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GLOSSARY
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AAA/Aaa rated the highest
rating that can be assigned by the credit rating agencies. It rates
the issuer's capacity to pay interest and repay principal extremely
strongly.
Active
Management the difference between actual returns and the returns
which would have been achieved from a passive investment strategy.
Basis
Point (bp) is equal to 100th of a percentage point,
e.g. 0.5% is equal to 50bp.
Benchmark
a neutral or passive investment strategy which can be easily monitored
to compare against actual performance.
Corporate
Commercial Paper short term debt issued by companies.
Credit
risk is the risk of financial loss arising from a counterparty
to a transaction defaulting on its financial obligations under that
transaction.
Currency
Risk is the risk of financial loss arising from fluctuations in
exchange rates.
ECU
was the European Currency Unit, a weighted basket of EU currencies
such as Sterling, Deutschmark and French Franc (now replaced by the
euro).
ECU
Notes three year marketable debt denominated in ECU issued by
HM Treasury (now redenominated into euro).
Eurosystem
is the area of 11 nations which adopted the Euro as a single currency
on 1st January 1999, and which will start using Euro notes
and coins three years later
European
Bloc Eurosystem currencies plus the Danish krone, the Swedish
krona, the Norwegian krone, the Greek drachma and the Swiss franc.
Forward
Book the difference between aggregate forward commitments to sell
sterling for foreign currency and forward commitments to buy sterling
with foreign currency.
Forward
Rate Agreement a contract obligating two parties to exchange the
difference between two interest rates at some future date. One rate
being fixed now and the other being a future floating rate (e.g. LIBOR)
Forward
transaction is an agreement to pay a specific amount at a specific
time in the future for a currency or financial instrument.
Futures
a contract to buy or sell a specified asset at a fixed price at some
future time. Futures differ from forward contracts in that they are
traded on a futures exchange. Initial and variation margin is also
paid or received to eliminate any counterparty credit risk.
Gold
loco swap exchange of gold in one location for gold in another
location with a commitment to reverse the exchange at some specified
future date.
Gold
quality swap exchange of gold of one delivery standard (purity)
for gold of another delivery standard with a commitment to reverse
the exchange at some specified future date.
Hedge
An asset or derivative whose market risk offsets the risk in another
asset held or liability.
Interest
Rate Risk is the risk of financial loss arising from fluctuations
in interest rates.
Intervention
is the purchase or sale of domestic currency by central banks or governments
with the intention of influencing the exchange rate.
Liquidity
risk is the risk of financial loss that could occur should the
reserves require restructuring.
Liquidity
is the ease with which one financial claim can be exchanged for another
as a result of the willingness of third parties to transact in these
assets.
Long
is to buy an asset on the expectation that its price will rise. In
the case of bonds this implies an expectation that interest rates
will fall.
Market
Risk is the risk of financial loss arising from movements in interest
rates or currencies.
National
Loans Fund (NLF) the account used for most of the Government's
borrowing transactions, payments of debt interest and some domestic
lending transactions.
Operational
risk is the risk of financial loss arising from the transaction,
settlement and resource management processes associated with reserves
and debt management. This broad definition includes risks such as
fraud risk, settlement risk, IT risks, legal risk, accounting risk,
personnel risk and reputational risk.
Reserve
Tranche Position (RTP) the difference between the IMF's holdings
of sterling and the UK's subscription (or quota) to the IMF. In effect
the amount of the UK's subscription the IMF has called. The RTP is
a reserve asset as in the event of need the UK could exchange sterling
for useable foreign currencies up to the value of its RTP.
Sale
and Repurchase Agreements (repo) the sale of an asset with an
obligation to repurchase it at a fixed price at some future date.
Essentially secured borrowing.
Short
is to sell on the expectation that the price of the asset will drop
below its prevailing market price. In the case of bonds this implies
an expectation that interest rates will rise.
Special
Drawing Rights (SDRs) an international reserve asset created by
the IMF. It is valued in terms of a weighted basket of four currencies
(US dollar, yen, sterling and euro).
Spot
transaction is an agreement to pay the prevailing market price
for a currency or financial instrument for immediate delivery which
for example means two days time for most major currencies.
Swap
is a financial transaction in which two counterparties agree to exchange
streams of payments occurring over time according to predetermined
rules. Swaps are used to change the currency or interest rate exposure
associated with investments.
US
Dollar bloc US and Canadian dollar holdings.
US
Government Agencies US entities carrying out public policy functions
in the US which issue their own debt e.g. Fannie Mae. Typically their
debt is not formally guaranteed by the US Government but they are
usually considered to be very credit worthy.
Value
at Risk (VAR) measures the aggregate market risk on a portfolio.
VAR is an estimate of the maximum potential change in the value of
a portfolio with a given probability over a defined time horizon given
the historic pattern of movements in financial markets. For example,
A95% of the time losses will not exceed $10mn over a two week period@.
Yield
curve plots the relationship between bonds' maturity and their
yield.
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