Glossary

ADR

American Depositary Receipts are certificates representing shares in a foreign corporation that a U.S. bank issues. The ADRs themselves can be traded on the U.S. stock market. They are a convenient means for U.S. investors to trade shares in non-U.S. companies.

Analyst

Employee of a brokerage or fund management house who studies companies and makes buy and sell recommendations on their stocks. Most specialize in a specific industry.

Arbitrage

A trading technique that involves the simultaneous purchase and sale of identical assets or of equivalent assets in two different markets with the intent of profiting by the price discrepancy.

Arbitrageur

An individual or company that takes advantage of momentary disparities in prices between markets which enables them to lock in profits because the selling price is higher than the buying price.

Assignment

"Notification by The Options Clearing Corporation to a clearing member that an owner of an option has exercised his or her rights there under. For equity and index options, assignments are made on a random basis by The Options Clearing Corporation. See also Delivery and Exercise"

Cash-only risk arbitrage

"In a cash-only risk arbitrage deal, or also know as cash-only merger arbitrage, a buyer proposes to purchase the share of the target company for a stated price in cash. The stock of the target usually trades under the purchase price of the deal until it is finalized. An arbitrageur buys the stock of the target and makes a profit if the acquirer actually buys the stock at the announced deal price. Risk arbitrage is only one example of an event driven strategy. The risk in risk arbitrage comes from the chance that the deal will not be finalized. This may happen for many reasons such as a tightening credit markets and/or material chances in the business.

Hedge / Hedged position

A position established with the specific intent of protecting an existing position. Reducing the risk of loss by taking a position through options or futures opposite to the current position they hold in the market.

Open interest

The total number of outstanding option contracts on a given series or for a given underlying stock.

Option pricing model

The first widely-used model for option pricing is the Black Scholes. This formula can be used to calculate a theoretical value for an option using current stock prices, expected dividends, the option's strike price, expected interest rates, time to expiration and expected stock volatility. While the Black-Scholes model does not perfectly describe real-world options markets, it is still often used in the valuation and trading of options.

Risk

The potential financial loss inherent in an investment.

Risk Arbitrage

Pertaining to mergers, It is an investment strategy that attempts to profit off the any differences (the spread) between the current asking price and the announced purchase price of the company that is being acquired. The risk is that the deal gets delayed, negotiated lower, or is not completed altogether. If a deal is not completed a larger loss can be incurred in a short time period while the stock adjusts to the transaction breakup news.