CFA® glossary: C

122 terms beginning with C.

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Calendar spread

Selling an option and buying one on the same underlying and strike with a different expiry, usually selling the nearer. It profits from the faster time decay of the short-dated option or from a view on implied volatility across expiries.

Calibration

Setting a model's parameters so it reproduces the market prices of chosen instruments, such as fitting a rate tree so benchmark bonds price exactly. Other instruments are then priced consistently with them. Where it appears →

Call option

The right, but not the obligation, to buy the underlying at the exercise price. The buyer can lose no more than the premium; the writer's loss has no ceiling as the underlying rises. Where it appears →

Callable bond

A bond the issuer may repay early. They will do it when rates fall, so the holder gives up the upside and is paid a higher yield for it. Where it appears →

Camels

A framework rating banks on six areas: capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk. Each is scored separately and then combined. Where it appears →

Cannibalisation

Sales a new product takes from a company's existing products. Only incremental cash flow counts, so the lost sales must be deducted from the new project's forecast.

Capital allocation line

The straight line of combinations of the risk-free asset and one risky portfolio. The best one runs through the tangency portfolio, and its slope is that portfolio's Sharpe ratio.

Capital asset pricing model

The model in which expected return is the risk-free rate plus beta times the market risk premium. Only market risk is paid for, since other risk can be diversified away. Where it appears →

Capital call

A general partner's demand for part of the capital a limited partner committed, made as investments are found. The manager chooses the timing, so investors must hold liquidity ready to meet calls. Where it appears →

Capital controls

Restrictions on moving money into or out of a country, such as taxes on inflows or limits on converting currency. Used to damp volatile flows or defend a peg, at a cost to efficiency and investor confidence. Where it appears →

Capital deepening

Raising the amount of capital per worker. It lifts output per worker, but each addition adds less than the last, so on its own it cannot sustain growth indefinitely. Where it appears →

Capital market line

The capital allocation line whose risky portfolio is the market portfolio, as it must be if everyone shares the same expectations. Efficient portfolios lie on it; single assets generally do not.

Capital structure

The mix of debt and equity funding a firm. It changes who is owed what, and can change the cost of capital, without changing the business. Where it appears →

Capitalisation rate

Net operating income as a proportion of a property's value, used in reverse to turn a year's stabilised income into a valuation. Small changes in it move the answer a great deal. Where it appears →

Capitalised

Recorded as an asset rather than expensed at once, then released to the income statement over the periods it benefits. Early profit is higher, and the cash spent sits in investing rather than operating activities. Where it appears →

Caplet

A single call on an interest rate, paying notional × accrual fraction × any excess of the reference rate over the cap rate, one period after the rate is set. An interest rate cap is a series of them. Where it appears →

Capture ratio

A manager's return as a percentage of the benchmark's, measured separately over rising (upside) and falling (downside) periods. Upside over downside capture above 1 points to a convex, asymmetric pattern. Where it appears →

Carried interest

The general partner's share of a private fund's profits, commonly 20%, usually paid only after investors have their capital back and any hurdle. It is what ties the manager's pay to results.

Carry arbitrage

Trading a forward price against spot plus the cost of carrying the asset: if the forward is too high, borrow, buy the asset and sell forward; if too low, the reverse. It pins forward prices to cost of carry. Where it appears →

Carry trade

Borrowing in a low-interest currency to invest in a high-interest one, betting that uncovered interest parity fails. Steady gains in calm markets, and sudden large losses when funding currencies rally in a crisis. Where it appears →

Carrying amount

What an asset or liability is recorded at in the accounts today, after depreciation, amortisation or any write-down. Frequently not what it would fetch. Where it appears →

Cash conversion cycle

Days of inventory plus days of receivables less days of payables: how long cash is tied up between paying suppliers and being paid by customers. Where it appears →

Cash dividend

A payment of cash to shareholders. The share price falls by about the amount paid on the ex-dividend date, so without taxes or signals holders are no better off than after a buyback of the same size. Where it appears →

Cash drag

The return lost by holding uninvested cash, such as dividends awaiting reinvestment or a buffer for redemptions, while the market rises. Equitising the cash with futures reduces it. Where it appears →

Cash flow matching

Buying bonds whose coupons and principal arrive as each liability falls due. It removes reinvestment risk and most rate risk without rebalancing, but usually costs more than duration matching. Where it appears →

Cautionary letter

A letter issued after an inquiry where conduct warrants attention but not discipline. It is not a disciplinary sanction. Where it appears →

Central limit theorem

The result that the mean of a large random sample is approximately normally distributed, whatever the population's shape, provided its variance is finite. It concerns the distribution of the mean, never of the data.

Cfa designation

The Chartered Financial Analyst credential, certifying mastery of the programme's body of knowledge and a commitment to the Code and Standards. There is no partial version, and it promises nothing about performance. Where it appears →

Chain rule of forecasting

Building multi-period forecasts from an autoregressive model by using each forecast in place of the unknown actual value at the next step. Errors compound, so later forecasts are less certain.

Changes in accounting principle

A switch from one permitted accounting method to another, such as a new inventory method. It is applied retrospectively, restating prior periods so the years remain comparable.

Changes in estimate

A revision to a judgement such as an asset's useful life or a bad-debt rate. It is applied prospectively, to the current and future periods only, and the past is not restated.

Channel stuffing

Shipping more goods to distributors than they need, to book revenue early. It shows up as receivables growing faster than sales, and later as returns.

Charterholder

A person awarded the right to use the CFA designation after passing all three levels and meeting the work experience requirement. The right lapses unless membership dues and the annual statement are kept up. Where it appears →

Cheapest-to-deliver

The deliverable bond, or in a credit default swap the deliverable obligation, that costs least for the short or the protection buyer to hand over. Futures prices and CDS recoveries are set by it. Where it appears →

Chi-square distribution

An asymmetric distribution bounded below at zero, shaped by its degrees of freedom. Used to test a hypothesis about the variance of a single normally distributed population.

Clawback

A provision requiring a manager to return performance fees or carried interest already paid if later losses mean it has received more than the final results justify. Where it appears →

Clean surplus relation

The link between earnings and book value: ending book value equals opening book value plus net income minus dividends. Gains and losses taken to other comprehensive income break it. Where it appears →

Clearing house

The body that becomes buyer to every seller and seller to every buyer in a futures market, protected by margin, so no trader relies on the solvency of whoever took the other side. Where it appears →

Closed-end fund

A fund with a fixed number of shares that trade on an exchange rather than being redeemed by the fund. Its price is set by buyers and sellers and can sit at a premium or discount to net asset value. Where it appears →

Closet indexer

A manager charging active fees while holding a portfolio close to the benchmark. The giveaway is low active share with low tracking error: the return is mostly the index, less a larger fee. Where it appears →

Club convergence

The view that poorer countries catch up with richer ones only if they share the institutions and policies of the richer club. Those outside it may fall further behind.

Co-investment

Capital placed directly into a specific deal alongside a fund the investor already backs, usually at reduced or no fees. Cheaper than the fund, but the investor must be able to assess the deal itself, and quickly. Where it appears →

Code of ethics

The statement of principles a profession's members commit to. CFA Institute's sets six, from integrity and putting clients first to maintaining competence; the Standards turn them into enforceable rules. Where it appears →

Coefficient of determination

The share of the dependent variable's variation that a regression explains, from zero to one. In a simple regression it equals the squared correlation, and it says nothing about causation. Where it appears →

Coefficient of variation

Standard deviation divided by the mean: risk per unit of return, which lets assets with different averages be compared. Lower is better, and it becomes unreliable as the mean nears zero.

Cointegration

Two series with unit roots that share a long-run relationship, so a regression of one on the other leaves stationary errors. Only then is the regression between them meaningful. Where it appears →

Combination formula

The number of ways to choose r items from n when order does not matter: n factorial divided by r factorial times (n − r) factorial. Often read as n choose r.

Combined ratio

An insurer's loss and loss adjustment expense ratio plus its underwriting expense ratio. Below 100% means underwriting is profitable before investment income.

Commercial paper

Unsecured short-term debt sold directly to investors by large, highly rated issuers, usually maturing within months. Cheaper than bank borrowing, but it depends on investors continuing to roll it over. Where it appears →

Common equity tier 1

The highest-quality bank capital: common shares and retained earnings, less deductions such as goodwill. Basel III sets minimum ratios of it to risk-weighted assets, because it absorbs losses while the bank keeps operating. Where it appears →

Common-size

Every line restated as a percentage — of revenue on an income statement, of total assets on a balance sheet — so firms of different size can be compared. Where it appears →

Comparative advantage

Being able to do something at a lower opportunity cost than others, not necessarily at a lower absolute cost. It decides who should specialise in what — and, in risk management, who should bear a risk. Where it appears →

Competence

Having the knowledge and skills a task requires. Standard I(E), added in the 12th edition, makes acting with and maintaining it enforceable, judged by the work done rather than by how results turned out. Where it appears →

Compliance procedures

A firm's written rules and controls for keeping its people within the law and the Standards. A supervisor depends on them to detect and prevent violations, so without them the role cannot be discharged.

Composite

Under the performance standards, all of a firm's fee-paying discretionary portfolios run to one strategy, grouped together so a record cannot be assembled from the successes. Where it appears →

Compounding

Interest being added to the balance so that it earns interest itself in later periods. It makes growth exponential rather than linear, and more frequent compounding raises the effective annual rate. Where it appears →

Concentration measures

Statistics summarising how much of an industry its largest firms control, such as their combined market share. High concentration tends to mean less price competition, though not always. Where it appears →

Concentration ratio

The combined market share of an industry's largest firms. Simple, but blind to how that share is split among them and to how easily new firms can enter.

Concession rights

The rights a government grants to build or run an infrastructure asset and collect its revenue for a set term, after which the asset is usually handed back. Value ends with the term, so there is no perpetual terminal value. Where it appears →

Conditional expected value

The expected outcome given that a particular scenario has occurred. Weighting each one by its scenario's probability recovers the overall expected value.

Conditional value at risk

The average loss in the outcomes worse than the VaR, so it says how bad the tail is, which VaR does not. It is always at least as large as the VaR at the same level. Where it appears →

Confidence interval

A range around a sample estimate built so that, across repeated samples, it would contain the true parameter a stated share of the time, such as 95 per cent. It allows for sampling error, not for bias. Where it appears →

Confidentiality

Under Standard III(E), keeping information about current, former and prospective clients private unless it concerns illegal activities, disclosure is required by law, or the client permits it. Where it appears →

Conflict of interest

An interest or relationship that could reasonably be expected to impair independence or interfere with duties to clients or employer. It must be avoided or fully and fairly disclosed, and avoiding it is preferred where reasonably possible. Where it appears →

Confusion matrix

A table of a classification model's predictions against actual outcomes: true and false positives and negatives. Precision, recall, accuracy and the F1 score are all computed from it.

Conglomerate discount

The amount by which the market values a diversified group below the sum of its parts valued separately. Often cited to justify a break-up, though separating the parts does not release it automatically. Where it appears →

Consensus mechanism

The rule by which participants in a distributed ledger agree which version of the record is authoritative — proof of work, proof of stake, or approval by designated validators on a permissioned network.

Conservatism bias

Holding on to an existing view and underreacting to new information, so revisions arrive too late and too small. In forecasts it shows as estimates that trail the evidence.

Constant currency

Restated to remove the effect of exchange rate changes, usually by applying last year's rates to this year's figures. Organic growth also strips out acquisitions and disposals.

Constant growth model

Values a share as next year's dividend divided by the required return less a growth rate assumed to last forever. It works only with growth below the required return, and the value explodes as the two converge. Where it appears →

Consumer surplus

What buyers would have been willing to pay less what they actually paid, summed over every unit bought. On a diagram it is the area between the demand curve and the price.

Contagion

The spread of a financial crisis from one country or market to others, often those investors see as similar, even where their own fundamentals are only moderately weak. Where it appears →

Contango

A futures curve sloping up, with later delivery dearer than spot. Rolling a long position forward then costs money, whatever the commodity does. Where it appears →

Contingent immunisation

Managing a bond portfolio actively while its value stays above what is needed to meet the liability by a set cushion, and switching to immunisation if it falls to that floor.

Continuously compounded return

The natural logarithm of one plus the holding-period return. Returns in this form add across periods, which makes multi-period arithmetic exact where simple returns mislead. Where it appears →

Contraction risk

The risk that a mortgage security repays faster than expected when rates fall, handing capital back exactly when it can only be reinvested at less.

Contribution margin

Price less variable cost per unit: what each unit sold contributes towards fixed costs and then to profit. The lower it is, the more volume a company needs to break even.

Control premium

The extra paid for a controlling interest over the value of a minority stake, for the power to direct the business. Multiples from acquisitions of whole companies already include it. Where it appears →

Convenience yield

The benefit of holding the physical commodity rather than a futures contract, such as keeping production running through a shortage. It lowers futures prices relative to spot and is largest when inventories are tight. Where it appears →

Conversion factor

In bond futures, the adjustment that puts each deliverable bond on a par with the contract's notional bond. The invoice price is the futures price times it, plus accrued interest. Where it appears →

Conversion ratio

The number of shares received for each convertible bond on conversion. Face value divided by it gives the conversion price. Where it appears →

Conversion value

The value of the shares a convertible bond can be exchanged for: the conversion ratio times the share price. A convertible is worth at least the higher of this and its straight value. Where it appears →

Convertible bond

A bond the holder can exchange for a set number of the issuer's shares. Worth at least the higher of its straight value and its conversion value, it offers equity upside with a bond's downside protection. Where it appears →

Convexity

The curve in the price–yield relationship that duration's straight line misses. For an ordinary bond it always favours the holder, so it is priced. Where it appears →

Cook's distance

A measure of how much a regression's fitted values would change if one observation were dropped, combining its leverage and its residual. Large values flag influential points worth checking.

Core inflation

Inflation with food and energy stripped out because their prices are volatile. It is the better guide to the underlying trend, which is why central banks watch it closely.

Correlation

Covariance rescaled to run from minus one to plus one, so co-movement can be compared across pairs. Anything below plus one pulls portfolio risk beneath the weighted average of the parts. Where it appears →

Cost approach

Valuing a property at what it would cost to replace the building today, less depreciation, plus the value of the land. Most useful for unusual buildings with no comparable sales. Where it appears →

Cost basis

The amount treated as paid for an asset when working out a taxable gain. A low one, typical of a long-held concentrated position, means a large tax bill on sale. Where it appears →

Cost leadership

Competing by having the lowest cost base in the industry, so the firm can match or undercut rivals' prices and still earn a return. Only one firm can truly hold the lowest costs.

Cost of carry

The net cost of holding an asset until a future date: financing, storage and insurance, less any income or convenience yield. Futures and forward prices are spot plus this cost.

Cost of goods sold

The cost of the goods a company actually sold in the period — materials, labour and production overheads attached to them. It is matched to the revenue those sales produced, not to what was bought. Where it appears →

Counterparty credit risk

The risk that whoever is on the other side of a contract fails to pay what they owe. It builds on an over-the-counter derivative as gains accumulate, and is what central clearing and margin exist to contain.

Covariance

A measure of whether two variables move together: positive if they rise and fall in step, negative if they offset. Its size carries the units of both, so it cannot be compared across pairs. Where it appears →

Covariance-stationary

Having a constant, finite mean and variance, and covariances with past values that depend only on the lag. Autoregressive models give valid results only for such series. Where it appears →

Covenant

A term written into a loan agreement constraining the borrower afterwards. It is what stops value being moved to shareholders once the money is lent. Where it appears →

Covered call

Owning the underlying and writing a call on it. The premium adds income in a flat market, and any gain above the exercise price is given up in return. Where it appears →

Covered interest parity

The arbitrage condition that a forward premium or discount exactly offsets the interest rate differential, so hedged foreign deposits earn the same as domestic ones. Unlike the other parities it holds closely in practice. Where it appears →

Crawling band

A peg whose permitted range of fluctuation is widened over time, typically as a managed exit from a fixed rate towards a float. The central bank still needs reserves to defend its edges.

Creation unit

The large block of ETF shares an authorised participant creates or redeems with the fund in one go, usually in exchange for a basket of the underlying securities.

Credit default swap

A contract in which the protection buyer pays a periodic premium and the protection seller pays out if the reference entity suffers a credit event. It transfers credit risk without trading the bonds. Where it appears →

Credit enhancement

Features that protect a structured bond's investors from losses on the collateral, such as subordination, overcollateralisation and excess spread, or a guarantee from an outside party.

Credit event

An event affecting a borrower's ability to pay. In a credit default swap, a defined trigger for payout: bankruptcy, failure to pay and, in many contracts, restructuring that makes creditors worse off. Where it appears →

Credit score

An ordinal ranking of default risk, mainly for individuals and small businesses: a higher score means lower risk, but it is not a probability and does not adjust for the economic cycle.

Credit spread

The extra yield a borrower pays over a government benchmark. It covers far more than expected default losses — liquidity and the risk of the spread itself widening take a share. Where it appears →

Credit valuation adjustment

The present value of expected credit losses over a bond's life, built date by date from exposure, loss given default and probability of default. Subtracted from the default-free value to value the risky bond. Where it appears →

Critical audit matter

An area that required especially challenging or subjective auditor judgement, described in a US audit report; international standards call it a key audit matter. It shows where the estimation risk sits. Where it appears →

Critical value

The cut-off a test statistic is compared with, read from the relevant distribution at the chosen significance level. A statistic beyond it leads to rejecting the null hypothesis. Where it appears →

Cross rate

An exchange rate between two currencies derived from each one's rate against a third, usually the US dollar. A quoted cross rate out of line with it offers triangular arbitrage. Where it appears →

Cross-hedge

Hedging with a different but correlated currency or asset because the exposure itself cannot be hedged cheaply, or at all. It leaves basis risk, since the two never move exactly together.

Cross-validation

Estimating out-of-sample error by rotating parts of the data through the validation role: in k-fold cross-validation, each of k parts is held out once while the model trains on the rest. Where it appears →

Crowding out

Government borrowing raising interest rates and so displacing private investment that would otherwise have happened. It offsets part of the effect of a fiscal stimulus.

Cryptocurrency

A digital asset recorded on a distributed ledger, intended as a medium of exchange or store of value, with no central issuer. It generates no cash flows, so its price rests on adoption and sentiment.

Cumulative voting

Letting shareholders cast all their votes — one per share for each seat — for a single director candidate. It helps a minority elect some of the board, which straight voting would prevent.

Currency board

A legal commitment to exchange domestic currency at a fixed rate, with the monetary base fully backed by foreign reserves. It buys credibility by surrendering almost all independent monetary policy.

Currency swap

A swap exchanging interest payments in two currencies, usually with the notional amounts exchanged at the start and back at the end. Used to convert borrowing or investment from one currency into another. Where it appears →

Current account

The part of the balance of payments recording trade in goods and services, investment income and transfers. A deficit means the country spends more abroad than it earns and must borrow or sell assets to pay. Where it appears →

Current rate method

Translating a foreign subsidiary's assets and liabilities at the closing rate and its income at the average rate, with the translation adjustment taken to equity. Used when the subsidiary's own currency is functional. Where it appears →

Current ratio

Current assets over current liabilities. It counts inventory, which is the current asset least likely to turn into cash when it is needed. Where it appears →

Custody

Safekeeping of assets on an owner's behalf. For digital assets it means control of the private keys, so a lost key or a hacked custodian can mean a permanent loss with no one to recover it from. Where it appears →

Customs union

A free trade area whose members also set a common tariff on imports from outside. It removes the incentive to route imports through whichever member charges the least.

Cyclically adjusted p/e

Price divided by average real earnings over the past ten years, which smooths out the business cycle. Used to judge whether a market is expensive against its own history.