An arrangement in which two companies in different countries borrow each other’s currency for a given period of time, in order reduce foreign exchange risk for both of them. also called parallel loans.
Purchase price, including commissions and other expenses, used to determine capital gains and capital losses for tax purposes. This can be determined by several methods. For a purchased investment, the basis is the amount paid. If inherited, the basis is the value of the stock on the date of the original owner’s death. If received as a gift, the basis is the amount that was originally paid for the investment, unless the market value of the investment on the date the gift was given was lower. also called cost basis or tax basis.
The difference between the cash price and the futures price of a given commodity.
An arbitrage strategy usually consisting of the purchase of a particular security and the sale of a similar security (often the purchase of a security and the sale of a corresponding futures contract). Basis trading is done when the investor feels that the two securities are mispriced with respect to each other, and that the mispricing will correct itself such that the gain on one side of the trade will more than cancel out the loss on the other side of the trade. In the case of such a trade taking place on a security and the futures contract, the trade will be profitable if the purchase price plus the cost of carry is less than the futures price. also called cash and carry trade.
Book to Market Ratio
A stock’s book value divided by its market value. Book value is calculated from the company’s balance sheet, while market value is based on the price of its stock. A ratio above 1 indicates a potentially undervalued stock, while a ratio below 1 indicates a potentially overvalued stock. Technology companies and other companies in industries which do not have a lot of physical assets tend to have low book to market ratios.
U.S. dollar-denominated bond issued by an emerging market, particularly those in Latin America, and collateralized by U.S. Treasury zero-coupon bonds. Brady bonds arose from an effort in the 1980s to reduce the debt held by less-developed countries that were frequently defaulting on loans. The bonds are named for Treasury Secretary Nicholas Brady, who helped international monetary organizations institute the program of debt-reduction. Defaulted loans were converted into bonds with U.S. zero-coupon Treasury bonds as collateral. Because the Brady bonds were backed by zero-coupon bonds, repayment of principal was insured. The Brady bonds themselves are coupon-bearing bonds with a variety of rate options (fixed, variable, step, etc.) with maturities of between 10 and 30 years. Issued at par or at a discount, Brady bonds often include warrants for raw materials available in the country of origin or other options.
A customer’s account at a brokerage. There are three kinds of brokerage accounts. The most basic kind is a cash-management account, into which investors place money in order to make trades. There must be enough money in the account to cover the trade at the time of its execution (including both the price of the security and the commission), or the investor must be able to pay for the trade within three days (which is called the settlement date). Some brokerage firms accept credit cards to fund cash accounts, but the most require cash or a personal check. Such an account is often a good substitute for a bank account. A second, more sophisticated kind of brokerage account is a margin account, which allows an investor to buy securities with money borrowed from the broker. The Federal Reserve limits margin borrowing to at most 50% of the amount invested, but some brokerages have even stricter requirements, especially for volatile stocks. brokerages charge a relatively low interest rate on margin loans in order to encourage investors to buy on margin. A third kind of brokerage account is a discretionary account, which permits the broker to buy and sell shares for the investor without first contacting the investor for approval.
An option strategy designed to profit from a rise in a security’s price, by buying a near-month futures contract and selling a deferred month futures contract.