Glossary - L

Ladder option
An option in which the strike resets automatically when the underlying hits predetermined levels or rungs. When the strike is reset, the intrinsic value of the option is automatically locked in, regardless of whether the underlying subsequently moves in the opposite direction.

Every time a rung level is reached, that option is exercised for its intrinsic value, locking in that gain. A new option is also triggered, with a strike equal to the previous rung level and a new rung level higher (for call options) or lower (for put options) than the previous one.

Lapse
An option lapses if it expires worthless – that is, it has no intrinsic value on expiry.

Lapsed rights premium
If you let a rights issue lapse by not taking it up a when it is offered to you, the company may decide to issue you a lapsed rights premium. If you lapse, the nil paid shares will be removed from your account once the issue has expired.

Large-cap
A company with a high market value, traditionally over £2.5 billion. Compare small-cap.

LBO
See leveraged buy out.

Lead manager
Lead investment bank or bank within a syndicate of underwriters. The entity awarded the mandate from the issuer and charged with forming the syndicate and coordinating the distribution.

Letter of allotment
Confirmation of the number of shares allotted to a shareholder. Also known as an allotment letter.

Letter of indemnity
Needs to be completed by a shareholder if they have lost their original share certificate. This is a request to the registrar to issue new stock or share certificates to replace an original which has been lost, destroyed or stolen. There may be a charge for this.

Letter of renunciation
The form on the back of a letter of allotment that enables the client to pass on a share entitlement received through a rights issue.

Leverage
The US term for gearing.

Leveraged buy out (LBO)
The takeover of a company, financed by significant borrowing of money, using the target’s assets as collateral.

Liability
A claim on a company’s assets.

LIBOR (London Inter Bank Offered Rate)
The interest rate at which banks lend money to each other. Unlike official retail interest rates, LIBOR changes constantly to reflect supply and demand within the cash and currency markets.

Limit order
An order that specifies the minimum price at which you want to sell, or the maximum price at which you want to buy.

Limit price
The maximum or minimum price at which you are wiling to buy or sell specified shares.

Liquid market
When there are plenty of shares in a particular company being bought and sold every day.

Liquidation
The process of ending a company’s existence. A company is obliged or chooses to go into liquidation when it can no longer pay its debts.

Liquidity
The ability to buy or sell an asset quickly and in large volume without substantially affecting the asset’s price.

Listed company
A Public Limited Company whose shares have been admitted to the London Stock Exchange's Daily Official List. It has to comply with the Exchange's listing regulations.

Listing
Registering a security on an organised exchange.

Listing rules
Rule book for listed companies that governs their behaviour. Commonly known as the Yellow Book.

Lognormal distribution
A variable has a lognormal distribution if the natural logarithm of the variable is normally distributed. The assumption about the process followed by assets is that they follow a geometric Brownian motion with drift. Therefore, when valuing an option using the Black-Scholes option pricing formula, we would take the expectation with respect to that lognormal distribution.

London Inter Bank Offered Rate
See LIBOR

London International Financial Futures and Options Exchange (LIFFE)
The world's largest futures and options exchange. Pronounced ‘life’, it merged with the London Commodity Exchange in September 1996.

London Stock Exchange (LSE)
Originated as New Jonathans Coffee House in 1773 before joining the UK’s regional exchanges to form the Stock Exchange of Great Britain. In 1995, the Dublin Stock Exchange left the alliance, and the Exchange became known as the London Stock Exchange.

Long position
When someone buys (holds) a warrant or the underlying asset. Contrasts with short position.

Long dated
A gilt with a life of 15 years or more.

Look back option
Allows the buyer, at maturity, to choose the most advantageous exercise conditions that have occurred over the life of the option. They come in two varieties.

The look back strike option or floating strike look back allows the buyer to look back over the life of the option at expiry and set the strike at the most favourable price that has occurred during that time. So for a look back call, the buyer would choose the lowest price that has occurred over the life of the option. These strikes are then compared with the spot price at expiration to determine the options’s payoff.

The look back spot option or fixed strike look back has a strike set at the outset, but at maturity the buyer can look back over the life of the option and choose the most favourable exercise point to maximise profit between strike and exercise.

LSE
See London Stock Exchange.