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Mastering Financial Calculations

Continuous
compounding

A mathematical, rather than practical, concept of
compound interest where the period of compounding is
infinitesimally small.

Contract date

The date on which a transaction is negotiated. See value
date.

Contract for differences A deal such as an FRA and some futures contracts, where
the instrument or commodity effectively bought or sold
cannot be delivered; instead, a cash gain or loss is taken
by comparing the price dealt with the market price, or an
index, at maturity.
Conversion factor

(or price factor). In a bond futures contract, a factor to
make each deliverable bond comparable with the
contract’s notional bond specification. Defined as the
price of one unit of the deliverable bond required to make
its yield equal the notional coupon. The price paid for a
bond on delivery is the futures settlement price times the
conversion factor.

Convertible currency

A currency that may be freely exchanged for other currencies.

Convexity

A measure of the curvature of a bond’s price / yield curve
2P
di2

(mathematically, d

364

dirty price).

Corridor

Same as collar.

Cost of carry

The net running cost of holding a position (which may be
negative) – for example, the cost of borrowing cash to
buy a bond less the coupon earned on the bond while
holding it.

Counter currency

See variable currency.

Coupon

The interest payment(s) made by the issuer of a security
to the holders, based on the coupon rate and face value.

Coupon swap

An interest rate swap in which one leg is fixed-rate and
the other floating-rate. See basis swap.

Cover

To cover an exposure is to deal in such a way as to
remove the risk – either reversing the position, or hedging
it by dealing in an instrument with a similar but opposite
risk profile.

Covered call / put

The sale of a covered call option is when the option
writer also owns the underlying. If the underlying rises in
value so that the option is exercised, the writer is protected by his position in the underlying. Covered puts are
defined analogously. See naked.