Quantitative Finance Laboratory

The order book records all active limit orders. Buy orders (bids) are sorted highest-to-lowest; sell orders (asks) lowest-to-highest. The highest bid and lowest ask define the bid-ask spread.

Price-time priority means the first order at a given price level gets filled first. Market orders consume liquidity by matching against the best available limit order.

Price slippage is the difference between the expected price and the actual executed price, typically occurring in illiquid markets or with large market orders.

The Black-Scholes-Merton model prices European options using five inputs: underlying price (S), strike (K), time (T), risk-free rate (r), and volatility (sigma).

Greeks measure sensitivity: Delta (underlying price), Gamma (delta's curvature), Theta (time decay), Vega (volatility), Rho (interest rates).

The volatility smile shows implied volatility varies by strike - OTM options often have higher IV due to tail-risk pricing.

Markowitz's MPT shows diversification reduces risk without sacrificing expected return. The Efficient Frontier represents portfolios offering the highest return for a given risk level.

The CML connects the risk-free rate to the tangency portfolio. The Sharpe Ratio measures risk-adjusted return.

Discounted Cash Flow values an asset by discounting expected future cash flows using WACC.

Terminal Value (Gordon Growth Model) captures perpetuity value beyond the projection period.

WACC is the blended cost of equity and debt financing, reflecting business risk.

Central banks use the policy rate to influence inflation and employment. The yield curve plots bond yields across maturities - its shape signals market expectations.

Quantitative Easing increases the money supply through asset purchases, lowering long-term rates. The transmission mechanism flows from policy rate to lending rates to aggregate demand to inflation.

Short selling involves borrowing shares, selling them, and hoping to buy back cheaper. Losses are theoretically unlimited if the price rises.

Maintenance margin is the minimum equity required. A margin call triggers when equity drops below the threshold, forcing liquidation.

Liquidation price = Entry Price * (1 - Collateral / (Entry Price * Shares) / Leverage).

Latency arbitrage exploits speed advantages to trade ahead of slower participants. HFT firms co-locate at exchanges to shave microseconds off transmission.

Spoofing involves placing orders with no intention of execution to manipulate prices. It is illegal under securities law.

Front-running is trading ahead of known orders. Modern surveillance detects these patterns through machine learning.