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.
The no-arbitrage forward price is F₀(T) = (S₀ − PV(Dividends)) × e^(rT). The cost-of-carry framework: the forward buyer avoids the opportunity cost of owning the stock (financing) but also forgoes dividends. Mid-life value for the long position: V_t = S_t − PV_t(remaining dividends) − F₀(T)·e^(−r(T−t)). A key insight: since the forward is priced at zero NPV at inception, any subsequent price change is reflected in the mark-to-market value V_t.
Cost of Carry
The net financing cost of holding an asset — interest paid minus dividends/income received.
FX Forward Rate
The agreed exchange rate for a future currency transaction, derived from Covered Interest Rate Parity.
Discount Factor (DF)
The present value of $1 receivable at a future time T, derived from the zero curve: DF = e^(−rT).
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.