Etymology of Sarajevo
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The earliest name for a major city on the region of today's Sarajevo is Vrhbosna. To claim however that Sarajevo and Vrhbosna are one and the same would be faulty, considering that the latter seems to have been destroyed well before the Ottomans occupied the region. Rather, the city of Sarajevo as we know it was built directly on top of the tiny existing Bosnian village of Brodac.
Sarajevo however is the only true historical name for the city. The origins of the word are no mystery. Sarajevo is a slavic word based on Saray, the Turkish word for the governor's castle. You can see the root in the Turkish name for Sarajevo, Saraybosna, and various areas of Turkey. The letter Y does not exist in the Bosnian version of the latin alphabet, and "evo" comes from "Ovasi" ("Saray Ovasi"), giving the name the basic meaning "The field around the castle".
Regarding nicknames, although none is official, Sarajevo has had a vast number over the years. The earliest is Šeher, which is the term Isa-Beg Ishaković used to describe the town he was going to build. Literally it's a Turkish word indicating an advanced city of key importance (şehir). As Sarajevo developed, numerous nicknames came from comparisons to other cities in the Islamic world, i.e. "Damascus of the North". The most popular of these was "European Jerusalem" which was a comparison given to the city by its sephardic Jewish populace. Other more modern nicknames include "Olympic City" and "Rajvosa" (pig-latin for "Sarajevo").
Some argue that a more correct translation of 'saray' is government office, or house; 'saray' is a common word in Turkish for a palace or mansion; a fortified government office, or house, though would still be called a saray, if it maintained the general look of an office, otherwise it would be called 'kale' (castle).
