Glossary - B

BACS 
Acronym for Bank Automated Clearing System. This is the system used to send money between most banks and building societies in the UK.

Balance sheet
A financial statement showing a company’s assets, liabilities, and shareholders’ equity on a given date, often at the end of the financial year.

Bank of England
The UK’s central bank. Responsible for monetary policies and interest rates.

Bargain
Term used on the London Stock Exchange to describe a purchase or sale. Unlike the normal usage of the term, it does not imply that the transaction took place at a special or discounted price. Also known as a transaction, deal or trade.

Bargain tax date
The date on which a deal took place.

Barrier option
A class of path dependant options which extinguish or come alive when pre-determined trigger points are reached. These are two types.

Knock-in options are activated when the preset barrier price is reached, after which it has the characteristics of a standard option. Knock-out options are extinguished when the barrier price is reached.

Both types of barrier option can be classified as up and in or up and out, which are activated or deactivated by upward movements through the barrier price, and down and in or down and out, which are activated or deactivated by downward movements through the barrier price.

Base currency
The first currency quoted in a currency pair. For example, the base currency is the euro in EUR/USD.

Base rate
The rate at which the Bank of England lends to other banks in the UK.

Basis
The price of a futures contract minus the spot price, and therefore the difference between the forward price/yield and spot price/yield of futures.

Basis is divided into carry basis and value or excess basis. Carry basis is the theoretical price of the future, minus the spot price of the underlying asset, and is equal to the net cost of carry. Value or excess basis is the difference between the theoretical price of the future and its market price.

Basis risk
The extent to which valuations for derivatives securities do not accurately reflect valuations for the underlying securities on which they are based. Sometimes exploited by investors engaging in arbitrage.

Basis trading
An arbitrage position typically comprising a long cash position together with a short position in its respective futures contract, whereby the cash price plus the cost of carry of the underlying position is lower than the futures price.

Arbitrageurs will therefore buy cash and carry to the futures date for delivery into the futures contract. It is assumed that the cash position is financed in the overnight repo market. Buying the basis is to buy cash bonds and sell futures, and selling the basis is to sell cash bonds and buy futures.

Basket
A portfolio consisting of more than one security that may or may not replicate an index. For example, a share basket is contains shares in more than one company.

Basket option
See rainbow option

Basket trade
A structure whereby the swap is not against one reference obligation or reference entity but a number or basket of obligations or entities. There is a payout under the swap if any of the reference obligations or entities defaults.

Bear market
A falling market or one that is expected to fall. Opposite to a bull market.

Bearer bond
Bonds not registered on the books of the issuer. Bearer bonds can be in physical form, with holders receiving interest payments by detaching coupons from the bond certificates and delivering them to the paying agent.

Bearer document
Documents that state that the person in physical possession of them (i.e. the bearer) is the owner.

Beneficial owner
The true owner of a security. The registered holder may act as nominee for the actual shareholder.

Benefits
Benefits offered by companies to their shareholders over and above the dividend payment, often requiring a minimum shareholding in the company. Also known as perks.

Best efforts
Arrangement whereby investment bankers acting as agents agree to use their best efforts to sell an issue to the public. This differs from underwriting the issue.

Best execution
A firm’s commitment to obtain the best price available in the market for the relevant order. Also known as dealing at best.

Beta
A measure of the sensitivity of a security relative to the market. The returns on a security with a beta of one will move in line with the market. If the beta is greater than one, the security will exaggerate market returns. If it is less than one, security and market returns will move in opposite directions. Betas are additives, meaning that the beta of a portfolio is the weighted average of all the individual betas in a portfolio.

Bid
An attempt by one company to take over another.

Bid/offer price
The difference between the buying and selling price of your units. It includes an allowance for the initial charge, if there is one, plus the cost of making the investment.

Bid price
The price at which a market maker is prepared to buy shares. Opposite of ask price.

Binary accrual swap
See accrual swap

Binary option
Binary options have discontinuous payoff profile. The holder of a European binary call option pays the holder nothing if the asset price ends up below the strike price at maturity and a fixed amount if it ends up above. Sometimes referred to as a cash or nothing call.

Binomial model
A methodology employed in some option pricing models that assumes that the price of the underlying can either rise or fall by a certain amount at each predetermined interval until expiry.

Binomial option tree
Option pricing method which assumes that the price of the underlying can go up or down by fixed multiples. Each price jump is assigned a probability and a tree of probable underlying prices is built. Working from the tree points or nodes at the option maturity date, the worth of the option can be back calculated until the option can be valued at the desired date. This technique is commonly used to price path dependant options where the option’s price is dependant on the underlying’s price history. A more advanced technique, the trinomial tree, assumes that option prices can move up down or stay the same.

Black-Scholes model
Developed by Fischser Black and Myron Scholes in 1973, this is the classic modern option pricing model and the first general solution for the valuation of options. The model provides no arbitrage value for European style options on shares as a function of the forward price, the exercise price of the option, the risk free interest rate and the variance of the stock price which is assumed to follow lognormal distribution.

Board of Directors
The individuals who are legally responsible for running a company.

Bond
Any interest bearing or discounted government or corporate security that obligates the issuer to pay the bondholder a specific sum of money, or coupon, at regular intervals. The issuer must also repay the principal amount at maturity.

A bond’s value will generally depend upon the inflation outlook, interest rates and the underlying security of the issuer. Bonds issued by UK Government are generally regarded as very low risk and are therefore known as gilt-edged investments or gilts. Bonds issued by corporations may be less secure, so the issuer may have to pay a higher rate of interest to attract investor's capital. Also known as fixed interest securities.

Bond basis
Refers to a method used to calculate accrued interest on some bond and money market instruments in the US corporate and Eurobond markets. Conventionally based on a 30 day month and a 360 day year.

Bond fund
A fund investing primarily in bonds.

Bond issue
A bond issue raises money for a company in the form of long-term debt. The company makes regular payments of interest to bondholders with repayment of the principal on maturity. The price of bonds can go up and down.

Bonus issue
See capitalisation issue

Book
Record maintained by a lead manager or bookrunner of buy orders for a new issue. Note that orders are not binding on the investor until they are aware of all the information relating to the issue, including the issue price and yield to maturity.

Book cost
Original cost of the stock on the date of purchase or transaction.

Books closed date
See record date

Bootstrapping
A general term for techniques used to deconstruct the prices of instrument in the market to the prices of instruments that are simpler, more fundamental or analytically more tractable. It is most commonly used to describe the process of mapping a yield curve defined through a series of market instruments into a series of zero-coupon bonds, but can also be applied to other instances, such as the mapping of a term volatility surface indexed by spot and elapsed time.

Bottom-up
An investment strategy in which companies are evaluated simply on their own merit, without taking into account the wider outlook for their country or sector (compare top-down).

Bought deal
A firm commitment to purchase an entire new issue, irrespective of the sale of the securities by the lead managers to investors. Differs from best efforts where no commitment to purchase exists.

Breaking the syndicate
Termination of syndicate, or banking group, formed to underwrite a new issue. Specifically, the agreement to restrict sales at the issue price only is terminated.

Broker
The intermediary agent between a market maker and an investor, who charges a commission for services provided. Also known as a stockbroker.

Brokerage
Commission charged by the broker.

Bulking
Combining many orders in one company’s shares together into one deal. Useful when individual orders are below the minimum dealing size. Also known as aggregation.

Bull market
A rising market, or one that is expected to rise. Opposite of bear market. 

Bullet bond
A bond that cannot be redeemed prior to maturity.

Buy price
The price at which shares are bought.

Buy write
Writing a covered call consists of taking a long position in the underlying asset plus a short position in a call option. The long asset position covers or protects the option writer from a rise in the asset price.

Buyer of protection
The party who, as a result of entering the swap, is reducing their risk exposure, or selling or shorting the reference obligation. Also known as the seller of risk.

Buyer of risk
The party who, as a result of entering the swap, is increasing their risk exposure, or going long the reference obligation. Also known as the seller of protection.