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Financial glossary

B

Backwardation

Backwardation refers to a market condition where the forward price of a contract trades below its spot price. In other words, backwardation is a situation where the tradeable price curve of an instrument is inverted (when the short term price is higher than the forward price). The opposite market condition to backwardation is contango.

Behavioural finance

Behavioural finance is a theory which argues that due to psychology-based biases, efficient-market hypothesis is not applicable. The proponents of behavioural finance, emotionality and lack of rationality of some investors explain market anomalies.

Benchmark

The Benchmark refers to an index representing the market(s) in which the fund is invested. The fund may invest beyond the index  components. The Benchmark is the yardstick reference for the measure of performance and risk.

Beta

Beta measures the sensitivity of the fund to the market. Centered around the value of 1, it indicates the impact of a one point market change on the fund.

Bid-to-cover ratio

The bid-to-cover ratio is an indicator used in an auction process to assess the strength of the demand for an asset. It is calculated as the number of suitable bids received divided by the number of bids accepted (the total value of bids can also be used). The higher the ratio (above 2), the more successful the auction. The opposite: a low auction ratio, signifies a disappointing auction.

Bond

A bond is a financial instrument (debt security) under which the issuer owes the holders a debt while being obliged to pay them periodic interest (coupons) repayments as well as the principal at a later date (maturity). A bond is generally negotiable as its ownership can be transferred in the secondary market.

Bond yield

The bond yield is the annualised internal rate of return that investors require to purchase a bond. The bond price thus equals the sum of all bond cash flows discounted to the bond yield.

Bottom-up

Bottom-up is a term widely used in asset management to explain the selection process of a security based on its individual analysis rather than other larger considerations (e.g. global economics, sector, region). The opposite term is top-down.

Brent crude

Brent crude refers to a trading classification of sweet light crude oil sourced from the North Sea. Brent crude oil is also called Brent Blend, London Brent or Brent petroleum.

Butterfly

A butterfly is an option strategy generally implemented when the future volatility of an underlying is expected to be different from its implied volatility. A long butterfly strategy will generate a profit if the underlying shows price stability, while limiting downside risk during adverse market movements. This strategy could be constructed by selling a call and a put at-the-money (see straddle definition for further details) and simultaneously buying a put and a call option both out-of-the-money.

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