For cost of carry for a Vanilla equity option or on futures, how should you properly account for your cash flow. The basic formula I used was s*(i/365)* number of days. It is rather simple. However, if your clearing firm is giving you money market rate each nite on you credit and debit balances, it doesn't take into account your compound interest. It just calculates based on the original stock price(or net debit or credit). Assuming no volatility in interest rates, would it be better to use s*(1+i/365)^number of days? This is for a customer account or a clearing firm account where you use interest rates given to you. This is to clear up a disagreement. Thanks

Are you talking about the cost of margin for futures or writing options? Or the cost of carry for the option premium?The first is a complex calculation which depends on the margin rules, the volatility of the underlying and the level and volatility of interest rates. For the second you should compound as you say, but you should use the rate you would earn in an alternative investment (probably a money market fund) rather than a broker rate. The compounding should make little difference in practice.

Thanks, you answered my question.