Learn the Lingo (Optionality and Greeks)

Derivatives are a booming business these days, and I figured I've yet to talk about options and the ways we describe them. It's been a while since I've done a real "learn the lingo" post.

People talk about the greeks all the time (not referring to their frat/sorority buddies), but it seems precious few outside the derivatives world understand what they're talking about. Actually, precious few IN the derivatives world understand what they're talking about. Try to avoid being one of those people. Do note that I use the term "derivative" both in referring to derivative contracts and in referring to the mathematical derivative. I'm sure you'll figure out when I'm using it in each way, but do ask if my writing is confusing.

Call Option - a contract to enter into the right to buy something at a set price.

Put Option - a contract to enter into the right to sell something at a set price.

Future - a contract, usually on an exchange, allowing one to buy X units of something at the price the contract was transacted.

OTC - Over-the-Counter, refering to transactions done as deals between entities as opposed to exchange traded, thus making the market for such transactions more opaque.

Forward - a contract, usually OTC, to buy X units of something at a set price.

Delta - the sensitivity of a derivative to a small move in the underlying reference material. Sometimes delta is used to refer to the trading of the reference material itself. The reference material can be an underlying security, a commodity, a rate, even some economic variable. Delta is also the first derivative of the price of a contract with respect to the underlying reference material (remember from Calculus that the first derivative is the slope of a curve? Notice how a the slope approximates a small move in the y coordinate due to a small move in the x coordinate?).

Gamma - the second derivative of a contract with respect to the underlying reference. This shows the sensitivity of the price of a contract to large moves in the underlying. It is the curvature of the price sensitivity graph. Do you remember doing Taylor approximations in Calculus? Delta and gamma (the first and second derivative of the price of a contract with respect to it's underlying) are often used to find the price of a contract after a move in the underlying via Taylor approximation. The important concept, however, is that gamma refers to the sensitivity of a contract to large moves in the underlying.

Theta - option decay. Options are worth more when there is a lot of time before they expire. It shouldn't be surprising that the longer you have the option, the more it's worth.

Vega - the sensitivity of a contract to the volatility of the underlying reference. This is often a parameter in pricing models, but conceptually it refers to how much more a contract is worth when the underlying reference material becomes more volatile. Most options are worth more with volatility. In fact, option traders are often referred to as vega or vol traders.

Rho - the sensitivity of a contract to the underlying interest rate assumption. This is important because the interest rate changes the discount factor of value over time.

Black-Scholes - The Black-Scholes model has been the benchmark option pricing model since it's inception. It incorporates all the greeks above. In fact, it pretty much gave birth to the greeks.

TAF? What?

The Fed introduced a new toy the night after last month's Fed meeting. The new toy has an acronym "TAF" as everything in finance has to have a stupid acronym. TAF stands for Term Auction Facility. In the scheme of things, it's the Fed's way of being able to mess with libor.
Up till now the Fed had three major tools: the discount rate, the fed funds rate (via open market operations) and the reserve ratio. See my post about the Fed (another "learn the lingo" posting) if you need details about these. Now the Fed has introduced a new tool that lets it have a more direct impact on libor.

But wait! Isn't the fed funds rate directly tied to libor? Well, sorta, not really. There's certainly a relationship, but generally libor trades at a spread over fed funds. That spread historically sticks to 1% or less. Right now it has blown way out, so the Fed needs something to deal with that spread issue. Enter the TAF.

Here's how it works. Memeber banks (note: member banks need to be commercial banks or savings and loan instutions--specifically, this EXCLUDES the investment banks) can borrow up to 10% of a $20Bn sum being auctioned off by the Fed. The auction works as a dutch auction so the money is lent out at whatever rate banks bid for the amounts they specify. The Fed announcement set two auction dates in December (already passed, clearly -- they were fairly successful and didn't show ridiculous demand for cash, which is good) and two dates for the roll in January. In fixed income a "roll" indicates when one needs to go from one security to another, in this case cash borrowed over one term to cash to be borrowed over another term.
By lending directly to banks via this auction, the Fed is creating cash on the balance sheets of banks. Then banks don't need to borrow as much in the libor markets so libor can set down. Brilliant. They're still flooding the cash markets via open market operations for year-end, but we should expect a lot of the cash-hoarding issues to be settled.

Turn of Year

A lot has been said about the turn of year premium this year. I'm probably writing this post a bit later than I should have. This would have been a more timely post a month ago or even three months ago. Alas.

First off, what is the turn of year premium? Well, in fixed-income-land, the turn of year premium represents the extra interest one charges to lend money over new year's eve. Generally this year-end rate is significantly higher, say 8% when libor is 5%. Sounds kinda silly right? It's just an artifact of financial regulations and having to shore up captial at the end of year when regulatory numbers are checked. A similar event happens at the end of every month.

Why is this important? It represents financial institutions willingness to lend to each other at the year/month end. This is a proxy for the financial institution's confidence in it's capital ratios. If a financial institution is under-capitalized it can mean all sorts of bad things for them from a regulatory perspective (not to mention a investor-base's perspective).

In the 1999-2000 turn of year, this overnight rate had been predicted to be ridiculously high. 3 month libor (the rate at which banks were willing to lend to each other for three months) starting in september started sky-rocketing due to the rate that would be charged for that one night. The overnight rate had spiked to over 200% annualized. Why? Y2K. People were afraid everything was going to fall apart when computers broke down due to the Y2K issue, so they were un-willing to lend over that evening (if everything falls apart, they may never get their money back). Well, the Fed made sure to flood the monetary system with loads of free cash and the turn of year disaster was averted (in fact the turn of year was quite cheap that year). The entry into the year 2000 passed with no disaster.

This year we had a similar spike in libor year-end rates. Not a computer bug that frightens the world this year though, something much scarier (at least from my perspective). Everyone's heard of the credit crunch occuring from sub-prime mortgages by now. Sub prime mortgage defaults and resets on stupid mortgages made for the past decade are catching up to banks and other lenders. Capital is at a premium because all the banks are having to write down so many of their assets (loans are assets to banks, if people are defaulting they're not worth as much). In fact banks are scared shitless that the sub-prime issue is going to spread to all credit products, and for good reason. As balance sheet capital becomes more dear to banks, our year end premium starts flying. Of course in the past couple weeks the Fed has pumped the economy full of cash again and it looks like we'll have another smooth transition into the new year.

These year end and month end spikes are a big deal in the fixed income world, especially in fixed income derivatives. The ramifications of interest rates ripple into all other markets though, as discount rates for futures (in equity, commodities, forex, etc) all depend on how the fixed income market is setting rates.

Tracking Markets

I was recently asked how to track markets when you are not yet a market participant.  Those of us connected to the markets pay tens of thousands of dollars a month for up-to-date news and user-friendly interfaces.  If you can't spend a few hundred thousand dollars a year for data feeds, are you toast?  Well, yes, if you're actually trying to day trade off that crap data then you're screwed.  If you're a student just trying to track markets and maybe doing a bit of personal trading on a day-over-day basis, then there are lots of good free sources.

My personal favorite datasource when I was a student was yahoo finance (finance.yahoo.com).  They actually have a very good database of historical prices, historical financials, current financials and slightly delayed prices.  You can track all sorts of market from here.  Their news may not be the most timely, but there are better places to find news.  There are lots of free stock tickers out there you can download to set up a personal set of tickers to track daily.  Beyond whatever equities you decide to track, I would suggest tracking the following on a day to day basis:

• 2y notes
• 10y notes
• S&P 500
• FTSE
• Nikkei
• 30y mortgage rates
• 3m libor
• fed funds rate
• EUR
• JPY
• GBP

This should be enough to get you started.  There are some more obscure things to track, but these will give you a general idea of how the US markets are moving and a peripheral view of the rest of the world.  

For news I'd use www.cnn.com, www.bloomberg.com and www.wsj.com.  The most timely of these sources may be cnn and bloomberg, but if you're checking once a day the wsj actually does a great job of synthesizing the important parts.  Generally speaking, you really don't start caring about the daily specific moves of securities until you have some skin in the game (i.e. you're actually involved in the market and are dependent upon it for your livelihood).  One way to get involved is to have a small (SMALL) speculative account to keep yourself in the game.  You can do this as a stock portfolio or as a futures portfolio (I tend to like the latter, but that's because I'm a derivatives guy who does this stuff professionally--don't do this unless you really understand futures.  Taking delivery by mistake can be a bitch).  For most people I'd recommend just having some stocks in a small spec account (couple thousand) and tracking them daily.  I would tell anyone who isn't a professional trader NOT to be day trading and NOT to be leaving limit orders in the market.  

As a student, I tried to get myself involved in markets, and I think it helped a bit.  One of the old-fashioned things I used to do (and still do in a modified form) is writing down the closing levels of the various indicies and securities I tracked every day.  Then you have a personal record that you are forced to look at daily.  The physical act of writing them down makes you reflect on them.  You start to notice patterns and you notice trends in the market as well as stories that the market reacted to.  

Good luck.

Learn the Lingo - SIV what?

Alright so the recent crisis is all about SIVs, ABCP and the like. Let's talk about this for a bit.

SIV - Structured Investment Vehicle. So most people don't really understand how these work (I didn't really know how they worked until I did some research a couple months ago when this fiasco started to come up). SIVs are similar to conduits or SPVs used for other structured products like MBS and CDOs. They are a legal entity that holds a bunch of securities. SIVs in particular are like mini-banks. They borrow short term and lend long term and make money off the spread--just like a bank. Usually SIVs stick to ABS and high grade bonds, mostly ABS.

ABS - Asset Backed Securities. These are securities created by pooling things like car loans, credit cards, student loans, airplane loans, etc. Generally they are tranched up to various credit ratings. Most of it is pretty high-grade since they are backed by an actual asset that could be sold off if necessary.

CP - Commercial Paper. Commercial paper refers to the world of super-short term borrowing.
Companies often issue commercial paper as a cheap way to borrow very short term. This financing is often used a bridge financing to keep their cash-flow timing balanced (say you receive money en-masse in the winter, but tend to have to borrow extra during the summer because your working cashflow isn't as good in teh summer).

ABCP - Asset Backed Commercial Paper. ABCP usually refers to the commercial paper issued by an SIV. They are considered asset backed because the SIV acts as a intermediary taking cashflows from the ABS and turning it into shorter term lending via the CP market. If anything should happen, the SIV could theoretically liquidate the ABS and pay off its debts.

Money Markets - The CP market is often considered the money market. You know those money market savings accounts at banks? Yea, they invest in CP. There are also treasury money market accounts which invest in treasury bills as opposed to CP. CP tends to yield more. Generally bills and CP are considered minimal risk, but as our current crisis shows CP is not risk free.

So hopefully this helps clear up why our financial world is in chaos. First off, if SIVs really started to go illiquid, billions of dollars of money market holders would feel the pain. That's consumers with money market accounts earning negative savings. That could be an issue. Next if the ABCP market dries up, so goes the ABS market as well. Since SIVs provide the liquidity needed in the market to pull these ABS off bank/dealer balance sheets and into the general public, this market drying up would stop ABS issuance to a large extent. That could be an issue to all sorts of consumers who need to take out credit in the form of car loans, student loans, credit cards, etc. Now you see why this SIV thing can have such an impact on our consumer.

The Fed

Fed meeting this coming Tuesday. Looks to be a fairly important one. Let's talk a bit about what the Fed does and why they're so important to our economy.

The Fed is the United State's central bank. They control monetary policy, which is to say they try to control the money supply. There are three main ways in which they control monetary policy: The Fed Funds Rate, the Discount Rate, and reserve requirements.

The Fed Funds Rate is the interest rate banks charge each other for overnight loans. The market determines this rate, so the Fed can not use regulations to enforce this (well, maybe they could but that would screw with market dynamics). Instead of regulation the Fed conducts open market transactions to buy/sell treasuries from the open market to increase/decrease the amount of money available to the public. When there is less money circulating, the interest rate for borrowing it must increase. The Fed Funds Rate is what the market watches the most closely because it is the Fed's primary means of affecting the market.

The Discount Rate is the interest rate that the Fed charges for overnight loans. Most banks go to other banks to borrow at the Fed Funds Rate before going to the Fed for their loans. Clearly the Fed can choose its Discount Rate at will.

The reserve requirement refers to the amount of reserves banks have to keep as a percentage of their deposits. If banks have to keep more money in reserve (as opposed to lending it out or buying illiquid assets), then the demand for money is higher and interest rates go up. The Fed hasn't actually messed with the reserve requirement for along time, but if they did it'd be a really big deal. The reserve requirement is the Fed's sledgehammer when it comes to monetary policy.

Alright, so now we know what the Fed does. Now how does this effect the economy? Well all of the above change the supply and demand for money and thus interest rates. The Fed's mandate, however, involves inflation (go wikipedia inflation if you don't know what it is) and economic growth. This is slightly different from most central banks who are only mandated to control inflation. Too much money floating about invokes high inflation, which is disastrous on an economy (well, some theory says it doesn't matter, but in practice inflation has been the devil). So the Fed has to maintain a delicate balance between wanting to raise interest rates to control inflation and wanting to lower rates for growth. Most people think if the rates are high that's bad for the economy, if rates are low that helps stimulate the economy.

A "hawkish" Fed means they are primarily focused on the inflation rate (e.g. watching inflation like a hawk). A "dovish" Fed means they are kind on the economy and worry as much about economic growth as inflation. Most people agree that the primary target of the Fed should be inflation. A hawkish Fed tends to demand more respect and can more easily control inflation and the markets without having to mess with the interest rates.

When the Fed Funds Rate is high, banks have to fund at a somewhat higher interest rate, so they have to charge others a higher rate as well (for those of you familiar with LIBOR funding, LIBOR tends to trade at a spread to Fed Funds, we'll talk about this more later). When interest rates are high, however, companies can not borrow as much money, so domestic companies tend to suffer a bit and aren't able to invest in as many capital intensive projects. New bonds tend to come out at a higher interest rate. When interest rates are high foreigners are more likely to buy US dollar denominated assets, so the dollar would appreciate.

When the Fed Funds Rate is low, borrowing is cheap so liquidity is plentiful. Thus companies can invest a lot in projects with the thought that funding these projects is nice and cheap. Another way people talk about this is to say credit is plentiful, which seems to be a problem with the economy right now.

Alright, so now you know the basics of the Fed. Why does this seem like a timely post? Markets are really moving these days, and the markets just priced in a Fed "ease" (lowering of the interest rate) via the Eurodollar futures. Eurodollar futures basically point to LIBOR. Future LIBOR being lower basically means the Fed has cut rates. In fact a lot of what I saw on the ticker on Friday was a lot of banks buying Eurodollar future calls, which means people were buying protection against a Fed cut (if the fed cuts rates, then the eurodollars go up in value a lot and the calls are in the money). A lot of the hype is around the policy statement that the Fed gives after the FOMC meeting on Tuesday. As much as policy effects the markets, the statement tends to have just a large an effect because it points to future policy. A lot of the move in markets seems to be pricing in what the Fed will "say" about the state of the economy (and whether a cut will be necessary in the future.

Learn the Lingo (Units of Meaure)

All these units of measure in markets. It's ridiculous. Of course in equity markets it's relatively easy. Everything trades in dollars and cents. What about all these other things though?

Pip - FX pips are the smallest unit of measure in FX. If we're quoting yen at 129.52 and it moves 0.22 yen, that's 22 pips. If we're quoting New Zealand dollars at .7805 and it moves 0.0025 that's 25 pips.

Big Figure - A "big figure" in FX is a hundred pips. So if we're quoting yen at 129.53 and it moves 1 yen, that's one big figure. If we're quoting New Zealand dollars at .7805 and it moves .01, that's a big figure.

Tick - ticks are more flexible. They are the general term for a basic move. A tick in bonds is one 32nd. A tick in commodities is usually a .01 move in the contract. It's worth noting that a lot of these aren't straight dollar values though. A silver contract that moves .01 (one tick) is not worth the same as an oil contract that moves .01 (one tick). The best way to look these up is via Bloomberg. The DES page will tell you the value of a one tick move. For US government bonds, for example, a one tick move is worth $312.50.

Par - 100, face value of a bond

plus - a plus is bond-speak for half a 32nd. So 98-24+ means 98 and twenty-four and a half thirty seconds. Some bonds trade in eighths of a tick (so eighths of a thirty-second. . .yes, that's a 256th, but don't think about it that way).

the figure - The figure refers to the exact amount. So "ninety-four the figure" means 94-00. In FX the figure means 00 pips.

cab - cab is a fourth (much like a plus is a half). Used in bonds sometimes as well as other derivatives.

even - even can mean zero or the figure. A switch being quoted at even means the front tenor and back tenor are the same rate (in a rate switch for instance, see "Learn the Lingo (Rates)" if this is confusing) so there is zero slope.

There are many more, but this will do for now.

Learn the Lingo (FX - spot)

I always found the foreign exchange market to be one of the simpler markets for guys "getting started." That being said, I've also found it to be one of the hardest to trade profitably. I'm guessing this primer will be relatively short because of the relatively straight-forward nature of foreign exchange spot trading. FX trading is a 24hour market and has both OTC and electronic markets. I'm going to go over the spot trading stuff here. I'll do FX derivatives another day.

First we should go over how these things are quoted. Let's say you're trading "dollar-yen." That means you're trading USDJPY. The quote is 123.12 or "one twenty-three spot one-two." Most people will just quote the decimal and say it's trading at "twelve." If I buy USDJPY that means I'm buying dollars and selling yen. The way I was taught to remember this is that YOU'RE ALWAYS BUYING THE LEAD CURRENCY. So buying USDCLP means you buy USD and sell CLP (Chilean Peso, if you're interested).

It is also worth noting that USDJPY is the same as USD/JPY and it means the yen per dollar (because some idiot in FX space apparently never took math or physics and never got the whole units/units thing down making it confusing for the rest of us). If you can quote the currencies properly and you understand how moves in currencies effect your net position, then you're set for the FX markets, really.

Pips - the small two marks on the fx quote. For USDJPY it's the part after the decimal, but for things like NZDUSD it is just the last two digits of the decimal (NZD is quoted at 0.7832).

Big figure - the third digit is often considered a "big figure." A big figure in yen is actually one yen. A big figure in NZD (New Zealand Dollar) is the third decimal point.

G7 - the set of most liquid developed country currencies: USD, JPY, EUR, GBP, CHF, CAD, AUD.

EM - emerging markets. Prime example is ZAR (Sourth African Rand). EM currencies tend to have higher interest rates than non-EM currencies, but they are also more volatile.

Cable - A catchy name for GBPUSD. Named for the cable that connects the US to Great Britain under the Atlantic.

Kiwi - A catchy name for NZD (yes, New Zealanders are often called Kiwis).

cross - a cross currency is a pair of currencies that is not so commonly quoted. Most things in the US market are quoted against USD. Thus something like AUDNZD ("Aussie-Kiwi") would be considered a cross or a cross-currency rate.

basket - a basket of currencies just refers to a set of currencies that people might look at together.

Vol - volatility. How much stuff moves around, measured in standard deviations. Vol is either looked at via historical standard deviation or implied from foreign exchange option.

Central Bank - Central banks are one of the main reasons currencies move. If a central bank intervenes in how a currency is trading, it can mean serious repercussions for the price. Central banks are the governing powers over rates and fx in a country.

Appreciation - a currency appreciates when it is worth more. Note that yen appreciates when USDJPY goes down. So if USDJPY goes from 123 to 122, the yen has appreciated. For NZDUSD, however, the NZD appreciates when the number goes from .7833 to .7892, an upward move.

Depreciation - the opposite of appreciation. If yen is appreciating when USDJPY goes from 123 to 122, then the dollar is depreciating. It's worth noting here that the dollar could be appreciating against a "basket" of currencies, but still depreciating with respect to a particular currency. For example, dollar could appreciate against everything except yen if yen just appreciates even more.

Carry - the concept of carry in all trading is the same: you make money when nothing happens. In currencies, carry trading refers to trading long a high interest rate currency and short a low interest rate currency. The popular carry trade as of this writing is JPYNZD. Japan has 0% interest rate and New Zealand has 8%. Thus, by selling JPYNZD, one is long New Zealand dollars and short Japanese yen. One borrows at approximately 0% and receives 8% interest (you receive and pay interest in all currency trades and in every currency trade you are effectively borrowing in one currency and investing in another). This makes money as long as there isn't volatility in the currency in the wrong direction.

Peg - some currencies are pegged. Being pegged means the central bank buys and sells its currency to keep the exchange rate the same. Most pegs are against the dollar, but very few currencies are still pegged. It is mostly used to minimize volatility of the currency and to ensure the currency does not appreciate, which promotes exporter businesses.

Managed - managed currencies are like pegged currencies, but the central bank only intervenes when certain things happen. Some are managed to stay within a band, some are managed to not move more than a certain percentage in a day, etc.

Guess that's all I have off the top of my head. As always, feel free to comment, ask questions, add something, etc.

Learn the Lingo (Mortgages)

So with the whole subprime market going bust and the Bear Stearns fund nearly going belly-up, I figured there might be some people who would like a mortgage markets primer. In case you're wondering, I did a good bit of prepayment modeling for a mortgage book. Here we go!

MBS - mortgage backed security. This is the fundamental building block. Basically a pool of mortgages are put together into one entity and then the entity pays off a coupon every month based on those mortgage payments. If you own an MBS you have effectively lent to this entity which has lent the money out to all the people who took out mortgages. If the people pay their mortgage off early then you get your money back early (this can be good or bad, depending). If they default on their mortgages you may have to take that loss as well.

Securitization - the act of creating a security from a set of assets. In the case we are talking about today, it is the act of pooling mortgages, enhancing the credit and selling it off.

FNMA - Fannie Mae, often refers to MBS backed by Fannie Mae. Fannie Mae guarantees the mortgages it packages. All FNMA securities have a set coupon and high credit ratings. These are all securitized with credit enhancement so they are AAA rated by credit agencies. Basically FNMA securities are considered default free and backed by the government (note that I said "basically." They aren't technically backed by the government).

GNMA - Ginnie Mae, much like Gannie Mae backs MBS. If you want the details between FNMA, GNMA and other quasi-government agencies that back MBS, I suggest you google around a bit (or e-mail me).

Credit Rating - Credit agencies (Standard and Poors, Fitch, etc) give credit ratings according to the likelihood of an entity's default. AAA is good, AA is a little worse, and it goes all the way down to B, C and technical default.

FICO - Fair Isaac's COrporation score refers to a commonly used method of rating a customer/individual's credit (likelihood to default).

Pool - a pool is a set of mortgages that go into a given security. Pools are often characterized by average size of loan, average FICO of borrower, average mortgage rate, etc.

Coupon - the % of notional that a given security pays off. A 5% FNMA security pays an annual 5% in monthly buckets.

Sub-Prime - Subprime mortgages refer to mortgages made to customers of "sub-prime" FICO score. Prime FICO scores generally are considerd those over 660. It is important to know that FNMA and other major agencies do not securitize sub-prime mortgages (remember, they make all their stuff AAA rated), so a lot of these are securitized directly by banks.

CMBS - Commercial Mortgage Backed Security. These are much like MBS, but they are backed by commercial mortgage loans (think: the loan taken out to fund the local mall or the grocery store).

Prepayment - refers to a mortgage holder's right to pay off the mortgage early to pay off part of the balance of the mortgage and thus reduce the life of the loan. This is often called the "prepayment option" embedded in the mortgage, which is the equivalent of an embedded put option.

ARM - Adjustable Rate Mortgage refers to mortgages that have an interest rate reset over time. These are often seen as "X-N ARMs," which means the rate is fixed for the first X years and then resets on an N year interval. Commonly you'll see things like 5-1 ARMs and 7-1 ARMs.

FRM - Fixed Rate Mortgage. These are mortgages where the rate is fixed from the beginning and never changes.

IO - Interest Only. These mortgages are like ARMs, but you only pay interest payments for the first X years. Kinda scary if you think about it. IOs can also refer to IO securities, which are the interest only portion of a loan. In mortgage space this means you can get the interest portion of a mortgage pool's payments. That means in the event of prepayment, you get basically nothing because they mortgage owner decided to pay off the entire balance before interest kicked in.

PO - Principal Only. You can't take out a principal only mortgage. I don't even know how you could make something of the sort. POs refer to the principal only securities. Clearly if you're securitizing IOs, you're going to have a PO portion left. The POs are the opposite of IOs in that if there is a prepayment, suddenly all the money you were expecting comes to you a lot early than expected (bonus!) and you can earn returns off of it some other way.

CMO - Collateralized Mortgage Obligation. These are a type of MBS (specifically called a "pass-through" MBS). These are special because they have a payment hierarchy, so you can get protection from prepayment (and default) through the structure. Thus AAA CMOs are protected more than A CMOs. These slices of hierarchy are called tranches.

CDO - Collateralized Debt Obligation. These usually refer to something that looks the same as CMOs except in non-mortgage space. They also can refer to a collection of CMO tranches collected into one item. So, for example, if I create an entity backed by a bunch of different CMO BBB tranches, I have effectively created a derivative off of the mortgage derivative (risk management for these are a bitch because they involve all sorts of weird correlations). Sometimes the CDOs of CDOs or CDOs of CMOs are called CDO-squares.

CPR - Conditional Prepayment Rate. This is how expected prepayment is measured in mortgage space. For example, a 10% CPR means 10% of the remaining balance is expected to be paid off in that period.

PSA - Public Securities Association prepayment model. This model is also used to measure prepayment rate (although not as commons as CPR). It assumes some constant prepayment rate and gives the forecasted rate according to that reference rate. See: http://en.wikipedia.org/wiki/PSA_prepayment_model for the details.

SMM - Single Monthly Mortality rate. This is directly related to CPR by the equation: SMM = 1-(1-CPR)^(1/12).

MSR - Mortgage Servicing Right. These are a residual security to compensate companies that service mortgages. When a mortgage is created, someone actually has to do the collection of the payments, process the payments and divvy it up among the holders of the MBS. The MSR is this form of payment, it gets .25 bps off of every payment. As you can imagine, these value much like IO securities --if prepayment occurs it's worth a lot less than if it drags on for a long time.

Mortgage Servicer - People will often talk about big players in the markets. Mortgage servicers are one of the big players. They are one of the whale accounts that often smash the market with billion dollar trades. The reason they do such ridiculous size is because they tend to be out there hedging their loads of MSRs. As it turns out mortgage servicing is an economies of scale business, so people who hold MSRs tend to have a lot of them. Hedging them is a rather complicated endeavor, but it's often done with a combination of swaps, swaptions, treasuries and MBS.

Mortgage Hedger - Another type of big player in the market. Mortgage hedgers are a superset of mortgage servicers. A lot of big mortgage originators hold a lot of those mortgages on their balance sheet instead of structuring them and selling them off. These people also need to hedge their balance sheet exposure via the capital markets and tend to do so in big size.

I'm sure I'm missing a whole bunch of stuff, but that's what rolls off my head at the moment. As always, feel free to e-mail me with questions.

Learn the Lingo (Rates)

It seems the "Learn the Lingo" series has been quite popular, so I figured I'd add to it in various product spaces. Today we do "rates," which usually refers to swaps. Swaps are extremely interesting, extremely versatile and surprisingly confusing.

As always, if you have any questions feel free to e-mail me (or check Wikipedia). It might be worth reading the "Learn the Lingo (Sales & Trading)" post before you read this one if you haven't already. Use the archives, it was one of my first posts.

Here's a primer that would cover what you might learn your first week on the "rates" desk:

Libor - London InterBank Offer Rate. This is the rate banks charge each other for inter-bank deposits in London. This is used as a benchmark floating rate for a lot of stuff. Permutations include "Euribor," which is the Euro interbank offer rate.

Eurodollars - Dollar denominated deposits at banks not regulated by the Fed (so outside the US). The eurodollar rate is the interest rate on these deposits. The eurodollar rate is important as it signifies the dollar interest rate free of Fed regulation. Don't confuse Eurodollar with anything having to do with Europe. It doesn't have that much to do with Europe. Permutations include "Euroyen," which is the deposit rate for yen denominated stuff outside Japan.

Eurodollar Futures - These are important enough that I figured they deserve their own post. These are futures on the Eurodollar rate. They are priced as 100-Rate. So if the Eurodollar rate is 5.25% on the future's maturity date then the price of a Eurodollar future is 95.75 at maturity. Of course, futures for future dates include a good bit of speculation. These are a fairly good proxy for the risk-free rate expected starting a given date (as libor is a good proxy for risk-free rate and Eurodollar trades with a slight adjustment to libor).

IMM Date - These are the days on which Eurodollar futures expire. There are monthly expiries, but the important ones are March (H), June (M), September (U) and December (Z).

Packs - packs refer to sets of four representing one year. The front pack, consisting of the first four eurodollar futures is called the "white pack." The next four are called the "red pack." Then green and blue after that. The rest have colors too (purple, pink, silver, copper etc), but the first four packs are really the only liquid eurodollars.

Bundles - bundles refer to all the eurodollars up to the given pack. So the green bundle would be the green, red and white packs all together ("bundled" up).

counterparty - the guy on the other end of a trade.

bp - pronounced "bip" refers to basis points. A basis point is one hundreth of a percent. So 5.7525% interest rate is 575.25bps or 575 and 1/4 bps. Most rate instruments are quoted in bps.

tenor - the length of a swap. A 5 year swap lasts for 5 years and is considered to have a 5 year tenor. The payments will occur as schedule for 5years until the swap matures.

settlement - most things in the fixed income world trade on one day and "settle" two days later. So all the maturities and coupons are priced off the "settle" date instead of the trade date.

maturity - maturity is when the last payment is scheduled.

Fixed-Float swap - also known as just "swaps" or "vanilla swaps." These are the basic building block of the rates world. One side pays a fixed rate and the counterparty pays a floating rate (usually libor). These are quoted by the fixed rate, the amount is either in notional or pv01 (present value of a 1bp move in rates, sometimes called duration in practice) and buyer pays fixed. So, "67 1/4 bid 100 5year rates" means "I want to pay fixed on a 5year fixed-float swap at 5.6725 for 100 thousand dollars per basis point." Note that the big figure (5) in the rate was omitted when quoted because it's assumed that everyone knows the big figure rate. In the US the convention for these is 3month semi-bond, which means the fixed payments happen "semi-bond" style (semi-annually, like a bond) and the float payments occur on 3month libor resets.

payer swap - refers to a swap in which I pay the fixed rate. Note, the convention is that buyer pays fixed.

receiver swap - refers to a swap in which I receive the fixed rate. I refer to these as "I" pay fixed because my payer swap is my counterparty's receiver swap and visa-versa. People also refer to receiving fixed on a swap as "giving" the swap, which means to "sell" the swap. Again, remember that buyer pays fixed.

MMS - matched maturity swap. Just like it sounds, it is a swap who's maturity matches something else. This often happens when you are trying to synthetically hedge a bond (CT5 MMS refers to a swap that matches the maturity of the on-the-run 5year treasury note).

Basis swap - these are a float-float swap. They usually refer to some basis vs libor. It can be the fed funds rate to libor basis, the basis of a treasury future, or what have you. These are mostly flow oriented, and I have yet to see a really good pricing algorithm for these. They seem like they ought to have some good "fair value" pricing algorithm though.

Swap spread - the swap spread is the spread of the swap rate over the treasury rates. So if 10yr treasury is trading at 5.1725 and 10yr swap is at 5.8225, then the spread is 65bps. People do trade the swap spread frequently.

Yield curve - the curve made by plotting swap tenors against rates. The treasury yield curve shows treasury rates over the different tenors (2yr, 3yr, 5yr, 10yr, 30yr and some interpolation in between). The "yield curve" generally refers to the swap rates curve though. Usually the short end is plugged by eurodollar rates.

Forward curve - a yield curve built in "forward space." So if I was to price today all the swaps starting in 1year (i.e. 5yr 1yr forward refers to a 5years swap that begins payments in 1 year, so effectively I'm locking in a rate for something that doesn't start for a year), then I would have the swap curve I expect to see one year from now.

curve trade - curve trades are trades that bet on the slope of the yield curve. In swaps, for example, a 5s10s curve trade would involve a receiver 5yr swap and a payer10year swap (which, if you think about it is a "steepener" -- a trade that bets on the slope getting steeper). You can also do curve trades in treasuries, eurodollars, MBS, etc. Curve trades are usually (but not always) done duration or dv01 neutral.

Rate switch - refers to a swaps curve trade. In curve trades, buyer puts on the steepener, so "50 offer 14 and a half 5s-10s rate switch" or alternately "my flattener 50k/bp at 14 and a half" means "I want to put on the flattener (sell the curve) at 50 thousand dollars per basis point at 14.5 bps differential between the 10s rate and the 5s rate."

Butterfly - butterfly trades are three legged trades where the two "wings" go one way and the "belly" goes the other. A typical rates butterfly is the 2s-5s-10s fly. So if I were "buying" this fly, then I would be paying the 5year fixed rate and receiving the 2s and the 10s fixed rates. There are various weightings for this, which I will not get into here.

There are an infinite number of details to go through in swaps land, but this is probably enough to sound intelligent your first few days.

Learn the Lingo (Sales & Trading)

I expect this to be long. It may include some stuff from the banking one, but with a different spin (as in they'll be viewed from the point of view of a trader instead of a banker):

Stock: Common stock traded on one of the exchanges (NYSE, Nasdaq, etc).
Bonds: Debt instruments traded OTC. Govies: Government bonds, usually issued by the US treasury. Treasuries are usually viewed as risk-free bonds (if the US Government defaults, the financial world is going to hell anyway).
Munis: Municipal bonds, these bonds from cities/states/government agencies. They are often linked to revenues from something like a tollway or parking meters.
ABS: Asset backed security. These are securities that pay out according to how some other assets pays out. For example, a student loan ABS is a security that pays out according to the loan payments on student loans. If students pay off their loans properly, you get your interest payments. If the students default, you're fucked.
MBS: Mortgage backed security. A type of ABS, but backed by mortgages. These are interesting because mortgage owners have the right to prepay, that is pay early. That being said, these are often covered from default by some government agency.
Fannies/Ginnies: MBS backed by Fannie May or Ginnie May, two government agencies that cover default on these. Other MBS include Jumbos, and other derivatives that we won't get into like IOs, POs, etc.
CMBS: Commercial mortgage backed security. A type of ABS backed by, surprise: commercial mortgages! Think, loan taken out to open a supermarket.Agencies: Often a basket term referring to bonds issued by government agencies.
Corporates: Corporate Bonds. These trade OTC and usually as a spread over treasuries. This spread is called the credit spread, and it is often used as a proxy to the default probability of the company issuing the bond.
Derivatives: A security that derives it's value from another security. It's worth noting that people will refer to trading derivatives vs "trading cash." That just refers to the fact that you can often buy/sell derivatives for very little up front; whereas, if you trade the underlying security then you have to pay cash up front. I'll go over a lot of the major ones here, but there are infinite permutations of derivatives. They are often categorized as equity derivatives, credit derivatives, fixed income derivatives and FX derivatives.
FX/Forex: Refers to the foreign exchange market.
Repo: Repurchase agreement. Essentially an investment bank / dealer owns a security and sells the security to another party and buy them back later at a higher price. The return rate between the original price and the higher price at which the security is bought back is called the "repo rate." As you might imagine, a "reverse repo" goes the other direction.
Future: A futures agreement is a contract that locks in a price for some underlying in the future. For example, if I buy a July gold future at $680, it means I just paid $680 for 12oz of gold to be delivered to me in July. Similarly a future on MSFT stock at $30 expiring in July would mean I just paid $30 to have some MSFT stock delivered to me in July.
Swap: A swap agreement usually involves agreeing to enter into a contract where one party pays some fixed amount regularly and the other part agrees to pay some floating (changing) amount regularly. The fixed payment is usually a fixed sum, and the floating rate can be pegged to anything (stocks, libor rates, etc).
CDS: Credit default swap. These are a credit derivative (a white hot market right now). A CDS buyer pays a fixed amount every quarter, but in the event of a default of the underlying the seller needs to pay the full amount for the defaulted bond. Basically it's default insurance.
CDO: Collateralized debt obligation. These are credit derivatives where lots of loans are packaged as one, so you get a piece of a lot of loans. These can be tranched, repackaged, synthetically created and all sort of other jazz. Won't get into the details here.
Converts: Convertible bonds. These are bonds that trade both with a credit spread and an embedded call option on the equity. There is a default risk, but you also get a call option in the bond so that if the equity does really well you can convert into stock instead of holding the bond. Basically you get the credit spread on the bond, but the spread is reduced because when you buy the bond you also buy the call option (and pay the premium for the call option in the form of reduced spread).
Libor rate: London inter-bank offer rate - used as a proxy in the fixed income markets for short term risk free interest rates.
Options: A contract that gives the buyer the right to buy or sell an underlying at a given price. This is in contrast to futures where the price is locked in and the sale is final. For example, if I buy a call option (the option to buy) MSFT at a strike of $30 by July for $2, it means I just paid $2 for the right to buy MSFT at $30 anytime between now and July. I still will have to pony up $30 if I want to buy MSFT between now and July. Options come in many forms, the most common being the "call" and "put" options. These can be combined in straddles, butterflies, spreads, etc.
Black-Scholes: Refers to the Black-Scholes-Merton model for option pricing. This has become so entrenched that options are often quoted in "vol" terms (the main input to the BS pricing formula).
Long: If you're long something, then you own something. If you bought a security, you are long that security.
Short: If you're short something it means you sold something without really owning it (thus you're going to need to buy it at some point). It's like being in debt.
Bid: The price at which someone wants to buy something. Commonly used as 16 bid 100 (translation, I'm willing to pay 16 for 100 of that thing).
Ask: The price at which someone wants to sell something. Offer: Same as ask, but can also be used as a verb. Commonly used as 100 offer 16 (translation, I'm willing to sell 100 of this thing for 16).
Bid-Ask spread: Just as it sounds, the difference between the bid and the ask.Desk: On the trading floor it refers to the group and focus of the group you work for.Mid: the average between the Bid and the Ask prices.
Lifted: People refer to your order or price being "lifted" it means someone traded with you at the price listed. Usually refers to when the offer gets taken.
Hit: People refer to the bid being taken as opposed to lifted.
Liquid market: Means there are lots of transactions in the market and an actively traded price. This is in comparison to illiquid markets where transactions barely ever occur (one needs to pay a "liquidity premium" to illiquid products with a bank, usually in the form of a large bid-ask spread). One refers to liquidity "drying up" when suddenly for some reason no one wants to trade (or no one wants to trade one side).
Hedge: A way to minimize risk on a trade by going into another trade that tends to move in the opposite direction. For example, if I am long a corporate bond, instead of selling it I could hedge it with a treasury. I'm still exposed to the credit spread, but I've hedged out my interest rate risk. You could also buy CDS to hedge out the credit spread (but if you're not taking any risk what's the point of being a trader?).
DEaR: Daily Earnings at Risk, also known as VAR (Value at Risk). This is often how the risk limits are set for a trading desk. It is a percentile for the losses incurred in a day over the course of a year. For example, if your DEaR limit is $1million, then you have a 5% chance of losing more than $1million on a given day. Note this means you should be exceeding a $1million loss about 2.5 times a year.
Balance Sheet: This is the other limitations, more important for places like hedge funds where capital is limited. It is the amount of capital you are using in your trade. If you have a balance sheet limitation, then it's important for you to trade derivatives over cash products.
PnL: Profit and Loss, enough said.
OTC: Over-the-counter. It means there is no physical exchange to trade the security. You actually have to call an investment bank or broker to trade them, and the people you call have to either have them, want them or get a hold of them.
Dealer Desk: It's worth noting that working on a trading desk, you're most likely on what'd known as a "dealer desk." It means you quote bids and asks all day long for people to buy/sell. You get to harvest the bid ask spread from everyone, but it's your job to give a price for anyone who shows up asking for a price. It's synonymous with "market maker." You are the market for your given security.
Sales/Trader: I don't think anyone really knows what this means. It often refers to people in the brokerage business that receive calls for orders and then passes them directly onto the market.
Sales Person: These people cover sets of clients. The clients call in with orders and the sales person either gives a quote or asks the traders for a quote. The sales people can often nudge the price up according to how well he/she knows the client to try to eek out a bit more off of them. They also often argue with traders to lower the price. Sales people entertain clients (read: free dinner at nice restaurants with clients).
Product specialist: A rather interestimg role for someone with a bit of experience. Product specialists often have some experience in structuring or trading, but are sales people who are especially knowledgeable in their product. They go on sales pitches with sales people, but are brought along specifically to talk about a product or a special deal/transaction. There are rumors of product specialists in Tokyo who are also allowed to trade.
TA: Trading assistant. This is probably what you'll be if you just joined a trading desk. They tend to book orders in the company systems, help program utilities (if you're capable in that area), get lunch/coffee, deal with middle office, risk and P&L. If you're capable they'll have you trade when the main trader is out or extremely busy. It's worth noting that not all TAs become traders.
Sales Assistant: I don't think anyone calls these people "SAs." A sales assistant is a salesperson in training. They do tasks and analyses for their sales person, go on client meetings with them, answer the phone, etc. From what I've seen almost all sales assistants become full sales people, an interesting contrast from TAs and traders.
Prop trading: Prop stands for proprietary. Prop trading refers to trading with the bank's money on the bank's behalf (as opposed to being market maker). It means you can actively enter into risk positions, but you are paying the bid-ask spread to enter into positions (as opposed to harvesting bid-ask on every transaction as a market maker). Prop books make money by placing directional and relative value bets. It's worth note that a lot of dealer desks keep prop books as well.
Structuring: A large part of the derivatives market is structuring products specifically for customers. For example, if a customer is averse to upward movements in the price of cotton and is a firm based in the UK that sells mostly to US clients, then you can create a specific security for them that hedges out the FX and commodity risk (which would be cheaper than the individual pieces due to correlation effects). Structuring happens most actively in the ABS markets where the yield of every ABS can be specifically created to be what the market is willing to pay for at the moment.
Arbitrage: An arbitrage is an opportunity to get a risk-free profit. Market economics says this should be impossible, but it's not. The simple example is if BP is listed on the NYSE for 66.60, but listed on the European exchanges for 66.62. Buy one, sell the other and pat yourself on the back for making 2 cents for every transaction you got through.
Stat Arb: Statistical arbitrage isn't really arbitrage at all, but it's taking advantage of statistical patterns at a high frequency level to eek out profits some 52% of the time.

That looks like enough for now. Feel free to message me with questions on any of my posts. It might be worth noting that there is an infinite world of derivatives to be explored here. Options can include options on bonds as opposed to equity (callable and puttable bonds). There are exotic options like Asian, knock-in/out, and Bermudan varieties. There are cross product derivatives like quantos (fx and equity derivative). If there is interest I can post a derivatives lingo primer.

Learn the Lingo (I-Banking)

Due to my limited view of i-banking, a lot of this will be general accounting stuff, and I'm going to stick to financial accounting (there's another type called managerial accounting that I'm sure MBAs can tell you all about, but you tend to use financial accounting in banking). I think you will find that a lot of what i-bankers do is accounting related (it's about tearing apart companies, after all). I guess research analyst types will often be in this realm too:

Double entry book-keeping: A type of accounting where all costs and income are listed twice. This is the norm.
Balance sheet: One of the three main accounting statements. The balance sheet is a snapshot of the company's financial state. In accrual accounting it lists assets and liabilities separately, and they should balance: assets = liabilities + stockholder's equity (for some reason stockholder's equity is always listed with liabilities, I don't know why. I guess just so the two columns can balance).
Income Statement: One of the three main accounting statements. The income statement summarizes the revenues and expenses over a period of time. This is sometimes mixed with what they call a statement of retained earnings. Basically the income statement shows revenues and expenses to find the net income. Then the dividends are taken out to get the retained earnings.
Cash Flow Statement: One of the three main accounting statements. Where the other two statements focus on the profitability of the company, this one focuses on the company's liquidity. It shows the in/out flows of cash for a company for a period of time.
Liquidity: The ability of assets to be turned into cash (or already in the state of cash). As they say "cash is king." Without cash you can not pay off debts (the bank won't accept, for example, your inventory of condoms to pay off your loan.
Common Stock: In terms of accounting, this refers to the "owners" investments in the company. This could be the owners plowing their savings into the company or money generated by an IPO.
Stockholders Equity: I see this as the value generated by the company. As far as I can tell it's just a number made up so that assets = liabilities + equity. I can't imagine coming up with this number any other way than accounting for assets and liabilities then subtracting.
Net Income: see income statement
Retained earnings: see income statement
GAAP: Generally Accepted Accounting Principles. Basically, this is how you need to do your accounting. They're written out.
IPO: Initial public offering. This is what a lot of people think i-banking is all about. It's really not. It is, however, a bit part (and very profitable). An IPO is where a company first "goes public," that is it sells shares in the company for cash. Shares represent ownership. If you own all the stock, you own the company.
Debt offering: Companies can also take out loans from the general public by selling bonds. This is actually a larger part of the finance world than equity.
Road Show: Analysts love these, senior people often find them a pain in the ass. Basically it's a traveling salesman type thing where the bankers go to a bunch of cities to make presentations about a given IPO or debt offering.
Beauty Contest: I forget what the official name for these is. Basically when a company decides it wants to raise capital (read: cash), it can have a bunch of investment banks come in and pitch their ideas on how the capital should be raised. There are some pretty interesting ideas that often go into these, actually. It's not just plain vanilla debt and equity, you can really mix it up with some interesting instruments.
M&A: Mergers and acquisitions. When a company wants to buy another company or merge with another company, they talk to the M&A guys. M&A guys tend to work more than anyone else on the street (except maybe Private Equity?), think 120hrs a week. If you think that's impossible, you've got another thing coming to you.
NPV: Net present value. Money in the future is worth less than money now (I'd rather have my Ferrari now than in 10 years, wouldn't you?). So we discount back future cashflows by some "discount factor." Usually an interest rate or a "hurdle rate."
DCF model: Discounted Cash Flow model. This is the bread and butter of i-banker types (and equity/credit research analysts for that matter). These things usually manifest themselves as giant excel sheets in which analysts predict the revenues/sales and costs a company will have in the future. They then choose a "discount rate" with which to discount their cashflows back.
Multiples method: This one's awesome. Basically you value a company by looking at how comparable companies are being valued. Oh you're a search company? Google's being valued at 200 times expected revenue in the market, so you must also be worth that much! WOW! Usually they look at the multiples (Price/earnings, EBITDA to Enterprise value, etc) and try to value a company by comparison.
EBITDA: Earnings before interest, taxes, depreciation and amortization. Just as it sounds, it's the earnings before you factor in all that crap.
Enterprise Value: Some measure of the value of a firm, often they just take the market capitalization + debt + minority interest + preferred shares - cash. This represents how much you'd have to pay to buy the firm outright.
Depreciation: The value lost by an asset over time. Like your car used be worth 20k, but now it's worth 10k just be using it normally.
Amortization: Sort of related to depreciation, but it can go up or down. It's most commonly used in terms of intellectual property. For some reason intellectual property amortizes instead of depreciates over time. Go figure.
CAPM: Capital Assets Pricing Model. This is used in both asset management and in company valuation. It most commonly is used to find the discount rate of a company's cashflows in i-banking. It's crap, but everyone uses it. Basically it finds how the company is valued in the stock market in terms of the rate of return expected. That rate then becomes your discount rate.Default: When a company or person decides not to pay / can not pay their debts. Like when you quit your job and can't pay off your student loans.
Goodwill: Something you will not come accross often in banking. Just kidding, you'll come across it all the time in accounting statements where they have a value to something intangible (like "brand name"). Companies sometimes pay dearly for "goodwill" in mergers/acquisitions. Market Cap: Market capitalization, the total value of a company in the stock market.
Dividend: Companies sometimes pay out some cash to stockholders from the earnings of a company. This cash is called a dividend.
Preferred stock: These are strange. They have a set dividend (as opposed to a dividend that can change like for normal stock) that gets paid before normal stocks are paid (but doesn't "have" to be paid like interest on debt). Sometimes it can be converted into normal stock.
Convertible bonds: These are bonds, but they have a clause that lets them turn into stocks at a certain ratio. Basically it's a way for a company to get lower interest rates with the caveat that if the company does really well, the ownership gets diluted by convert holders.
Munis: Municipal bonds. Lots of states/cities/government entities sell bonds. These are called munis. Might be worth noting that a lot of municipals are now also leasing off assets in whole, the equivalent of an LBO or IPO on government property/companies --cool, eh? The big example is the Chicago skyway (it's a toll road that's now privately owned, for the most part).
LBO: Leveraged Buy-Out. Really it's just an acquisition that involves taking out a lot of debt to be able to buy the company. It's like when you buy a house with only 5% down. Then you're really doing a leveraged buy-out of that house =P.

A note: to be considered proficient in accounting, you should be able to build any of the three main accounting statements from the other two. This is the quick and dirty acid test CPAs often ask me to see if I actually know accounting despite never working with financial statements.

I will post an example of a DCF sheet by Goldman or something at some point, assuming blogger allows this sort of thing.

Learn the Lingo (General Finance)

I know at least some people out there are going into finance. You're going to get there and not understand half the things people say. Maybe this will help a little. I'll do three of these. One for general finance, one for banking, one for sales/trading. The general finance one will focus on the terms used to describe the players in the finance industry and terms used ubiquitously. The banking/trading specific ones will focus on terms used in each business. If anyone in the industry wants to correct anything, feel free:

Security: some sort of financial instrument, be it a stock, bond, option, etc. . .
Derivative: type of security that "derives" it's value from another security
Banker: someone in the investment banking side of things, someone who has access to private information about companies' intentions and spends ridiculous hours working. These people deal with the legal and financial implications of transactions a company needs to make to produce funding, acquire companies, merge companies, etc.
M&A: Mergers and Acquisitions, a special part of investment banking that deals specifically with the merger of companies or acquisitions of companies (other banking involves producing funding options for companies like loans, debt offerings and stock offerings).
Trader: someone who trades securities for the firm
Market maker: a special type of trader who's job it is to "make a market." It is his job to quote a price for anything (within his mandate) someone might want to trade with him and trade it at that price regardless of whether he wants to do the trade or not.
Salesperson: someone who talks to clients, usually to generate trading business
Structurer: Structurers are special kinds of traders and/or bankers. They either put together "structures" of securities to fit clients needs, or they put together deals that turn into special structured securities to fit clients needs.
Originator: These people are essentially sales people on the debt side who produce deals (usually loans) for the structurers to securitize (turn into a security) and the traders to sell off.
Broker: someone who acts as a pass-through agent for trading.
Specialist: someone who is actually in the trading pit (i.e. at the NYSE) and takes orders and matches up the buys and sells. Obviously this only applies to physical exchanges, electronic exchanges dont' have specialists.
Flow: can refer to deal flow or trading flow, basically the volume of business passing through a given desk.
Private Wealth / Wealth Management: Basically an asset management area specifically for wealthy people. Clients of a wealth management arm of a bank usually have excess of a million (in some banks over 10 million) dollars.
Back/middle/front office: these are value terms. Back office usually refers to operations (technology, data entry, etc), front office usually refers to revenue generating people (traders, salespeople, bankers, structurers), middle office is anything in between (programmers, P&L reporters, etc).
Quants: the geeks of the realm. These guys know their math/stat and are usually used to find the correct price of things on the market.
Private/Public side: Private side of the bank knows stuff that the outside world is not allowed to know (bankers, structurers, originators, etc). The public side is not allowed to know stuff the private side knows about because they can take advantage of it (traders, brokers, etc).
Compliance: there are a TON of legal hassles to make sure the private side of the bank and the public side of the bank do not interact and allow for illegal trading. Compliance is the verb for staying in the legal bounds and the noun for the people who make sure you do.
Buy/Sell side: Buy side refers to asset managers, proprietary traders, private equity and the like, people who buy things for their own portfolios. Sell side refers to people in the investment bank who have to bend over backwards to fulfill their sell side clients' needs. Institutional Investor - usually refers to large clients that transact in large volume. Most commonly these are mutual funds, pension funds, insurance companies, etc.
Comp: compensation, usually refers to the year end bonus. This is why people are in this game, for the most part.
Headhunter: people who specialize in matching qualified candidates with open jobs.

That's all I can think of for now. Unfortunately it looks like I'm heavily weighted on the trading side. I don't know if that's because I'm on the trading side or because the banking side just doesn't involve as many titles (plus who needs to define to whom "legal" refers?).