12b-1 fee A fee charged mutual fund investors, and deducted directly from the fund's portfolio, to cover marketing expenses and sales commissions.

ABC paper Asset-backed commercial paper.

above par Selling for a price in excess of par value.

absolute pricing model An asset valuation model that bases prices on economic arguments as opposed to other related prices quoted in the market.

acceptance A time draft on which the drawee has accepted an obligation to make payment.

accrual bond A type of CMO bond, also called a Z bond.

accrual instrument A money market instrument that accrues interest to maturity.

accrued-coupon bond A bond that, rather than paying coupons, accrues them to maturity.

accrued interest Interest that is earned but not yet paid on a bond or other obligation.

adjustable-rate preferred stock Preferred stock that pays a dividend linked to floating interest rates.

agency Agency security.

agency security A security issued by a US federal agency or government sponsored enterprise.

ALM Asset-liability management.

alpha If active investment management were a religion, alpha would be its god.

alpha transport Use of a self-financing market neutral strategy to generate alpha in one market while investing in another.

alternative option A better-of option.

Amaranth Advisors A hedge fund that suffering staggering losses speculating on natural gas prices.

American exercise A provision that permits exercise of an option any time prior to expiration.

AMT bond A municipal bond whose interest is subject to the Alternative Minimum Tax.

annual compounding Compounding based on annual crediting of interest.

annual rate of return Rate of return.

annualized return A return calculated over one period, but adjusted to be comparable to a return calculated over a year.

annualized volatility A quoting convention for volatility.

antithetic variates A technique of variance reduction for the Monte Carlo method.

AR process Autoregressive process.

arbitrage 1) A transaction that generates a risk-free profit; 2) a leveraged speculative transaction; and 3) the activity of engaging in either of the above two forms of arbitrage transactions.

arbitrage CDO A CDO sponsored for the purpose of adding value by repackaging collateral.

arbitrage condition Any relationship that must prevail between certain prices if they are to be arbitrage-free.

arbitrage free A condition in which prices offer no arbitrage opportunities.

arbitrage-free model A type of financial engineering model that generates prices that entail no arbitrage opportunities.

arbitrage-free pricing The approach to pricing instruments that underlies essentially all of financial engineering in complete markets.

arbitrageur One who engages in arbitrage.

ARCH Autoregressive conditional heteroskedasticity

arithmetic random walk A random walk with increments that are a Gaussian white noise.

arithmetic random walk with drift An arithmetic random walk with a constant drift.

arithmetic return Simple return.

ARMA process autoregressive moving-average process.

arranger A party that arranges a syndicated loan.

ARS Auction rate security.

Arthur Andersen conviction In 2002, accounting firm Arthur Andersen was convicted on a single charge related to its auditing of Enron.

Asian option An option whose expiration value depends on the average value of an underlier over a specified period.

Askins, David Manager of the Granite Fund, a hedge fund that failed in 1994.

asset-backed commercial paper Commercial paper secured by receivables or other assets.

asset-backed security A securitized interest in non-mortgage assets.

asset-based lending Collateralized lending.

asset-liability management Techniques for protecting a firm's solvency in the context of accrual accounting.

asset-liability risk Risk to a firm from having assets and liabilities whose risk exposures do not offset one another.

asset management Investment management.

asset management firm Investment management firm.

asset manager Investment manager

asset-or-nothing binary A type of binary option.

asset sensitive Having assets that reprice earlier than liabilities.

asset swap A non-vanilla swap customized to change the character of a specific asset.

asset value model A type of default model.

at par Selling for a price equal to par value.

at-the-money A condition where the value of an option's underlier equals the option's strike price.

auction rate security A floating-rate municipal security.

autocorrelation A correlation between a component of a stochastic process and itself lagged a certain period of time.

autoregressive conditional heteroskedasticity A category of conditionally heteroskedastic stochastic processes.

autoregressive process A type of stochastic process.

autoregressive moving-average process A type of stochastic process.

average option An Asian option.

average price option An average rate option

average rate option A form of Asian option whose payoff is linked to the average underlier value over a specified period.

average strike option A form of Asian option whose strike equals the average underlier value over a specified period.

AW Jones & Co. An early hedge fund formed in 1949.

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