Page 101 - PRIAA Glossary

the client’s collateral is segregated from the Futures Commission Merchant’s propriety and a trade-off between costs and risk is found.
LETTER OF CREDIT
A bank’s guarantee on behalf of its client that payment will be received to a counterparty. This becomes a line of credit from the bank to its client, and the client frequently needs to submit collateral to cover the exposure.
LEVERAGE
The use of borrowed capital or margin to increase investment return. Leverage magnifies gains but also losses, so it comes with increased risk if the market moves away from the targeted goal.
LEVERAGED LOAN CDS
A credit default swap where the underlying reference credit is a leveraged loan.
LIABILITY DRIVEN INVESTMENT (LDI)
An investment approach targeted to gain assets to cover all current and future liabilities. This approach is common in defined-benefit pension plans, which since the early 2000s have been deemed a faulty structure. The plan sponsor and members have faced increased liabilities, which in some cases resulted in reduced benefits to the retired members, or even the shutdown of the plan.
LIBOR MARKET MODEL (LMM)
A multi-factor, lognormal, stochastic interest rate (IR) model which assumes that every LIBOR forward rate is a separate random variable governed by its own stochastic process. The LMM is generally regarded as the most powerful IR model, capable of taking highly granular levels of market information into account, and it is used to price the most complex IR derivatives. Also known as the “BGM model”.
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