The Risk Limited Glossary
C:

Call Option  option that gives the buyer the right, but not the obligation, to buy a futures contract for a specified price within a specified period of time in exchange for a onetime premium payment. See also Put Option.
Call Spread  an option trading strategy involving buying a call option with a certain strike price and selling a call option having the same expiration date as the first but at a different strike price.
Capacity [electric power]  the maximum power that a machine or system can produce or carry safely. The maximum instantaneous output of a resource under specified conditions. For electric power, the capacity of generating equipment is generally expressed in kilowatts or megawatts.
Capacity Factor  the amount of energy that a power generation plant actually generates compared to its maximum rated output, expressed as a percentage.
Cash Flow Hedges  in U.S. accounting terminology, a hedge of a forecasted asset and liability acquisition, for which the gain or loss on the hedging instrument will remain in equity when the asset or liability is acquired. That gain or loss will subsequently be included in net profit or loss in the same period as the asset or liability affects net profit or loss. See also FAS 133.
CBOT  an acronym for the Chicago Board of Trade.
CFTC  an acronym for the U.S. Commodities Futures Trading Commission.
ChiSquared Distribution  the distribution for the square of a normal random variable. The chisquared distribution arises frequently in applications because of its close association with the normal distribution.
CHP  an acronym for Combined Heat and Power. A term referring to cogeneration, more commonly used in Europe and other nonU.S. countries.
CME  an acronym for the Chicago Mercantile Exchange.
CNG  an acronym for Compressed Natural Gas. CNG is natural gas that has been compressed under high pressure (typically 2000 to 3600 psi).
Coefficient of Determination  a measure of the proportion of variance in y which can be explained by x. See also r^{2}.
Cogeneration  the production of electricity and useful thermal energy from a common fuel source.
Combined Cycle  two or more generation processes in series or in parallel, configured to optimize the energy output of the system. For electric power, the combination of a gas turbine and a steam turbine in an electric generation plant. The waste heat from the gas turbine provides the heat energy for the steam turbine.
Confidence Interval  a confidence interval for a parameter is a random interval constructed from data in such a way that the probability that the interval contains the true value of the parameter can be specified before the data are collected.
Contango  market situation in which prices in succeeding delivery months are progressively higher than in the nearest delivery month; the opposite of backwardation. See also Backwardation.
Continuous Variable  a quantitative variable is continuous if its set of possible values is uncountable. Examples include temperature, exact height, exact age (including parts of a second). Since in practice one can never measure a continuous variable to infinite precision, continuous variables are sometimes approximated by discrete variables.
Convexity  a measure of the sensitivity of duration to changes in yield levels. Convexity is a measure of the stability or instability of the measured duration over a range of yields. If convexity is low, that is, if the price/yield relationship is close to a straight line, duration is stable. If convexity is high, duration is unstable. The greater an instrument’s convexity, the less accurate duration will be. See also Duration.
Cooling Degree Day  a typical index variable in weather derivative transactions. Also referred to as CDD.
Correlation  a measure of linear association between two (ordered) lists. Two variables can be strongly correlated without having any causal relationship, and two variables can have a causal relationship and yet be uncorrelated. In a twodimensional plot, the degree of correlation between the values on the two axes can be quantified by the socalled correlation coefficient (see below).
Correlation can be an important consideration in risk management for such areas as developing surrogate hedges, structuring hybrid instruments, and demonstrating hedge effectiveness within accounting & reporting rules of FAS 133.
Correlation Coefficient  the correlation coefficient (also referred to as "r") provides an index of the degree to which variables covary in a linear fashion.
Counter Party Risk  the risk that a counter party to a transaction or contract will default (fail to perform) on its obligation under the contract. Counter party risk is not limited to credit risk (the risk that the counter party cannot fulfill its contractual obligations for payment) but may also result from other problems associated with a counterparty unwilling to honor the contract.
Covariance  a measurement of the relationship between two variables. The arithmetic mean of the products of the deviations of corresponding values of two quantitative variables from their respective means.
Covariance Matrix  a square, symmetrical matrix in which the rows and columns are variables, and the entries are covariances. The diagonal elements (the covariance between a variable and itself) will equal the variances.
Coverage Ratio  the ratio of earnings to some key expense, such as interest or dividend payout.
CoxRossRubinstein Option Pricing Model  an option pricing model (CRR) developed by John Cox, Stephen Ross, and Mark Rubinstein that can be adapted to include effects not included in the BlackScholes Model (e.g., early exercise).
Crack Spread  a commodityproduct spread involving the purchase of crude oil futures and the sale of gasoline and heating oil futures.
Credit Default Swap  a bilateral overthecounter (OTC) contract in which the seller agrees to make a payment to the buyer in the event of a specified credit event in exchange for a fixed payment or series of fixed payments; the most common type of credit derivative; also called Credit Swap.
Credit Derivative  a derivative product with a payoff that depends on risk factors related to credit quality, such as yield spread over Treasuries, price discount from par, or a "credit event" such as a drop in credit rating or some sort of failure, such as occurrence of default, insolvency or bankruptcy.
Credit Risk  the risk that a counter party to a transaction or contract does not perform, including repayment on debt obligations but also payments on commercial transactions such as hedges and derivatives.
Credit Scoring  a system used by lenders to calculate the statistical probability of repayment on possible loans or extensions of credit.
Critical Day Option  an option structure used for weather derivative transactions where the option payoff is based on defined critical conditions being met for a specified number of days.
Cumulative Probability Distribution Function  the cumulative distribution function of a random variable is the chance that the random variable is less than or equal to x, as a function of x.
Currency Risk  the financial risk posed by fluctuating worldwide exchange rates.
Current Ratio  refers to the ratio computed as the current assets divided by current liabilities from the most recent quarter. The current ratio is a measure of a firm's immediate financial health and its ability to meet current obligations.
Curvilinear Function  a function whose value, when plotted, will follow a continuous but not necessarily straight line, such as a polynomial, logistic, exponential, or sinusoidal curve.
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