Cost of Carry
The net financing cost of holding an asset — interest paid minus dividends/income received.
Cost of carry determines the forward-spot relationship: F = S × e^((r−δ)T) for a continuous dividend yield δ. It represents: (1) financing cost = r × S × T (cost of borrowing to buy the asset), minus (2) income received = δ × S × T (dividends or coupons). Positive carry means holding the asset costs money (storage commodities). Negative carry means the asset generates income exceeding financing (high-dividend stocks in low-rate environments). In FX, carry = domestic rate − foreign rate.
Interest Rate Swap (IRS)
An agreement to exchange fixed-rate cash flows for floating-rate cash flows on a notional principal.
Equity Forward Contract
A commitment to buy or sell an equity at a fixed price F₀(T) at a future date T, priced to have zero value at inception.
FX Forward Rate
The agreed exchange rate for a future currency transaction, derived from Covered Interest Rate Parity.
Black-Scholes-Merton Model (BSM)
The foundational option pricing formula that gives the fair value of a European call or put as a function of spot, strike, rate, volatility, and time.
Delta (Δ)
The sensitivity of an option's price to a $1 change in the underlying spot price.
Gamma (Γ)
The rate of change of delta with respect to the spot price — the curvature of the option's value.