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Trading Glossary

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Earnings multiplier: An estimated price-earnings ratio adjusted for the current level of interest rates. Used to determine the value of a stock, based on Graham's formula relating value to recent earnings and expected earnings growth rates.

Earnings per share: Earnings calculated by dividing the earnings available to common stock holders by the weighted average number of common shares outstanding over the year for which the calculation takes place.

Earnings surprises: Positive or negative differences from the consensus forecast.

Earnings yield: Earnings per share for the most recent 12 months divided by market price per share. Relates the generation of earnings to share price. It is the inverse of the price-earnings ratio.

Economic surplus: For an entity, the difference between the market value of all its assets and the market value of its liabilities.

Effective convexity: The convexity of a bond calculated with cash flows that change with yields.

Effective date: In an interest rate swap, the date the swap begins accruing interest.

Effective duration: The duration calculated using the approximate duration formula for a bond with an embedded option, reflecting the expected change in cash flow caused by the option.

Efficient portfolio: A portfolio that provides the greatest expected return for a given level of risk, or equivalently, the lowest risk for a given expected return.

Embedded option: An option that is part of the structure of a bond, as opposed to a bare option, which trades separately from any underlying security.

Enhanced indexing: Also called indexing plus, an indexing strategy whose objective is to exceed the total return performance of the index.

Equilibrium market price of risk: The slope of the capital market line (CML). Since the CML represents the return offered to compensate for a perceived level of risk, each point on the line is a balanced market condition, or equilibrium. The slope of the line determines the additional return needed to compensate for a unit change in risk.

Equity: The residual dollar value of a futures trading account, assuming its liquidation at the going market price.

Equity collar: The simultaneous purchase of an equity floor and sale of an equity cap.

Equity floor: An agreement in which one party agrees to pay the other at specific time periods if a specific stock market benchmark is less than a predetermined level.

Equity options: Options in which the underlying is either a stock or a stock index.

Equity rosk premium: An extra return that the stock market must provide over the rate on Treasury bills to compensate for market risk.

Equity swap: A swap in which the cash flows that are exchanged are based on the total return on some stock market index and an interest rate (either a fixed rate or a floating rate). Related: Interest rate swap

Eurobond: A bond that is (1) underwritten by an international syndicate, (2) offered at issuance simultaneously to investors in a number of countries, and (3) issued outside the jurisdiction of any single country.

Euroequity issues: Securities sold in the Euromarket. That is, securities initially sold to investors simultaneously in several national markets by an international syndicate.

Evening up: Buying or selling to offset an existing market position. Related: Buy in, Liquidation, Offset

Event risk: The risk that the ability of an issuer to make interest and principal payments will change because of (1) a natural or industrial accident or some regulatory change or (2) a takeover or corporate restructuring.

Excess returns: Returns in excess of the risk-free rate or in excess of a market measure such as the S&P 500 index.

Exchangeable security: A security that grants the security holder the right to exchange the security for the common stock of a firm other than the issuer of the security.

Exchange rate risk: Also called currency risk, the risk of an investment's value changing because of currency exchange rates.

Execution costs: The difference between the execution price of a security and the price that would have existed in the absence of a trade, which can be further divided into market impact costs and market timing costs.

Exercise: The conversion of the option by the holder into the appropriate long or short underlying futures contract.

Exercise price: The price at which the underlying future or options contract may be bought or sold.

Expectations theories: Theories including the pure expectations theory, the liquidity theory of the term structure, and the preferred habitat theory, which share a hypothesis about the behavior of short-term forward rates and also assume that the forward rates in current long-term contracts are closely related to the market's expectations about future short-term rates. These three theories differ, however, on whether other factors also affect forward rates, and how.

Expected return: The return expected on a risky asset based on a probability distribution for the possible rates of return.

Expiration date: The last day upon which an option can be exercised. The date when an option contract ends.

External market: Also referred to as the international market, the offshore market, or, more popularly, the Euromarket, the mechanism for trading securities that (1) at issuance are offered simultaneously to investors in a number of countries and (2) are issued outside the jurisdiction of any single country. Related: Internal market