FM Flashcards
What are Treasury rates?
Rates that correspond to government borrowing in its own currency and are considered risk-free rates.
What does LIBOR stand for?
London Interbank Offered Rate
Why was LIBOR phased out in mid-2023?
It was based on estimates, which subjected it to potential manipulation.
What is SOFR?
Secured Overnight Financing Rate, a one-day, repo-based rate derived from actual transactions.
What does the repo rate refer to?
The implied rate on a repurchase agreement.
What is a repurchase agreement?
An agreement where one party sells a security to another with the understanding it will be bought back later at a higher price.
What is the most common type of repo?
Overnight repurchase agreement.
What is the overnight rate?
The rate at which large financial institutions borrow from each other in the overnight market.
What is the federal funds rate?
The overnight rate in the United States, monitored and influenced by the central bank.
What is an overnight indexed swap (OIS)?
An interest rate swap where a fixed rate is exchanged for a floating rate based on the geometric average of overnight federal funds rates.
What is the OIS rate?
The fixed rate in an overnight indexed swap.
How do traders view Treasury rates for risk-free rates?
They consider them too low to be truly risk-free due to demand from regulatory requirements.
What do derivative traders prefer to use for short-term risk-free rates?
OIS rates.
Fill in the blank: The repo rate is the _______ on a repurchase agreement.
implied rate
True or False: The overnight indexed swap involves exchanging a fixed rate for a fixed rate.
False
What happens if the fixed rate is greater than the geometric average of the overnight rates?
The fixed side makes a payment.
What occurs if the fixed rate is less than or equal to the geometric average of the overnight rates?
The floating side makes a payment.
Fill in the blank: If the fixed rate is greater than the geometric average of the overnight rates, the _______ makes a payment.
fixed side
Fill in the blank: If the fixed rate is less than or equal to the geometric average of the overnight rates, the _______ makes a payment.
floating side
True or False: The fixed side always makes a payment regardless of the comparison with the geometric average of overnight rates.
False
What determines which side makes a payment in a fixed vs. floating rate scenario?
The comparison between the fixed rate and the geometric average of the overnight rates.
