Glossary

Core idea

Glossary is presented here as an educational market-neutral research topic with explicit assumptions, paired exposures, implementation costs, and residual risks.

Implementation

A useful glossary process must remain understandable after costs, constraints, and validation.

Primary risk

Neutrality can drift when relationships, liquidity, or estimated sensitivities change.

Key terms

Beta

A measure of how sensitive a portfolio is to broad market moves.

Basis

The difference between spot and derivative prices for the same exposure.

Cointegration

A stable long-run relationship that may exist between non-stationary price series.

Delta

The expected change in an option’s value for a one-unit move in its underlying asset.

Gross exposure

The sum of long and short exposure before they offset one another.

Hedge ratio

The quantity of one position used to offset risk in another.

Net exposure

Long exposure minus short exposure; market-neutral portfolios generally target a low value.

Rebalancing band

A permitted drift around a target weight before a portfolio is rebalanced.

Spread

A constructed difference or ratio between related instruments.

Tracking error

The variability of returns relative to a benchmark or target.