Chapter 9: Derivatives, Loan Sales & Securitization Flashcards
are financial contracts whose value is derived from the performance of an underlying asset, index, or interest rate.
Derivative securities
use derivatives to secure prices and mitigate potential losses from adverse market movements.
Hedger
play a crucial role in managing a FI’s interest rate, foreign exchange, and credit risk exposures.
Derivatives
An agreement to transact involving the immediate exchange of assets and funds.
Spot Contract
An agreement to transact involving the future exchange of a set amount of assets at a set price.
Forward Contract
An agreement to transact involving the future exchange of a set amount of assets for a price that is settled daily.
Futures Contract
An investment that is made with the intention of reducing the risk of adverse price movement in asset.
Hedge
Describes the prices on outstanding futures contracts that are adjusted each day to reflect current futures market conditions.
Market to Market
Hedging the entire duration gap of an FI. An investment technique used to mitigate or eliminate downside systemic risk from a portfolio of assets.
Macrohedging
Using a derivative securities contract to hedge a specific asset or liability. An investment technique used to eliminate the risk of a single asset from a larger portfolio.
Microhedging
An option contract giving the holder the right to buy an underlying asset at a specified price within a specific time frame.
Put option
An option contract giving the holder the right to sell an underlying asset at a specified price within a specific time frame.
Call option
are financial contracts that give buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price and date.
Options
Options hedged against ___________________.
interest rate risks
is an agreement that protects against rising interest rates. It sets a maximum interest rate, and if rates exceed this level, the seller compensates the buyer.
Caps
provides protection against falling interest rates by setting a minimum interest rate. If rates drop below this level, the seller compensates the buyer.
Floors
combines elements of both caps and floors. It involves simultaneous positions in a cap and a floor, providing a range of protection against both upward and downward interest rate movements.
Collars
is the risk that the counterparty defaults on payment obligations
Contingent Credit Risk
is an agreement between two parties to exchange financial instruments, cash flows, or payments for a specific period.
Swaps
It involves swapping the values or cash flows of one asset for another
Swaps
Five Generic Types of Swaps
- Interest Rate Swaps
- Currency Swaps
- Credit Risk Swaps
- Commodity Swaps
- Equity Swaps
is a financial derivative contract between two parties to exchange interest rate payments, with one party making fixed-rate payments and the other making floating-rate payments. This is done to manage or hedge against interest rate risk.
interest rate swap
involves the exchange of principal and interest payments in one currency for equivalent payments in another currency.
currency swap
It is often used to hedge against currency exchange rate risk or to obtain cheaper financing in a different currency.
currency swap
these swaps are contracts that allow an investor to “swap” or offset their credit risk with another party.
Credit Risk Swaps
True or False
If a borrower defaults on their debt, the CDS seller compensates the CDS buyer for the profit.
False
If a borrower defaults on their debt, the CDS seller compensates the CDS buyer for the loss.
are agreements between two parties to exchange payments based on the price of a specific commodity over a predetermined period.
Commodity swaps
involve the exchange of cash flows based on the returns of an equity index, a basket of individual stocks, or a single stock.
Equity Swaps
is a technique used to manage foreign exchange risk by mitigating the effects of currency fluctuations on international trade or investment.
Hedging with currency swaps
It is a widely used strategy to minimize the risk associated with fluctuating interest rates.
HEDGING WITH INTEREST RATE SWAPS