Derivatives glossary
Counterparty risk
The risk that a counterparty might fail to fulfil its contractual obligations.
Counterparty
The other party to a contract.
Collateral/margin
Cash or securities pledged against the value/performance of a contract.
Futures
Agreement to buy a commodity or financial asset on a date in the future at a fixed price.
Options
Gives the holder the right to buy or sell an underlying asset by a certain date at a fixed price.
Swaps
A contractual agreement where two parties agree to exchange (swap) either a single payment or a series of payments in the future. The most widely used swaps are contracts relating to interest rates, inflation, or currencies.
‘Long’ position
One that will benefit from the value of the underlying assets going up.
‘Short’ position
One that will benefit from the value of the underlying assets going down.
Value-at-risk (VaR)
A statistical estimate regarding the probability of portfolio losses in normal market conditions based on analysis of historical price movements, correlations and volatilities. This can be expressed as a percentage at a given level of confidence over a given time horizon. Regulated funds are required to calculate their 99% confidence over one month. For example, if a fund’s VaR is 5% over one month with 99% confidence, there is a 1% chance that over the forthcoming month the fund value will fall by over 5%.
UCITS III
Undertakings for Collective Investment in Transferable Securities – regulations which are set by the European Union and incorporated into the FSA handbook. The most recent update to the UCITS regulations allows funds to invest in a wider set of financial instruments, including derivatives.
NURS
Non-UCITS Retail Schemes (NURS) are funds set up and managed in accordance with FSA regulations for such schemes. NURS rules allow funds to access additional asset classes over and above UCITS. They also provide increased flexibility with regards to investing in other collective investment schemes. In the main, however, the regulations regarding the use of derivatives are consistent with UCITS.
Maximum drawdown
The largest drop in unit price since the launch of the fund, i.e. the drop in unit price from its highest point to the subsequent trough.
The information contained on these pages is for investment professionals only and must not be relied upon by anyone else. This Fund is not guaranteed, a capital protected product or a substitute for cash. The value of your investments can go down as well as up. In order to achieve its investment objectives the Fund will make extensive use of derivatives.
