ADR 
Annualized Default Rate. Similar to MDR (Monthly Default Rate), except that it expresses the default percentage as an annual rate. 
At The Money (ATM) 
An option with no intrinsic value, with the price of the underlying equal to the strike price. 
Backwardation 
Contract pricing structure in which deliveries in the near future have a higher price than those made later on. This occurs when expectations of demand, for the near future, exceed supply at current price level. 
Basis 
The difference between the cash price of the underlying position to be hedged minus the price of the hedge instrument. 
Basis  Strengthening 
When the price of the cash position increases by more than the price of the hedge instrument. Or, when the price of the cash position decreases less than the price of the hedge instrument. 
Basis  Weakening 
When the price of the cash position decreases by more than the price of the hedge instrument. Or, when the price of the cash position increases less than the price of the hedge instrument. 
Calendar Spread (Time Spread) 
A form of the horizontal spread wherein a nearby option is sold and a more deferred option is purchased, both at the same strike price. 
Caps and Ceilings 
An agreement that limits the holder's exposure to upward movements in the price or rate of the underlying instrument. Caps are similar to call options and are most often employed by buyers of the underlying instrument and by borrowers in floating rate financing agreements. Caps are normally traded in OTC markets and can have tailored terms and conditions with performance risk assumed by the involved parties. 
Cash Market 
Over The Counter (OTC) and Exchange traded markets, whereby, the physical commodity or financial instrument is traded on a near term settlement basis. 
CATs 
Certificate of Accrual on Treasury Securities (Salomon Brothers). 
CMOs 
Collateralized Mortgage Obligations. Relates to the stripping of the cash flows produced by the underlying mortgage instrument(s). The stripped cash flows are then reallocated to multiple classes with different maturities and payment priorities. 
Collars 
A combination of Cap and Floor agreements that effectively places both an upper and lower limit on price or rate. 
Contango 
Contract month pricing situation in which future prices get progressively higher as contract dates get progressively longer, creating negative spreads as contracts go further out. The increases reflect carrying costs, including storage, financing, and insurance. 
Convexity 
Describes the rate of change in duration as interest rates change. 
CPR 
Conditional Prepayment Rate or Constant Prepayment Rate. Similar to SMM, except that it expresses the prepayment percentage as an annually compounded rate. 
Default 
A mortgage loan in default is one that no longer pays principal and interest, and then remains delinquent until liquidated. 
Deferred Contract Month(s) 
Contract months with the most distant delivery/expiration dates. 
Deferred Stack And Peel 
Contract month placement establishing multiple futures and/or options positions in the less liquid deferred contract month(s), closing them out as time and the underlying risk exposure passes. 
Delta 
The amount by which a derivative security will change in price, given a change in price in the underlying instrument. It is the slope of the curve that relates the derivative's price to the underlying instrument's price. 
Derivative 
The most basic definition of a derivative instrument is  An instrument whose structural characteristics and variables are based on the structural characteristics and variables of other more basic underlying instruments. These structural characteristics and variables include  amount and timing of cash flows; maturity and expiration dates; and exposure to interest rate, credit, prepayment, and valuation risks. Derivative instruments include, futures, options, swaps, caps, ceilings, floors, collars, etc. 
Duration 
The measure of how long, on average, the holder of a bond has to wait before receiving cash payments. Expressed as a weighted average of the times when payments are made with the weight applied to time being equal to the proportion of the bond's total present value provided by the payment in each time interval. Also used to measure the percent change in price for a percent change in yield. 
Exercise or Strike Price 
The price, in the option contract, at which the underlying will be delivered should the holder choose his right to exercise. 
Floaters 
As the name implies, the holder receives a floating interest rate, usually adjusted monthly and tied to an index. Principal paydown rules are generally drawn from the underlying instrument. 
Floor 
An agreement that limits the holder's exposure to downward movements in the price or rate of the underlying instrument. Floors are similar to put options and are most often employed by sellers of the underlying instrument and by lenders in floating rate financing agreements. Floors are normally traded in OTC markets and can have tailored terms and conditions with performance risk assumed by the involved parties. 
Forward Market 
OTC markets, whereby, the physical commodity or financial instrument is traded on a forward settlement basis. The contract is an agreement, with latitude for tailored terms and conditions, to buy or sell an underlying instrument at a certain future time for a certain price. The risk of contract performance is assumed by the involved parties. 
Futures Market 
Commodity exchange where futures contracts are traded. Different exchanges tend to specialize in particular kinds of contracts. The contract is an agreement, with standardized terms and conditions, to buy or sell an underlying instrument at a certain future time for a certain price. These exchanges also provide mechanisms that give the involved parties a guarantee for contract performance. 
Gamma 
The rate at which the delta changes with respect to changes in the underlying instrument's price. A measure of the delta's rate of change. 
Horizontal Spread 
An option spread strategy in which the options have the same strike price, but different expiration dates. 
In The Money (ITM) 
An option with intrinsic value. A call option is in the money if the price of the underlying is higher than the strike price of the call. A put option is in the money if the price of the underlying is below the strike price of the put. 
Intermarket Spread 
A spread position with contracts in different markets. 
Intramarket Spread 
A spread position with contracts in the same market. 
Intrinsic Value 
The greater value of zero, or the difference between the price of the underlying instrument and the strike price of the option. Put options have intrinsic value greater than zero when the price of the underlying instrument is below the option's strike price. Call options have intrinsic value greater than zero when the price of the underlying instrument is above the option's strike price. 
Inverse Floaters 
As the name implies, the holder receives a floating interest rate that moves inverse to the underlying index. As with floaters, the rate is usually adjusted monthly and principal paydown rules are generally drawn from the underlying instrument. 
IOs 
Interest Only. As the name implies, the holder receives a portion of the cash flow derived from the interest payments produced by the underlying instrument(s). 
Lag 
The amount of time from default to liquidation. 
Long 
A position wherein new commitments are established by buying, and closeouts are effected by selling. 
Long The Basis 
A position wherein the cash position is long the market and the hedge position is short the market. Favorably impacted by a strengthening basis. Adversely affected by a weakening basis. 
Long The Market 
A position favorably impacted by rising prices, and adversely affected by declining prices. 
MDR 
Monthly Default Rate. The percentage of the performing mortgage loans outstanding at the beginning of a month assumed to default during the month. 
Nearby Contract Month(s) 
Contract months with the nearest delivery/expiration dates. 
Nearby Stack And Roll 
Contract month placement establishing multiple futures and/or options positions in the more liquid nearby contract month(s), closing them out as expiration nears and underlying risk exposure passes, then reestablishing the remaining balance required in other contract months that have since become the more liquid nearby months. 
Negative Carry 
Contract pricing structure when the cost of money borrowed to finance securities is higher than the yield on the securities. 
Options  American 
Can be exercised any time up to the expiration date. American refers only to the exercise style, not to geographic location. 
Options  Buyer (Holder) 
Pays a premium for the right, but not the obligation, to buy (in the case of a call) or sell (in the case of a put) the underlying instrument at a specific price by a certain date. 
Options  Call 
Convey to the holder the right to buy the underlying instrument by a certain date for a certain price. Likewise, obligates the writer to sell the underlying instrument, if the holder chooses to exercise. 
Options  European 
Can only be exercised on the expiration date itself. European refers only to the exercise style, not to geographic location. 
Options  Expiration, Exercise, or Maturity 
The date, in the option contract, after which the option may no longer be exercised. 
Options  Market 
OTC and Exchange traded markets, whereby, options contracts on underlying physical commodities or financial instruments, either cash or futures contracts, are traded. There are two basic types of options. A call option gives the holder the right to buy the underlying instrument on or before a certain date for a certain price. A put option gives the holder the right to sell the underlying instrument on or before a certain date for a certain price. The holder of an option has the right, but not the obligation, to exercise. If the holder of the option chooses to exercise, then the seller of the option is obligated to perform. Options traded on organized exchanges normally have standardized terms and conditions with contract performance guaranteed by the exchange. Options traded in an OTC market can have tailored terms and conditions with contract performance risk assumed by the involved parties. 
Options  Put 
Convey to the holder the right to sell the underlying instrument by a certain date for a certain price. Likewise, obligates the writer to buy the underlying instrument, if the holder chooses to exercise. 
Options  Seller (Writer) 
Receives a premium, up front, for taking the risk that he will be obligated to perform if the buyer chooses to exercise his rights due to a favorable (to the buyer) price move. 
Out Of The Money (OTM) 
An option with no intrinsic value. A call option is out of the money if the price of the underlying is below the strike price of the call, while a put option is out of the money if the price of the underlying is higher than the strike price of the put. 
PACs 
Planned Amortization Class. The primary differentiating feature is the protection from the reinvestment risk and weighted averagelife volatility associated with prepayments. This protection is achieved by creating a principal payment schedule based on the minimum amount of principal cash flow produced by the underlying instrument(s) at two prepayment rates known as PAC bands. 
POs 
Principal Only. As the name implies, the holder receives a portion of the cash flow derived from the principal payments produced by the underlying instrument(s). 
Positive Carry 
Contract pricing structure in which the cost of money borrowed to finance securities is lower than the yield on the securities. 
Premium or Total Value 
The sum of the intrinsic and time value. 
PSA 
Public Securities Association. In addition to being the initials for the Public Securities Association, PSA is also used to refer to the PSA's Standard Prepayment Model that specifies a prepayment percentage for each month in the life of the underlying mortgages, expressed on an annualized basis. 100% PSA assumes prepayment rates of 0.2% CPR in the first month following origination of the mortgage loans (not the pool) and an additional 0.2% CPR in each succeeding month until the 30^{th} month. In the 30^{th} month and beyond, 100% PSA assumes a fixed annual prepayment rate of 6.0% CPR. 
REMICs 
Real Estate Mortgage Investment Conduit. Oftentimes used interchangeable with CMOs. The key differences lie in the different tax and regulatory characteristics for the issuer. 
Rho 
The price change of an option's theoretical value due to a change in interest rates. Cannot generalize about Rho since its characteristics depend on the type of underlying instrument and the settlement procedure for the options. 
SDA 
Standard Default Assumption. The PSA's attempt to standardize market assumptions about the pattern of mortgageloan defaults, with defaults assumed to occur at some chosen multiple of the path established by a standard default curve. This is very similar, in concept, to the PSA's Standard Prepayment Model. 100% SDA assumes a linear rise for 30 months from 0 to a default "peak" of 0.60% ADR; remain constant at "peak" value for the next 30 months; linear decline from "peak" to "tail" of 0.03% ADR over the next 60 months; remain constant at "tail" value for the remaining life of the pool (except for the last n months, when the default rate will be 0. n=Lag.) 
Senior/Subordinates 
A form of credit enhancement, for nonagency MBS issues, that does not rely on a third party (government or private). The credit enhancement is achieved by giving one or more senior classes cash flow priority over one or more subordinate classes. Any shortfalls of scheduled principal and interest payments are absorbed by the subordinatedcertificate holders. 
Severity 
A percent representing the dollar amount of loss resulting from liquidating a defaulted mortgage loan, divided by the principal balance of the loan at the time of default. 
Short 
A position wherein new commitments are established by selling, and closeouts are effected by buying. 
Short The Basis 
A position wherein the cash position is short the market and the hedge position is long the market. Favorably impacted by a weakening basis. Adversely affected by a strengthening basis 
Short The Market 
A position favorably impacted by declining prices, and adversely affected by rising prices. 
SMM 
Single Monthly Mortality
The percentage of the mortgage loans outstanding at the beginning of a month assumed to terminate during the month.

SPA 
Standard Prepayment Assumption. Oftentimes used in MBS offering statements and related materials to describe the prepayment modeling assumptions underlying the numbers in the material. Most oftentimes the model is the PSA Standard Prepayment Model. 
Spot Month 
Current month. 
Spread 
A trading strategy that involves taking a position in two or more positions in different classes and/or contract months. 
Strip 
Contract month placement establishing multiple futures and/or options positions in a series of contract months that closely approximates the time characteristic of the position being hedged, closing them out as time and the underlying risk exposure passes. 
Stripped Securities 
Usually government and mortgagebacked securities stripped into certificates, classes, or tranches. These derivative securities include STRIPS, TIGRs, CATs, CMOs, REMICs, Senior/Subordinates, IOs, POs, PACs, TACs, Floaters, Inverse Floaters… 
STRIPS 
Separate Trading of Registered Interest and Principal Securities. Most directly relates to the stripping of U.S. Treasury Notes and Bonds as permitted by the Treasury. Proprietary names for similar securities include TIGRs and CATs. 
Swaps 
A private agreement between two counterparties who agree to exchange cash flows based on a notional amount tied to a floating index, in exchange for cash flows based on the same notional amount tied to a fixed index. Swaps are normally traded in OTC markets and can have tailored terms and conditions with performance risk assumed by the involved parties. 
TACs 
Targeted Amortization Class. Offers holders a prepaymentprotected class at wider spreads than PACs in exchange for higher yields. 
Theta (Time Decay Factor) 
The rate at which an option loses value as time passes. It is usually expressed in points lost per day (as a negative number), when all other conditions remain the same. 
TIGRs 
Treasury Investment Growth Receipts (Merrill Lynch). 
Time Value 
The additional amount of premium beyond the intrinsic value that traders are willing to pay for an option. 
Time Value Decay 
The loss of premium value due to the passage of time. 
Underlying Instrument 
The instrument upon which a derivative is based. Underlying instruments include stocks, stock indices, foreign currencies, debt and money market instruments, mortgagebacked securities, commodities, and futures contracts. 
Vega (Tau or Kappa) 
The sensitivity of an option's theoretical value to a change in volatility. It is usually expressed in point change in theoretical value for each one percentage point change in volatility. Always expressed as a positive number. 
Vertical Spread 
An option spread strategy in which the options have different strike prices, but the same expiration dates. 
Volatility 
In general, a measure of the uncertainty of the amount by which the price of the underlying instrument is expected to fluctuate in a given period of time. Generally expressed in annualized percentage terms as a standard deviation of the daily price changes in the underlying instrument. Volatility, as described, is calculated from both historic prices for the underlying instrument, as well as the implied volatility resulting from a theoretical option pricing model given all normal input variables (except volatility) plus the premium amount. 
WAC 
Weighted Average Coupon. 
WAM 
Weighted Average Maturity. 