Derivatives Chapter 5 Flashcards
Caps
Floors
Collars
Caps:
- OTC call option on an interest rate (calls profit as prices rise)
- Borrowers hedge using caps (use as hedge against a loan)
Floors:
- OTC put option on an interest rate (put profits as prices fall)
- Lenders hedge using floors
Collars:
- cap and floor combined
Interest Rate Swaps:
Features
Plain Vanialla Swap(on exam)/Coupon Swap
Swaption
Basis Swap/Index Swap
Asset Swap
package of an asset and a swap together
Example:
investor buys an FRN and transacts a swap to recieve a fixed rate and pay LIBOR (to create a synthetic fixed rate investment)
Total Return Swap
creates exposure to the appreciation (or fall) in value, and the investment return from a specified asset/market
Amortising
Accreting
Roller Coaster Swaps
Amortising: notional principal decreases over the life of the swap (e.g. matched against a loan paid back by instalments)
Accreting: notional principal increases (e.g. with increased borrowing requirements)
Roller Coaser: notional interest rises and falls (e.g. in line with seasonal borrowing requirements)
Inflation Swaps
cash flows calculated by reference to an inflation index
Constant Maturity Swaps (CMS) `
Interest rate swap where the rate is reset by reference to a swap market rate (rather than to LIBOR)
Arrears Swaps
Interest rate swap where the floating rate is observed and paid at the end of the period
Forward Start Swaps
Swap agreement transacted today, with an agreed future start date
Overnight Index Swaps (OISs)
a fiexed/floating swap where the floating index is an overnight interest rate
Market-to-Market Swap
settlements calculated by revaluing the swap
effect: same as closing out the existing swap and putting a new swap in place
Commodity Swap
swaps a fixed (pre-agreed) commodity price for a floating (market) price
Equity (volatility) Swap
payments on one or both sides linked to the performance of equities or an equity index
Credit Default Swaps
provide protection against/compensation for ‘credit events’
credit events:
- default
- bankrupcy
- signiicant fall in an asset’s value
- debt restructuring
Master Agreements
features
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Features:
- negotiated between trading parties based on a standard printed contract
- legally binding once signed
- important issues covered: termination events, default events, netting
Collateral Management
- banks may ask for collateral as security against credit risk
- ‘margining’ keeps the amoung of collateral in excess of perceived credit risk
- margin calls may be made daily, weekly, or monthly
MarkitSERV
- Combines MarketWire and the DTCC’s trade confirmation platform to provide a single gateway for OTC derivative trade processing.
- connects market participants and execution venues to downstream processing platforms
- owned by DTCC
The Depositary Trust & Clearing Corporation (DTCC)
- provides a matching service (‘Deriv/SERV’) for OTC derivatives, used in post trade processing
SWIFTNet FpML
- a financial industry co-operative payment sustem
- allows users to send secure messages, PTC trade confirmations and advice
Financiel Products Markup Language (FpML)
- industry standard protocol developed for dealing and processing OTC derivatives communications
- provides standard data content and structure
NEX TriOptima
- software product that helps clients redice capital, credit and operational costs associated with OTC derivatives portfolios
SwapClear
- provides clearing for basic interest rate swaps
EurexOTC Clear
- Transaction management service for OTC swaps, facilitation capital managment and clearing
ICE Link
- Credit derivatives trade matching and processing service
