Legal & Financial Concepts

Compound Interest (Anatocism)
When interest is added to the principal, and then new interest is calculated on both. In other words: “interest on interest.”
Usury
Charging excessively high interest rates, often above legal limits. Considered illegal or unfair in many countries.
Default
Failure to meet a financial obligation, such as missing a loan or bond payment.
Collateral
An asset pledged by a borrower to secure a loan. If they don’t pay, the lender can take it.
Lien
A legal claim on property until a debt is paid.
Foreclosure
When a lender takes back property (like a house) after the borrower fails to repay a mortgage.
Bankruptcy
A legal process when a person or company cannot pay debts, leading to liquidation or restructuring.
Insolvency
The financial state of being unable to pay debts when they come due.
Arbitration
A private method of dispute resolution where a neutral third party makes a binding decision.
Mediation
A negotiation process with a neutral mediator helping parties reach a voluntary agreement.
Estoppel
A legal rule preventing someone from going back on a statement or promise if another person relied on it.
Fiduciary Duty
An obligation to act in another party’s best interest, common in trustee–beneficiary or director–shareholder relationships.
Consideration
Something of value exchanged in a contract (money, service, promise). Without it, a contract may not be valid.
Force Majeure
A clause in contracts freeing parties from liability if extraordinary events (war, natural disasters) prevent performance.
Indemnity
A promise to compensate someone for harm, loss, or liability.
Liquidated Damages
Pre-agreed compensation stated in a contract, payable if one party breaches.
Nemo dat rule
A principle in property law: “you cannot give what you don’t have.” A seller without ownership cannot transfer ownership.
Novation
Replacing one party or obligation in a contract with another, with consent from all sides.
Quantum Meruit
Latin for “as much as he deserves.” Payment for services when no exact contract price is agreed.
Retainer
An upfront fee paid to secure a lawyer’s or consultant’s services.

Escrow
Money or assets held by a neutral third party until conditions of a contract are fulfilled.
Promissory Note
A written promise to pay a certain amount of money to someone at a specific time.
Bill of Exchange
A written order from one party to another to pay a fixed sum, often used in international trade.
Letter of Credit
A bank’s guarantee that a seller will receive payment from a buyer once conditions are met.
Suretyship
When a third party guarantees the debt or obligation of another.
Guarantor
The person or entity that promises to cover another’s debt if they fail to pay.
Debenture
A type of long-term debt instrument not backed by collateral but by the issuer’s credit.
Bond
A fixed-income security where an investor lends money to a borrower (government or company).
Equity
Ownership interest in a company, usually in the form of shares.
Dividend
A portion of a company’s profits distributed to shareholders.
Par Value
The face value of a share or bond, stated in its charter or certificate.
Capital Gain
Profit earned when an asset is sold for more than its purchase price.
Capital Loss
The opposite of capital gain: when an asset is sold for less than it was purchased.
Merger
When two companies combine into one new entity.
Acquisition
When one company buys another and takes control of its operations.
Takeover Bid
An offer to buy shares of a company to gain control, often directly made to shareholders.
Tender Offer
An open offer to purchase stock from existing shareholders at a specified price and time.
Insider Trading
Buying or selling securities based on confidential, non-public information.
Prospectus
A legal document issued by companies offering securities, describing details to potential investors.
Underwriting
A financial service where banks or institutions guarantee the sale of securities.
Escalation Clause
A contract provision allowing prices or payments to increase under certain conditions.
Non-Disclosure Agreement (NDA)
A contract where parties agree not to share confidential information.
Non-Compete Clause
A contract clause preventing someone from working with competitors for a certain time.
Intellectual Property (IP)
Legal rights protecting creations of the mind, like inventions, designs, or artistic works.
Patent
A government right granting exclusivity to an inventor for a new invention.
Trademark
A symbol, word, or logo legally protecting a brand identity.
Copyright
Legal protection for authors, artists, and creators of original works.
Trade Secret
Confidential business information (like formulas or processes) that gives an advantage.
Joint Venture
A business arrangement where two or more parties cooperate to achieve a specific goal.
Partnership
A business structure where two or more people share ownership, profits, and liabilities.

Limited Liability
When business owners are not personally responsible for company debts — their loss is limited to what they invested.
Unlimited Liability
The opposite: owners are fully responsible, even with personal assets, for business debts.
Incorporation
The legal process of forming a corporation, separate from its owners.
Articles of Association
A document outlining a company’s internal rules and structure.
Memorandum of Association
A legal statement by company founders, including objectives and powers.
Bylaws
Rules adopted by a corporation to regulate internal management.
Quorum
The minimum number of members needed to make decisions in meetings legally valid.
Proxy
The authority to represent someone else in voting at company meetings.
Resolution
A formal decision made by shareholders or directors in a meeting.
Minority Shareholder Rights
Protections given to small shareholders against unfair majority actions.
Majority Rule
The principle that decisions supported by most shareholders or directors will prevail.
Piercing the Corporate Veil
When courts hold owners personally liable despite the company’s limited liability status.
Injunction
A court order to do or stop doing something.
Specific Performance
A legal remedy forcing a party to carry out their contractual obligations.
Breach of Contract
Failure to fulfill the terms of a valid agreement.
Rescission
Canceling a contract and returning parties to their original positions.
Consideration Clause
A part of the contract specifying what value (money, goods, services) is exchanged.
Termination Clause
A contract provision explaining how and when the contract can be ended.
Assignment
The transfer of rights or obligations under a contract to another party.
Warranty
A legal promise about the quality or condition of goods/services.
Guarantee
A secondary promise ensuring the performance or payment of another’s obligation.
Bailment
When goods are delivered to someone for a purpose, with the obligation to return them.
Agency
A legal relationship where one party (agent) acts on behalf of another (principal).
Principal
The person who authorizes an agent to act on their behalf.
Ratification
Approval of an act carried out by an agent without prior authority.
Apparent Authority
When a third party reasonably believes an agent has authority, even if not formally given.
Ultra Vires
Acts done beyond the powers granted to a company by its constitution.
Due Diligence
A thorough investigation of a business or investment before making a deal.
Good Faith
Acting honestly and fairly in contracts and business dealings.
Bad Faith
Dishonest or unfair conduct, like hiding facts or misleading the other party.

Consideration in Kind
Payment in goods or services instead of money in a contract.
Severability Clause
A contract term stating that if one part is invalid, the rest still applies.
Governing Law Clause
Specifies which country’s or state’s law will apply to the contract.
Jurisdiction Clause
Defines which court or authority will handle disputes.
Arbitration Clause
A contract provision requiring disputes to be resolved through arbitration instead of court.
Mediation Clause
A clause requiring parties to try mediation before going to court.
Liquidation
The process of selling all company assets to pay debts when closing down.
Voluntary Liquidation
When shareholders decide to close a company and distribute its assets.
Compulsory Liquidation
When a court orders a company to shut down due to insolvency.
Receivership
When a receiver is appointed to manage a company’s assets on behalf of creditors.
Trust
A legal arrangement where one party holds assets on behalf of another.
Trustee
The person or entity managing the trust’s assets for beneficiaries.
Beneficiary
The person who benefits from a trust, insurance policy, or will.
Power of Attorney
A legal document giving someone authority to act on another person’s behalf.
Testament (Will)
A legal document stating how a person’s assets will be distributed after death.
Inheritance
Assets or rights passed down from someone who has died.
Probate
The legal process of validating a will and administering an estate.
Escheat
When a person dies without heirs, their property passes to the state.
Per Stirpes Distribution
A method of dividing inheritance equally among family branches.
Intestate Succession
Inheritance rules that apply when someone dies without a will.

Leverage
Using borrowed money to increase the potential return on an investment.
Hedging
Reducing risk by making an investment that offsets potential losses.
Derivative
A financial contract whose value comes from an underlying asset, like stocks or commodities.
Futures Contract
An agreement to buy or sell an asset at a set price on a future date.
Options Contract
A contract giving the right, but not the obligation, to buy or sell an asset at a set price.
Swap
A financial agreement to exchange cash flows, such as interest rate swaps.
Forward Contract
A private agreement to buy or sell an asset at a fixed price on a future date.
Market Manipulation
Unfair practices that artificially affect the price of securities.
Price Fixing
When competitors agree to set prices at a certain level instead of competing.
Cartel
A group of companies that collude to control prices or markets.
Antitrust Law
Laws preventing monopolies and promoting competition.
Monopoly
A market dominated by one seller, limiting competition.
Oligopoly
A market controlled by a small number of firms.
Duopoly
A market with only two dominant sellers.
Insider Information
Confidential knowledge about a company not available to the public.
Tender Document
A formal invitation for suppliers to submit offers for a contract.
Bid Bond
A guarantee that a bidder will sign the contract if selected.
Performance Bond
A bond ensuring a contractor will complete a project as agreed.
Payment Bond
A bond guaranteeing workers and suppliers will be paid.
Retention Money
A portion of payment withheld until project completion.
Subrogation
The legal right for an insurer to step into the shoes of the insured to recover losses.
Reinsurance
Insurance purchased by insurance companies to reduce their own risk.
Double Insurance
When the same risk is insured by more than one insurer.
Uberrimae Fidei (Utmost Good Faith)
Principle that insurance contracts require full honesty and disclosure.
Insurable Interest
The requirement that the insured must have a financial stake in what is insured.
Risk Pooling
Combining risks from many people so losses are shared.
Moral Hazard
When insurance coverage encourages riskier behavior.
Adverse Selection
When high-risk individuals are more likely to seek insurance.
Act of God Clause
Contract provision excusing liability for natural disasters.
Penalty Clause
A contract term imposing a fine for non-performance.
Non-Assignment Clause
A clause preventing transfer of rights or obligations to another party.
Change of Control Clause
Allows termination if a company changes ownership.
Hardship Clause
Allows renegotiation of a contract if circumstances change drastically.
Acceleration Clause
Makes the entire debt immediately due if one payment is missed.
Covenant
A binding promise in a contract, especially in finance.
Restrictive Covenant
Limits what a borrower or employee can do.
Positive Covenant
An obligation to perform certain actions, like maintaining insurance.
Debtor in Possession
A bankrupt company that continues operating under court supervision.
Workout Agreement
A negotiated settlement between debtor and creditors to avoid bankruptcy.
Preference Payment
A payment made to one creditor before bankruptcy that can be reversed.
Fraudulent Conveyance
Transferring assets to avoid paying creditors.
Clawback
Recovering money already paid, often in bankruptcy or executive pay cases.
Turnover Ratio
A measure of how efficiently assets are used to generate sales.
Liquidity Ratio
A financial ratio showing the ability to pay short-term obligations.
Debt-to-Equity Ratio
Measures financial leverage by comparing debt to shareholder equity.
Solvency Ratio
Indicates whether a company can meet long-term obligations.
Working Capital
Current assets minus current liabilities, showing short-term liquidity.
Cash Flow Statement
A financial report showing money coming in and out.
Balance Sheet
A snapshot of a company’s assets, liabilities, and equity.
Income Statement
A financial report showing revenues, expenses, and profit.

Gross Profit
Revenue minus the cost of goods sold, before other expenses.
Net Profit
The final profit after all expenses, taxes, and costs are deducted.
EBITDA
Earnings before interest, taxes, depreciation, and amortization — a measure of operating performance.
Amortization
Gradual reduction of a debt or intangible asset over time.
Depreciation
Allocation of the cost of a tangible asset over its useful life.
Accrual Accounting
Recording income and expenses when they are earned or incurred, not when cash is exchanged.
Cash Accounting
Recording transactions only when money is received or paid.
Provision
Money set aside for a probable expense or liability.
Reserve
Profits retained in the business instead of being distributed.
Contingent Liability
A potential liability that may occur depending on future events.
Joint Liability
When two or more parties are equally responsible for a debt.
Several Liability
Each party is only responsible for their portion of a debt.
Joint and Several Liability
Creditors can demand the full debt from any one of the responsible parties.
Liquid Assets
Assets that can be quickly converted into cash without losing value.
Fixed Assets
Long-term assets like land, buildings, and machinery.
Intangible Assets
Non-physical assets like patents, trademarks, and goodwill.
Goodwill
The value of a business’s brand, reputation, and customer loyalty.
Fair Value
The estimated market price of an asset under normal conditions.
Book Value
The value of an asset according to the company’s balance sheet.
Market Value
The current price an asset could sell for in the market.
Pari Passu
A Latin term meaning “on equal footing” — creditors share equally.
Preferential Share
Shares that give fixed dividends and priority over ordinary shares.
Ordinary Share
Common shares with voting rights but variable dividends.
Convertible Bond
A bond that can be exchanged into shares of the issuing company.
Callable Bond
A bond that the issuer can repay early before maturity.
Puttable Bond
A bond that the holder can sell back to the issuer before maturity.
Perpetual Bond
A bond with no maturity date, paying interest indefinitely.
Syndicated Loan
A large loan provided by a group of banks together.
Bridge Loan
A short-term loan used until long-term financing is secured.
Overdraft
When withdrawals exceed the balance in a bank account, creating debt.
Credit Line
A flexible loan allowing borrowing up to a set limit.
Revolving Credit
Credit that renews after repayment, like a credit card.
Secured Loan
A loan backed by collateral.
Unsecured Loan
A loan with no collateral, only based on borrower’s creditworthiness.
Securitization
Turning financial assets (like loans) into tradable securities.
Mortgage-Backed Security (MBS)
A financial product made from a pool of mortgages.
Asset-Backed Security (ABS)
A security backed by other assets like loans or receivables.
Credit Rating
An evaluation of a borrower’s ability to repay debt.
Credit Default Swap (CDS)
A financial contract providing insurance against loan default.
Hedge Fund
An investment fund using high-risk strategies to maximize returns.
Mutual Fund
An investment pool where many investors contribute and share profits.
Exchange-Traded Fund (ETF)
A fund traded on stock exchanges, like individual stocks.
Index Fund
A fund designed to track a specific market index, like the S&P 500.
Venture Capital
Investment in early-stage startups with high growth potential.
Private Equity
Investment in private companies, often to restructure or grow them.
Crowdfunding
Raising small amounts of money from many people online.
Angel Investor
An individual who invests personal funds in startups, often providing mentorship too.
Seed Capital
The first money invested to start a business idea.
Series A Funding
The first round of significant venture capital for scaling a startup.
Initial Public Offering (IPO)
When a company first sells its shares to the public on a stock exchange.

Secondary Offering
When a company sells additional shares after its IPO to raise more capital.
Lock-Up Period
A time during which insiders cannot sell their shares after an IPO.
Underwriter Spread
The difference between the price paid to the issuer and the price at which shares are sold to the public.
Market Capitalization
Total value of a company’s shares on the stock market (shares × price).
Blue-Chip Stocks
Shares of large, well-established, financially stable companies.
Penny Stocks
Low-priced, high-risk shares of small companies.
Dividend Yield
Annual dividends divided by the share price — shows return from dividends.
Price-to-Earnings Ratio (P/E)
A valuation metric: share price divided by earnings per share.
Earnings Per Share (EPS)
Net profit divided by the number of shares outstanding.
Market Order
An order to buy or sell a security immediately at the current market price.
Limit Order
An order to buy or sell a security at a specific price or better.
Stop-Loss Order
An order to sell a security automatically if its price falls to a certain level.
Take-Profit Order
An order to sell a security automatically when its price reaches a target profit.
Bid Price
The price a buyer is willing to pay for a security.
Ask Price
The price a seller is willing to accept for a security.
Spread
The difference between the bid and ask price.
Liquidity Risk
Risk that an asset cannot be sold quickly without losing value.
Credit Risk
Risk that a borrower will fail to repay a loan.
Interest Rate Risk
Risk that changes in interest rates affect investment values.
Inflation Risk
Risk that inflation will reduce the purchasing power of returns.
Currency Risk (FX Risk)
Risk that exchange rate changes affect investments in foreign currencies.
Operational Risk
Risk of loss due to failed internal processes, systems, or human error.
Systemic Risk
Risk that affects the entire financial system, like a market crash.
Horizon Risk
Risk that your investment period is too short to achieve expected returns.
Reinvestment Risk
Risk that future cash flows cannot be reinvested at the same rate.
Diversification
Spreading investments across assets to reduce risk.
Portfolio
A collection of investments held by an individual or institution.
Asset Allocation
Distribution of investments among asset classes (stocks, bonds, cash).
Benchmark
A standard or index used to measure portfolio performance.
Alpha
A measure of how much an investment outperforms its benchmark.
Beta
A measure of a stock’s volatility compared to the market.
Sharpe Ratio
A measure of risk-adjusted return of an investment.
Treynor Ratio
A risk-adjusted performance measure based on beta.
Sortino Ratio
A variation of Sharpe ratio, focusing only on downside risk.
Monte Carlo Simulation
A method to model possible investment outcomes using random variables.
Scenario Analysis
Testing investment performance under different hypothetical conditions.
Stress Testing
Assessing how extreme events affect financial positions.
Value at Risk (VaR)
Estimate of the maximum loss a portfolio could face over a period at a given confidence level.
Expected Shortfall (Conditional VaR)
Average of losses that exceed the Value at Risk threshold.
Capital Asset Pricing Model (CAPM)
A model linking expected return with risk and market performance.
Efficient Frontier
The set of portfolios offering the highest return for a given risk.
Modern Portfolio Theory (MPT)
A theory that diversification reduces risk for a given return.
Risk-Free Rate
Return on an investment considered free of risk, e.g., government bonds.
Systematic Risk
Market-wide risk that cannot be diversified away.
Unsystematic Risk
Risk specific to a company or sector, can be reduced by diversification.
Capital Structure
The mix of debt and equity a company uses to finance operations.
Weighted Average Cost of Capital (WACC)
Average cost of a company’s capital, weighted by debt and equity proportions.
Leverage Ratio
A ratio measuring the degree of debt financing relative to equity.
Debt Service Coverage Ratio (DSCR)
Ability of a company to cover debt payments with its income.
Interest Coverage Ratio
A measure of how easily a company can pay interest on its debt.

Working Capital Ratio (Current Ratio)
Shows a company’s ability to pay short-term liabilities with short-term assets.
Quick Ratio (Acid-Test Ratio)
A stricter measure of liquidity, excluding inventory from assets.
Operating Margin
Profitability from core business operations before interest and taxes.
Gross Margin
Revenue minus cost of goods sold, expressed as a percentage of revenue.
Net Margin
Net profit as a percentage of total revenue.
Break-Even Point
The level of sales where total revenue equals total costs, no profit or loss.
Contribution Margin
Sales revenue minus variable costs, used to cover fixed costs.
Return on Investment (ROI)
Measure of profitability: gain from investment divided by its cost.
Return on Equity (ROE)
Profitability measure showing return to shareholders relative to equity.
Return on Assets (ROA)
Profitability relative to total assets.
Debt Ratio
Proportion of total debt to total assets.
Equity Ratio
Proportion of total equity to total assets.
Operating Cycle
Time it takes for a business to turn inventory into cash.
Cash Conversion Cycle
Time between outlay of cash and collection from sales.
Inventory Turnover
How often inventory is sold and replaced over a period.
Accounts Receivable Turnover
How quickly a company collects money owed by customers.
Accounts Payable Turnover
How quickly a company pays its suppliers.
Days Sales Outstanding (DSO)
Average number of days to collect receivables.
Days Payable Outstanding (DPO)
Average number of days a company takes to pay suppliers.
Days Inventory Outstanding (DIO)
Average number of days inventory remains before sale.
Economic Value Added (EVA)
Profit measure after deducting cost of capital.
Market Value Added (MVA)
Difference between market value of a company and capital invested.
Book-to-Market Ratio
Comparison of book value to market value of a company.
Price-to-Book Ratio (P/B)
Market price per share divided by book value per share.
Price-to-Sales Ratio (P/S)
Share price divided by revenue per share.
Enterprise Value (EV)
Total company value including debt, equity, and cash.
EV/EBITDA
Valuation metric comparing enterprise value to operating profit.
Leverage Buyout (LBO)
Purchase of a company using significant debt.
Management Buyout (MBO)
When a company’s management purchases the business they run.
Spin-Off
Creating a new independent company by separating part of an existing business.
Divestiture
Selling off a business unit, asset, or subsidiary.
Recapitalization
Restructuring a company’s capital, e.g., changing debt-to-equity ratio.
Mezzanine Financing
Hybrid of debt and equity financing, often with higher risk/reward.
Convertible Security
An investment that can convert from debt to equity under specific conditions.
Preferred Stock Dividend
Fixed payment made to preferred shareholders before common shareholders.
Callable Preferred Stock
Preferred shares that the issuer can repurchase at a set price.
Cumulative Preferred Stock
Preferred shares that accumulate unpaid dividends to be paid later.
Non-Cumulative Preferred Stock
Preferred shares where missed dividends are not owed in the future.
Participating Preferred Stock
Preferred shares that may receive extra dividends beyond the fixed amount.
Warrant
A security giving the right to purchase stock at a fixed price before expiration.
Equity Kicker
An incentive in loans where lenders receive equity in addition to interest.
Debt Covenant
Contractual condition imposed by lenders to protect their interests.
Cross-Default Clause
Clause making a borrower default on one loan if they default on another.
Acceleration Clause in Bonds
Clause that makes all debt due immediately if certain conditions are breached.
Negative Pledge
Clause preventing a borrower from pledging assets to other lenders.
Debt-for-Equity Swap
Conversion of debt into equity to reduce company leverage.
Recapitalization via Equity Injection
Raising new equity to improve a company’s balance sheet.
Bridge Financing
Temporary funding used until permanent financing is secured.
Syndicated Loan Participation
Sharing parts of a large loan among multiple lenders.
Structured Finance
Complex financial instruments created to manage risk and optimize capital.

Special Purpose Vehicle (SPV)
A separate legal entity created for specific financial or operational objectives.
Off-Balance Sheet Financing
Financial obligations not recorded on the company’s balance sheet, often via SPVs.
Securitization Vehicle
A structure used to pool financial assets and issue securities backed by them.
Mortgage Pool
A collection of mortgages combined to create mortgage-backed securities.
Tranche
A portion or slice of a structured financial product, often with different risk levels.
Credit Enhancement
Techniques to improve the credit profile of a financial instrument.
Senior Debt
Debt with priority claim over other debts in case of liquidation.
Subordinated Debt
Debt that ranks below senior debt in priority of repayment.
Mezzanine Debt
High-risk debt that sits between senior and equity financing.
Bullet Payment
A single, large payment at the end of a loan term rather than periodic installments.
Amortizing Loan
A loan repaid gradually through regular payments including principal and interest.
Interest-Only Loan
A loan where only interest is paid during a period, with principal repaid later.
Floating Rate Loan
A loan with an interest rate that varies according to a benchmark rate.
Fixed Rate Loan
A loan with an interest rate that remains constant throughout the term.
Swaption
An option granting the right to enter into a swap agreement in the future.
Collateralized Debt Obligation (CDO)
A structured financial product backed by a pool of loans or bonds.
Credit Tranching
Dividing debt into different risk levels for investors.
Structured Investment Vehicle (SIV)
A pool of financial assets funded by issuing short-term debt.
Liquidity Facility
An arrangement to provide funding if cash flow issues arise.
Overcollateralization
Providing more collateral than required to secure a loan or obligation.
Haircut
The difference between the market value of an asset and its lending value.
Mark-to-Market
Accounting method where assets and liabilities are valued at current market prices.
Fair Value Accounting
Valuing assets and liabilities based on their estimated market value.
Impairment
When an asset’s carrying value exceeds its recoverable amount.
Write-Off
Removing an asset or debt from financial records due to its irrecoverable nature.
Provision for Bad Debts
Funds set aside to cover expected loan defaults or uncollectible accounts.
Contingent Asset
A potential asset that may arise depending on future events.
Derivative Hedge
Using derivatives to reduce risk exposure in investments.
Forward Rate Agreement (FRA)
A contract to lock in an interest rate for a future period.
Interest Rate Cap
A derivative limiting the maximum interest rate a borrower pays.
Interest Rate Floor
A derivative ensuring the minimum interest rate a lender receives.
Swap Spread
Difference between swap rate and government bond yield of the same maturity.
Basis Risk
Risk that hedge does not perfectly offset exposure due to imperfect correlation.
Currency Swap
Exchanging cash flows in different currencies to manage FX risk.
Cross-Currency Swap
A currency swap that also includes exchange of interest payments in different currencies.
Notional Amount
The principal amount on which derivative payments are calculated.
Credit Event
An event like default or bankruptcy that triggers derivative or insurance payout.
Credit Linked Note (CLN)
A debt instrument combining a bond and credit derivative.
Total Return Swap (TRS)
A contract exchanging the total return of an asset for fixed or floating payments.
Equity Swap
An agreement exchanging equity returns for cash flows or other assets.
Forward Contract on FX
An agreement to exchange currencies at a fixed rate on a future date.
Option Premium
The price paid to buy an option.
Strike Price
The predetermined price at which an option can be exercised.
Call Option
Gives the holder the right to buy an asset at the strike price.
Put Option
Gives the holder the right to sell an asset at the strike price.
In-the-Money Option
An option that would lead to profit if exercised immediately.
Out-of-the-Money Option
An option that would lead to a loss if exercised immediately.
At-the-Money Option
An option where the strike price equals the current market price.
Option Expiry Date
The last date an option can be exercised.
Delta (Options Greek)
Measures sensitivity of an option’s price to changes in the underlying asset.

Gamma (Options Greek)
Measures how much delta changes when the underlying asset price changes.
Theta (Options Greek)
Measures how the value of an option decreases as time passes (time decay).
Vega (Options Greek)
Measures sensitivity of an option’s price to volatility changes.
Rho (Options Greek)
Measures sensitivity of an option’s price to interest rate changes.
Implied Volatility
Market’s forecast of the likely movement in an asset’s price.
Historical Volatility
Actual volatility of an asset based on past prices.
Volatility Smile
Pattern where options with different strike prices have different implied volatilities.
Barrier Option
An option activated or deactivated if the underlying asset reaches a specific price.
Binary Option
Option with only two outcomes: fixed payoff or nothing.
Exotic Option
Complex option with features beyond standard calls or puts.
Knock-In Option
Becomes active only if the underlying asset hits a specific barrier.
Knock-Out Option
Expires worthless if the underlying asset hits a specific barrier.
Convertible Bond Option
Bond that can be converted into a set number of shares.
Warrants vs. Options
Warrants are issued by companies; options are traded on exchanges.
Callable Bond Option
Issuer can redeem the bond before maturity.
Puttable Bond Option
Holder can sell the bond back to issuer before maturity.
Swaption vs. Swap
Swaption gives the right to enter a swap; swap is the actual contract.
Forward-Start Option
Option that begins at a future date, not immediately.
Compound Option
Option on another option.
Employee Stock Option (ESO)
Option given to employees to buy company shares at a fixed price.
Vesting Period
Time an employee must wait to exercise stock options.
Exercise Price (Strike Price)
Price at which an option can be exercised.
Black-Scholes Model
Mathematical model for pricing European-style options.
Binomial Option Pricing Model
A model using discrete-time intervals to price options.
Monte Carlo Option Pricing
Using simulations to estimate the value of complex options.
Hedging with Options
Using options to protect against adverse price movements.
Protective Put
Buying a put option to limit potential losses on an asset.
Covered Call
Selling a call option while owning the underlying asset.
Collar
Combining protective put and covered call to limit losses and gains.
Straddle
Buying a call and a put at the same strike price to profit from volatility.
Strangle
Buying a call and put at different strike prices to profit from big price moves.
Butterfly Spread
Options strategy combining multiple strikes to profit from low volatility.
Iron Condor
Options strategy combining spreads to profit from minimal price movement.
Credit Spread
Difference between yields of two bonds with different credit qualities.
Yield Curve
Graph showing interest rates for bonds of different maturities.
Inverted Yield Curve
When short-term rates are higher than long-term rates, often a recession signal.
Normal Yield Curve
Long-term rates higher than short-term rates, typical economic condition.
Flat Yield Curve
Short- and long-term rates are similar.
Duration
Measures sensitivity of bond price to interest rate changes.
Convexity
Measures the curvature of the price-yield relationship of bonds.
Credit Spread Risk
Risk that the yield difference between bonds changes adversely.
Interest Rate Swaption
Option to enter into an interest rate swap in the future.
Inflation Swap
Swap exchanging fixed interest for payments linked to inflation.
Basis Swap
Swap exchanging interest payments based on different floating rates.
Total Return Swap (TRS)
Swap exchanging total return of an asset for fixed/floating payments.
Equity-Linked Note
Debt security with returns tied to an equity or index.
Credit Linked Note (CLN)
Debt instrument linked to the credit risk of a reference entity.
Principal Protected Note (PPN)
Investment guaranteeing the return of initial principal at maturity.
Structured Product
Financial instrument created to meet specific risk/return needs.
Synthetic CDO
CDO using derivatives to gain exposure to credit risk without owning actual assets.

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