CFA® glossary: O

21 terms beginning with O.

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Oligopoly

A market with so few sellers that each must anticipate how rivals will react to its price and output. Outcomes range from nearly competitive to nearly monopolistic, depending on whether they collude. Where it appears →

One-hot encoding

Turning a categorical feature into a set of 0-or-1 indicator variables, one for each category, so that a model can use it.

One-sided durations

Effective durations measured separately for a fall and for a rise in rates. They differ for bonds with embedded options, because a call caps the price gain and a put cushions the price fall.

Operating cash flow

Cash generated by the trading that produces net income. Far harder to manage than profit, which is why the two coming apart is worth explaining. Where it appears →

Operating lease

A lease reported as a single straight-line cost. Since the standards changed, the asset and the obligation sit on the balance sheet either way. Where it appears →

Operating leverage

Fixed operating costs magnifying what a change in sales does to operating profit. A company with no debt at all can be dangerously leveraged. Where it appears →

Operating margin

Operating profit over revenue. It stops above interest, so two identical businesses financed differently share it — which is what makes it comparable. Where it appears →

Operating profit

Profit from the business's operations after operating expenses but before interest and tax. Financing choices do not reach it, which is why it is the line to compare across firms. Where it appears →

Operationally efficient

Describes a market where trading is cheap — narrow spreads, low commissions — so acting on information pays. The base the other two kinds of efficiency rest on.

Opportunity cost

The value of the best alternative given up by a choice. For a country, it is the other goods its resources could have produced instead, and it is what comparative advantage compares. Where it appears →

Option-adjusted spread

The Z-spread with the embedded option's value stripped out, using a model. Comparable across option features, and an opinion rather than arithmetic. Where it appears →

Option-free bond

A bond neither side can end early. Its convexity works only in the holder's favour, which is exactly what an embedded option takes away. Where it appears →

Order-driven market

A market where buy and sell orders are matched by rules of precedence — price first, then usually display and time — with no dealer needed. How most exchange-traded shares trade.

Other comprehensive income

Gains and losses recognised in equity without passing through net income, such as currency translation differences, some pension remeasurements and fair value changes on certain investments. Where it appears →

Out-of-sample

Using data that were not used to estimate the model. Out-of-sample tests show how well a model forecasts; a close fit in sample can hide overfitting. Where it appears →

Output gap

Actual output less potential output. A negative gap means spare capacity and downward pressure on inflation; a positive one means the economy is running above what it can sustain. Where it appears →

Overconfidence

Rating one's own knowledge, judgement or virtue higher than the evidence supports. It narrows forecast ranges, encourages over-trading and, in ethics, makes people think themselves more principled than their peers. Where it appears →

Overfitting

A model learning the noise in its training data as though it were signal. It fits the past closely and predicts badly, which is why models are tested on data held out from training. Where it appears →

Overlay

Derivatives such as futures, forwards or swaps held alongside a portfolio to change an exposure without trading the physical holdings. Often run by a specialist, for hedging, rebalancing or active return. Where it appears →

Overnight indexed swap

A swap exchanging a fixed rate for the compounded overnight rate over its term. Its rate is close to risk-free, so a bank rate's spread over it measures bank credit and liquidity risk.

Oversubscribed offering

A new issue with more orders than securities to go round. Under Fair Dealing it is allocated by a pre-set, disclosed method such as pro rata, and never to members' own accounts ahead of clients.