Derivatives

Carbon Swap A swap exchanging fixed carbon permit prices for floating emission-allowance costs, letting firms hedge regulatory compliance expense volatility.

Cash Secured Put A conservative income strategy that sells put options while holding the strike price's worth in cash, collecting premium while remaining ready to own the underlying stock.

Cash Settlement Resolving a derivatives contract by paying the difference in value rather than delivering the underlying asset—used for index futures, interest rate derivatives, and intangible underlyings.

Cash Settlement (Equity) Equity options settlement where the buyer and seller exchange cash equal to intrinsic value rather than physically delivering shares.

Cash-and-Carry Arbitrage A riskless trade buying the spot asset and selling the futures contract to exploit mispricings relative to theoretical forward value.

Cash-or-Nothing Call Option Explained A cash-or-nothing call pays a fixed cash amount if the underlying finishes above the strike at expiration, zero otherwise. Payoff differs sharply from vanilla calls.

Cash-or-Nothing Option A digital option that pays a fixed cash amount if the underlying finishes in-the-money, or nothing otherwise.

Cash-or-Nothing vs Asset-or-Nothing Option Binary options settle in fundamentally different ways: cash-or-nothing pays a fixed sum on exercise, while asset-or-nothing transfers the underlying itself.

Cash-Settled Option An option that pays out the in-the-money profit in cash rather than requiring delivery of the underlying asset.

Cash-Settled vs Physically Settled Options Understand the difference between cash-settled and physically settled options, which markets use each method, and what this means for option holders at expiration.

Central Clearing of Swaps The post-2008 regulatory framework requiring standardised OTC swaps to be novated to a central counterparty clearinghouse.

Charm The rate of change of gamma with respect to time, measuring how an option's gamma decays as expiration approaches.

Charm: How an Option's Delta Changes With Time Charm measures how delta drifts as expiration approaches, forcing dynamic hedgers to rebalance even when the underlying price stays flat.

Charm: How Delta Changes as Expiration Approaches The charm Greek measures how fast an option's delta decays as expiration nears, crucial for traders rehedging delta-neutral positions overnight.

Chooser Option An exotic option that lets the holder decide at a future date whether it becomes a call or put.

Chooser Option vs Straddle: Which Offers More Flexibility Compare a chooser option against a straddle: when the decision-delayed option is cheaper and when both-legs-at-once is more efficient given volatility.

Christmas Tree Spread A multi-leg option strategy that extends a butterfly across three strikes, balancing limited risk with defined profit zones.

Cliquet Option A series of reset options that lock in gains periodically while maintaining upside exposure throughout the contract's life.

CMS Spread Swap A swap exchanging the difference between two constant-maturity swap rates for a fixed or floating payment, used to trade the relative value of different swap tenors.

Collar A hedging strategy that buys downside protection and sells upside call options to offset the cost, capping both loss and gain.

Collar Strategy A hedging strategy that protects a long stock position by buying a put and selling a call at higher strikes, offsetting hedge costs.

Collateral Management in Derivatives The practices of posting, substituting, and managing initial and variation margin to secure bilateral and cleared derivatives exposures.

Color Third-order option Greek measuring the rate of change of gamma with respect to the underlying asset price.

Commodity Contract Specifications The detailed rules defining what can be delivered, where, in what grade, and when—the legal framework that determines whether a commodity futures contract serves actual hedgers or becomes pure speculation.

Commodity Swap A swap that exchanges fixed or floating payments based on commodity prices, used to hedge price volatility or lock in costs.

Commodity Trading Advisor A regulated professional managing client money through discretionary futures and forward contracts with derivatives expertise.

Compound Option A compound option is an option on an option—the underlying is another derivative contract, not a stock, creating nested optionality and lower cost.

Compound Option Types: Call on Call, Put on Call, and Beyond Compound option types include call on call, put on call, call on put, and put on put. These nested derivatives allow hedging and cost-efficient staged betting on price.

Concentration Limits Regulatory caps on the maximum size of a futures or derivatives position a trader can hold in a single contract or commodity.

Condor Spread A four-strike option strategy that profits when the underlying stays within a wide middle band, combining elements of vertical spreads and butterflies.

Constant Elasticity of Variance Model A local-volatility option pricing model where volatility changes inversely with stock price, generating leverage effects and volatility skew.

Constant Maturity Swap A swap where one leg's rate is reset periodically to match the yield of a fixed-maturity security, isolating curve positioning.

Contango Cost for Long Futures Holders Contango cost for long futures holders occurs when rolling forward costs money; persistent contango erodes returns on repeatedly-rolled positions.

Contango Drag on Futures-Based ETFs Why commodity ETFs that roll futures contracts in a contango market suffer price erosion relative to the spot commodity, even when prices stay flat.

Contango vs Backwardation for Hedgers How contango and backwardation affect hedgers differently: buyers and sellers face opposite profit/loss scenarios when rolling futures. Critical for cost planning.

Contango vs Backwardation in Futures Markets Contango vs backwardation futures explained: understand how futures prices curve up or down the contract term, and what it means for rolling positions.

Contingent Claim A financial contract whose payoff depends on the realisation of an uncertain future event or market price.

Contingent Premium Option An option where the buyer pays no upfront fee but owes a premium only if the option finishes in-the-money.

Convenience Yield Explained Convenience yield is the implicit benefit of holding a physical commodity, affecting how futures and forward prices relate to storage costs.

Convenience Yield in Commodity Futures Explained The convenience yield is the implicit return from holding physical inventory instead of buying futures contracts; it explains why futures prices often trade below the spot price.

Conversion Strategy An arbitrage strategy that pairs a short stock position with a long call and short put at the same strike, exploiting pricing inefficiencies between stock and options.

Convexity Adjustment in Swap Pricing Why in-arrears and CMS swaps need convexity adjustment to their forward rates, and how the correction direction depends on payoff structure.

Convexity Adjustment: Why Futures Prices Differ From Forward Prices Convexity adjustment explains why futures contracts command a price premium or discount relative to economically identical forwards due to daily settlement cash flows.

Copula Pricing Model A framework using copula functions to model the joint dependence of asset returns or default probabilities for pricing basket and correlation derivatives.

Correlation Greek The sensitivity of a multi-asset derivative's value to changes in the correlation between its underlying assets.

Correlation Option An exotic option whose payoff depends on the realised correlation between two or more underlying assets.

Cost of Carry Cost of carry is the total cost of holding an underlying asset from today until a future date, including storage, financing, and insurance, which determines futures prices.

Cost-of-Carry Model for Futures Pricing The cost-of-carry model explains how storage costs, interest rates, dividends, and convenience yield determine futures prices. Learn the formula and application.

Counterparty Credit Risk The risk that a trading counterparty defaults on their obligations—why forward contracts face higher credit risk than futures, and how clearing houses mitigate it.

Counterparty Credit Risk in Swap Contracts Understand how counterparty credit risk arises in OTC swaps, why it differs from bond credit risk, and how netting and collateral reduce default exposure.

Counterparty Risk in Derivatives Explained How counterparty risk in derivatives arises between OTC parties, how credit valuation adjustment (CVA) measures it, and how collateral, netting, and clearing reduce it.

Covered Call A strategy of selling a call option on shares you already own, capping upside in exchange for the premium received.

Covered Call on Dividend-Paying Stock Covered call mechanics on dividend stocks: assignment risk before ex-date, strike selection, and how to capture dividends safely.

Covered Call on LEAPS How to sell short-term calls against long-dated LEAPS options, with margin mechanics and roll strategies that differ from standard covered calls.

Cox-Ingersoll-Ross Model A square-root short-rate model with mean reversion that enforces non-negative interest rates through its diffusion process.

Crack Spread Futures A spread trade between crude oil and refined petroleum product futures that hedges or speculates on a refinery's processing margin.

Credit Default Swap A credit default swap is a derivative contract that transfers credit risk—the risk a borrower will default—from one party to another in exchange for periodic payments.

Credit Derivative A contract that transfers credit risk from one party to another, allowing the holder to hedge or speculate on the likelihood of default by a borrower or issuer.

Credit Risk in Forward Contracts vs Futures How bilateral counterparty exposure in OTC forwards differs from centrally cleared futures, and why one carries far greater credit risk.

Cross-Currency Swap A swap between two parties to exchange principal and interest payments in different currencies, used for financing and hedging.