and their collection.
Fair value: “The right value”, an objective value, fair price. It is rather a theoretical structure; fair value cannot be calculated very precisely. Hypothetically, in the case of perfect competition, it would equal the market price. In the real world, it is not directly observable on the market.
FDI: (Foreign Direct Investments). Investments from abroad to domestic economy, which are 30% greater than values of the particular company, to which it is being invested. It can be, for instance, the purchase of a company using foreign capital or re-creating the company anew.
Fed: The US central bank.
Fill or kill: A type of investor instruction to a securities trader. After delivering it to the market, the order must be filled immediately and in its entirety, and if that is not an option, it must be immediately cancelled (killed).
Fiscal policy: Government policy, by which the government attempts to influence its economy. It usually tries to keep unemployment levels low or to attain high economic growth. It uses the state budget for these purposes. If the government increases expenditure from the state budget (even if it is at the expense of a state deficit), in theory unemployment should fall and economic growth should increase. However, it is debatable in practice whether state budget deficits really lead to such outcomes. Moreover, if a state budget registers high deficits over the long term, public debts grows more quickly, this will, by contrast, harm the economy.
Fixed exchange rate: Foreign exchange rate, which set by the central bank and which cannot be changed, i.e. weaken or strengthen according to the current development in supply and demand for a particular currency. Lately, fixed foreign exchange rates are being abandoned in favour of the so-called floating rates (freely movable rates).
Fixing: The central bank usually announces every day the “official” level of a foreign exchange rate, interest rates and other values. This official, fixed value is known as fixing. It is used, for instance, for accounting or tax purposes. The reality is that the forex rate or interest rates do change throughout the day in the market environment and it would not be clear, which particular exchange rate or rate to use on the given day. Fixing setting is executed based on an algorithm of levels as reported by reference banks to the central bank as the current market values at a given moment.

Flexible rate: A synonym for floating. See ‘floating’.
Floating: A foreign exchange rate, which the central bank “allows” to move freely, i.e. to weaken or strengthen according to the current development of offers and bids for a particular currency. In practice, a completely free-floating exchange rate is rare; central banks try to more or less balance out major Swings of the exchange rate by foreign exchange interventions or with other central bank instruments. In that case, we talk about managed floating or dirty floating. An example of managed floating is the Czech crown, the dollar or the euro.
Floor: A type of financial derivative based on the linking of several options in terms of its structure. From the floor buyer’s perspective, the objective is to ensure a minimum interest rate on a variable rate deposit, bond, etc. The price for this security is the option premium paid by the floor buyer. The floor seller hopes to gain from the option premium.
FOMC: A Federal Open Market Committee or a committee of presidents of the local branches and the headquarters of the American central bank ‘The Fed’. It makes decision on the basic measures of monetary policy, especially the setting of interest rates. Voting rights are rotated amongst the members.
FOP: (Free of payment). A transfer of securities executed free of payment. Transaction settlement is only done on the securities leg.
Foreign Direct Investments: (FDI). Investments from abroad to domestic economy, which are 30% greater than values of the particular company, to which it is being invested. It can be, for instance, the purchase of a company using foreign capital or re-creating the company anew.
Foreign exchange reserves: The central bank of a country manages sums of foreign exchange owned by the particular country, which are known as foreign exchange or forex reserves. Forex reserves include different currencies; however, in European countries, the largest amounts are held in currencies, which are of the most significance for the particular geopolitical space, i.e. the euro and the dollar. The sale or the buying of forex reserves is undertaken, for example, when the central bank tries to influence the forex exchange rate of the local currency or when hedging the forex liquidity of government bodies.
FOREX: A colloquial term for the foreign exchange market.

Forward price: The name of a price used in trading with financial derivatives. Forward price of a trade is agreed today, but the transaction will physically executed only later at a previously agreed forward price, disregarding the fact that the current market price might be different at the moment of the transaction.
FRA contract: A type of financial derivative, which is based on today’s agreement on a future one-off exchange of two payments. One party pays the other a firmly agreed amount, and the other party will pay the first party a variable payment, which is based on the current market interest conditions. This variable payment is a function of a variable rate which might be set at, for instance, 3-month PRIBOR. (In practice, both payments are not carried out; it is only the party, which is obliged to pay the higher amount, which will pay the net difference to the other party). An FRA contract is mainly used in hedging against the movement of interest rates; however, it can be used for speculation, too. It is suitable mainly for legal entities and financial institutions.
Forward: A type of financial derivative. Today, a price will be agreed (the so-called forward price), for which material, currencies, etc. will be supplied sometime in the future. At the moment of the physical execution of the transaction, the agreed (forward) price will be paid, disregarding the fact that the current market price at the moment of the transaction might be different. Forward enables one to hedge against a certain financial risk (a change in the foreign exchange rate, etc), or to speculate. A forward as a security is suitable for legal entities, which normally conclude them with banks. Derivatives as a speculation are suitable only for very experienced investors.
FRA rates: An interest rate, which is used in the case of a an FRA contract. An FRA contract is based on an agreement concluded today about a future one-off exchange of two payments. One party will pay the other a fixed agreed payment, the other party will pay the first party a variable payment. The fixed agreed amount is set as the FRA rate times a certain amount. The other party pays the first one a variable payment, which will be based upon a market interest rate (e.g. 3-month PRIBOR at the particular moment of payment) times the particular amount. (In practice, both payments are not carried out; it is only the party, which is obliged to pay the higher amount, which will pay the net difference to the other party). An FRA contract is mainly used in hedging against the movement of interest rates; however, it can be used for speculation, too. FRA rates are set for various maturities (from 1 month to 1 year). They are determined by expectations regarding the development of market interest rates. If an increase in market interest rates (PRIBOR) is expected, the FRA rates rise too and vice versa. Therefore, the level of FRA rates is useful in determining investor expectations regarding the future development of interest rates.

FRN: The same as VAR bonds. Bonds with a variable coupon. Coupon is not defined as a predetermined percentage of the nominal value, but as variable percentage from nominal value, which is derived from the current market interest rates.
FTSEurofirst 300: Stock index of 300 largest Western European companies.
Fundamental analysis: A forecast for the development of the exchange rate, stocks, bonds, etc., based primarily on fundamental factors. It usually uses a wide variety of models.
Fundamental factors: Factors influencing the exchange rate, interest rates or prices of a certain investment instrument, which are associated with the macroeconomic situation, the state of the industry or a particular company. It consists of tracking currently published macroeconomic indicators, statements from the creators of economic policies, with regard to stocks it tracks the publishing of financial results of companies and others. Trading is sometimes influenced more by psychological factors, sometimes by fundamentals or technicals.
Fund of funds: (= Umbrella fund). A mutual or investment fund focused mainly on investments into participation certificates or stocks of other funds. It is one of the less risky ones, but also less profitable.
Fund performance: Appreciation/depreciation of assets in a mutual or an investment fund over a certain period in time (usually a year). Previous fund performance might serve as a guide to an investor; however, it definitely does not guarantee the same performance in the future, too.
Fund status: A document, which defines the objective of an investment, investment strategy and fund’s investment limits.
futures: A type of financial derivative. A type of forward contract, but as opposed to forwards, futures are traded only on derivative exchanges. There is no such an exchange in the Czech Republic.

G

GAAP: Generally Accepted Accounting Principles. They are accepted internationally and used mainly in the USA.
gamma: A measure used in the pricing of options, according to the Black-Scholes model. It demonstrates the relationship between “delta” (see relevant entry) and the market value of underlying assets.
GDP: (Gross Domestic Product). The measure of overall goods and services produced in a particular country during one year. Many often think that a country with a higher GDP per capita must necessarily enjoy a higher standard of living. Such categorical judgments are deceptive, due to the fact that the standard of living includes areas, which the GDP is not able to capture. However, so far, a better economic productivity indicator than this does not exist.

GDR: See ‘Global Depository Receipts’.
Gilts: Government bonds issued in Great Britain, South Africa or Ireland.
Global Depository Receipts: (Global Depository Receipt). Part of the shares of a domestic joint-stock company from a Country A are bought by a foreign bank from Country B. The bank will issue against these stocks securities known as GDR. Consequently, the GDR can be traded on markets of Country B. The purpose of this transaction is to enable the trading of stocks of the original company on a foreign market, without the need to go through any demanding administrative issues.

Global fund: A mutual or investment fund focused on investments (mostly in securities) distributed globally. However, the base is usually in the European Union or the USA. The risk and potential yields depend particularly on the type of instruments into which investments are made (stocks, bonds, money market, etc.) A problem often lies in the exchange rate risk undertaken with investments in territories in other than local currency.
Goodwill: A financial term for the good name or reputation of a company. In accounting, goodwill is quantifiable, which is especially useful during acquisitions and mergers.
Green fund: Mutual or investment fund focused mainly on investment into stocks (or other securities) of environmentally minded companies. It is a moderately risky, but also moderately higher-yielding, investment.

Grey economy: The untaxed part of the economy, however still within the limits of the law.
Gross Fixed Capital Formation: The same as investment into machines, equipment, etc (including amortization).
Gross margin: The differential between earnings for sold goods and the costs incurred for their production.
Gross profit: (EBT). Earnings before taxation.
Guaranteed fund: (= Click fund, Secured fund). See entry ‘Click fund’.

H

Hawk: Central banker preferring low inflation over economic growth. In practice, this means the demonstration of a preference for higher interest rates than what the so-called doves would prefer.

Hedging: An equivalent to securing The term is used especially in regards to securing oneself on the derivatives market against market risks (movement of exchange rates, interest rates, etc.)

High-Yield fund: A mutual or investment fund focused above all (but not exclusively) on investments in securities with low value (low-value bonds – the so-called junk bonds, or low-quality stocks – the so-called fallen angels). They are one of the higher risk, but potentially very high-yielding, investments.

I

IFO: German economic institute publishes the index of consumer confidence IFO every month, which is base on a survey of company managers. The index usually forecasts the growth of GDP very well, so it is followed closely by investors. The higher the index, the better the average expectations of managers regarding future economic development.
Immunisation: A manner of hedging a portfolio (especially bonds) in such a way, so as to ensure the movement of interest rates doesn’t influence the market value of the portfolio.
Index fund: Mutual or investment fund focused predominantly on investments into financial options on stock or other indices. They carry a medium risk and generate medium yields.
Indirect taxes: Taxes associated with consumption. The higher the consumption of a company, usually the higher the taxes paid, disregarding its income; e.g. VAT, excise tax.
Industry fund: Mutual or investment fund focused mainly (but not exclusively) on investments into securities in a particular industry. It is one of the riskier, but potentially higher-yielding investments.
Inflation targeting: The attempt of the central bank to keep inflation within its inflationary goals through its monetary policy. The central bank’s main instrument is usually the correct setting for interest rates levels.
Inflationary target: The target that is set by the central bank for inflation. Central bank tries to direct its monetary policy, in order to be constantly in line with this inflationary target. The CNB determines its inflationary target as a corridor (inflation will be from X% to Y%). The ECB determines that inflation will be lower than 2%.

Interest rate risk: The risk of a loss resulting from a change in interest rates. for instance a debtor has a variable rate loan, the interest rates go up and the debtor has to pay higher interest. Or, a company will offer its daughter company a variable rate loan, the interest rates go down and the company receives lower interest. It is possible to secure against interest rate risk through financial derivatives.
Intervention: The central bank rarely leaves its foreign exchange rate to market forces; from the central bank’s perspective, this could lead to undesirable sharp swings (i.e. sharp strengthening or weakening of the exchange rate). The most common measures the central bank uses to steer the exchange rate towards its desired direction is the intervention on the foreign exchange market. In an attempt to weaken its domestic currency, the central bank buys foreign currency from other banks (whilst offering the domestic currency) and thus creates a greater offer of the domestic currency for sale. The domestic currency surplus over the demand for it leads to a sudden reduction in the value of the domestic currency, i.e. its weakening. On the other hand, in an attempt to strengthen the local currency, the central bank sells foreign currency. If the foreign exchange market expects central bank intervention, then its impact is debatable and can disappear within a few hours.
Intervention buying: Supplementary supply of securities at a given price provided by the clearing system of the exchange (Univyc in the Czech Republic), in a situation when a selling party is not able to meet all its obligations stemming from an automatic trade.
Intervention selling: A supplementary supply of money in exchange for securities organized by the clearing system of the exchange (Univyc in the Czech Republic), in a situation when the buying party is not able to meet all its obligations stemming from an automatic trade.
Inverted yield curve: A falling yield curve. The longer the maturity, the lower the yields. An inverted yield curve is rare and signals that themoney market is expecting a significant dip in interest rates.

Investment companies: Financial institutions (usually banks) set up investment companies, which serve as the professional administrators for the investments of small investors. These investment companies usually establish a whole spectrum of mutual funds focused on various types of investment (stocks, bonds, money market, etc.) and manage the portfolios. Thus, a mutual fund is the organisational unit of an investment company, however it is not a legal entity, only the investment company is.
Investment fund: A legal entity, which offers professional savings management, thereby enabling collective investment for small investors. Assets are accumulated by subscription of stocks, which makes the individual investors the shareholders of the fund (as opposed to a mutual fund, which is a legal entity itself). It can be open (seldom) or closed.
Investment horizon: A period, for which an investment is planned.
Investment limit: A law, fund’s status or, for instance, the prospectus of a security, can all determine the maximum allowed limits for investing into one particular investment instrument, a group of securities, industry, etc. The purpose of setting investment limits is to limit the risk undertaken.
IPO: (Initial Public Offering). The first public offering of the stocks of a company. The term is used mainly with regard to introducing a company to the market.
IRS contract: (= interest rate swap) A type of financial derivative, which is based on a regular exchange of two payments, usually every 6 months. One party will pay the other a fixed agreed payment, the other party will pay the first party a variable payment, which will be derived from the current interest conditions on the market. This variable payment may be set at, for instance, 3-month PRIBOR (In practice, both payments are not carried out; it is only the party, which is obliged to pay the higher amount which will pay the net difference to the other party). IRS contracts are mainly used in hedging against the movement of interest rates; however, they can be used for speculation too. They are primarily used by legal entities and financial institutions.

IRS rates: An interest rates used in IRS contracts (= interest swap). An IRS contract is based on a regular exchange of two payments, usually every 6 months. One party will pay the other a fixed agreed payment, which will be set as the IRS rate multiplied by a certain amount. The other party will pay the first party a variable payment, which will be based upon the market interest rate (for instance, 3-month PRIBOR at a relevant moment of the payment) multiplied by the given amount. (In practice, both payments are not carried out; it is only the party, which is obliged to pay the higher amount, will pay the net difference to the other party). IRS contracts are mainly used in hedging against the movement of interest rates; however, they can be used for speculation too. IRS rates are set for various maturities (ranging from 1 year to 10 or more years.) They are dictated by the current situation on the market or by the development of offer and demand. IRS rates move in the same direction as bond yields. If bond yields are falling, so do IRS rates and vice versa.
ISIN: (International Securities Identification Number). An international identification number, which is given to every security that is traded on public markets.
ISM: (Institute for Supply Management). An American institute, it publishes a monthly index based on the survey of purchasing manager’s opinions. The index measures the power of economic growth. Although its forecasting abilities are usually slightly worse than, for instance, the German IFO index, the financial markets still follow it closely.
Issuance: Securities of the same type, which are issued by the same person, in the same form and with the same rights and which have the same terms
Issuer: An entity issuing a security.

J

January Effect: An empirically observed rule, when January revenues on stocks reach statistically above-average levels in comparison with the other months of the year.

Joint venture: A company jointly owned by several companies, who contribute to the capital of the joint venture and/or its management. Joint ventures are often specifically set up for a particular project and often concentrate on projects which carry a higher risk, and therefore higher expected yields.

L

Large cap: A company with a large market capitalisation (it is not specified how large must the capitalization be).
Leverage trading: Trading whereby an investor manages a high nominal value of an investment through a much lower amount invested in real terms (i.e. the margin), which is usually deposited in the account of the trader. The result is the possibility of a higher profit or loss than under classic investments for a given amount of margin.

LIBOR: An internationally accepted interest rate, for which the banks in the eurozone, Britain or the USA lend to one another. It is determined in London for various maturity dates, ranging from 1 day to 1 year. It is set for many variants, such as dollars, pounds or euros (LIBOR in euros competes with the EURIBOR and there are only marginal differences). Interest rates for clients are usually set in the form of LIBOR + a certain spread. If LIBOR increases, the end rates as set by banks for their clients will also rise.

Limit price: The maximum price for buying or the minimum price for selling, which the trader has been instructed by the investor at which to execute the trade (i.e. the worst price accepted by an investor for a particular trade).
Lombard rate: An interest rate for a loan which is offered by the central bank to banks which suffer a temporary shortage of liquidity. In return, the bank requires the provision of securities as collateral. A bank asking for a Lombard loan will be branded a slightly problematic bank. In the Nineties of the 20th century, Lombard rate in the Czech Republic carried headline significance in monetary policy, today its macroeconomic purpose equals zero.

Long position in currency: An investor has more of a particular currency in his/her assets than in liabilities.
Lot: The smallest unit (amount) of a certain security, which can be traded on an exchange or through other trading systems.

M

Maastricht criteria: Criteria, which every country must meet before the adoption of the euro. Some of the criteria apply to the level of public debt, state budget deficit, long-term interest rates, rate of inflation, exchange rate stability.
MACD: (Moving Average Convergence / Divergence).It is a technical analysis indicator calculated as the differential between the fast and slow exponential moving average of closing rates. It is used for the purpose of identification of buying and selling signals.
MBS: (Mortgage Backed Security) A bond, which is covered by receivables from mortgage loans, thereby carrying a small risk of not being paid. MBS‘s are issued only by banks with mortgage licences.
Majority stockholder: Shareholder, who owns the largest volume of company stock, or a person who acts in concert with other shareholders, where the combined amount of their stock makes up the highest percentage of the share capital of the company.
Margin: A loan provided to an investor by a securities or other investment instruments trader, to support the undertaking of a trade. Throughout the duration of the trade, margin is deposited with the trader.
Margin call: Some trades, which a securities trader undertakes for an investor, are secured by the trader against failure to pay or provide the securities on the investor‘s part, by requesting him to post collateral. If the value of the collateral falls below the required holding level, the trader will request the investor to top up its collateral posting and the investor is obliged to do so. The request is called a margin call.

Margin trading: Trading of securities or other investment instruments with money provided by the broker.
Market capitalisation: The number of stocks multiplied by their market price. It can be either the market capitalisation of a company (number of company shares issued multiplied by their price) or, for instance, the market capitalisation of an exchange (all stocks quoted on the exchange multiplied by their current prices on the exchange).
Market liquidity: In times of high market liquidity trades are being executed by many players. In such circumstances, each trade will move the rate/price only insignificantly. If liquidity is low, it means only A few players are trading, and transactions are executed only infrequently. In such periods of low liquidity, even a small trade can substantially move the rate/price.
Market maker: A trader in securities who is also obliged to determine the buying and selling price of a security for trading.
Market maker: Securities trader, who is obliged to set the buying and selling price of a security as part of trading
Market price (market value): The price, for which it is possible to actually sell a particular asset at a particular moment on the market. In the case of a security traded on the exchange, the last known price from the exchange is considered to be the market price. The opposite case would be the price, for which an asset would be sold on the OTC market.
Market segmentation: The division of target groups of potential clients into smaller sub-groups, which have something in common. Consequently, it enables every segment to use a better targeted promotional campaign, different offered products or a different price policy
Merger: The merging of two companies into one, which is usually the creation of a new entity.

Minority shareholder: Shareholder, who does not own the largest number of company stocks, nor does he/she act in concert with other shareholders in order to attain majority position.
Mixed fund: Investment or mutual fund, which invests in stocks, as well as in bond and thus tries to distribute the risk. It is usually considered to be a medium risk fund, therefore a fund with medium potential for yields. The usual expectation is that at a time of stocks slump, bond prices will grow and vice versa. This previously often applicable rule does not really apply these days.
Mixed fund: (= balanced fund). Mutual or investment fund focused on investment into stocks and bonds (and possibly into other investment instruments, especially money market instruments). It belongs to the range of medium risk and medium yield investments.
Momentum: An indicator measuring the strength of the current trend. This term is used in technical analysis. Outside of technical analysis, it is also used as an analogy in general to convey the strength of a trend, the rate of change and the speed of the rate’s movement.
Monetary aggregates: A term used in monetary policy for the definition of the volume of individual types of liabilities of monetary financial institutions on a macroeconomic level. Usually, monetary aggregates are defined as M1 to M3. M1 includes the amount of the issuance of notes and coins in circulation (without cash in bank’s vaults) and demand deposits. M2 includes M1, deposits within 3-month term and deposits with maturity up to 2 years. M3 includes M2, stocks and deposits in money market funds, issued debt securities with maturity up to 2 years and repo operations.
Monetary Financial Institutions: (MFI) (1) Central bank, (2) residential loan institutions and (3) all other residential financial institutions, whose business is to accept deposits or resources very similar to deposits from other companies rather than monetary financial institutions and to offer loans on their own account or to invest in securities.

Monetary policy: The same as currency policy. The policy of the central bank with which the central bank influences the economy. Usually, central bank tries to keep inflation low; sometimes it tries to influence the foreign exchange rate or economic growth. It uses instruments, such as the setting of official interest rates, intervention on the foreign exchange market and other measures.
Money market: Interbank deposits market. Banks lend money to one another with maturities of up to 1 year at the PRIBOR interest rate.
Money market fund: Mutual or investment fund focused mainly on investments in money market instruments, i.e. government treasury bills or bank deposits. It is one of the less risky, but also lower yielding, investments.
Monopoly: A company that controls most of the market as the producer of a particular product for which there is no substitution. Therefore, it can dictate prices well above the level, which would correspond with competition.
Month-on-month growth: Growth statistically measured in comparison with the previous month. For example, growth in June 2004 versus May 2004.
Mortgage backed security: (MBS). A bond, which is covered by receivables from mortgage loans, thereby carrying a small risk of not being paid off. MBS’s are issued only by banks with mortgage licences.
Mutual fund: Financial institutions (usually banks) set up investment companies, which serve as the professional administrators for the investments of small investors. These investment companies usually establish a whole spectrum of mutual funds focused on various types of investment (stocks, bonds, money market, etc.) and manage the portfolios. Thus, a mutual fund is the organisational unit of an investment company, however it is not a legal entity, rather the investment company is.
Mutual funds issue participation certificates, which are comparable to stocks in a joint-stock company. Mutual funds can be open (more usual) or closed.

N

NASDAQ: (National Association of Securities Dealers Automated Quotations System). The largest electronic trading system with securities in the world, operated in the USA, with the Czech Republic equivalent being the RM-System.
Net assets: The current market value of all securities, cash, etc., to which a mutual fund invested the entrusted money.
NIKKEI Index: The main index of the Tokyo Stock Exchange, made up of 225 primary stocks.

Noise traders: A term denoting the less experienced and under-informed investors, usually small investors, who make up the majority on the financial market. These investors are unable to correctly identify the start of a new trend on the financial market as well as the professional players. They often conduct trading based on rumour, which spreads among the non-professional community and their typical characteristic is that they often “go with the trend”. This means that in time of falling prices they sell and in time of rising prices, they buy. Due to this fact, they often close/conduct trades at the least favourable moment (they buy at a time of highest prices, or sell at a time of lowest prices).
Noise trading: The trading of a group of investors known as ‘noise traders’. A typical characteristic of this sort of trading is moving with the trend. This means selling at a time of price fall and buying at times of price growth. Due to this fact, trades are often concluded at the least favourable moment (buying at a time of highest prices, or selling at a time of lowest prices).

Nominal share: (=Registered share). Stock issued to a particular person. Stocks might be transferred to other names with only a signature of the current owner on the reverse side (endorsement).
Nominal value of a bond: An issuer (government, company, municipality, etc.) will issue a bond with a certain nominal value, e.g. 10 000 CZK. It obliges itself to pay this nominal value to the bond purchaser (investor) at the maturity of the bond, which is usually in a several years’ time (e.g. 5 years). Moreover, the issuer also obliges to pay regular (usually annual) payments – more commonly known as coupons (e.g. 6% of the nominal value = 600 CZK). If the investor holds the bond to its maturity and the issuer does not default in the meantime, the investor is guaranteed to be be paid all coupons and the nominal value at the end (so, for 5 years he/she will get 600 CZK as a coupon and then will receive 10 000 CZK as the nominal value, i.e. a total of 13 000 CZK). Please note, nominal value is different from a bond price!

NUTS: (=La Nomenclature des Unités Territoriales Statistiques.) International standard introduced by the Statistical Office of the European Union for the needs of classifying single unified structures of territorial units. The classification consists of 6 NUTS levels, according to variously sized groups. The specification of individual NUTS levels is characterized by the number of inhabitants and the area. The regions in the Czech Republic have been classified as NUTS III.

O

Obligation: The same as bond. It can be issued by the government, municipalities or companies. It is usually a less risky investment instrument than stocks.
Off-exchange market: See ‘OTC market’.
Official interest rate: Interest rate set by the central bank. This rate is used when banks borrow from the central bank. All the other interest rates in the economy are derived from this official rate. If the official interest rate changes, all other interest rates will change in the same direction (including the end interest rates for clients).
Oligopoly: A situation where there is a limited number of large producers of a single product, so the companies forming the oligopoly have the power to influence the price. This price is higher than what the case would be with larger competition, but lower than in the case of a monopoly.

Open fund: Mutual or investment fund, which an investor may enter at any point, as well as exit (by selling his/her proportion back to the fund) and to obtain ready money, without the need for length of notice or any other limitation. The fund is obliged to buy the security back. The disadvantage of this fund lies in the fee associated with the reverse buy of the participation certificates (in the case of a mutual fund), or stocks (in the case of an investment fund). The price of a participation certificate depends on the value of net assets corresponding to the particular number of participation certificates.
Opening of a long position in a currency: The purchase of a certain currency in such a manner, so that its amount in assets would exceed the amount in liabilities. For instance, the opening of a long position in CZK for EUR is purchasing crowns for euros.
Opening of a short position in a currency: The purchase of a certain currency in such a manner, so that its amount in liabilities exceeds the amount in assets. For instance, the opening of a short position in CZK for EUR is to sell crowns for euros.

Operational profit: Earnings before Interest and Taxes or EBIT.
Option: A type of a financial derivative. The price will be agreed today (the strike price), for which the trade will be conducted in the future. At the exercise date, the previously agreed strike price will be paid, disregarding the fact that the current market price might be different. However, the parties’ position is not equal. One of the parties (the option buyer) does not have the obligation to carry out the trade, but he/she has only the right to do it. For this right of this option on whether this trade will be exercised or whether the option will lapse, the owner pays the other partner a fee, which is called an option premium. The seller of the option is dependent on the buyer’s decision and cannot in any way force the trade. in the case that the option buyer will decide to exercise the option, then the option seller will have to engage in this trade. An option as a hedging instrument is usually less suitable in terms of the Czech legal system than forwards or swaps, for instance. An option as a speculation is only suitable for very experienced investors.

Oscillator: A group of indicators used in technical analysis for the purpose of filtering the trend movement.
OTC market: An “over the counter” market, or a market outside of an organized exchange. Traders in securities, currencies, deposits, etc. trade amongst themselves through telephone or computer systems.
Overbuying: A term used in technical analysis. It is a situation, when technical indicators signal an imminent drying up of demand and thus an imminent change in the upward trend.
Overselling: A term used in technical analysis. It is a situation, when technical indicators signal an imminent drying up of supply, in the form of offers, and thus an imminent change in the downward trend.

P

P/E ratio: (Price / earnings). A ratio indicator of a stock price/stock‘s net earnings. Investors try to buy stocks with a low P/E.
p.a.: Per annum – annually. Used mainly in association with interest rates. For instance, 5% p.a. means 5% per year.
Par bond: A rarely occurring situation when the bond’s market price equals its nominal value.
Parity: Market price which equals the nominal value. With foreign exchange rates, this term is used as a notion of equality between two currency units (e.g. in the situation 1 EUR = 1 USD).
Participation certificate: A security, which provides the right of its owner to a corresponding share of assets in a mutual fund.
Passive investment strategy: Investments, when above-average yields are given up on in comparison with the financial market average, but at the same time, there is no risk of suffering above-average losses. Holding an investment for a long time without a change, without actively re-balancing the investment portfolio.
Pension fund: (= dividend fund) A mutual or investment fund, which pays out profits with dividends and as such does not re-invest the profits. It is suitable for investors, who prefer a regular income. Investors are responsible for recording the dividends for tax purposes.
Percentage point: The differential between percentages, e.g. the differential between 3% and 5% is 2 percentage points (not 2 percent).
Pips: The smallest technically possible change in rates (stock, currency, etc.). The pips referred to in relation to the crown against the euro exchange rate are each 0.001 CZK/EUR, for the euro against the dollar exchange rate they are 0.0001 USD/EUR. There is no smaller unit of an exchange rate than this.

PMI: A general term for a group of indicators based on a survey amongst economic entities, which tracks the strength of economic growth. A typical example is, for instance, the American ISM index.
Portfolio: A collection of investments (securities, etc) owned by an investor. The fact that an investor owns several types of investments rather than only a single one helps to distribute risk and thus decrease the risk.
Portfolio investments: Investments from abroad into the domestic economy, which do not exceed 30% of the value of a particular company, into which investment is made. It might be, e.g. a purchase of domestic bonds or a part of a company’s stocks by a foreign investor.
PPI: Producer price index – an index measuring producer prices rate of inflation.
Prague Stock Exchange: (PSE). The main organiser of the security market in the Czech Republic.
Preferred stock: Stocks, where preferential rights apply when distributing profits (dividends); however, it is usually without a voting right.
Premium bond: A situation, when market price of a bond is higher than its face value.
PRIBID: (Prague Interbank Bid Rate), it is PRIBOR’s counterpart. It represents the average interest rate which banks pay on loans from other banks on the Czech interbank money market (i.e. the rate at which they are willing to borrow). PRIBID is used as the benchmark or reference rate, similar to, for example, LIBID for deposits requested in USD or GBP. It is set by the Czech National Bank on a daily basis. It is published with maturities ranging from 1 day up to 1 year.

PRIBOR: Interest rate at which banks lend to one another. It is set for different maturities ranging from 1 day up to 1 year. It is derived from the CNB 2-week repo rate. Bank interest rates for clients are established as PRIBOR + a certain surcharge. If the CNB raises the 2-week repo rate, PRIBOR will rise and so will the bank end rates for clients.
Price bubble: A situation when exchange rate prices (or prices of stocks, bonds, commodities, currencies, etc) are driven up by speculations above economically justifiable levels; despite the fact that most investors know that the prices are exaggerated, they continue buying the particular investment instrument, hoping to gain from further price growth and that it would be possible to sell it before the price bubble bursts.
Price bubble burst: A sharp slump of prices on a market, where the bubble was created (see the entry ‘price bubble’). Most investors will come to the conclusion that prices have no more room to grow and they will start selling and trigger a price slump. The prices usually slump even more than what would reflect a balanced state and an economically justifiable level.
Primary market: A market of newly issued securities, which are offered up for sale.
Principal: The remaining amount of debts without interest that remains unpaid.
Production Price Index: The index measures the rate of inflation of producer prices, which means the rate of growth in prices charged by producers. It is known as PPI.
Prospectus of a security: A legal document describing a particular security.
PSE: (Prague Stock Exchange) The main organiser of the securities market in the Czech Republic.

Psychological analysis: Forecasting the development of the exchange rate, stocks, bonds, etc., particularly based on psychological factors.
Psychological factors: Factors, which influence the rate, interest rates or the prices of a particular investment instrument, which are associated with the psychology of traders. It contains succumbing to the herd instinct in the event of a sharp rise or fall of prices, speculations on what the opponent players will do on the market, etc. Trading is sometimes influenced more by psychological factors, sometimes more by fundamentals or technicals.
Public debt: The cumulative total of all deficits of a state budget, municipalities budgets, those of state agencies and state non-budget funds for all prior years. In simple terms: the total debt of the government to its citizens, companies, overseas parties, etc. According to the Maastricht criteria, at the moment of the adoption of the euro, the public debt of a country cannot exceed 60% of GDP; or, it could be higher, but it must be declining significantly.
Public finances: All finances managed in the public sector (government, municipalities, non-budget funds, etc.)
Public market: An exchange or any other organised, non-exchange market of the RM-System or NASDAQ type.
Public relations: A manner of communication between companies, the media and clients, with the aim of creating a “good name” to enhance the image of a company, to promote oneself and one’s own brand.
PX: The main stock index of the Prague Exchange.

Q

Quoted security: A security, which is accepted for trading on a public market (i.e. on an exchange or off-exchange trading system of the RM-System type)

R

Rally: A term used for a sharp rise in prices, rates or the whole market
Range: A term used for the range of rate (price, interest) movement.
Ranking: A term to denote the comparison of an investment‘s performance to others.
Rate cut: A term used for the cutting of benchmark interest rates by the central bank.
Rate hike: A term used for the cutting of benchmark interest rates by the central bank.
Rating: Evaluation of the ability of a economic entity to meet its debt obligations, usually carried out by a rating agency, based on the evaluation of the overall macroeconomic environment and the financial health of the company. Rating always applies to a particular type of obligation, so one company can have several different ratings with regard to different types of its debt. (e.g. with governments, it is the rating of obligations in foreign currency and in domestic currency.)
Rating agency: An agency specialising in rating (see ‘rating’). One of the most famous global agencies is Standard & Poor’s, Moody’s and Fitch.
Recession: Recession is typically defined as a minimum of two consecutive declines in GDP growth below the zero level. .
Record date: The day when an investor has to own a security to be eligible to receive the proceeds associated with owning this security (dividends, coupon).
Registered shares: (= nominal share). Stock issued to a particular person. Stocks might be transferred to other names with only a signature of the current owner on the reverse side (endorsement)
Re-investment: Using the returns from one investment in the form of dividends, coupons, interest, etc. to buy other investments.

Re-investment fund: Mutual or investment fund, which does not pay its profits in the form of dividends, but rather re-invests them. It is suitable for investors who prefer appreciation of the held securities rather than regular income.
Repo operation: (Repurchase agreement, Sell/Buy – back operation)The sale of a security with a future obligation to buy this security back at an appointed time. The entity selling the security obtains liquidity temporarily this way. In the Czech Republic, the most famous example of such operations are the repo operations of the Czech National Bank (CNB). The CNB most often sells state treasury bills to commercial banks, with the obligation of buying these back (usually in 14 days). The purpose of CNB repo operations is to reduce liquidity in the money market and therefore influence the level of interbank interest rates. The so-called 2-week CNB repo rate, or the interest rate applicable in repo operations, is the basic benchmark interest rate of the CNB.
Reserve currency: Low interest currency used in speculative carry trades. Speculators will borrow Reserve currency A. Instantly, they will exchange it for Currency B, which either has a high interest or is strengthening against most of the world’s currencies. (Reserve currency A will weaken and Currency B will strengthen as a side effect). The speculator hopes that by holding Currency B, he/she will receive a high rate of interest or will gain from the exchange rate appreciation. After some time (usually several weeks or months), the speculator will end his speculation, exchange Currency B back for Reserve currency A and will pay off the initial loan. (As a side effect, this will result in the appreciation of Reserve currency A and weakening of Currency B). With a successful speculation, the yields of holding Currency B will be higher than the costs for the loan in Reserve currency A. The Czech crown is often the reserve currency.
Residents: All local and foreign legal entities and natural persons, including the branches of foreign banks and the foreign owners of buildings and land, who undertake their economic activities in the given area. Foreign legal entities and natural persons are considered to be residents after a minimum of a year’s economic activity in the particular area.

Resistance: The same as resistance. If a price is growing ( the exchange rate is strengthening), it might occasionally stop at a certain level, which is significant for some psychological reason. It could be, for instance an all-time high, the level of the exchange rate where the central bank has already previously intervened, or some “round level”, such as the exchange rate of 1 EUR = 1 USD, a price of stock for a 100 Czech crowns, etc. Usually, the price growth (the strengthening of the exchange rate ), stops here because due to the psychological reasons, it is difficult to break this resistance. However, if it does manage to break through the resistance level, the price or the rate will once again, and fairly quickly, strengthen to the next resistance level. The opposite of the resistance level is the support level in the case of weakening.
Resistance level: The same as ‘resistance’. If a price is growing (the exchange rate is strengthening), it might occasionally stop at a certain level, which is significant for some psychological reason. It could be, for instance an all-time high, the level of the exchange rate where the central bank has already previously intervened, or some “round level”, such as the exchange rate of 1 EUR = 1 USD, a price of stock for a 100 Czech crowns, etc. Usually, the price growth (the strengthening of the exchange rate), stops here because due to the psychological reasons, it is difficult to break this resistance. However, if it does manage to break through the resistance level, the price or the rate will once again, and fairly quickly, strengthen to the next resistance level. The opposite of the resistance level is the support level in the case of weakening.
Restrictive policy: A policy of the central bank (monetary), or the government (fiscal), which usually leads to the curbing of economic growth, increased unemployment and decreased inflation. It is usually accompanied by the raising of interest rates or with a decline in the state budget deficit.

Reverse repo operations: (Reverse repurchase agreement, Buy / sell – back operation). The purchase of a security with a concurrent obligation to sell this security back at an appointed time. The entity selling the security obtains liquidity temporarily in this way. In the Czech Republic, the most famous example of reverse repo operations are operations of the Czech National Bank (CNB), which are however incomparably less wide-spread than the CNB repo operations (presently, they are hardly used at all). The purpose of the CNB reverse repo operations is to add liquidity to the money market and thus to push the level of interbank interest rates downwards.
ROA: (Return on assets). A ratio indicator of returns of a company, linking net profit to assets.
ROE: (Return on Equity). A ration indicating the returns of a company by comparing its net profit to its equity.
Risk aversion: Based on their personal preferences, each investor has his/her own level of unwillingness to undertake risk when investing. In the financial world, this unwillingness is referred to as risk aversion. Risk aversion differs not only from investor to investor, but also over time for individual investors. In times of increased risk aversion, investors avoid riskier (and potentially higher yielding) investments and invest in the so-called safe havens (Swiss francs, gold and the like), the price of which is increasing.
Risk-free asset: An asset (= investment), whose yields for a pre-defined holding period until the maturity date is known up front and guaranteed. In practice, there is no pure risk-free asset; usually government treasury bills are considered to be such a theoretical investment.
Risk-free rate: Theoretical interest rate, the lowest on the market and which provides yields that are not associated with any risk; it is therefore only a reward for investors for their deferred consumption. In practice, the risk-free rate is taken to be the yield on short-term (i.e. 3-month) government treasury bills.

S

Samurai bond: A bond issued in the Japanese yen, nevertheless the issuer is not a Japanese resident.
SCP: (= Prague Securities Centre) An institution founded by the government, which ensures recording booked securities and the management of asset accounts of individual securities owners in the Czech republic.
Secondary market: A market, where previously issued securities are traded.
Secured fund: See ‘click fund’.
Securing: The same as hedging. The term is used mainly in association with securing on the derivative market against financial market risks (movement of exchange rates, interest rates, etc.)
Security creditworthiness: The quality of a security in terms of the risk of the security issuer’s bankruptcy and therefore a devaluation of the investment.
Sell/Buy–back: See ‘repo operations’.
Shallow market: A market with low liquidity and turnover. A characteristic trait of such a market is a large spread between buying and selling prices.
Share: An equity, the ownership of which usually guarantees the right to a share of assets, profit and voting rights within a joint stock company. (Variants exist, for instance without the voting rights)
Shareholder: The owner of a share (see ‘stocks’)
Short position in a currency: Investor has more of the currency in his/her liabilities than in his his/her assets (i.e. he/she owes the currency)
Short sale: Investors will sell something they do not own and must borrow it. The purpose of this is to speculate on a price fall. For instance, a short sale of euros for crowns means that an investor will borrow euros, sell them and then wait until they weaken against the crowns. When that happens, he/she will buy the euros (with a profit) back and return to the original owner. If the investor’s estimates were wrong and the euro strengthens against the crown, the investor would suffer losses. It is a common strategy used on the financial market.

Small caps: General term for shares of companies with small market capitalisation, usually carrying higher risk and above-average chance of appreciation (i.e. great growth potential).
Small caps fund: Mutual or investment fund focused mainly (but not exclusively) on investments into stocks of smaller companies, whereby it is presumed that even though they are more risky, they have a higher growth potential. It is one of the more risky, but also higher-yielding, investments.
Smart money: A term denoting experienced and exceptionally informed investors, usually from the ranks of large institutional investors (investment funds, etc.), who are able to identify the beginning of a new trend on the financial market before the less-informed majority does and use it to their early advantage in their trading.
SME (small and medium enterprises): The EU considers an SME to be a company, which has fewer than 250 employees and a turnover not greater than 50 mil. EUR. Within SME’s, we differentiate between micro-enterprises (not more than 10 employees, turnover up to 2 mil. EUR), small enterprises (not more than 50 employees and turnover up to 10 mil. EUR) and medium enterprises (not more than 250 employees with a turnover up to 50 mil. EUR)
SPAD: (= System for the support of stock and bond markets). One of the segments of the Prague Stock Exchange, where only the most prestigious securities (blue chips) are traded. A type of trading, which utilizes the activity of market makers (i.e. companies, who place their quotations on the market).
Splitting: See ‘stock splitting’
Spot price: The price used in all trades other than with financial derivatives (where forward price applies). It is quite a common price, which is what we usually understand under the term ‘price’. The attribute ‘spot’ is used mainly to distinguish it from a forward price.
Spread (= Differential): Usually used in association with bond yields as a spread (=differential) between the yields of domestic bonds and the yields of German bonds, for example. Investors follow this differential closely in order to know which bonds (domestic or foreign) bring the highest yields.
Stability and Growth Pact: An agreement among the eurozone countries that they will abide by the Maastricht criteria regarding state budget deficits (budget deficits cannot exceed 3% of GDP), even after entering the eurozone. An exception is granted only in particular circumstances (e.g. in the case of a recession). If the stability pact is broken, the offending party has to pay a fine. The purpose lies in keeping the fiscal discipline of member countries based on the empirical knowledge that a long-term fiscal contravention harms the economy.

Stagflation: A situation, in which there is a concurrent rise in the rate of unemployment and rise in the rate of inflation. In the past few decades, stagflation has not been a typical occurrence, as most often the growth of inflation is associated with a period of rising GDP rate growth and therefore a decline in the unemployment rate (and vice versa). Stagflation is difficult to cure with today’s common economic policy instruments.
Stakeholder: The owner of a participation certificate in a mutual fund.
Standard & Poor's 500: Stock index listing 500 American blue chip (most prestigious) shares.
State treasury bill: Short-term government bond with a maturity of up to 1 year. It is considered to be the least risky existing investment instrument. Due to low risk, its yields are also quite low. Due to its short maturity, it does not pay out coupons. It is traded for a price lower than the nominal price. Nominal value is usually very high and thus state treasury bills are not suitable for small investors, but only for large financial institutions.
Stochastics: An indicator of random movement used in technical analysis. It links the closing rate with the highest and lowest rate during the tracking period. It is used for the purpose of identification of buying and selling signals.
Stock market: Market where stocks are traded. This can be organized (i.e. on an exchange) or non-organized (off-exchange trading, more commonly known as OTC trading).
Stock splitting: (Splitting). An accounting operation, which increases the number of stocks owned by existing shareholders whilst maintaining the same proportion of shareholder participation. Most often, the purpose is to decrease the nominal value of one stock, which makes trading in this stock easier.
Stop-loss: A pre-determined level of an exchange rate (price) at which an investor closes his/her loss position (e.g. sells the held instrument). The purpose is to prevent significant losses. For instance, an investor expects a stock price to grow and buys the stock. As opposed to his/her expectations, stocks weaken and the investor incurs losses. As soon as the stock weakens to the pre-determined stop-loss level, he/she will sell the stock as to prevent further losses. (With forex trading, banks very often set such stop-loss limits and sell orders will start almost automatically at these levels, without any trader input. The result of this wide-spread start and the sale of the particular weakening currency is an even sharper fall of this currency).The opposite of a stop-loss is trigger.

Structural funds: EU instrument to enforce solidarity of the richer regions with the poorer ones. The resources from these funds are directed at less developed regions, regions with structural problems/ISSUES, etc. It includes the European regional development fund (ERDF), the European social fund and the Solidarity fund.
Support: If price is falling (rate is weakening), it might occasionally stop at a certain level, which is significant for some psychological reason. It could be, for instance an all-time low, the level of the exchange rate where the central bank has previously intervened, or some “round level”, such as the exchange rate of 1 EUR = 1 USD, a price of stock for a 100 Czech crowns, etc. Usually, the price decline (rate weakening) stops here, because due to psychological reasons, it is difficult to break this level. However, if the support is broken, the price or rate will fairly quickly weaken to the next support level. The opposite of support in the case of strengthening is resistance level.
Support level: The same as ‘support’. If a price is falling (the exchange rate is weakening), it might occasionally stop at a certain level, which is significant for some psychological reason. It could be, for instance an all-time low, the level of the exchange rate where the central bank has already previously intervened, or some “round level”, such as the exchange rate of 1 EUR = 1 USD, a price of stock for a 100 Czech crowns, etc. Usually, the price growth (the strengthening of the exchange rate), stops here because due to the psychological reasons, it is difficult to break this support level. However, if it does manage to break through the support barrier, the price or the rate will once again, and fairly quickly, weaken to the next support level. The opposite of the support level is the resistance level in the case of strengthening.
Swap: A type of financial derivative, which is based on a regular exchange of two payments, usually every 6 months. A swap provides the possibility of securing against a certain financial risk (a change in exchange rates, interest rates, etc.) or, by contrast, to speculate. In the case of securing (speculating) against exchange rate risk, payments are in two different currencies. In the case of securing (speculating) against interest rate risk, payments are in the same currency, but one party will pay the other a fixed agreed payment, the other party will pay the first party a variable payment, which will be derived from the current interest conditions on the market. This variable payment may be set at, for instance, 3-month PRIBOR. This type of swap is known as an IRS. They are primarily used by legal entities and financial institutions. There are also other variants of swaps. Swaps as hedging instruments are suitable for legal entities, who usually execute them with banks. Using a swap for speculation is only suitable for very experienced investors.

T

Tax freedom day: Some of the money we make, has to go to the state as taxes. Tax freedom day is a day, which divides the year into two parts, according to how much of the earned money has been deducted and paid to the state. The tax freedom day marks the moment when we hypothetically stop working for the state and begin earning our own money. Every year falls on a different day, in the Czech Republic it is celebrated approximately in the middle of June.
Tax haven: Places where taxes are levied at a low rate or not at all. Foreign companies often register in such places on paper, even though they conduct business from an entirely different country.
T-bill: An American government bond with maturity of up to one year, including. Comparable to the Czech state treasury bill.

T-bond: American government bond with maturity over one year.
Technical analysis: A forecast for the development of exchange rates, stocks, bonds, etc. based mainly on technical factors.
Technical factors: Factors influencing the exchange rate, interest rate or prices of a certain investment instrument, which is associated with the actual basis of trading. It includes the level of liquidity, automatic stop-losses pre-determined by traders, an unusually large trade which moves the rate/price, closing of positions before upcoming holidays and others. Trading is sometimes influenced more by technical factors, at other times by fundamental or psychological factors.

Testing of levels: If a rate is falling / rising, it might occasionally stop at a certain level, which is significant for some psychological reason. It could be, for instance an all-time low, the level of the exchange rate where the central bank has previously intervened, or some “round level”, such as the exchange rate of 1 EUR = 1 USD, a price of stock for a 100 Czech crowns, etc. Usually, the price decline/growth stops here, because due to psychological reasons, it is difficult to break this level. If the exchange rate tries to move beyond this level, but without any success, it is referred to as the testing of a significant level.
Tranche: A part of an issuance of a security.

Trigger: The level of an exchange rate (price), pre-determined by an investor, at which a trading operation will be executed (e.g. purchase a stock or currency). The purpose is to conduct the trade at a suitable moment, so that the investor does not miss this opportunity, e.g. due to his/her own indecisiveness or exaggerated risk-taking (With forex trading, banks very often set their triggers and buy orders start almost automatically, without any trader input. The result of this wide-spread start and the purchases of the particular strengthening currency is an even sharper strengthening for this currency.) The opposite of a trigger is stop-loss.

U

Umbrella fund: (= fund of funds). a mutual or investment fund focused mainly on investments into participation certificates or stocks of other funds. It is one of the less risky ones, but also less profitable.

Underlying asset: An asset (stock, currency, commodity, index, interest rate, etc.), whose value, which may change over time, is the basis for the movement of prices in financial derivates (see ‘derivative’).

Univyc,a.s.: Subsidiary of the Prague Stock Exchange, which is responsible for the settlement of securities trades of the exchange members and other non-exchange participants of Univyc.

USGAAP: (US Generally Accepted Accounting Principles). The American variant of general accounting standards.

V

VAR bonds: The same as FRN or bonds with a variable coupon. Coupon is not defined as a predetermined percentage of the nominal value, but as variable percentage from nominal value, which is derived from the current market interest rates.

Volatility: The fluctuation of a price or a yield.

W

Warrant: A security of the derivative type, entitling a person to obtain stocks, bonds or other investment instruments.

Y

Year-on-year growth: Growth statistically measured in comparison with the same period in the past year. For example, growth in June 2004 versus June 2003.

Yield curve: The relation of interest rate levels to maturity dates, graphically expressed. it usually applies that the longer the maturity, the higher the yield/interest rate. Therefore, a yield curve is usually rising. However, this need not always apply.

Z

Zero coupon bond: This bond does not require the issuer to pay the coupon to the owner, but only the face value of the bond. Such bonds, especially with long maturity dates, are usually subject to very volatile prices and are therefore suitable for speculations on their price change. By contrast, they are less suitable for small investors.

ZEW: An index published monthly by the German Economic Institute. It is based on an opinion survey amongst economic analysts and investors with regard to the expected economic development over the next 6 months.

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