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While I understand theta (time decay) in options, I often see theta being computed for linear products as well (outright FX forwards). What is theta in this case then? And how is it different from the interest rate sensitivity that comes from the forward points?

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I think your FX theta is probably not the same as the theta in black scholes sense.

I think it may mean time pnl, which is applicable to all products, i.e., the PnL of time passing 1 day, but keeping all the market data the same. Note that here you have two markets, market 1 (original market) and market 2 (the original market's but moving 1 day forward)

For options, one part of time pnl would come from theta. For linear products, a part would come from the 1 day less of accrual.

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    $\begingroup$ I think the term theta should be used only for decay of time value. $\endgroup$ – dm63 Sep 27 '19 at 0:27
  • $\begingroup$ cannot agree more. In most cases, this is what people care about $\endgroup$ – PeacePanda Sep 27 '19 at 15:09
  • $\begingroup$ I would guess that it is based on the forward points (per day) for the outright fwd , or on a comparison of this with the one day (spot vs next) points. Some people may call this carry, rather than theta. $\endgroup$ – noob2 Sep 27 '19 at 16:53

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