Financial Derivative Terms - E

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Effective Date: The date on which interest starts to potentially accrue for a particular transaction.
Effective Yield: The equivalent annual yield for a security quoted on another compounding basis.
Embedded Option: An option that is an inseparable part of another instrument such as a call provision in a corporate bond which may have a lockout period when the bond cannot be called.
Employee Stock Options (ESOs): Awards granted by a company to its employees. The value of the award ultimately depends on the performance of the employee and the performance of the company as a whole. ESOs are similar to traded call options in that the owner has the option to purchase shares of company stock at a specified date in the future at a specified price. However, ESOs are different from traded call options in significant ways such as: Maturity: ESOs usually have a much longer maturity, typically 10 years. Delayed Vesting: ESOs usually have a vesting period after grant. Exercise is not permitted during this period, which is typically three years. If employees leave the company during the vesting period, they forfeit these ESOs, whereas if employees leave the company after the vesting period of their ESOs, they forfeit out-of-the-money ESOs and must exercise in-the-money ESOs immediately; finally, employees cannot sell their ESOs and so are a call options only. Forfeiture: If employees leave the company during the vesting period of their ESOs, they forfeit these ESOs. If employees leave the company after the vesting period of their ESOs, they forfeit out-of-the-money ESOs and must exercise in-the-money ESOs immediately. Non-Transferability: Employees usually cannot sell their ESOs to other people. If employees need cash or want to diversify their portfolio, they must exercise the ESOs and sell the underlying shares. Because of this, ESOs are typically exercised earlier than similar traded options. Dilution: When ESOs are exercised, the granting company issues new shares of stock and receives cash in return. This changes the capital structure of the company.
Entity: The name of an organization (such as a business or governmental unit) that has an identity separate from those of its members and so exists as a particular and discrete unit.
Equalizing Ratio: A measure of the profit from option positions of equivalent risk where risk is adjusted using its delta. Equalizing ratio is calculated by dividing the difference between an option's theoretical (fair) value and market price by the absolute value of its delta.
Equities: Stocks or any other securities which constitute ownership interest.
European Options: Options that can only be exercised at the specified maturity or expiration date.
European Swaption: An option on a forward start swap that gives the purchaser the right to either pay or receive a fixed rate. A buyer of a swaption who has the right to pay fixed and receive floating is said to have purchased a payer swaption. Alternatively, the right to exercise into a swap through which the buyer receives fixed and pays floating is known as receiver swaption. The options holder is only permitted to exercise on the expiry date.
Ex-dividend Date: The date on which the ownership is determined in order to be entitled to dividends on an underlying asset. If an owner purchases the asset before its ex-dividend date, then he or she is entitled to the next dividend. If ownership occurs on or after the ex-dividend date, there is no entitlement to the dividends for the new owner and payments are made to the previous owner.
Exercise: To execute the rights of an option, by buying (call options) or selling (put options) the underlying asset.
Exercise Price: See Strike Price.
Exit Option: An exit option is an option to get out of a structure. For example, an exit option on a swap allows you enter into an offsetting position at a certain date, so it represents a swaption on the offsetting swap.
Exotic Option: An option that has more complex features than a simple call or put option (plain vanilla). It usually trades over the counter. Examples include barrier options (path dependent), compound options (options on options), chooser options (options to buy options at a later date) etc.
Expected Future Cash Flows: Projected amounts of money paid periodically derived from a notional principal amount.
Expiration Date: The date on which an agreement is no longer in effect.
Extendible Accrual Interest Rate Swap: These swaps differ from regular extendible swaps in that fixed (and floating) coupon payments are not made periodically during the swap. Instead, the coupons accrue interest and the fixed (and floating) leg(s) provide a single payment at the termination of the swap.
Extendible Swap: An option on a swap (swaption) where one or both parties has the right to extend the life of the swap beyond the original maturity date.

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