Potential credit risk on an unsettled transaction in either securities, or spot or derivative transaction due to a counterparty default or failure. Counterparty risk is often used synonymously with PSR, but strictly counterparty risk includes both PSR and settlement or delivery risk.
Measures the reliability of a statistical result expressed as a percentage probability that the result is correct. A confidence level of 99% means that the result of an event will probably meet expectations 99% of the time.
Agreement that gives an investor the right, but not the obligation, to buy a stock, bond, commodity or other instrument at a specified price within a specific time period. The buyer of the option benefits from an increase in the value of the underlying instrument but the maximum loss is the premium paid.
A technique that produces estimates of the potential change in the market value of a portfolio over a specified time horizon at given confidence levels.
Prime mortgage loans generally have low default risk and are made to borrowers with good credit records and a monthly income that is at least three to four times greater than their monthly housing expense (mortgage payments plus taxes and other debt payments). These borrowers provide full documentation and generally have reliable payment histories.
Equity investments in operating companies not quoted on a public exchange. Capital for private equity investment is raised from retail or institutional investors and used to fund investment strategies such as leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital.
Likelihood that a customer will fail to make full and timely repayment of credit obligations. Banks using internal models for their Basel II capital calculations estimate PD over a one year time horizon. Rating agencies calculate historic PDs over multiple time horizons.
Offer to buy shares of a company, usually at a premium above the shares’ market price, for cash or securities or a combination of both. Where only a small proportion of the company’s shares are traded on the market and the offer is followed by a compulsory buyout, the process is known as a “squeeze-out”.
A form of short-term borrowing used primarily by dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the following day. For the party selling the security (and agreeing to repurchase it in the future) it is a repo; for the party on the other end of the transaction, (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement.
Asset-backed securities for which the underlying asset portfolios are residential mortgages.