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U

UK Treasury

Issuer of Treasury debt in the form of UK Government securities or gilts (gilt-edged stock) which are fully guaranteed by the UK government.

 

Underlying cash markets

The markets for financial instruments upon which a futures or options contract is based. These tend to be homogeneous or a 'basket' of like instruments, e.g. 3 month sterling interest rates, German government bonds with 8 1/2 - 10 years to maturity. (In the case of options on futures, the underlying instrument is the futures contract.)

 

Underlying price

Cash market price of the contract from which futures and options contracts are derived.

V

Variation margin

Actual debits (losses) and credits (profits) arising from the mark-to-market process on open futures and options positions are posted as variation margin. In the event of a shortfall, as a result of an adverse price move, a call will be made on clearing members for additional funds to cover the realised loss. Conversely, realised profits may be called from the clearing house. See Margining.

 

Vega

The measure of change in the value of an option compared with a change in volatility.

 

Vertical spreads (Bear spread)

An option strategy combining the purchase and sale of two puts (bear put spread) or two calls (bear call spread) with different strikes on the same underlying.

 

Volatility cone

The result of plotting the maximum, average, and minimum volatilities against their sample horizon period.

 

Volatility (option volatility)

The tendency of security returns or prices to fluctuate in a random, unpredictable manner. Called historical volatility when derived from past movements. Called implied volatility when estimated from the market price of options.

 

Volatility skews

In statistics, the skew is the difference between an actual distribution and a benchmark (usually lognormal) distribution. Volatility skew most commonly refers to the difference in implied volatility between out of-the-money puts and calls.

 

Volatility trade

'Delta Neutral' trades where options and their related futures contract are transacted simultaneously in an options contract. Designed primarily for professional users who wish to take a specific trading view on the level of (implied) volatility of the underlying contract, rather than the direction of price movement.

 

Volume

The total number of contract lots traded in a designated period of time.

W

Writer

An opening seller of an options contract.

X

Y

Yield

Internal rate of return expressed as a percentage.

 

Yield curve

A diagram showing the relationship between yields and maturities for a set of similar securities or interbank deposits.

Z

Zero-coupon notes

A bond which pays no coupon but is issued at a deep discount to face value. The difference between the issue and the redemption prices creates a hefty capital gain which boosts the yield close to market levels.