Value at Risk (VaR)
The maximum expected loss over a given time horizon, at a given confidence level, under normal market conditions. A "1-day 99% VaR of $1M" means there's a 1% chance of losing more than $1M in a single day.
Full Valuation & Risk Models breakdown →Expected Shortfall (ES)
Also called Conditional VaR — the average loss given that the VaR threshold has been breached. Preferred by regulators (Basel III) over VaR because it captures how bad the tail actually is, not just where the tail starts.
Full Valuation & Risk Models breakdown →EWMA
Exponentially Weighted Moving Average — a volatility estimate that updates yesterday's variance using today's return, with a decay factor (λ) that weights recent observations more heavily than older ones.
Full Quantitative Analysis breakdown →GARCH(1,1)
A volatility model more sophisticated than EWMA — it adds a long-run average variance term, so volatility estimates "mean-revert" toward a long-term level instead of just decaying based on recent data.
Full Quantitative Analysis breakdown →Sharpe Ratio
Excess return per unit of total risk: (portfolio return − risk-free rate) / standard deviation. Contrast with the Treynor ratio, which divides by beta (systematic risk only) instead of total volatility.
Full Foundations breakdown →RAROC
Risk-Adjusted Return on Capital — expected return divided by economic capital (capital held against risk), used by banks to compare profitability of business lines with very different risk profiles on a like-for-like basis.
Full Foundations breakdown →Duration (Macaulay / Modified)
Macaulay duration is a bond's weighted-average time to receive its cash flows, in years. Modified duration (Macaulay ÷ (1+yield)) converts that into a direct measure of price sensitivity to a change in yield.
Full Valuation & Risk Models breakdown →Cost of Carry
The net cost of holding an underlying asset until a futures contract's delivery date — financing costs and storage costs, minus any income (like dividends) earned while holding it. Drives the no-arbitrage futures price.
Full Financial Markets & Products breakdown →Covered Interest Rate Parity
A no-arbitrage condition linking spot and forward FX rates to the interest rate differential between two currencies: F = S × (1 + r_domestic) / (1 + r_foreign).
Full Financial Markets & Products breakdown →Contango / Backwardation
Contango: futures prices above the expected spot price (storage costs dominate). Backwardation: futures prices below the expected spot price (a convenience yield to holding the physical asset now dominates).
Full Financial Markets & Products breakdown →Delta Hedging
Offsetting an option position's directional exposure by holding an amount of the underlying asset equal to the option's delta — as delta changes with the underlying's price, the hedge must be rebalanced (dynamic hedging).
Full Valuation & Risk Models breakdown →Merton Model
A structural credit-risk model that treats a company's equity as a call option on its assets, using option-pricing theory to estimate default probability from the firm's asset value and volatility.
Full Valuation & Risk Models breakdown →Basis Risk
The risk that a futures hedge doesn't perfectly offset the underlying exposure, because the futures price and the spot price of the actual asset being hedged don't move in perfect lockstep.
Full Financial Markets & Products breakdown →Yield Curve
A plot of interest rates (yields) across different maturities for otherwise-similar bonds. Its shape (normal, inverted, flat) is widely watched as a signal about growth and monetary-policy expectations.
Full Financial Markets & Products breakdown →Kupiec Test
A statistical backtest for VaR models — it checks whether the actual number of days a portfolio's losses exceeded its VaR estimate is consistent with the model's stated confidence level, flagging models that are too loose or too conservative.
Full Valuation & Risk Models breakdown →Enterprise Risk Management (ERM)
A firm-wide framework for identifying, measuring, and managing risk holistically across business lines — rather than each unit managing its own risk in isolation — explicitly accounting for diversification benefits and limits.
Full Foundations breakdown →Bayes' Theorem
A rule for updating the probability of an event given new evidence — combines a prior probability with new information (via a likelihood) to produce an updated ("posterior") probability.
Full Quantitative Analysis breakdown →Credit Default Swap (CDS)
A derivative contract where the protection buyer pays a periodic premium (the CDS spread) in exchange for a payout from the protection seller if a specified credit event (like default) occurs on a reference entity.
Full Financial Markets & Products breakdown →Loss Given Default (LGD)
The percentage of exposure a lender expects to actually lose if a borrower defaults, after accounting for recoveries (e.g., from collateral or bankruptcy proceedings). Expected Loss = PD × LGD × EAD.
Full Valuation & Risk Models breakdown →Risk Appetite
The amount and type of risk an organization is willing to accept in pursuit of its objectives — set by the board, and the reference point risk governance and limit-setting are measured against.
Full Foundations breakdown →