Chapter 9: Popular Search Words 343
Calibration Determining parameters (possibly state and time
dependent) such that one’s theoretical prices match traded
prices. Also called fitting. This is a static process using a
snapshot of prices. Calibration does not typically involve
looking at the dynamics or time series of the underlying. See
page 191.
Callable A contract which the issuer or writer can buy back
(call). The amount he has to pay and the dates on which he
can exercise this right will be specified in the contract.
Cap A fixed-income contract paying the holder when the
underlying interest rate exceeds a specified level. See page 313.
CDO A Collateralized Debt Obligation is a pool of debt instru-
ments securitized into one financial instrument. See page 315.
CDS A Credit Default Swap is a contract used as insurance
against a credit event. One party pays interest to another for
a prescribed time or until default of the underlying instrument.
See page 317.
CFA Chartered Financial Analyst. A professional designation
offered by the CFA Institute for successfully completing three
examinations. The syllabus includes aspects of corporate and
quantitative finance, economics and ethics.
CMS Constant Maturity Swap is a fixed-income swap in which
one leg is a floating rate of a constant maturity (from the date
it is paid). A convexity adjustment is required for the pricing
of these instruments. See page 314.
Convertible An instrument that can be exchanged for another
of a different type. A convertible bond is a bond that can be
turned into stock at a time of the holder’s choosing. This gives
an otherwise simple instrument an element of optionality. See
page 316.
Convexity Related to the curvature in the value of a derivative
(or its payoff) with respect to its underlying. A consequence
ofJensen’s Inequalityfor convex functions together with
randomness in an underlying is that convexity adds value to
a derivative. A positive convexity with respect to a random