Interest Rate Swap (IRS)
An agreement to exchange fixed-rate cash flows for floating-rate cash flows on a notional principal.
In a plain vanilla IRS, the fixed payer pays a fixed coupon (the 'par swap rate' SFR) and receives floating (e.g., SOFR + spread ≈ SOFR flat). Notional is never exchanged. The fixed rate is set so NPV = 0 at inception. IRS are priced using the SOFR zero curve (post-2023 LIBOR transition). Main use cases: (1) converting floating-rate liabilities to fixed (interest rate risk management), (2) speculation on rate direction, (3) expressing curve views.
SOFR (Secured Overnight Financing Rate)
The US dollar risk-free rate based on overnight Treasury repo transactions, replacing LIBOR since 2023.
Par Swap Rate (SFR)
The fixed rate that makes an interest rate swap have zero NPV at inception.
Cost of Carry
The net financing cost of holding an asset — interest paid minus dividends/income received.
Rho (ρ)
The sensitivity of an option's price to a 1% change in the risk-free interest rate.
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.