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Call option

An option that provides the right but not the obligation to buy the underlying security.

 

Cap

An option strategy that sets a ceiling on the holder's interest rate exposure.

 

Cash-and-carry arbitrage (carry arbitrage)

A basis trade involving a long cash position exactly offset by a short futures position. The holder of the position believes that the futures contract is expensive. He shorts the future, borrows at money market rates to finance a long position in the underlying, and either delivers the asset into the futures contract or waits for a narrowing of the basis and closes out the positions in which case he effectively collects the yield on a synthetic money market instrument. Also called buying the basis. This arbitrage and its opposite, reverse cash-and-carry, ensures an efficient relationship between cash and derivatives markets.

 

Cash market

The market in the underlying financial instrument on which a futures or options contract is based.

 

Central Gilts Office (CGO)

The computerised book entry settlement system for gilt transactions operated by the Bank of England.

 

Change

The difference between the last settlement price and the last reported ask, bid or trade.

 

Cheapest to deliver

The cash security that provides the lowest cost (largest profit) to the arbitrage trader. The futures price tracks the CTD instrument.

 

Clearing

The process of registration, settlement, margin and the provision of a guarantee.

 

Clearing Members

LIFFE members who ensure the process of registration, position maintenance, settlement and provision of the guarantee of the exchange-traded transaction.

 

Clearing Processing System (CPS)

LIFFE electronic system which supplies all members with their real-time positions and margin calculations, as well as maintaining accounts and informing members of all account developments.

 

Combo trade

Option strategy where transaction requires going short a call and long a put at a lower exercise price.

 

Commodity Trading Advisors (CTAs)

A CTA is anyone who, for compensation or for profit, exercises trading authority over a customers account or gives advice on the advisability of buying or selling futures and/or options, whether it be directly or through written publications or other media.

 

Contract month

The month in which a futures contract is fulfilled. See Delivery month.

 

Convergence

The movement of the cash asset price toward the futures price as the expiration date of the futures contract approaches.

 

Counterparty

The opposing side(s) of a transaction undertaken.

 

Counterparty risk

Exposure to a loss resulting from a default on a payment due. Also known as credit risk.

 

Coupon

Generally, the nominal annual rate of interest of a fixed income security expressed as a percentage of the principal value. This interest is paid to the holder of the security by the borrower. The coupon is generally paid annually, semi-annually or, in some cases quarterly depending on the type of security.

 

Covered call

The sale of call options while long the underlying instrument. The covered call writer gives up any potential upside beyond the strike of the calls in exchange for the premium income.

 

Covered put

The sale of put options while long cash.

 

Cross currency spreads

Transactions where futures contracts relating to different interest rate markets are bought and sold.