Summary CPA Financial Risk Management (FRM) Keyword Index for Semester 2, 2024 (Word)
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Course
CPA Australia
Institution
CPA Australia
Book
Financial Risk Management
CPA Financial Risk Management (FRM) Keyword Index (Word)
Subject: Financial Risk Management (FRM)
Period: Semester 2, 2024
Details: Detailed Keyword Index with page references for the official CPA Australia Study Guide
Study Guide Edition: Financial Risk Management (FRM) 3rd Edition (pu...
Financial Risk Management (FRM) Keyword Index
Keyword Description Page Reference
Accounting rate of return Calculated as the average annual profit divided by the initial Module 3
(ARR) cash outlay. (p.201)
Adjusted present value An approach that assumes the project being considered is Module 3
(APV) financed using only equity, and discounts the after-tax (p.225)
operating cash flows at
the appropriate discount rate for the business. It then adjusts
this base net present value (NPV) for the valuation
implications of the financing side effects associated with the
project, which typically include the present value of interest
tax shields, flotation or capital raising costs, and the value of
subsidised financing.
Agreed price (strike price) The price that the option buyer pays or receives for the asset. Module 4
The agreed price is typically called the strike price or exercise (p.280)
price.
American depository A US dollar-denominated security that trades like a common Module 3
receipt (ADR) share on US exchanges. (p.182)
American style option An option that can be exercised at any point during its life Module 4
until expiry. See ‘Option’ and ‘European style option’. (p.285)
Amortising (re: structure of Used for derivatives where the notional principal decreases Module 7
derivative) over the life of the instrument in accordance with either a (p.483)
preset pattern or with an index of interest rates/mortgage
prepayment rates. Instruments that can be structured in this
way include caps, collars, floors, swaps and swaptions.
Annuity An annuity is a series of equal payments at regular intervals. Module 2
(p.129)
Arbitrage Instruments that have identical characteristics and so are Module 6
perfect substitutes should trade at the same price. If they do (p.394)
not, a risk-free profit can be generated by simultaneously
selling the higher-priced asset and buying
the lower-priced asset. Arbitrage is the identification and
exploitation of such price anomalies.
Asset-backed security A security that is supported by a pool of specified collateral, Module 3
typically in a trust structure. (p.175)
At-the-money The point at which an option’s strike price and the price of Module 4
the underlying asset are the same. See ‘In-the-money’ and (p.283)
‘Out-of-the-money’.
Backwardation Primarily used in commodity markets, backwardation is the Module 4
situation in which futures prices are lower than spot prices to (p.274)
produce a negatively sloped forward curve. See ‘Contango’.
Bank bill swap rate (BBSW) The bank bill rate published daily on Reuters Screen BBSW Module 3
page that is used as the Australian floating rate benchmark (p.173)
for most interest rate swaps and other interest rate
derivatives such as swaptions, caps, collars and floors.
For UK equivalent see ‘London Interbank Offered Rate
, (LIBOR)’.
Bank overdraft A form of bank lending whereby a customer can overdraw a Module 3
current account up to an agreed limit, which provides the (p.165)
customer with funding on a fluctuating basis. Typically used
to cover fluctuating working capital requirements.
Basis points This is a common term in financial transactions, especially in Module 2
respect of the spread being charged between the buy and (p.124)
sell quotes, or in terms of bank charges on foreign exchange
transactions.
One basis point is 0.0001 or 0.01 per cent, 100 basis points
equals 1 per cent. Banks often consider the impact of a basis
point change in a variable (index, FX or interest rate, etc.) on
the fair value of their positions.
Basis risk Basis risk is a risk associated with imperfect hedging using Module 4
derivatives. (p.268)
It arises through the difference between the asset whose
current price is
to be hedged and the price of the asset underlying the
derivative, and/or because of a mismatch between the
maturity date of the derivative used and the actual selling or
delivery date of the asset being hedged or its quality
or ‘grade’.
Basket A selection of stocks, indices, commodities, currencies or Module 4
interest rates that can either be traded as a unit in (p.285)
themselves or used as the underlying (i.e. underlying asset or
index, etc.) for a derivative product.
Beta (ß) This is a measure of the sensitivity of an asset’s return to an Module 2
underlying factor or index. It is most commonly used to refer (p.134)
to market beta where the underlying factor is the market.
The market’s beta is one (1), so returns on a security with a
beta of one will move in line with the market. If beta is
greater than one, the security will exaggerate market returns;
if it is less than one, it will under-reflect market moves. If
beta is negative, security and market returns move in
opposite directions.
Bill of exchange Commonly used to fund international trade or working Module 8
capital. An unconditional order in writing addressed by one (p.551)
person to another, signed by the person giving it, requiring
the person to whom it is addressed to pay on demand, or at a
fixed or determinable future time. The bill of exchange states
a fixed amount of money and is paid to the order of
a specified person or bearer. Commonly utilised as a source
of short-term funding.
Black–Scholes (Black– Developed by Fischer Black and Myron Scholes in 1973, this is Module 4
Scholes–Merton) model the classic modern option pricing model and the first general (p.288)
equilibrium solution for the valuation of options. The model
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