The Risk Limited Glossary
B:
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Backwardation - market situation in which futures prices are progressively lower in the distant delivery months. See also Contango.
Barrier Option - a path-dependent option that terminates or is activated by the underlier reaching some "barrier" price level.
Basis Point - 1/100th of 1%.
Basis Risk - the risk of financial loss due to a change in the price differential between the hedge index and the underlying cash price. Basis risk typically involves product, location or time differences.
Basel Accord (1988) - an international accord on bank capital requirements. Amended in 1996 to add capital requirements for market risk.
Bayes Rule - a rule that expresses the conditional probability of the event A given the event B in terms of the conditional probability of the event B given the event A.
Bell Curve - a common description of the characteristic shape of the most common of statistical distributions: the Normal distribution.
Below Investment Grade Bond - a junk bond, whose credit rating is below BBB.
Bermuda Option - an option that allows exercise at discrete points in time after a certain date. Also known as a modified American option. See American, European and Asian options.
Bernouilli Process - the simplest probability model - a single trial between two possible outcomes, such as a coin toss.
Beta - a measure of a stock's (or a portfolio's) volatility in relation to the overall market, which by definition has a beta of 1.0.
Bid-Ask Spread - the difference between prices at which dealers are willing to buy or sell. Also referred to as the Bid-Offer Spread.
Binary Option - a type of option which features a discontinuous expiration value.
BIS - an acronym for the Bank for International Settlements. The BIS is an international body that promotes the cooperation of central banks, fulfils the function of a central banks' bank and acts as a clearing and settlement agent. The BIS also acts as a forum for discussion of international monetary policy and conducts research into international banking developments.
Black-Derman-Toy Model (BDT) - an options pricing model using the Black/Derman/Toy binomial interest rate model. This model is a set of simultaneous nonlinear equations. It is named after the late Fischer Black, Dr. Emanuel Derman of Goldman, Sachs & Co. and William Toy, who developed the model in 1987.
Black-Scholes Model - an options pricing formula first developed in 1973 by Fisher Black and Myron Scholes for securities options and later applied to a range of other option structures.
Blue Sky Laws - laws various states have enacted to protect the public against securities frauds. The name is believed to have originated when a judge ruled that a particular stock had about the same value as a patch of blue sky.
Brownian Motion - a stochastic process that has stationary independent increments which follows a normal distribution and also has continuous sample paths. It is a Markovian process, and is also known as a Wiener process.
BTU - an acronym for British Thermal Unit.
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