B

1 Back Testing

Testing a value-at-risk or other model using historical data. For example, under the current BIS market risk-based capital requirements, a bank must back test its internal market model over a minimum of 250 past days if it is used for capital requirement calculations. If the forecast VAR errors on those 250 days are too large (i.e., risk is underestimated on too many days), a system of penalties is imposed by regulators to create incentives for bankers to get their models right.

2 Back-to-Back Transaction

A transaction where a dealer enters into offsetting transactions with different parties, effectively serving as a go-between.

3 Backward Equation

[See Kolmogorov backward equation]

4 Backwardation

A forward curve in which the futures prices are falling with time to expiration.

5 Backwardization

The situation in which futures prices in futures contracts that expire farther in the future are below prices of nearby futures contracts.

6 Backwards Induction

A procedure for...