Interest Rate Derivative Products
Interest rate dervative reference
Amortizing and Accreting Cap and Floor
An amortizing cap or floor is a special type of interest rate cap or floor whose notionals decrease at predefined dates, while an accreting cap is also a special type of interest rate cap or floor whose notionals increase at predefined date. Amortizing/accreting cap or floor is very useful for hedging variable principal loans where the principal of a loan is changing dur the life of the contract.
Amortizing and Accreting Swap
An amortizing or accreting swap is an interest rate swap whose notional principal amount decreases r increases during the life of the contract. The financial instrument is used to hedge mortgage or construction fund whose principal changes at a predefined schedule. Both amortizing and accreting swaps can be used to reduce or increase exposure to fluctuations in interest rates.
Basis Swap
Unlike a regular interest rate swap, an interest rate basis swap has two floating legs. Each leg is derived from different index rates. Basis swaps are settled periodically and are quoted as a spread over the reference index.
A basis swap can be used to limit interest rate risk that a firm exposes as a result of having different lending and borrowing rates. Basis swaps help investors to mitigate basis risk. Firms also utilize basis swaps to hedge the divergence of different rates.
Interest Rate Bermudan Swaption
An interest rate Bermudan swaption gives the holder the right but not the obligation to enter an interest rate swap at predefined dates. It is one of the fundamental ways for an investor to enter a swap. Comparing to regular swaptions, Bermudan swaptions provide market participants more flexibility and control over the exercising of an option and less restriction.
Interest Rate Cancelable Swap
A cancelable swap provides the holder the right but not the obligation to cancel the interest rate swap at predefined dates. Cancelable swaps have multiple exercise dates. That means it has Bermudan style optionality. In other words, a cancelable swap is a vanilla swap embedded with a Bermudan swaption.
Interest Rate Caps and Floors
An interest rate cap or floor is a financial contract between two parties that provides an interest rate ceiling or flooring on the floating rate payments. It consists of a series of European call/put options (caplets/floorlets) on interest rates.
Capped Swap
A capped or floored swap is an interest rate swap embedded with an interest rate cap or floor option where the floating rate of the swap is capped or floo at a certain level. Capped swaps or floored swaps limit the risk of the floating rate payer or receiver to adverse movements in interest rates. A capped or floored swap can be decomposed into a swap and a cap or floor.
Compounding Swap
A compounding swap is an interest rate swap in which interest is not paid immediately, instead it is compounded forward into the next payment date. Compounding swaps can be valued by assuming that the forward rates are realized.
Normally the calculation period of a compounding swap is smaller than the payment period. For example, an overnight index swap has 12-month payment period and daily calculation period.
Portfolio Aggregation
The portfolios and aggregation set include agreements and limit structures. These constitute different partitions of the trade population. While agreements indicate the exposure aggregation rules (netting, collateral, etc…), the aggregation sets define the on which partition the risk measures (EE, PFE, etc…) will be defined on.
Interest Rate Futures
An interest rate future is a futures contract between the buyer and seller to deliver an interest bearing asset. Futures allow the buyer and seller to lock in the price of the interest bearing asset for a future date. The most popular interest rate future is Eurodollar future. The underlying instrument in Eurodollar futures is a Eurodollar time deposit having a principal value of $1,000,000 with a three-month maturity. Eurodollar futures prices are expressed numerically using 100 minus the implied 3-month U.S. dollar LIBOR interest rate.
CCR Customer Violation
The Counterparty Credit Risk (CCR) Customer Violation Approval process allows credit limit breaches that were caused by a single deal to be approved or closed by the appropriate users. The entity being approved is a Violation Group, which is a group of Violations.
Interest Rate Swap
An interest rate swap is a financial contract between two parties to exchange future interest rate payments over a set period of time. It consists of a series of payment periods, called swaplets. A vanilla interest rate swap involves the exchange of a fixed interest rate for a floating rate, or vice versa. In other words, it has two legs: a fixed leg and a floating leg. Swaps are OTC derivatives that bear counterparty credit risk beside interest rate risk.
Swaption
An interest rate swaption is a European OTC option that grants its owner the right but not the obligation to enter an underlying interest rate swap. There are two types of swaptions: a payer swaption and a receiver swaption.
An payer swaption is also called a right-to-pay swaption that allows its holder to exercise into a swap where the holder pays fixed rates and receives floating rates, while a receiver swaption is also called right-to-receive swaption that allows its holders to exercise into a swap where the holder receives fixed rates and pays floating rates.