Kitchen-sink Bond
Bonds are composed by bundling up tranches of CMO and REMICs. These bonds are collection of many mortgages with varying cash flows.
Knock-in Option
An option that behaves like a normal option when a certain price level is reached before expiration.
Knock-out Option
An option which cease to exist when a specified price level is exceeded.
Kurtosis
Degree of peakedness of a distribution compared to a normal distribution. It is also defined as the fourth central moment of a distribution.
Ladder
An option strategy on a index, which locks-in gains once the underlying reaches a pre-determined price level.
LCDS
A CDS contract where the underlying instrument is a syndicated secured loan.
Legal Risk
The general potential for loss arising from the uncertainty of legal and regulatory interpretation of contracts relating to financial market transactions and bankruptcy.
Leptokurtosis (fat tails)
The condition of a probability density curve with more occurrences far away from the mean (i.e. fatter tails) and higher peak at the mean than would be predicted by a normal distribution.
Letter of Credit (LOC)
A promise to lend issued by a bank which agrees to pay the addressee, the 'beneficiary', under specified conditions on behalf of a third party, also known as the 'account party'. "There are different types of letters of credit. A financial letter of credit (also termed a stand-by letter of credit) is used to assure access to funding without the immediate need for funds and is triggered at the obligor's discretion. A project letter of credit is secured by a specific asset or project income. A trade letter of credit is typically triggered by a non credit related (and infrequent) event.
Leverage Ratio
The ratio of Tier1 capital to total adjustable assets.
Leveraged Buyout
The acquisition of a company with a substantial portion of borrowed funds.
Leveraged Financing
Enhancement of return on equity by increasing the amount of debt relative to equity. It’s a debt financing in excess of the value of a company's assets.
Leveraged Super Senior
A partially funded super senior tranche of a CDO. It offeres the ability for investors to earn a leveraged return on a remote credit risk.
LIBOR (London Interbank Offered Rate)
Average interest rate charged when banks in London interbank market borrow unsecured funds from each other.
Libor Floor
An European put option on LIBOR rate. Option buyer receives money if LIBOR is below the strike rate.
Lien
A legal claim on an asset which is used to secure a loan.
Lifting a Leg
The practice of selling out one half of a spread position.
Limit Down
Maximum decline in the price of a future contarct in one trading day.
Limit Move
A situation in which a future contarct price hits the upper or lower limit price. The limit price is set by the exchange.
Limit Order
An order to buy/sell a security, option, or futures contract at a specified price or better.
Limit Up
Amount by which the price of a future contarct may move up in one trading day.
Linkage
The ability to trade a contract on multiple exchanges at different time.
Liquidity
Ability to convert assets to cash to meet immediate and shot-term obligations.
Liquidity Risk
Financial risk arising due to uncertain liquidity.
Loan Participation
A Loan that is shared by group of banks to a single borrower.
LIFFE
London International Financial Futures and Options Exchange. Now part of NYSE Euronext.
LOCH
London Option Clearing House.
London Securities and Derivatives Exchange (OMLX)
An exchange to trade in future contarcts and options in Swedish Equities located in London.
Long
A position in the cash or futures market in which the investor profits if the price of the contract goes up.
Long Credit
The position of the CDS Protection Seller that receives periodic payments from the Protection Buyer. The seller is required to compensate the buyer if the credit instrument experiences a credit event.
Long Hedge
A strategy that involves buying financial instruments to protect against the possible price increase of an asset that will be bought or sold in the future.
Long-short Credit
A common strategy pursued by credit hedge funds that involves taking selective long and short credit positions.
Long-term Equity Anticipation Securities (LEAPS)
Option contracts with expiration dates greater than a year that provide exposure to price changes of an underlying asset over an extended period of time.
Look-Back Options
An option that provides the owner the best price over the term of the contract. The owner has the right to buy at the lowest price (or sell at the highest price) reached by underlying asset.
Loss Frequency
The number of losses related to the number of risks. It is a statistical measure that is used in the valuation of credit instruments.
Loss Given Default (LGD)
The amount of loss on a credit instrument after the occurrence of a credit event. It is commonly presented as a percent of the debt's par value and is calculated as one minus the recovery rate.
Loss in the Event of Default (LIED)
Another term for LGD.
Loss Ratio
The total amount of unrecoverable debt for a lender compared to its total outstanding debt.