Incentive Stock Option
ISO. A type of employee stock option which provides tax advantages for the employer that a non-qualified stock option does not, but which is subject to more stringent requirements. For ISOs, no income tax is due when the options are granted or when they’re exercised. Instead, the tax is deferred until the holder sells the stock, at which time he/she is taxed for his/her entire gain. As long the sale is at least two years after the options were granted and at least one year after they were exercised, they’ll be taxed at the lower, long-term capital gains rate; otherwise, the sale is considered a “disqualifying disposition”, and they’ll be taxed as if they were nonqualified options (the gain at exercise is taxed as ordinary income, and any subsequent appreciation is taxed as capital gains). ISOs may not be granted at a discount to the current stock price, and they are not transferable, except through a will. also called qualified stock option.
A strategy designed to profit from temporary discrepancies between the prices of the stocks comprising an index and the price of a futures contract on that index. By buying either the stocks or the futures contract and selling the other, an investor can sometimes exploit market inefficiency for a profit. Like all arbitrage opportunities, index arbitrage opportunities disappear rapidly once the opportunity becomes well-known and many investors act on it. Index arbitrage can involve large transaction costs because of the need to simultaneously buy and sell many different stocks and futures, and so only large money managers are usually able to profit from index arbitrage. In addition, sophisticated computer programs are needed to keep track of the large number of stocks and futures involved, which makes this a very difficult trading strategy for individuals.
A foreign exchange rate of a foreign currency per unit of the domestic currency. In terms of U.S. dollars, an indirect quote is the number of U.S. dollars that one unit of a foreign currency could buy. For example, an indirect quote for the Japanese Yen could be 110 Yen = US $1. opposite of direct quote.
The possibility that the value of assets or income will decrease as inflation shrinks the purchasing power of a currency. Inflation causes money to decrease in value at some rate, and does so whether the money is invested or not.
Interest Rate Cap
A provision of an adjustable rate mortgage limiting how much interest rates may increase in a single adjustment period.An options contract which puts an upper limit on a floating exchange rate. The writer of the cap has to pay the holder of the cap the difference between the floating rate and the reference rate when that reference rate is breached. There is a premium to be paid by the buyer of such a contract in order to gain the certainty of a maximum payout.