Glossary

Call Option
An option which gives its holder the right but not the obligation to purchase an asset at a predetermined date (maturity date) for a predetermined price (exercise price). (See also Put Option).

Cap
A ceiling or maximum rate of interest under a loan. A `capped rate loan' means that the borrower cannot pay more (but can still pay less) than the specified maximum rate of interest. (See also Collar).

Capital Account
The part of Australia's Balance of Payments relating to investment flows (ie. share and bond transactions, loans and borrowings, and the level of international reserves held by the Reserve Bank), as opposed to current account items such as imports and exports.

Capital Adequacy
a) An internationally-adopted standard for the prudential supervision of banks, under which minimum levels of shareholders' equity (weighted according to the risks associated with different kinds of activity) must be maintained to support the investment and lending activities of banks. (See also Risk Weighting); b) In relation to public offer funds, a requirement under the SIS Legislation that the approved trustee maintain a prescribed level of capital in cases where the trustee intends to keep custody of the fund's assets (or, alternatively, that the custodian is appropriately capitalised in cases where an external custodian is used).

Capital Asset Pricing Model (CAPM)
A model for describing the way prices of individual assets are determined in an efficient market, based on their relative riskiness in comparison with the return on risk-free assets. According to this model, prices are determined in such a way that risk premiums are proportional to systematic risk as measured by the beta coefficient. As such, the CAPM provides an explicit expression of the expected returns for all assets. Basically, the CAPM holds that if investors are risk averse, high-risk stocks must have higher expected returns than low-risk stocks.

Capital Gain/Loss
The difference between the sale price of a capital asset and its cost.

Capital Gains Tax
A tax on the increase in the capital value of investments, payable when the capital gain is realised. Capital gains tax is indexed so that nominal increases in value due to inflation are not taxed as well. The taxation regime also allows capital losses to be offset against other taxation liabilities (eg. income tax) in certain circumstances. Most pooled superannuation trusts accrue either fully or in part the liability for capital gains tax on the assets held even though those gains may not yet be realised.

Capital Growth
Appreciation in the capital or market value of an investment, as opposed to income which may be received from the investment from time to time, eg. dividends in the case of share investments.

Capital Guaranteed
Referrig to an investment product, normally offered by a life insurance company, which includes some form of guaranteed return of capital. The nature of the guarantee varies in format but is, typically, a `promise to pay' by the life insurance company itself, ie. there is no external guarantor. Interest earnings are not generally guaranteed in advance. (See also Capital Protected, Capital Stable).

Capital-Indexed Bonds (CIBs)
A form of indexed bonds whose proceeds on maturity are linked to movements in the Consumer Price Index, and which pay a small coupon rate eg. 1% per quarter of the variable final amount. (See also Indexed Annuity Bonds).

Capitalisation
The sum of the total amount of various securities issued by a corporation, multiplied by the price of those securities. Capitalisation may include bonds, debentures, preference shares and ordinary shares. Similarly, the capitalisation of the share market is the sum of the value of listed shares. (See also Market Capitalisation).

Capital Market Line
The line used in the Capital Asset Pricing Model to illustrate the rates of return for efficient portfolios depending on the risk free rate of return and the level of risk (beta) for a particular portfolio.

Capital Markets
The markets for medium to long term investments, ie. 3 years and over, in securities such as shares and bonds, as distinct from the (shorter term) money market.

Capital Protected
Referring to a type of investment portfolio which is managed in such a way as to reduce or eliminate the risk of capital losses, usually through the use of quantitative techniques such as protection overlays. (See also Capital Stable, Capital Guarantee and Protected Growth Fund).

Capital Stable
A term usually describing unitised investment vehicles which have a high fixed interest and/or cash component. This creates a relatively stable unit price compared with balanced funds, which typically have a higher exposure to equity markets. Capital stable funds should also be distinguished from capital guaranteed funds, which in fact offer a (usually retrospective) promised return to the investor, and from capital protected, which aim to produce a certain minimum return while allowing a controlled participation in the expected higher gains from growth assets.

Capital Stock
All shares representing ownership of a business, including preference and ordinary shares.

CAPM
Abbreviation for Capital Asset Pricing Model.

Carded Rates
Currency exchange rates quoted by banks each day and usually listed on a daily exchange rate sheet. Carded rates usually apply to small foreign exchange transactions.

Carrying Charge
The expense, such as storage charges, insurance, interest, and other incidental costs involved in ownership of stored physical commodities over a period of time. The carrying charge may be reflected in futures contracts based on the physical commodities in question by successively higher prices for each succeeding future month of the contract.

CASAC
Abbreviation for Companies and Securities Advisory Committee.

Cash
a) Generally, coin and note currency of a country in circulation and deposited in cheque accounts and other deposits that are available upon short notice; b) One of the asset classes invested in as part of a typical balanced investment portfolio.

Cash and Carry
The practice which involves the purchase of a physical commodity against the forward sale of that commodity on the futures market.

Cash-Back Pension
Another term for allocated pension.

Cash Commodity
The actual physical commodity as distinguished from futures contracts based on that commodity. Also called Spot Commodity.

Cash Dividend
A dividend paid on a security in cash or by cheque.

Cash Equivalents
Short-term investments held in lieu of cash and readily converted into cash within a short time span (ie. Bank Bills, Treasury Notes, etc), generally with maturities of no longer than 180 days. Often referred to, along with cash, as liquid assets.

Cash Flow
In relation to company accounts, reported net income plus amounts charged off for depreciation, amortisation, and extraordinary charges to reserves, which are book-keeping deductions and not paid out in actual dollars and cents.

Cash Management Trust (CMT)
A pooled investment vehicle for investors who would not individually have access to the professional money market. By pooling funds from various sources, larger volumes of higher yielding short-dated securities can be purchased and the resulting higher returns can then be returned to the trust members. CMTs generally restrict themselves to negotiable instruments of a duration of no longer than six months. As these securities are highly liquid, a CMT can accommodate cash flows, both in and out, on a daily basis, thereby offering small investors a flexibility not present in a traditional fixed rate term deposit.

Cash Settlement
The settlement on some options and futures contracts that do not require delivery of the underlying security. For options, the difference between the settlement price on the underlying asset and the option's exercise price is paid to the option holder at exercise. For futures contracts, the exchange establishes a settlement price on the final day of trading and all remaining open positions are marked to market at that price.

CD
Abbreviation for Certificate of Deposit.

CEDA
Abbreviation for Committee for the Economic Development of Australia.

Certificate
The actual piece of paper which is evidence of ownership (eg. of shares in a corporation).

Certificate of Deposit (CD)
A written certificate by a bank or financial institution stating that a fixed dollar amount has been deposited with it for a fixed period of time at a predetermined rate of interest.

CGIS
Abbreviation for Commonwealth Government Inscribed Stock, the main type of bond issued by the Commonwealth of Australia.

Closing Transaction
A transaction in which the seller (writer) of an option terminates his/her obligation. In the case of a listed option, a seller effects a closing transaction by purchasing a new listed option having the same terms as the option which is being sold.

CMSF
Abbreviation for Conference of Major Superannuation Funds.

CMT
Abbreviation for Cash Management Trust.

Codification
The translation of common law legal principles and precedents into statute law. The duties of superannuation fund trustees spelt out in the SIS Legislation are an example of codification, drawing upon decades of judicial decisions and refinements of common law principles of trust.

Collar
Referring to a loan facility in which both maximum and minimum interest rates are specified. The maximum rate acts as a cap, while the minimum rate is a floor below which the interest rate will not be allowed to fall.

Collateral
Securities or other property pledged by a borrower to secure payment of a loan.

Collective Investment
A generic term for investment products such as unit trusts which are managed by professional managers on behalf of numerous individual investors. The term <169>collective investments<170> covers a wide variety of investment schemes, with the clearest common characteristic being the involvement of a professional manger who manages the total fund or collection of assets to produce a return which is shared by all investors. A common form of collective investments is a unit trust, but there are numerous other types (eg. racehorse syndicates, agricultural plantation schemes). Most are subject to regulation under the Corporations Law as prescribed interests. (See also Commingled Funds and Pooled Investments).

Commercial Paper
Negotiable, short-term, unsecured promissory notes issued in bearer form, usually on a discount basis, by a corporation to raise working capital for any term normally up to 180 days.

Commercial Property
Property intended for use or occupancy by retail and wholesale businesses (eg. stores, office buildings, hotels and service establishments).

Commingled Fund
The collective investment of the assets of a number of small funds, sometimes through a master fund arrangement, allowing for broader and more efficient investing.

Commission
The broker's basic fee for purchasing or selling securities (or property) as an agent. This fee is generally negotiated. Also known as Brokerage.

Committee for the Economic Development of Australia
An independent association established in 1960 to promote

(CEDA)
discussion, objective research and inter-disciplinary communication in the interests of development of the national economy and of the future of Australia. CEDA draws its membership from the business, professional and academic communities, and has offices in all mainland capitals and the ACT.

Commodity
A tradeable item that can generally be further processed and sold; including industrial (metals), agricultural (wool, wheat, sugar, etc) and bulk (coal, iron ore) goods. Commodities are important to the Australian economy as they account for the majority of our exports.

Common Factor
An economic or other factor which affects the return on virtually all securities.

Commutation
In relation to superannuation benefits, the process of converting a pension or annuity into a lump sum.

Company
A legal entity regulated by the Australian Securities Commission under the Corporations Law. Also referred to as a Corporation. Companies can take a number of different forms, including: a) a company limited by shares, where shareholders' liability is limited to the amount of unpaid shares; b) a company limited by guarantee, where liability is limited to an amount prescribed in the company's memorandum of association; c) a no-liability company (restricted to mining companies only); and d) a proprietary limited (or private) company, where shareholding is restricted to a small number of shareholders and restrictions are placed on transfers of shares.

Companies and Securities Advisory Committee (CASAC)
A Committee established under the Corporations Law to advise the Commonwealth Attorney-General on proposals for corporate law reform and improvements to the efficiency of the Australian securities and futures markets. Along with the Australian Law Reform Commission, CASAC was responsible for a major review of collective investments schemes in 1992-93, leading to a number of expected legislative changes to that sector in late 1994 or early 1995.

Companies Auditors and Liquidators Disciplinary Board
A Board established under the Corporations Law to determine whether auditors or liquidators have failed to properly perform their duties. Penalties which the Board may impose include cancellation or suspension of the individual's licence, imposition of restrictions on conduct or an admonition.

Compliance
Procedures undertaken at regular intervals or on an on-going basis to ensure internal and external controls and regulations are complied with.

Complying Fund
A superannuation fund which complies with the operational standards specified in the SIS Regulations and is thereby eligible to receive concessional taxation treatment. (See also Regulated Superannuation Fund).

Compounding
The arithmetical process of determining the final value of an investment or series of investments when compound interest is applied ie. when interest is earned on the interest as well as on the initial principal. Investment returns are typically compounded, so two consecutive periods of 10% returns results in a compound return of 21%. (See also Annualising).

Compound Interest
A method of interest calculation where, in each period, interest is calculated on both the principal and interest previously accrued. Henry Ford once said that compound interest was 'the eighth wonder of the world'. (Opposite of Simple Interest).

Compound Option
An option instrument that gives the holder the right, but not the obligation, to buy another specified option prior to a given expiry date.

Compulsory Superannuation
A policy adopted by the Hawke and Keating Labor Governments, requiring contributions to superannuation funds by or on behalf of virtually all employed Australians. (See also Superannuation Guarantee Charge).

Condor
Referring to the sale (purchase) of two options with consecutive exercise prices, together with the purchase (sale) of one option with an immediately lower exercise price and one option with an immediately higher exercise price. All options must be of the same type, have the same underlying, and expire at the same time. (See also Butterfly).

Conference of Major Superannuation Funds (CMSF)
A major annual forum for superannuation fund trustees, managers and service providers, with a particular focus on issues facing industry funds. The CMSF is the keynote annual event for the Australian Institute of Superannuation Trustees.

Confirmation Note
A written document confirming a transaction struck between two dealers or between a broker and a client. Alternatively referred to as a Contract Note.

Conglomerate
A corporation that has diversified its operations, usually by acquiring enterprises in widely varied industries.

Consideration
The 'price' for which the promises of another is bought when entering into a contract. Consideration may take the form of a right, interest, profit or benefit accruing to one party or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.

Constitutional Corporation
A term used in the SIS Legislation to describe the legal status a superannuation fund must have if it wishesto meet one of two alternative criteria to be a Regulated Superannuation Fund and thereby be eligible for concessional taxation treatment. The alternative method is that the fund has, as its main purpose, the provision of age pensions. (See also Corporate Trustee).

Consumer Price Index (CPI)
An index measuring the prices at various times of a selected group of goods and services which typify those bought by ordinary Australian households. It allows comparisons of the relative cost of living over time, and is used as a measure of inflation. (See also Average Weekly Earnings).

Consumption Tax
See Goods and Services Tax.

Contango
A relationship in which spot or cash prices are lower than futures (or forward) prices. (Opposite of Backwardation).

Contingent Liability
A liability or obligation which may arise in the event of a certain occurence; eg. the damages which might have to be paid to a external party in the event of a successful legal action. Contingent liabilities are not taken into account in the company's balance sheet. Rather, they are normally disclosed in notes to the company's accounts.

Continuous Disclosure
A regulatory requirement under the Corporations Law for companies, listed entities and prescribed interest schemes to disclose to the ASC for public release any <169>material matter<170> which is likely to affect their financial position or credit standing, or which investors would reasonably require to know in order to be able to make an informed investment decision. Continuous disclosure is an additional obligation to prospectus disclosure and periodic financial returns. It was introduced by the Commonwealth's Corporate Law Reform Act 1994, and will extend to many products in Australia's superannuation industry through the incorporation of parallel provisions into the SIS Legislation.

Continuous Market
A market in which transactions occur whenever selling orders are matched or exceeded by buying orders. The Stock Exchange is an example of continuous market.

Contract
An agreement between individuals, companies or other entities which binds each party and is legally enforceable. Contracts are used in many facets of business and investment markets, including areas such as employment, engagement of investment managers and service providers, and transactions of securities. (See also Futures Contract, Management Agreement).

Contract Month
The future month in which delivery or cash settlement is to be made under a futures contract.

Contract Note
See Confirmation Note.

Contribution
An amount of money placed into a fund. In relation to superannuation funds, contributions may be made by either employers or employees or both.

Contribution Holiday
A period of time over which the sponsor of a defined benefit fund is not required to make contributions to the plan owing to an actuarial assessment that current assets and reserves are sufficient to meet the plan`s liabilities for the time being.

Contributions Tax
The 15% tax levied on certain contributions to superannuation funds.

Convergence
The tendency of futures and cash prices to come together as the delivery month approaches.

Conversion
In relation to options markets, long underlying position together with a short call and long put, where both options have the same exercise price and expiration date. A conversion is a long underlying position offset by a synthetic short underlying position.

Convertible Notes
Securities which are convertible into the ordinary shares of a company at a prescribed price or ratio at specified times at the option of the holder. Convertible Bonds and Debentures may also be issued by corporations or government bodies. Convertible Notes are attractive to some investors in that they may display certain properties of both shares and fixed interest securities.

Convexity
The sensitivity of the duration of a bond to changing interest rates. A high convexity means that the price of the bond in question will be more responsive to interest rate fluctuations.

Conveyance
The means by which title to real estate is transferred.

Core Portfolio
A portfolio comprising (generally) the bulk of a fund's assets, which is invested in a highly controlled fashion in an attempt to secure the fund's liabilities with a reasonable degree of confidence. The balance of the fund's assets may then be managed more aggressively in search of higher than average returns. (See also Active Management).

Corporate Bond
An instrument written under seal whereby a company acknowledges that a stated sum is owed, which it will repay at a specified date. The company is also obliged to pay a stipulated amount of interest to the

Corporate Governance
A generic term covering issues associated with the management practices, Board structures and personnel policies of companies. From the investor's point of view, corporate governance is normally concerned with the degree of influence which should be exerted over companies by their shareholders in order to advance their financial interests, normally though the exercise of voting rights or proxies at the companies' Annual General Meetings. Corporate governance is becoming an increasingly significant issue in Australia's superannuation and fund management industries, as the volume of institutional investment increases and attention is focused on the proper exercise of trustees' and managers' fiduciary responsibilities.

Corporate Trustee
A superannuation fund trustee which has been incorporated as a company. Incorporation of a trustee board may occur to meet the Constitutional Corporation provisions of the SIS legislation. Alternatively, it may exist because the trustee is a professional Public Trustee Company or the employer-sponsor of the fund has established a special company to take on the responsibility of trusteeship. Individuals appointed to exercise fiduciary responsibilities in corporate trustees are called Trustee Directors.

Corporation
Another term for company. The term is also sometimes used to refer to public sector enterprises which engage in business activities.

Corporations Law
A series of Acts of the Australian Parliament regulating companies and the securities and futures industries in Australia. The Corporations Law is administered by the Australian Securities Commission (ASC).

Corporations Power
The Commonwealth Government's power under section 51(xx) of the Australian Constitution which authorises it to regulate and control the activities of <169>trading and financial corporations<170>. The Corporations power is the legal foundation of the Corporations Law and (in conjunction with the Pensions Power) of the rules governing superannuation fund trustees under the SIS Legislation. (See also Constitutional Corporation).

Corporatisation
The alteration of the reporting, legal and management structure of a public trading body to allow it to operate at arm?s length from the Government, with profit as a major objective. Unlike privatised bodies, corporatised bodies remain under government ownership and control and are not usually subject to the Corporations Law. (See also privatisation.)

Correction
A movement in prices which reverses a previous trend. The term is normally used to refer to a lowering of share prices after a sustained period of increase.

Correspondent Bank
A bank that, in its own country, handles the banking for banks from another country.

Council of Financial Supervisors
A coordinating body established in 1992 which brings together Australia's main financial supervisory authorities. The Council is chaired by the Reserve Bank of Australia. Its other members are the Insurance and Superannuation Commission, Australian Securities Commission and Australian Financial Institutions Commission.

Counter-Cyclical
Referring to an investment style which aims to anticipate and take advantage of expected turns in the business cycle; eg. to sell out of equity investments after a prolonged period of growth in anticipation of a cyclical dip or recession.

Counterparty
The customer or bank with whom a foreign exchange or over-the-counter options deal is made. The term is also used in interest and currency swaps markets to refer to a participant in a swap exchange.

Counterparty Risk
The risk that the other party to a contract will not fulfil the terms of the contract.

Coupon
A certificate attached to a bond, representing an obligation to pay interest on the bond. Not to be confused with the yield, which varies as interest rates move. (See also Zero Coupon Bonds).

Coupon Payments
The periodic interest payments on a bond.

Coupon Rate
The annual value of a bond's coupon payments, expressed as a percentage of the bond's par value.

Covariance
A measure of the degree to which two variables move in relation to each other. A positive covariance means that both variables tend to be above or below their mean at the same time.

Covenant
An agreement or promise, under which one party pledges to the other that something has been done or will be done, or vouches for the truth of certain facts. Covenants are either positive or negative, and relate as a rule to the relationship between vendor and purchaser, or landlord and tenant. A positive covenant is one by which the party binds him/herself to do some act or carry his/her rights in relation to the other party, or promises not to do a certain thing. Covenants are also express or implied: express, where they are set out in terms; implied, where the mere relationship of the parties automatically creates the covenant.

Cover
To close out a position previously taken, for example, by taking a long position equal to an existing short position.

Covered Call
A call option whose seller (writer) owns the underlying security and is able to deliver it if the option is exercised.

Covered Put
A put option whose seller (writer) owns a put on the same underlying security with an exercise price equal to or greater than the exercise price of the put written, or who has sold the underlying security short.

Covered Write
The sale of a call option against an existing long position in the underlying security.

CPA
Abbreviation for Certified Practising Accountant, a member of the Australian Society of Certified Practising Accountants.

CPI
Abbreviation for Consumer Price Index.

CRB Index
Abbreviation for Commodities Research Bureau Index, a United States Index of global commodity prices.

Credit Foncier Loan
A loan which is repaid in instalments comprising both principal and interest components. Most mortgages are structured this way. (See also Amortisation).

Crediting Rate
In relation to superannuation, the rate at which fund earnings are attributed to members' accounts. The crediting rate may differ from the fund's actual earnings rate; eg. if the trustees have adopted a smoothing policy in relation to their year-to-year investment returns.

Credit Rating
The financial standing of a company, government or financial institution relative to others. The credit rating determines what the institution will be charged to raise funds, in relation both to the amount it is able to raise and the interest it will be charged. (See also Australian Ratings, Moody?s, Standard & Poors).

Credit Risk
The risk of suffering loss due to another party defaulting on its financial obligations.

Credit Union
A type non-bank financial institution for personal savings and loans, structured on a co-operative basis. Historically, credit unions were established on the basis of a common bond among their membership, eg. workplace, local community, and existed to provide savings and personal loan facilities to their members. Many have now diversified their activities and grown into significant institutions within their respective localities or States. Regulated by the Australian Financial Institutions Commission and individual State-based supervisory bodies .

Crossing
The buying and selling of futures contracts simultaneously in the same contract month for the same commodity. A broker may do this where he has orders both to buy and to sell; strict exchange rules apply to the practice.

Cross Rate
An exchange rate between two currencies, usually constructed from the individual exchange rates of the two currencies, measured against the United States dollar.

Cross Subsidisation
The use of revenue generated in one area of a business to supplement returns or prevent losses in another.

Cum Distribution
Referring to a unit in a unit trust, which is trading such that the buyer rather than the seller is entitled to receive the next distribution of income from the trust. Opposite of Ex-distribution.

Cum Dividend
Referring to a share or unit in a unit trust which is trading such that buyers rather than sellers qualify to receive the next dividend payment, which amount is usually reflected in the price of the security in question. (Opposite of Ex-Dividend).

Cumulative Rate of Return
A rate of return covering (generally) more than one year. If a fund earns 15% in the first year, 36% in the second year and -7% in the third year, its cumulative return is 45.45%. Its annual average compound return, by comparison, is 13.3%. It is always advisable to look at the individual annual returns which make up cumulative and compound returns in making judgements about the quality and consistency of returns.

Currency
A country's unit of exchange that has a value in terms of purchasing goods and services within a country and in purchasing units of other countries' currencies. However, some currencies are not convertible into the value of other currencies.

Currency Basket Option
See Basket Option.

Currency Forward
A forward contract where the commodity to be exchanged, at the predetermined amount and date as agreed by two parties, is Currency Option
An option contract which gives the buyer the right (but not the obligation) to buy or sell a specified amount of a foreign currency in exchange for another on or before a specified future date. Sometimes used to hedge securities held in overseas markets. Also known as FX Option.

Currency Overlay
An investment management technique aimed at protecting an investor's overseas currency exposure by means of a dynamic hedging model.

Currency Risk
Risk of incurring losses in relation to the value of overseas investments as a result of movements in international exchange rates.

Currency Swap
See Swap.

Current Account
The part of Australia's Balance of Payments relating to imports and exports of goods and services and the net effect of income received and payments made on Australia's foreign debt and investments. A Current Account Deficit means that the sum of all these activities yields a negative figure. (See also Capital Account).

Current Assets
See Assets.

Current Prices
The most recent sale prices prevailing in the market at a specific moment of time.

Current Yield
Annual interest, coupon or dividend divided by market price per bond or share to determine the income return, expressed as a yield based on the current market price. (See also Running Yield).

Custodian
An organisation which safeguards and maintains assets (eg. cash, securities) on behalf of other people. Unlike a trustee, a custodian is solely responsible for holding assets on behalf of others; it does not strictly own the assets on behalf of beneficiaries (or unitholders in the case of a unit trust), and is not subject to the same fiduciary duties as trustees. Trustee companies generally also act as custodians, as do many banks. Those custodians who aggregate a series of portfolios are known as Master Custodians, usually managed by different investment managers, in order to provide a single overall report on the fund. By contrast, a custodian who holds assets on behalf of clients in a number of different countries is known as a Global Custodian. (See also Trustee).

Custody
Possession of securities by a financial institution on behalf of others, for purposes of safekeeping. (See also Custodian).

Cutting a Loss
The decision to close out an unprofitable market position and take the loss involved before it becomes larger.

Cyclical Stocks
Shares which move directly with the business cycle; generally they advance as business conditions improve and decline when business slackens. Mining companies are typically cyclical, and the shares of Australian banks and media companies have been shown to be very sensitive to domestic conditions.

A, B, C, D, E, F, G, H, I, J, K, L, M, N, O, P, Q, R, S, T, U, V, W, X, Y, Z.