Products
Interest Rate Derivatives
Products based on interest rates, from FRAs, futures and swaps to caps, swaptions and callable structures.
Introductory4 pagesPractitioner7 pagesAdvanced6 pages
1Interest Rate Forwards and Futures
- IntroductoryForward Rate Agreements (FRA)The buyer is the side that pays the contract rate. It receives the difference when the benchmark rate is above the contract rate and pays the difference when the benchmark rate is below it.
- IntroductoryInterest Rate FuturesBecause the price is expressed as 100 minus the rate, the price falls when the rate rises, so the seller of the futures gains and the buyer loses.
- PractitionerJGB Futures10-year JGB Futures use a 6% coupon, 10-year notional bond; deliverable bonds are 10-year JGBs with 7 years or more but less than 11 years remaining.
2Interest Rate Swaps
- IntroductoryInterest Rate SwapsThe floating rate is set for each interest period from a benchmark rate such as TONA or TIBOR.
- PractitionerValuing an Interest Rate SwapThe value is the present value of what you receive minus the present value of what you pay, and it is zero at the time the swap is traded at market rates.
- IntroductoryOvernight Index Swaps (OIS)The notional amount itself is not exchanged, and only the difference between the two interest amounts changes hands at the end of the period.
- PractitionerBasis SwapsIn an exchange of compounded TONA for 3-month TIBOR, the TIBOR rate is set before the period and the compounded TONA rate at the end of the period.
- PractitionerAmortizing SwapsWith a notional amount that starts at 10 billion yen and falls by 2.5 billion yen a year, the 2% fixed-rate payer pays 200, 150, 100, and 50 million yen.
3Interest Rate Options
- PractitionerCaps and FloorsCap payments are set separately for each interest period (each caplet), and nothing is received for a period in which the floating rate is at or below the strike rate.
- PractitionerSwaptionsThe expiry and the swap term are quoted in that order, as in "1 month into 10 year."
4Interest Rate Exotics
- PractitionerOverview of Exotic Rate ProductsBermudan swaptions and callable swaps let the holder exercise a right to enter into or terminate a swap before maturity as well.
- AdvancedBermudan SwaptionsFor each exercise date, the swap that starts has the same end date, and the later the start, the shorter the swap.
- AdvancedCallable SwapsThe holder of the termination right can end the swap without settling the present value of the remaining payments, as a plain swap closed out early would require.
- AdvancedConstant Maturity Swaps (CMS)A CMS exchanges a swap rate of fixed tenor, such as the 10-year swap rate, for a short-term floating rate or a fixed rate on each payment date.
- AdvancedCMS Spread OptionsThe call (caplet) pays the amount by which the difference exceeds the strike, and the put (floorlet) pays the amount by which it falls below.
- AdvancedRange AccrualsThe coupon is set by whether the reference rate is inside the range on each observation day, and it rises with the share of days spent inside.
- AdvancedSnowballsThe coupon is the previous period's coupon plus an add-on minus the floating rate, and in the formula used here it is 0% if the result is negative.