SHOP

A structure to give the investor more stable cash flow by channeling prepayments from the underlying mortgage pass-throughs to companion or support classes.

The simplest form of a financial instrument. Often associated with the first manifestation of an instrument, e.g. a “plain vanilla swap”.

The risk that the performance of a portfolio / manager may not track the appropriate benchmark over the next measurement period. Investors try to minimize this risk by allocating the investments to two or more investment managers.

The process of quantifying the performance of a security/portfolio by calculating returns generated and the risks faced by the portfolio over the measurement period.

Compares the actual performance of the portfolio with the desired performance, on the parameters of returns and risks. It also includes attributing the reasons for the variances.

A security backed by mortgages where the interest and principal paid on the underlying mortgages is passed through to the holders of the pass-through security on a pro-rata basis, less any servicing and guaranty fees.

An investment strategy which aims to track the performance of an index but not to beat it. Buy and hold strategy and indexing are passive management strategies.

With reference to yield curve movements, a parallel shift is an equal shift of the whole curve; either upwards or downwards. A parallel shift in the yield curve occurs when the interest rate on all maturities increases or decreases by the same number of basis points.

The redemption value of a bond. Also known as face value.

A repurchase agreement that provides for a secured lending for a period of one business day.

Known more commonly by the acronym OTC. A dealer market in which transactions take place via telephone, Reuters, Bloomberg and other electronic forms of communication as opposed to trading on the floor of an exchange. Such markets allow for great flexibility in product design.

In the case of a call option, the price of the underlying asset is below the strike price of the option. In the case of a put option, the price of the underlying asset is above the strike price of the option.