Derivatives

Outperformance Option An exchange option that pays the positive difference in returns between two assets, allowing a bet on relative strength.

Over-the-Counter Option Bilaterally negotiated option contracts traded directly between parties outside exchange infrastructure; offer customisation at the cost of counterparty risk.

Overnight Indexed Swap A swap that exchanges a fixed rate for the daily compounded return of an overnight rate, used for cash management and short-term hedging.

Overnight Indexed Swap vs LIBOR Swap Compare overnight indexed swaps and LIBOR swaps: how OIS reference rates embed credit risk differently, and why spreads diverge during market stress.

Par Rate vs Zero-Coupon Rate in Swap Pricing Par rate vs zero coupon rate in swap pricing: par rates are quoted market rates where the swap has zero value at initiation, while zero-coupon rates are discount factors used to value future cash flows.

Par Swap A swap whose fixed rate is set so that both legs have equal present value at inception, requiring no upfront payment.

Parisian Option A barrier option that activates only if the underlying price spends a continuous or cumulative period beyond the barrier level.

Parisian Option vs Standard Barrier Option Parisian options require the underlying to spend a continuous period beyond the barrier, not just touch it, making them less prone to manipulation and harder to trigger.

Passport Option An exotic option whose payoff equals the profit (or loss) from an optimally-traded account in the underlying asset, chosen freely by the holder.

Payer Swaption vs Receiver Swaption Payer swaption vs receiver swaption: understand the right to pay fixed and receive floating, the economic exposures they hedge, and their payoff profiles.

Perpetual Futures A perpetual futures contract with no expiry date that uses periodic funding payments to keep its price tethered to the underlying spot market.

Perpetual Option An American-style option with no fixed expiration date, priced via optimal-stopping theory and exercised at the holder's discretion.

Phi The option's sensitivity to changes in the foreign risk-free interest rate, a key greek for FX options and dual-currency derivatives.

Physical Settlement vs Cash Settlement in Derivatives Physical settlement vs cash settlement derivatives: understand how contracts are resolved at expiry, from commodity futures to index options.

Physically Settled Option An option that results in the delivery of the actual underlying asset when exercised, rather than a cash payment.

Pin Risk The danger when an underlying closes at a strike price at expiration, leaving delta and exercise outcome undefined until the final moment.

Poor Man's Covered Call A strategy that buys a longer-dated call and sells shorter-dated calls against it, replicating covered call returns with less capital than owning stock.

Position Limits in Futures Regulatory caps on the number of futures contracts any trader may hold, designed to prevent market manipulation and reduce systemic risk.

Power Option A nonlinear exotic option whose payoff equals a power function of the underlying asset price at expiry.

Power Options: How Raising the Underlying to a Power Changes Leverage How power options deliver amplified exposure to underlying moves by using a convex payoff function, and why pricing requires convexity corrections.

Price Discovery How futures markets reveal true supply-and-demand values for commodities and other assets by bringing together informed buyers and sellers in a transparent, continuous marketplace.

Property Swap A swap exchanging real-estate index returns for fixed or LIBOR-based payments, offering synthetic property exposure without direct ownership.

Protective Put A strategy of buying a put option on shares you own, establishing a floor price while retaining full upside.

Protective Put Cost and Breakeven Calculation A protective put adds cost to a stock position; the breakeven shows how high the stock must rise to overcome the premium paid for downside protection.

Protective Put vs Collar: Choosing the Right Hedge Compare buying a standalone put versus funding it with a short call. Understand cost structure, upside tradeoffs, and when each hedge strategy fits your goal.

Put Backspread An option strategy that sells fewer near-the-money puts and buys a greater number of out-of-the-money puts to profit from sharp downside moves.

Put Option A put option is a contract granting the holder the right, but not the obligation, to sell an underlying asset at a fixed price on or before a specific date.

Put Option vs Short Selling Compare buying a put option to short selling: loss limits, capital costs, margin rules, and when each strategy fits a bearish outlook.

Put Ratio Spread An advanced option strategy that buys one put and sells multiple puts at a lower strike, generating credit while exposing traders to naked short-put risk below the short puts.

Put Spread A bearish options strategy that buys one put and sells another put at a lower strike to reduce cost.

Put Spread Strategy combining a long put with a short put at a lower strike to define and limit downside risk.

Put Swaption Option granting the right to enter into a swap where the holder receives fixed and pays floating interest rates.

Put-Call Parity A mathematical relationship between put and call option prices that prevents arbitrage, governing European-style option pricing.

Put-Call Parity Explained Put-call parity is the no-arbitrage relationship between call and put prices. Learn how deviations create riskless arbitrage opportunities with a worked example.

Put-Call Parity for European Options The put-call parity relationship for European options, how arbitrageurs enforce it, and the effect of dividends and interest rates.

Puttable Swap A swap contract where the floating-rate payer holds the right to terminate the agreement on specified dates, embedding a receiver swaption.

Quanto Derivative Cross-currency derivative that locks in a fixed exchange rate for converting payoffs from one currency to another.

Quanto Option An option on a foreign asset that settles in domestic currency at a pre-fixed exchange rate, isolating currency risk from asset risk.

Quanto Option and Currency Risk A quanto option locks in an exchange rate, eliminating currency risk from cross-border equity or bond bets by converting the foreign payoff at a fixed rate.

Quanto Option vs Standard Cross-Currency Option Learn how a quanto option locks in an exchange rate while a standard cross-currency option exposes you to both underlying and currency moves.

Quanto Pricing How currency correlation enters the valuation of derivatives on foreign assets, adjusting strike prices and volatility for FX risk.

Quanto Swap A derivative that swaps cash flows in one currency while referencing an index in another, hedging foreign exchange exposure.

Rainbow Option An exotic option whose payoff depends on the best or worst performing of multiple underlying assets.

Rainbow Option Best-of and Worst-of Payoffs Explained Learn how best-of and worst-of rainbow options reference multiple underlyings and how correlation affects their cost relative to single-asset options.

Range Accrual Swap A swap in which interest accrues only when a reference rate stays within a pre-defined range, compressing costs for rate-sensitive hedgers.

Ratio Call Spread A credit-generating strategy that sells multiple calls at a higher strike against a single long call at a lower strike, generating income with defined risk.

Ratio Put Spread A credit-generating strategy that sells multiple puts at a lower strike against a single long put, designed to collect income from neutral to mildly bullish markets.

Ratio Spread An options strategy that buys and sells unequal numbers of options at different strikes to magnify income or reduce cost.

Ratio Spread Undefined Risk Explained A ratio spread has undefined risk because you sell more option contracts than you buy, leaving a naked (unhedged) leg. Learn how to calculate maximum loss.

Real Option Application of option-pricing theory to corporate investment decisions, valuing the flexibility to expand, defer, or abandon projects.

Reverse Calendar Spread An option strategy that buys near-term options and sells longer-dated options at the same strike to profit from short-term volatility spikes.

Reverse Iron Condor A four-leg option strategy that buys puts and calls around the current price, designed to profit from large moves in either direction.

Reverse Jade Lizard An option strategy combining a short call with a short put spread such that the total premium collected eliminates upside risk entirely, creating a defined-risk income trade.

Rho Rho measures how much an option's price changes for each 1% change in interest rates, with smaller effects than other Greeks for most options.

Rho Sensitivity The rate of change in an option's price relative to shifts in interest rates, measured as the derivative of option value with respect to the risk-free rate.

Rho Sensitivity in Interest Rate Environments Rho measures option sensitivity to interest rate changes. Learn when rho becomes material—especially for long-dated options as rates rise or fall.

Rho Sensitivity in LEAPS vs Short-Term Options Why rho—interest-rate sensitivity—is negligible for weekly and monthly options but can be a meaningful P&L driver for multi-year LEAPS when interest rates shift.

Risk Reversal An options strategy that combines a long out-of-the-money call and short out-of-the-money put at different strikes to gain directional exposure while minimizing upfront premium.

Risk-Free Rate in Options Pricing How the risk-free rate affects option prices through discounting, carrying costs, and rho sensitivity — and what happens when short-term rates shift.

Risk-Neutral Measure Explained With an Example Learn how risk-neutral measure in options pricing changes probability distributions to simplify derivatives valuation via arbitrage.