Interest Rate Derivative Instruments Flashcards
0
Q
Interest rate floor
A
Agreement where one party agrees to pay the other at intervals when benchmark falls below floor rate in contract
1
Q
Interest rate cap
A
Agreement where one party agrees to pay the other at intervals when benchmark exceeds cap rate in contract
2
Q
Interest rate collar
A
Floor and cap; pay if int rate exceeds cap, get paid if int rate falls below floor or vice versa
Purchase cap, sell floor or
Purchase floor, sell cap
3
Q
Credit default swap
A
- Insurance contract against credit risk
- If default on insured bond/loan occurs, buyer receives payment from seller of swap
- Seller receives premium up front or over time
4
Q
Value of Credit default swap increases as ____ and _____ decline
A
Credit quality
Market price
5
Q
Credit derivatives enable the following:
A
Separated credit risk Short positions Greater liquidity Customized positions Confidentiality
6
Q
Uses of credit derivatives
A
Hedging/bank regulatory purposes
Ibanking market makers, hedging, seek mispricing
Insurance sell protection
7
Q
Credit derivative strategies
A
Basis trade Curve trade Index trade Options trade Capital structure trade Correlation trade
