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Glossary of Terms

 

Basis Point

1/100th of one percentage point

        

Eligible Employee

 

 

An Employee who qualifies for issue of Options under the ESOP-scheme and who fulfils the minimum conditions of service and other conditions as decided in the appraisal process.

 

        

Exercise

It is the act of an application being made by the Employee to the Company to have the Options vested in him issued as Shares upon payment of the Exercise Price. Exercise can take place as specified after Vesting.

        

Exercise Period

The period from the date of vesting of options till the date the options can be exercised. On the expiry of the Exercise Period, any Options that have not been exercised will lapse and cease to be valid for any purpose.

          

Exercise Price

The amount to be paid by an Optionee at the time of Exercise of his option. This price is determined at the time of grant and remains constant over the term of the option.

        

Grant

Grant means issue of options to employees under ESOP

        

Market price

Market price of a share on a given date means the closing price of the shares on that date on the stock exchange on which the shares of the company are listed.

          

Foreign Employee

An Employee who is a person resident outside India as defined in Sec.2(q) of The Foreign Exchange Regulation Act, 1973 or an Employee who is a foreign national or an Employee of a subsidiary company in a foreign country. (This definition is according to the RBI Guidelines)

        

Vesting Period in lieu of IPO (Initial Public Offer)

In the event of the equity shares of the Company not being listed in any recognized stock exchange at the end of vesting period, such period starting from the end of the vesting period and ending on a date 15 days prior to the filing of the Offer Document with SEBI (Securities and Exchange Board of India) or at any time at the discretion of the ESOP Advisory Committee to comply with the prevalent SEBI guidelines at the point of conversion, shall be called vesting period in lieu of IPO.

        

Option

Option means a stock option granted pursuant to the Plan, comprising of a right but not an obligation granted to an Employee under the Plan to apply for and be allotted Shares of the Company at the Exercise Price determined earlier, during or within the Exercise Period, subject to the requirements of Vesting.

        

Optionee

Optionee means the holder of an outstanding Option granted pursuant to the Plan.

        

Vesting

Vesting means the process by which the employee gains full rights to the options granted to him in pursuance of ESOP.

        

Vesting period

The period during which the vesting of the option granted to the employee in pursuance of ESOP takes place.

          

Amortization

An accounting procedure that gradually reduces the cost or value of an asset through periodic charges against income     

Option discount

Option discount means the excess of the market price of the share at the date of grant of the option under ESOP over the exercise price of the option

        

Book Value

It is the value at which an asset is carried on a balance sheet. The book value of a share is given by dividing the equity reserves of the company by the number of shares issued.

        

Beta

A measure of a security's performance in relation to the general movement of the market. A share with a beta of 1 rises and falls corresponding exactly to the market. The rise or fall of a security with a beta higher than 1 is more than of the market and the rise or fall in a security with a beta less than 1 is less than the rise or fall in the market index.

        

Share Price

This denotes the market price of the stock today.

 

Interest Rate

The simple risk-free interest rate for the period. Strictly, the Black-Scholes valuation model requires the interest rate to be a continuously compounded rate.

        

Option Type

 

 

This denotes the type of ESOP i.e. Loyalty, Bonus, Growth etc.

        

Option Value

The theoretical (or fair) value of the option. It is made up of two parts i.e., the intrinsic and time value.

          

ESOP

In India ESOPs generally mean Employee Stock Option Plans. In USA, ESOP is not equivalent to the stock option plans that we normally refer to. ESOP stands for Employee Stock Ownership Plan and it refers to Ownership of a business by its employees.

          

Expiration Date

The Expiration Date of Options is a predetermined date at which time you must make the decision of exercising your Options. If you do not exercise your options till the expiration date, they expire/lapse and cannot be exercised after that day.

          

Vesting Schedule

The vesting schedule gives the details of the vesting of options granted under the ESOP Plan It gives the vesting period and the percentage of the total options granted that can be exercised after the completion of the vesting period.

      

          

Historical Volatility 

The Historical Volatility of the Stock means the Volatility of the Stock using historical price Information, i.e. a measure of the previous fluctuations in share price

        

Implied Volatility

Implied volatility is the volatility implied by an option price observed in the market. To calculate implied volatility, instead of inputting a volatility parameter into the Black-Scholes model to determine an option's fair value, the calculation is turned round and the actual current option price is input to get the implied volatility as the output.

        

At-The-Money

An option is at-the-money if the exercise price of the option is equal to the market price of the underlying security.

          

Derivative Security

A financial security whose value is determined from the value and characteristics of another security. The other security is referred to as the underlying security.

          

Hedge

Protecting the price of a financial instrument or commodity at a date in the future by undertaking an offsetting position using options, futures or another instrument.

        

European-Style Options

An option contract that may be exercised only during a specified period of time just prior to its expiration.

          

In-the-money

An option is in the money if the exercise price is less than the market price of the underlying security.

        

Out-Of-The-Money

An option is out-of-the-money if the exercise price is greater than the market price of the underlying security.

          

Time value

The portion of the option premium that is attributable to the amount of time remaining until the expiration of the option contract. Time value is whatever value the option has in addition to its intrinsic value. This is often referred to as premium.

        

Volatility

A measure of the fluctuation in the market price of the underlying security. Mathematically, volatility is the annualized standard deviation of returns.

          

Intrinsic Value

The greater of the following: the difference between the stock price and the strike price, or zero (if the difference between the stock price and the strike price is negative).

        

Black-Scholes Model

The Black & Scholes option model is an option valuation model. The fair value of an option can be estimated by using this valuation model. Professionals and academics extensively use it since it was published in the 70s.

        

Option Exchanges

Options on Stocks are traded in option exchanges, usually with expirations of 2 years and less.

        

American-style option

An option that may be exercised at any time between the date of grant and the expiration date.

        

Premium

The price of an option, which the buyer of the option pays to the option writer for, the rights conveyed by the option contract.

        

Strike price

See Exercise Price

        

Underlying security

The security subject to being purchased or sold upon exercise of the option contract.        

Writer

The seller of an option contract

        

Initial Public Offering (IPO)

The first time a company offers its stock for sale to the public.

          

Long Term Gain

A gain on the sale of securities or other capital assets where the holding period was 12 months or more

 

 

        

Reprising

Reprising of stock options means changing the existing exercise price of the option to a different price. The company generally does this when the stock price has dropped due to market conditions and hence the stock price is lower than the exercise price.

        

Restricted Stock

Stock issued to employees with the agreement that they will own the stock only if certain goals are achieved.

        

Short Term Gain

The gain on the sale of securities or other capital assets where the holding period was less than twelve months.

        

Stock Option Plan

A document outlining the rules under which stock options are granted.

        

Stock Swap

The exercise of stock options where the value of currently owned shares are used to pay the exercise price.

        

Stock Appreciation Rights (SARs)

The right to receive the appreciation value (the spread between the market price at exercise and grant price) of a certain number of shares of the company over a specific period of time in cash, company stock, or some combination of the two.

        

Under-Water Option

An option whose exercise price is more than the current stock price.

        

Warrant

A stock market security with a market price of its own that can be converted to a specific share at a predetermined price and date.

          

Early exercise

The early exercise program permits exercise of stock options immediately after grant rather than waiting for any vesting period. However the stock issued on exercise is restricted and is subject to a vesting schedule.

        

Accelerated Vesting

This provision, if included in the plan, allows acceleration in vesting of the stock options. This acceleration will occur only when the conditions mentioned are met with.

        

Time-based vesting schedules

The vesting schedules in which the vesting of options is tied to the length of service requirements.

        

Graded vesting

In this type of vesting, a portion of the options granted to the employees vest each year they stay with the company following the grant.

        

Cliff vesting

In this type of vesting, the employee gains no right to his grant until he has stayed with the company for the full specified period at which time the options become 100% vested.

        

Performance based vesting schedules

The vesting schedules in which the vesting of options is tied to the achievement of certain performance goals.

        

Time to expiry

The time remaining for the expiration of the option

 

 

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