guaranteed stock

Preferred or common stock of one corporation whose dividends are guaranteed by another corporation. Since the dividends are guaranteed, investors are generally willing to pay a higheramount for the stock than if the stock was not backed up by a guarantee. How valuable theactual guarantee is will depend on the guarantor's financial and credit history. The guaranteed stock arrangement has frequently been used by railroads.

currency basket

A group of securities whose weighted average is used to determine the value of an obligation or the value of another currency. For instance, a country that does not peg the value of its currency to a single other currency, such as the U.S. dollar, could value its currency to the value of a currency basket comprised of Euros, U.S. dollars, and Japanese Yen.

letter of indemnity

A written undertaking by a third party (such as a bank orinsurance company), on behalf of one of the parties (thefirst party) to a transaction or contract, to cover the other party (the second party) against specific loss or damagearising out the action (or a failure to act) of the first party. Also called indemnity bond.

indemnity

Undertaking given to compensate for (or to provide protection against) injury, loss, incurred penalties, or from acontingent liability. A shipping company, for example, will ask for a bank's indemnity for releasing a shipment to a consignee who has lost original shipping documents. The bank in turn will require the consignee to sign acounter-indemnity before issuing its indemnity to the shipping company. This way the consignee gets therelease of shipment in completion of a transaction, and both the shipping company and the bank are protected in case some dispute arises out of that transaction. See also letter of indemnity.

European Exchange Rate Mechanism

ERM. A system created in 1979 as a way to reduce the volatility of the various Eurpoean currencies and to create a stable monetary system. The ERM created fixed margins in which a country's currency could operate. It was the predecessor of the European Economic and Monetary Union