Early Exercise
Exercise of an option before its expiration date.
Earnings Per Share (basic/diluted)
Ratio calculated by dividing the net income for the year attributable to shareholders by the weighted average number of shares oustanding. For calculating diluted earnings per share the number of shares and the net income for the year attributable to shareholders are adjusted by the dilutive effects of any rights to subscribe for shares which have been or can still be exercised. Subscription rights arise in connection with participation certificates and share based compensation plans.
Economic Capital
A figure which states with a high degree of certainty the amount of equity capital a bank needs at any given time to absorb unexpected losses arising from current exposures.
Effective Date
The date on which a financial instrument comes into effect.
Efficient Market Hypothesis
This is the theory which claims that given full access to all information, the market's current price of a share is the best estimate of future returns from that share. An efficient market implies that all available public information is embedded in the current price at all times.
Electronic Brokering Platform
A system in which all market participants can enter bids and offers, and observe others entering bids and offers, and then observe as the quotes are matching according to an algorithm and then executed.
Electronic Bulletin Board
A system whereby dealers or all market participants can post bids and offers, but they are not matched or executed.
Electronic Trading Platform
An electronic brokering platform or a proprietary system in which bids and offers can be posted by a dealer and market participants can execute trades with by hitting of lifting bids and offers (i.e. signaling the acceptance of posted bids and offers).
Embedded Derivatives
Derivative contracts that exist as part of other securities.
End-user
An end-user enters a derivatives contract in order to hold the position, whether for hedging, speculative or arbitrage purposes, and not for the purpose of market making.
Equity tranche/position
Also called first loss, the tranche in a CDO or securitisation capital structure that is the first to absorb losses. This is identical in concept to the position of common shares in a corporate capital structure. However, in CDOs and securitisations, the first-loss tranche does not take the legal form of common shares. CDO equity usually takes the form of preference shares, income notes or junior debt obligations. In a single-tranche CDO or index tranche, a credit default swap or credit-linked note with an attachment point of zero is known as the equity or first loss.
Equity Bonds
Equity Bonds (or Insurance bonds investing exclusively in company shares) are comparable with unit trusts, except for the taxation differences. Equity Bonds can be just as specialist as unit trusts, putting cash into sectors such as 'Emerging Markets' or investing for 'UK Income' or 'UK Growth'. Since insurance bonds pay Capital Gains Tax (CGT) internally (within the fund), they will be less tax efficient than unit trusts for most investors. However, insurance bonds do have their merits. For example, switching between different funds within an Insurance Bond is frequently 'free of charge' and is not counted as a disposal for CGT purposes by the taxman. They are therefore a useful tool for those people who wish to actively manage their investments.
Equity Capital Markets (ECM)
Primarily, activities connected with a company’s IPO or the placement of new shares. It also covers the privatization of state-owned companies.
Equity Consolidation
The relevant proportion of cost for the investment in a subsidiary is set off against the relevant proportion of the shareholders’ equity of the subsidiary.
Equity Default Obligation
A portfolio equity default swap.
Equity Index Swap
A swap that exchanges the return on a stock index for the return on a bond index or other equity index.
Equity Method
Investments in joint ventures and associated companies are accounted for by this method. They are valued at the Group’s proportionate share of the net assets of the companies concerned. In the case of investments in companies which prepare consolidated financial statements of their own, the valuation is based on the sub-group’s consolidated net assets. The valuation is subsequently adjusted to reflect the proportionate share of changes in the company’s net assets, a proportionate share of the company’s net earnings for the year being added to the Group’s consolidated income.
Equity Swap
A contract in which counterparties agree to exchange payments related to indices, at least one of which (and possibly both of which) is an equity index.
Euro Commercial Paper Program
Instrument allowing the flexible issuance of unsecured, short-term debt by an issuer. A program may comprise several bond issues over a period of time.
Eurobond
A medium or long-term interest-bearing bond created in the international capital markets. A Eurobond is denominated in a currency other than that of the place where it is being issued. This means, among other things, that interest on such bonds is usually paid gross - without tax being deducted. Eurobonds are only issued by major borrowers, such as governments, other public bodies or large multinational companies.
European Option
An option that can only be exercised on the expiration date.
Event Risk Scenarios
Scenarios representing important events, e.g. large movements in interest or exchange rates. ex coupon A stock or bond sold without the right of receipt of the next due dividend or interest payment.
Exchange
Also known as a board of trade or contract market, it is a central market in which all participants can observe the bids, offers and execution prices of all other participants.
Exchange Traded Contracts
Financial instruments listed on exchanges such as the Chicago Board of Trade.
Execution Price
The price at which a trade occurs.
Exercise
The process by which a call option is used to buy or a put option used to sell the underlying according to the contractual terms of the contract.
Exercise Limit
The maximum number of option contracts that one investor can exercise over a specific period.
Exercise Notice
A notice in writing delivered to a clearinghouse on or by a specific time giving notice of intent to make or take delivery of the underlying.
Exercise Price
The exercise price is the price at which a call's (put's) buyer can buy (or sell) the underlying instrument.
Exit Loan
A loan issued by a company exiting US chapter 11 bankruptcy.
Exotic Derivatives
Any derivative contract that is not a plain vanilla contract. Examples include barrier options, average rate and average strike options, lookback options, chooser options, etc.
Expected Loss
Measurement of loss that can be expected within a one-year period from credit risk and operational risk based on historical loss experience.
Expected Recovery
Given default (ERGD) Recovery, in this context, is the complement of loss given default (LGD). This long-winded term is far less popular than simply saying, "recovery rate".
Expense Ratio
Represents acquisition and administrative expenses (net) divided by premiums earned (net).
Expiration
A date after which an option or futures contract no longer is in effect.
Exposure
The amount which would be lost in default given the worst case regarding recovery in the liquidation or bankruptcy of an obligor. For a loan or fully drawn facility, this is the full facility amount plus accrued interest.
Exposure at Default (EAD)
The expected amount of the credit exposure to a counterparty at the time of a default.
Extension Risk
The possibility that prepayments will be slower than an anticipated rate causing later-than-expected return of principal. This usually occurs during times of rising interest rates.
Extinguishable Option
An option in which the holder’s right to exercise is canceled if the value of the underlying passes a specified level.
Facility
A generic term which includes loans, commitments, lines, letters of credit, etc. Any extension of credit made by a bank officer. Note that there can be (and often are) multiple facilities outstanding to a bank client at once.
Failure to Pay
The reference entity fails to make interest or principal payments when due, after the grace period expires (if grace period is applicable in the trading documentation). Also, a credit event used in most credit derivatives. Settlement in these contracts can be triggered by a failure to pay.
Fair Value
Amount at which assets or liabilities would be exchanged between knowledgeable, willing and independent counterparties, other than in a forced or liquidation sale.
Fallen Angels
Obligors that originally borrowed/issued while rated "investment grade" who have since been downgraded to "sub-investment grade".
Family Office
Financial services which are designed for families with very large and complex portfolios of assets and which protect customers’ interests on the basis of absolute independence through optimal management and comprehensive coordination of individual wealth components.
Financial
A financial borrower - that is, a bank or insurance company. Corporates and financials make up two of the biggest categories of reference entities in the credit derivatives market.
Financial Assets Carried at Fair Value Through Income
Financial assets held for trading and financial assets designated at fair value through income.
Financial Futures
A futures contact on a financial claim such as a bond, currency or deposit.
Financial Liabilities Carried at Fair Value Through Income
Financial liabilities held for trading and financial liabilities designated at fair value through income.
Financial Supply Chain Management
Optimization of financial payments along the supply chain.
First Pay
The first-pay bond of a CDO or other securitisation is the tranche that has the obligation to make coverage payments for the first losses in a pool of obligations.
First-day Motion
A motion filed with the US bankruptcy court simultaneously with the Chapter 11 petition which, in the opinion of counsel, requires expedited consideration by the Court within two business days of the filing.
Fiva
A forward or futures contract on implied volatility.
Fixed Hedge
A hedge in which the quantity being hedged is matched by the quantity that the options give the right to buy and sell.
Fixed Interest
The term generally refers to bonds on which the holder receives a pre-determined and unchanging rate of interest. What this offers the potential investor is a known return from holding the investment. That return contrasts with non-guaranteed variable return on equities.
Floor
Most commonly, an interest rate option that pays an amount of interest on an agreed-upon amount of notional principal whenever the market index is below the floor's predetermined base.
Forward Contract
Agreement between two parties to buy or sell an asset at a specified future date for a price agreeed today.
Forward Rate Agreements (FRA)
A forward contract where one party pays a fixed interest rate and receives a floating rate (tied to an underlying index, e.g. USDLIBOR).
Forward/forward Rate
A rate applicable between two dates in the future.
Funded Credit Default Swap
A credit default swap (CDS) where principal is exchanged at the start of the transaction.
Funding Valuation Adjustment (FVA)
A term that takes into account cost of funding the trading position, it should be calculated consistently with counterparty risk framework.
Future Contracts
An exchange traded standardized contract between two parties to buy or sell a specified asset of a standardized quantity and quality at a specified future date at a price agreed today.