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Glossary

O

Objective function 
A quantitative expression of the objective or goal of a process.
Objective probabilities
Probabilities that generally do not vary from person to person; includes a priori and objective probabilities.
Off-balance sheet financing
Arrangements that do not result in additional liabilities on the balance sheet but nonetheless create economic obligations.
Off-market FRA
A contract in which the initial value is intentionally set at a value other than zero and therefore requires a cash payment at the start from one party to the other.
Offsetting
A transaction in exchange-listed derivative markets in which a party re-enters the market to close out a position.
One-sided hypothesis test
Activities that are part of the day-to-day business functioning of an entity, such as selling inventory and providing services. Synonyms: one-tailed hypothesis test
Open market operations 
The purchase or sale by a central bank of government securities, which are settled using reserves, to influence interest rates and the supply of credit by banks.
Open outcry auction market 
Public auction where representatives of buyers and sellers meet at a specified location and place verbal bids and offers.
Operating activities
Activities that are part of the day-to-day business functioning of an entity, such as selling inventory and providing services.
Operating breakeven
The number of units produced and sold at which the company’s operating profit is zero (revenues = operating costs).
Operating cycle
A measure of the time needed to convert raw materials into cash from a sale; it consists of the number of days of inventory and the number of days of receivables.
Operating lease
An agreement allowing the lessee to use some asset for a period of time; essentially a rental.
Operating leverage
The use of fixed costs in operations.
Operating profit
A company’s profits on its usual business activities before deducting taxes. Synonyms: operating income
Operating profit margin
A profitability ratio calculated as operating income (i.e., income before interest and taxes) divided by revenue. Synonyms: operating margin
Operating return on assets
A profitability ratio calculated as operating income divided by average total assets. Synonyms: operating ROA
Operating risk
The risk attributed to the operating cost structure, in particular the use of fixed costs in operations; the risk arising from the mix of fixed and variable costs; the risk that a company’s operations may be severely affected by environmental, social, and governance risk factors.
Operations risk
The risk of loss from failures in a company’s systems and procedures (for example, due to computer failures or human failures) or events completely outside of the control of organizations (which would include “acts of God” and terrorist actions). Synonyms: operational risk
Opportunistic participation strategies
Passive trading combined with the opportunistic seizing of liquidity.
Opportunity cost
The value that investors forgo by choosing a particular course of action; the value of something in its best alternative use.
OCC
Office of the Comptroller of the Currency of the US.
OCI
Other Comprehensive Income
Odd lot
Block of bonds of $100,000 or less. Block of shares which is not a multiple of the minimum order size.
OECD
Organization for Economic Co-operation and Development
Offer
The price at which a seller offers to sell a security.
Offering document (official statement or prospectus)
The disclosure document prepared by the issuer that gives in detail security and financial information about the issuer and the bonds or notes.
Offering price
The price at which members of an underwriting syndicate for a new issue will offer securities to investors.
Official statement (OS)
See offering document.
Off-the-run Treasuries
Those sold in the secondary market rather than "on-the-run" Treasury securities, which are those most recently issued by the Government.
OFR
Office of Financial Research was established within the U.S. Department of Treasury by the Dodd-Frank Act, to improve the quality of financial data available to policymakers and facilitate more robust and sophisticated analysis of the financial system.
On-the-run
The most recently auctioned U.S. Treasury bond of a particular maturity. Opposite of off-the-run, which are Treasuries sold in the secondary market. Typically, on the run Treasuries are the most liquid, frequently traded securities. On-the-run bonds are usually more expensive, yielding less than off-the-run securities.
Opportunity cost sell discipline 
A sell discipline in which the investor is constantly looking at potential stocks to include in the portfolio and will replace an existing holding whenever a better opportunity presents itself.
Opportunity set
The set of assets available for investment.
Optimal capital structure
The capital structure at which the value of the company is maximized.
Optimization
With respect to portfolio construction, a procedure for determining the best portfolios according to some criterion.
Optimizer
A specialized computer program or a spreadsheet that solves for the portfolio weights that will result in the lowest risk for a specified level of expected return.
Option
A financial instrument that gives one party the right, but not the obligation, to buy or sell an underlying asset from or to another party at a fixed price over a specific period of time. Also referred to as contingent claims.
Option price
The amount of money a buyer pays and seller receives to engage in an option transaction. Synonyms: option premium premium
Option-adjusted spread
The current spread over the benchmark yield minus that component of the spread that is attributable to any embedded optionality in the instrument. Synonyms: OAS
Options on futures
Options on a designated futures contract. Synonyms: futures options
Options on physicals 
With respect to options, exchange-traded option contracts that have cash instruments rather than futures contracts on cash instruments as the underlying.
Option-adjusted duration (effective duration)
A measure of the bond’s movement for a shift in the yield curve. For noncallable bonds modified duration and effective duration are the same.
Option-adjusted spread
The average spread over the AAA spot curve, based on potential paths that can be realized in the future for interest rates. The potential paths of the cash flows are adjusted to reflect the options (puts/calls) embedded in the bond.
Optional principal redemption bond
Term used to describe callable securities issued by the FHLB with either fixed- or floating-rate structures.
Optional redemption
A right of the issuer, at its option, to retire all or part of an issue prior to the stated maturity during a specified period of years, often at a premium.
Order-driven markets 
Markets in which transaction prices are established by public limit orders to buy or sell a security at specified prices.
Ordinal scale
A measurement scale that sorts data into categories that are ordered (ranked) with respect to some characteristic.
Ordinary annuity
An annuity with a first cash flow that is paid one period from the present.
Ordinary least squares
An estimation method based on the criterion of minimizing the sum of the squared residuals of a regression. Synonyms: OLS
Ordinary life insurance
A type of life insurance policy that involves coverage for the whole of the insured’s life. Synonyms: whole life insurance
Ordinary shares
Equity shares that are subordinate to all other types of equity (e.g., preferred equity). Synonyms: common stock common shares
Organic growth
Company growth in output or sales that is achieved by making investments internally (i.e., excludes growth achieved through mergers and acquisitions).
Orphan equities investing 
A distressed securities investment discipline that involves investment in orphan equities that are perceived to be undervalued.
Orphan equity 
Investment in the newly issued equity of a company emerging from reorganization.
Orthogonal
Uncorrelated; at a right angle.
Order period
Specific length of time when orders for new issues are placed by investors.
Original delivery
The delivery of a new issue by the issuer to the original purchaser, upon payment of the purchase price. Also called “initial delivery."
Original face
The face value or original principal amount of a security on its issue date.
Original issue discount
A bond, issued at a dollar price less than par which qualifies for special treatment under federal tax law. Under that law, the difference between the issue price and par is treated as tax-exempt income rather than a capital gain, if the bonds are held to maturity.
ORTM
Other Risk Transfer Mechanisms
OTC
Over the Counter
Other comprehensive income
Items of comprehensive income that are not reported on the income statement; comprehensive income minus net income.
Other post-retirement benefits
Promises by the company to pay benefits in the future, other than pension benefits—such as life insurance premiums and all or part of health care insurance—for its retirees.
Other receivables
Amounts owed to the company from parties other than customers.
Outcome
A possible value of a random variable.
Outliers
Small numbers of observations at either extreme (small or large) of a sample.
Out-of-sample forecast errors
The differences between actual and predicted values of time series outside the sample period used to fit the model.
Out-of-sample test
A test of a strategy or model using a sample outside the time period on which the strategy or model was developed.
Out-of-the-money
Options that, if exercised, would require the payment of more money than the value received and therefore would not be currently exercised.
Output gap
The difference between the value of GDP estimated as if the economy were on its trend growth path (potential output) and the actual value of GDP.
Overall trade balance
The sum of the current account (reflecting exports and imports) and the financial account (consisting of portfolio flows).
Overcollateralization
A type of credit enhancement in which the principal amount of collateral used to secure a given transaction exceeds the principal of the securities issued.
Overconfidence trap 
The tendency of individuals to overestimate the accuracy of their forecasts.
Overlapping debt
On a municipal issuer’s financial statement, “overlapping debt” is the debt of other issuers which is payable in whole or in part by taxpayers of the subject issuer. As an example, a county usually includes several smaller governmental units and its debt is apportioned to them for payment based on the ratio of the assessed value of each smaller unit to the assessed value of the county. Another example is when a school district includes two or more municipalities within its bounds. In each example, “overlapping debt” is the proportionate share of the county and/or of the school district borne by the included subject issuer.
Over-the-counter market (OTC)
A securities market that is conducted by dealers throughout the country through negotiation of price rather than through the use of an auction system as represented by a stock exchange.
Owner trust
An amortizing structure that permits significant cash-flow engineering, which is generally prohibited with grantor trusts. Owner trusts are often used with auto loans, equipment leases and student loans.
Overnight index swap
A swap in which the floating rate is the cumulative value of a single unit of currency invested at an overnight rate during the settlement period.
Owners’ equity
The excess of assets over liabilities; the residual interest of shareholders in the assets of an entity after deducting the entity’s liabilities.
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