Reference

Glossary

Short, plain-language definitions of the jargon used across the five atlases. 44 terms, grouped by subject. A term earns a place here when it is genuinely a word students meet before they meet its idea.

General

Arbitrage: A set of trades that locks in a riskless profit with no net investment, by exploiting a price difference for the same cash flows. The assumption that arbitrage is competed away (no free lunch) underlies most pricing in finance.
Basis point (bp): One hundredth of a percentage point, so 100 basis points equal 1 percent. Rates and spreads are quoted in basis points because the moves are small, for example a cut from 4.50 percent to 4.25 percent is 25 bp.
Ceteris paribus: Latin for "all else equal". It isolates the effect of changing one variable while holding every other influence fixed, which is how comparative-statics statements and the option Greeks are defined.
Nominal vs real: A nominal value is measured in current money; a real value is adjusted for inflation and measured in constant purchasing power. The real interest rate is roughly the nominal rate minus expected inflation.
Numéraire: The unit in which prices and payoffs are measured, for example money today or a money-market account. Changing the numéraire is a standard technique for simplifying derivative pricing.
Present value: The value today of a future cash flow, found by discounting it at an appropriate rate. It is the single idea behind bond pricing, DCF valuation, and the time value of money.

Derivatives

Backwardation / contango: Shapes of the futures curve. In backwardation futures prices fall with maturity (often when a physical asset is scarce now); in contango they rise with maturity, typically reflecting storage and financing costs.
Basis: The spot price minus the futures price for the same asset. The basis narrows toward zero as delivery approaches (convergence), and unexpected changes in it are the source of basis risk in a hedge.
Cost of carry: The net cost of holding the underlying until a futures delivery date: financing plus storage or insurance, minus cash income such as dividends or coupons. For a commodity, a convenience yield, the benefit of holding the physical good, further lowers the fair futures price.
Implied volatility: The volatility that, put into a pricing model such as Black-Scholes, reproduces an option’s observed market price. It is the market’s forward-looking estimate of how much the underlying will move, not a historical figure.
Intrinsic value vs time value: Intrinsic value is the payoff from exercising now, floored at zero; time value is the option premium minus intrinsic value. Time value reflects the chance of a better payoff before expiry and falls to zero at expiry.
Moneyness: The relationship between the underlying price and the strike. A call is in-the-money when the underlying is above the strike, at-the-money when they are roughly equal, and out-of-the-money when below; for a put the directions reverse. Moneyness drives intrinsic value and delta, but ignores the premium paid.
Notional: The face amount a derivative is written on, used to scale its payments, such as the principal of a swap. It is usually not exchanged; only the net cash flows computed from it change hands.
Put-call parity: A no-arbitrage identity linking European call and put prices on the same strike and expiry: holding a call and writing a put replicates a forward on the underlying. It lets one option be priced from the other.
Risk-neutral probability: An adjusted set of probabilities under which every asset earns the risk-free rate, so a derivative’s price is just the discounted expected payoff. It is a pricing device, not a forecast of real-world odds.
The Greeks: The sensitivities of an option price to its inputs: delta (to the underlying price), gamma (to delta itself), vega (to volatility), theta (to time), and rho (to interest rates). Traders use them to measure and hedge risk.

Investments

Alpha: The abnormal return on a portfolio: the intercept in a benchmark or factor-model regression, after accounting for its systematic risk exposure. Positive alpha signals outperformance relative to the model, but does not by itself prove skill rather than luck.
Beta: How much an asset’s return moves with the market return, measured as their covariance divided by the market’s variance. A beta above 1 is amplified market sensitivity, between 0 and 1 is damped same-direction sensitivity, and a negative beta moves opposite the market. It captures systematic risk, the part that cannot be diversified away.
Duration and convexity: Modified duration approximates the percentage change in a bond’s price for a one-percentage-point change in yield; Macaulay duration is the cash-flow-weighted average time to its payments. Convexity is the second-order correction that sharpens the estimate for larger yield moves.
Efficient frontier: The set of portfolios offering the highest expected return for each level of risk. Rational mean-variance investors hold a portfolio on this frontier; nothing below it is worth owning.
Efficient Market Hypothesis (EMH): The idea that asset prices already reflect available information, so consistently beating the market is hard. Its weak, semi-strong, and strong forms differ by whether past prices, public news, or even private information are already priced in.
NAV (Net Asset Value): A fund’s assets minus its liabilities, divided by units outstanding, giving the per-unit value. Open-end mutual funds are bought and redeemed at NAV, recalculated after each trading day.
Sharpe ratio: A portfolio’s excess return over the risk-free rate divided by its standard deviation, that is, reward per unit of total risk. It is the standard way to compare risk-adjusted performance across portfolios.
Systematic vs idiosyncratic risk: Systematic (market) risk affects all assets and cannot be diversified away, so it is the risk that earns a return premium. Idiosyncratic risk is firm-specific and is diversified away in a large portfolio.

Valuation

Enterprise value vs equity value: Enterprise value is the worth of the whole business to all capital providers; equity value is what is left for shareholders. They differ by net debt: equity value equals enterprise value minus debt plus cash.
Free cash flow (FCF / FCFE): Cash a business generates after reinvestment. Free cash flow to the firm is available to all investors and is discounted at the WACC; free cash flow to equity is what remains for shareholders after debt payments.
Levered vs unlevered beta: Unlevered (asset) beta reflects business risk only; levered (equity) beta also reflects the extra risk that debt loads onto shareholders. Unlevering and relevering beta lets an analyst move a comparable’s risk to a different capital structure.
Multiple (P/E, EV/EBITDA): A ratio of value to a financial measure, used to price a company relative to peers. The price-to-earnings multiple divides equity value by net income; EV/EBITDA divides enterprise value by EBITDA, a pre-interest, pre-tax operating-earnings proxy rather than a cash flow measure.
Terminal value: The value of a business beyond the explicit forecast horizon in a DCF, often the bulk of the total. It is estimated with a perpetuity growth formula or an exit multiple, and small assumptions about it swing the answer a lot.
WACC: The weighted average cost of capital: the blended required return on a firm’s debt and equity, weighted by their market values and adjusting debt for the tax shield. It is the discount rate for free cash flow to the firm.

Money & Banking

BBSW: The Bank Bill Swap Rate, the Australian benchmark interest rate derived from bank bill trading. It anchors floating-rate loans, swaps, and bank bill futures in the Australian market, much as SOFR or EURIBOR do elsewhere.
Deflation vs disinflation: Deflation is an outright fall in the general price level; disinflation is a slowdown in the rate of inflation while prices still rise. Central banks fear deflation because it can raise real debt burdens and stall spending.
Lender of last resort: A central bank’s role of lending freely to solvent banks during a panic to stop a liquidity crisis from becoming a collapse. It is a core tool for financial stability, balanced against the moral hazard it can create.
Money multiplier: The factor by which the banking system expands base money into the broader money supply through repeated lending and deposit creation. A higher reserve requirement lowers the multiplier.
Open market operations: A central bank’s buying or selling of government securities to add or drain reserves and steer short-term interest rates toward its policy target. They are the day-to-day instrument of monetary policy.
Quantitative easing (QE): Large-scale central-bank purchases of longer-term assets, used to ease policy further once short-term rates are near zero. It raises asset prices and lowers long-term yields rather than the policy rate itself.
Yield curve: A plot of interest rates against maturity for bonds of the same credit quality. Its slope summarises the term structure; an inverted curve, with short rates above long rates, has often preceded recessions.

Econometrics

Endogeneity: When an explanatory variable is correlated with the regression error, so the estimated effect is biased and cannot be read as causal. Common sources are omitted variables, reverse causality, and measurement error.
Heteroskedasticity: When the variance of a regression’s errors is not constant across observations. With exogenous regressors the OLS coefficients stay unbiased, but the usual standard errors become invalid, so heteroskedasticity-robust standard errors are used instead.
Multicollinearity: When explanatory variables are highly correlated with each other, inflating the standard errors so individual effects are estimated imprecisely. The variance inflation factor (VIF) is the usual diagnostic.
Omitted variable bias: The bias in a coefficient when a relevant variable is left out and is correlated with both the outcome and an included regressor. Its direction depends on the signs of those two correlations.
Ordinary least squares (OLS): The workhorse method that fits a line by minimising the sum of squared residuals. Under the standard assumptions it gives the best linear unbiased estimates of the coefficients.
Robust standard errors: Standard errors that stay consistent under specified departures from homoskedastic, independent errors, such as heteroskedasticity or within-cluster correlation. They correct inference on the standard errors only; they do not change the coefficient estimates or fix endogeneity.
Stationarity and unit root: A time series is stationary when its statistical properties do not drift over time. A unit-root (non-stationary) series can produce spurious regressions, so it is usually differenced or tested before modelling.

Every term here comes alive in the atlases, where it sits inside worked examples, formulas, and a connected map of ideas.