Appendix B — Glossary

Alpha. A model-defined return component beyond that implied by specified exposures; its interpretation depends on the benchmark and model.

Beta. Sensitivity of an asset’s return to a selected market benchmark, commonly estimated through covariance.

Covariance. Measure of how two variables deviate together from their means.

Delta. A local first derivative of option value with respect to underlying price.

Efficient frontier. Estimated portfolios that minimize risk for stated expected-return levels under specified constraints.

Implied volatility. Volatility parameter that reproduces a market option price under a chosen model.

Model risk. Risk arising from a model’s assumptions, implementation, inputs, or use.

Payoff. Value delivered by a contract at a specified state or expiration, before consideration of initial cost.

Spread. Combination of options or other instruments designed to create a structured exposure.