MacKenzie D. An engine, not a camera.. How financial ... - TiERA

Glossary 299expected value If a quantity varies randomly, its expected value is its value averagedacross possible outcomes, when those outcomes are “weighted” by their probabilities.For example, if a fair coin is tossed, and a player wins $1 if it lands heads andloses $1 if it lands tails, then the expected value of the player’s net gain is zero. Theplayer has a 50% chance of winning $1 and a 50% chance of losing $1, so the expectedvalue of the player’s net gain is 0.5 ¥ $1 + 0.5 ¥ (-$1) = 0.expirationbe valid.The point in time when a derivatives contract such as an option ceases toforward A contract in which one party undertakes to buy, and the other party tosell, a set quantity of an asset of a particular type at a set price at a given future time.If the contract is standardized and traded on an organized exchange, it is referred toas a future.front-run To buy assets in advance of known purchases, or to sell them or take ashort position in them in advance of known sales. The term is generally used for cases inwhich the knowledge of coming purchases/sales is privileged, as when a broker usesknowledge of sales or purchases he or she is about to make for a customer to makeadvantageous personal trades.future A standardized contract traded on an organized exchange in which one partyundertakes to buy, and the other to sell, a set quantity of an asset of a particular typeat a set price at a given point in time in the future. The term is also used for contractsthat are equivalent economically to such future purchases/sales but are settled by cashpayments.haircut The difference between the amount in effect lent in a repo or similar agreementand the market price of the securities pledged as “collateral” for the “loan.”hedgeTo eliminate or minimize a risk by entering into transactions that offset it.hedge fund A special category of investment vehicle, often registered offshoreand/or falling within the “private funds” exemption from the U.S. InvestmentCompany Act of 1940, which typically permits only very large investments and/or astrictly limited number of investors, is exempt from many regulatory requirements, andis free to adopt strategies (such as short selling and using borrowed funds to enhancereturns) that many other categories of investor are prohibited from using.illiquid In an illiquid market, assets can be bought and/or sold only with difficultyor with large effects on prices. See liquid.implied volatility The volatility of a stock or index consistent with the price ofoptions on the stock or index, as indicated by an option-pricing model.leverage The extent to which an investment offers prospects for gains and losses thatare large relative to the size of investment; the extent to which a firm or transaction isfinanced by taking on debt.