equity derivative
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Equity derivative
From Wikipedia, the free encyclopedia
Infinance, an equity derivative is a class ofderivativeswhose value is at least
partly derived from one or moreunderlyingequitysecurities.Optionsandfuturesare by farthe most common equity derivatives, however there aremany other types of equity
derivativesthat are actively traded.
Contents
[hide]
1 Equity options
2 Warrants
3 Convertible bonds
4 Equity futures, options and swaps
o 4.1 Stock market index futureso 4.2 Equity basket derivativeso 4.3 Single-stock futureso 4.4 Equity index swapso 4.5 Equity swap
5 Exchange-traded derivatives6 References
[edit]Equity options
Main article:Option (finance)
Equity options are the most common type of equity derivative.[1]They provide the right, but
not the obligation, to buy (call) or sell (put) a quantity of stock (1 contract = 100 shares of
stock), at a set price (strike price), within a certain period of time (prior to the expiration
date).
[edit]Warrants
Main article:Warrant (finance)
Infinance, a warrant is asecuritythat entitles the holder to buy stock of the company that
issued it at a specified price, which is much lower than the stock price at time of issue.
Warrants are frequently attached to bonds or preferred stock as a sweetener, allowing the
issuer to pay lower interest rates or dividends. They can be used to enhance theyieldof the
bond, and make them more attractive to potential buyers.
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[edit]Convertible bonds
Main article:Convertible bond
Convertible bonds are bonds that can be converted into shares ofstockin the
issuingcompany, usually at some pre-announced ratio. It is ahybrid securitywith debt- and
equity-like features. It can be used by investors to obtain the upside of equity-like returns
while protecting the downside with regular bond-like coupons.
[edit]Equity futures, options and swaps
Investors can gain exposure to the equity markets using futures, options and swaps. These
can be done on single stocks, a customized basket of stocks or on an index of stocks. These
equity derivatives derive their value from the price of the underlying stock or stocks.
[edit]Stock market index futures
Main article:Stock market index future
Stock market index futures are futures contracts used to replicate the performance of an
underlyingstock market index. They can be used for hedging against an existing equity
position, or speculating on future movements of the index. Indices for futures include well-
established indices such asS&P,FTSE,DAX,CAC40and otherG12country indices. Indices
for OTC products are broadly similar, but offer more flexibility.[vague]...
[edit]Equity basket derivatives
Equity basket derivatives are futures, options or swaps where the underlying is a non-index
basket of shares. They have similar characteristics to equity index derivatives, but are always
traded OTC (over the counter, i.e. between established institutional investors),[dubiousdiscuss] as
the basket definition is not standardized in the way that an equity index is.
These are used normally for correlation trading.
Futures contract
Infinance, a futures contract is a standardizedcontractbetween two parties to buy or sell a
specified asset of standardized quantity and quality for a price agreed today (thefutures
price orstrike price) with delivery and payment occurring at a specified future date,
the delivery date. The contracts are negotiated at afutures exchange, which acts as an
intermediary between the two parties. The party agreeing to buy the underlying asset in the
future, the "buyer" of the contract, is said to be "long", and the party agreeing to sell the asset
in the future, the "seller" of the contract, is said to be "short". The terminology reflects the
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expectations of the partiesthe buyer hopes or expects that the asset price is going to
increase, while the seller hopes or expects that it will decrease.
Option (finance)
Infinance, an option is aderivativefinancial instrumentthat specifies a contract between
two parties for a future transaction on an asset at a reference price (the strike).[1]The buyer of
the option gains the right, but not the obligation, to engage in that transaction, while the
seller incurs the corresponding obligation to fulfill the transaction. The price of an option
derives from the difference between the reference price and the value of theunderlyingasset
(commonly astock, abond, acurrencyor afutures contract) plus a premium based on the
time remaining until the expiration of the option. Other types of options exist, and options
can in principle be created for any type of valuable asset.
Fixed income
From Wikipedia, the free encyclopedia
Financial markets
Public market
Exchange Securities
Bond market
Bond valuation Corporate bond Fixed income
Government bond High-yield debt Municipal bond
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Stock market
Common stock Preferred stock Registered share
Stock Stock certificate Stock exchange Voting shareDerivatives market
Credit derivative Futures exchange Hybrid security Securitization
Over-the-counter
Forwards Options
Spot market Swaps
Foreign exchange
Currency Exchange rate
Other markets
Commodity market Money market
Reinsurance market Real estate market
Practical trading
Clearing houseFinancial market participants
Financial regulation
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Financeseries
Banks and banking Corporate finance Personal finance Public finance
V
T
EFixed income refers to any type ofinvestmentthat is notequity, which obligates the
borrower/issuer to make payments on a fixed schedule, even if the number of the payments
may be variable.
For example, if you lend money to a borrower and the borrower has to payinterestonce a
month, you have been issued a fixed-incomesecurity. Governments issuegovernment
bondsin their own currency andsovereign bondsin foreign currencies. Local governments
issuemunicipal bondsto finance themselves. Debt issued by government-backed agencies is
called anagency bond. Companies can issue acorporate bondor get money from a bank
through acorporate loan("preferred stock" can be "fixed income" in some contexts).
Securitized bank lending (e.g. credit card debt, car loans or mortgages) can be structured
into other types of fixed income products such as ABS asset-backed securitieswhich can be
traded on exchanges just like corporate and government bonds.
The term fixed income is also applied to a person's income that does not vary with each
period. This can include income derived from fixed-income investments such as bonds
andpreferred stocksorpensionsthat guarantee a fixed income. When pensioners or retirees
are dependent on their pension as their dominant source of income, the term "fixed income"
can also carry the implication that they have relatively limiteddiscretionary incomeor have
little financial freedom to make large expenditures.
Fixed-income securities can be contrasted with equity securities that create no obligation to
pay dividends, such asstocks. In order for a company to grow as a business, it often must
raise money; to finance an acquisition, buy equipment or land or invest in new product
development. Investors will give money to the company only if they believe that they will
be given something in return commensurate with the risk profile of the company. The
company can either pledge a part of itself, by givingequityin the company (stock), or the
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company can give a promise to pay regularinterestand repay principal on the loan (bond,
bank loan, or preferred stock).
The term "fixed" in "fixed income" refers only to the schedule of obligatory payments, not
the amount. "Fixed income securities" include inflation linked bonds, variable-interest ratenotes, and the like. If an issuer misses a payment on a fixed income security, the issuer is
indefault, and the payees can force the issuer into bankruptcy. In contrast, if a company
misses a quarterly dividend to stock (non-fixed-income) shareholders, there is no violation
of any payment covenant, and no default.
Contents
[hide]
1 Terminology
2 Investors
3 Pricing factors
4 Inflation-linked bonds
5 Derivatives
6 Risks
7 See also
8 References
9 External links
[edit]Terminology
While a bond is simply a promise to pay interest on borrowed money, there is some
important terminology used by the fixed-income industry:
Theissueris the entity (company or govt.) who borrows an amount of money (issuingthe bond) and pays the interest.
Theprincipalof a bond also known as maturity value, face value, par value is theamount that the issuer borrows which must be repaid to the lender.[1]
Thecoupon(of a bond) is the interest that the issuer must pay. Thematurityis the end of the bond, the date that the issuer must return the principal. The issue is another term for the bond itself. Theindentureis the contract that states all of the terms of the bond.[edit]Investors
Investors in fixed-income securities are typically looking for a constant and secure return ontheir investment. For example, a retired person might like to receive a regular dependable
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payment to live on, but not consume principal. This person can buy a bond with their
money, and use the coupon payment (the interest) as that regular dependable payment.
When the bond matures or is refinanced, the person will have their money returned to them.
[edit]Pricing factors
Fixed income investments such as bonds and loans are generally priced as a credit spread
above a low-risk reference rate, such as LIBOR or U.S. or German Government Bonds of the
same duration.[2]For example, if a 30 year mortgage is available for 5% and 30 year U.S.
treasuries yield 3%, the credit spread is 2%. The credit spread reflects the risk of default and
profits for lenders, while the low-risk reference rate reflects other factors that may drive
interest rates.[2]Risk free Interest rates change over time, based on a variety of factors,
particularlybase ratesset bycentral bankssuch as the USFederal Reserve, UKBank of
England, and Euro ZoneECB. If the coupon on the bond is lower than the prevailing interestrate, then this pushes the price down, and conversely, low interest rates increase the
attractiveness of a given coupon, and so increase the price.
In buying a bond, one is in effect buying a set of cash flows, which are discounted according
to the buyer's perception of how interest and exchange rates will move over its life.
Supply and demand affect prices, especially in the case of market participants which are
constrained in the set of investments they make. Insurance companies often have long term
liabilities that they wish to hedge, which requires low risk, predictable cash flows, such as
long dated government bonds.
[edit]Inflation-linked bonds
There are alsoinflation-indexed bonds, fixed-income securities linked to a specific price
index. The most common examples are USTreasury Inflation Protected Securities(TIPS) and
UK Index LinkedGilts. This type of fixed income is adjusted to aConsumer Price Index(in
the US this is the CPI-U for urban consumers), and then a real yield is applied to the
adjusted principal. This means that these bonds are guaranteed to outperform the inflation
rate (unless the government defaults on the bond). This allows investors of all sizes to not
lose the purchasing power of their money due to inflation, which can be very uncertain at
times. For example, assuming 3.88% inflation over the course of 1 year (just about the 56
year average inflation rate, through most of 2006), and a real yield of 2.61% (the fixed US
Treasury real yield on October 19, 2006, for a 5 yr TIPS), the adjusted principal of the fixed
income would rise from 100 to 103.88 and then the real yield would be applied to the
adjusted principal, meaning 103.88 x 1.0261, which equals 106.5913; giving a total return of
6.5913%. TIPS moderately outperform conventional US Treasuries, which yielded just 5.05%
for a 1 yr bill on October 19, 2006.
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[edit]Derivatives
Fixed income derivatives includeinterest rate derivativesandcredit derivatives.
Ofteninflation derivativesare also included into this definition. There is a wide range of
fixed income derivative products:options,swaps,futures contractsas well asforwardcontracts. The most widely traded kinds are:
Credit default swaps[3] Interest rate swaps Inflation swaps Bond futureson 2/10/30-year government bonds Interest rate futureson 90-day interbank interest rates
Forward rate agreements[edit]Risks
Fixed income securities from any entity have risks that may include but are not limited to:
inflationary risk that the buying power of the principal will decline during the term ofthe security
interest rate risk that overall interest rates will change from the levels extant when thesecurity is sold, causing an opportunity cost
currency risk that exchange rates with other currencies will change during thesecurity's term, causing loss of buying power in other countries
default risk that the issuer will be unable to pay the scheduled interest payments dueto financial hardship
repayment of principal risk that the issuer will be unable to repay the principal due tofinancial hardship
reinvestment risk that the purchaser will be unable to purchase another security ofsimilar return upon the expiration of the current security
liquidity risk that the buyer will require the principal funds for another purpose onshort notice, prior to the expiration of the security, and be unable to exchange the
security for cash in the required time period without loss of fair value
maturity risk this is another name for interest rate risk streaming income payment risk duration risk convexity risk credit quality risk
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political risk that governmental actions will cause the owner to lose the benefits of thesecurity
tax adjustment risk market risk the risk of market-wide changes affecting the value of the security climate risk event risk the risk that externalities will cause the owner to lose the benefits of the
security
Interest rate derivative
From Wikipedia, the free encyclopedia
An interest rate derivative is aderivativewhere the underlying asset is the right to pay or
receive anotional amountofmoneyat a giveninterest rate. These structures are popular for
investors with customized cashflow needs or specific views on the interest rate movements
(such as volatility movements or simple directional movements) and are therefore usually
tradedOTC; seefinancial engineering.
The interest ratederivatives marketis the largest derivatives market in the world. TheBank
for International Settlementsestimates that thenotional amountoutstanding in June
2009[1]were US$437 trillion forOTCinterest rate contracts, and US$342 trillion
forOTCinterest rate swaps. According to theInternational Swaps and Derivatives
Association, 80% of the world's top 500 companies as of April 2003 used interest rate
derivatives to control their cashflows. This compares with 75% forforeign exchange options,
25% forcommodityoptions and 10% forstock options.
Modelingof interest rate derivatives is usually done on a time-dependentmulti-
dimensionalLattice("tree") built for theunderlyingrisk drivers, usually domestic or
foreignshort ratesandforeign exchange marketrates, and incorporating delivery- andday
count conventions; seeShort-rate model.Specialised simulation modelsare also often used.
http://en.wikipedia.org/w/index.php?title=Tax_adjustment_risk&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Tax_adjustment_risk&action=edit&redlink=1http://en.wikipedia.org/wiki/Climate_riskhttp://en.wikipedia.org/wiki/Climate_riskhttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Notional_amounthttp://en.wikipedia.org/wiki/Notional_amounthttp://en.wikipedia.org/wiki/Notional_amounthttp://en.wikipedia.org/wiki/Moneyhttp://en.wikipedia.org/wiki/Moneyhttp://en.wikipedia.org/wiki/Moneyhttp://en.wikipedia.org/wiki/Interest_ratehttp://en.wikipedia.org/wiki/Interest_ratehttp://en.wikipedia.org/wiki/Interest_ratehttp://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Financial_engineeringhttp://en.wikipedia.org/wiki/Financial_engineeringhttp://en.wikipedia.org/wiki/Financial_engineeringhttp://en.wikipedia.org/wiki/Derivatives_markethttp://en.wikipedia.org/wiki/Derivatives_markethttp://en.wikipedia.org/wiki/Derivatives_markethttp://en.wikipedia.org/wiki/Bank_for_International_Settlementshttp://en.wikipedia.org/wiki/Bank_for_International_Settlementshttp://en.wikipedia.org/wiki/Bank_for_International_Settlementshttp://en.wikipedia.org/wiki/Bank_for_International_Settlementshttp://en.wikipedia.org/wiki/Notional_amounthttp://en.wikipedia.org/wiki/Notional_amounthttp://en.wikipedia.org/wiki/Notional_amounthttp://en.wikipedia.org/wiki/Interest_rate_derivative#cite_note-0http://en.wikipedia.org/wiki/Interest_rate_derivative#cite_note-0http://en.wikipedia.org/wiki/Interest_rate_derivative#cite_note-0http://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Interest_rate_swaphttp://en.wikipedia.org/wiki/Interest_rate_swaphttp://en.wikipedia.org/wiki/Interest_rate_swaphttp://en.wikipedia.org/wiki/International_Swaps_and_Derivatives_Associationhttp://en.wikipedia.org/wiki/International_Swaps_and_Derivatives_Associationhttp://en.wikipedia.org/wiki/International_Swaps_and_Derivatives_Associationhttp://en.wikipedia.org/wiki/International_Swaps_and_Derivatives_Associationhttp://en.wikipedia.org/wiki/Foreign_exchange_optionhttp://en.wikipedia.org/wiki/Foreign_exchange_optionhttp://en.wikipedia.org/wiki/Foreign_exchange_optionhttp://en.wikipedia.org/wiki/Commodityhttp://en.wikipedia.org/wiki/Commodityhttp://en.wikipedia.org/wiki/Commodityhttp://en.wikipedia.org/wiki/Stock_optionhttp://en.wikipedia.org/wiki/Stock_optionhttp://en.wikipedia.org/wiki/Stock_optionhttp://en.wikipedia.org/wiki/Financial_modeling#Quantitative_financehttp://en.wikipedia.org/wiki/Financial_modeling#Quantitative_financehttp://en.wikipedia.org/wiki/Multi-dimensionalhttp://en.wikipedia.org/wiki/Multi-dimensionalhttp://en.wikipedia.org/wiki/Multi-dimensionalhttp://en.wikipedia.org/wiki/Lattice_model_(finance)http://en.wikipedia.org/wiki/Lattice_model_(finance)http://en.wikipedia.org/wiki/Lattice_model_(finance)http://en.wikipedia.org/wiki/Underlyinghttp://en.wikipedia.org/wiki/Underlyinghttp://en.wikipedia.org/wiki/Underlyinghttp://en.wikipedia.org/wiki/Short_ratehttp://en.wikipedia.org/wiki/Short_ratehttp://en.wikipedia.org/wiki/Short_ratehttp://en.wikipedia.org/wiki/Foreign_exchange_markethttp://en.wikipedia.org/wiki/Foreign_exchange_markethttp://en.wikipedia.org/wiki/Foreign_exchange_markethttp://en.wikipedia.org/wiki/Day_count_conventionhttp://en.wikipedia.org/wiki/Day_count_conventionhttp://en.wikipedia.org/wiki/Day_count_conventionhttp://en.wikipedia.org/wiki/Day_count_conventionhttp://en.wikipedia.org/wiki/Short-rate_modelhttp://en.wikipedia.org/wiki/Short-rate_modelhttp://en.wikipedia.org/wiki/Short-rate_modelhttp://en.wikipedia.org/wiki/Monte_Carlo_methods_for_option_pricinghttp://en.wikipedia.org/wiki/Monte_Carlo_methods_for_option_pricinghttp://en.wikipedia.org/wiki/Monte_Carlo_methods_for_option_pricinghttp://en.wikipedia.org/wiki/Monte_Carlo_methods_for_option_pricinghttp://en.wikipedia.org/wiki/Short-rate_modelhttp://en.wikipedia.org/wiki/Day_count_conventionhttp://en.wikipedia.org/wiki/Day_count_conventionhttp://en.wikipedia.org/wiki/Foreign_exchange_markethttp://en.wikipedia.org/wiki/Short_ratehttp://en.wikipedia.org/wiki/Underlyinghttp://en.wikipedia.org/wiki/Lattice_model_(finance)http://en.wikipedia.org/wiki/Multi-dimensionalhttp://en.wikipedia.org/wiki/Multi-dimensionalhttp://en.wikipedia.org/wiki/Financial_modeling#Quantitative_financehttp://en.wikipedia.org/wiki/Stock_optionhttp://en.wikipedia.org/wiki/Commodityhttp://en.wikipedia.org/wiki/Foreign_exchange_optionhttp://en.wikipedia.org/wiki/International_Swaps_and_Derivatives_Associationhttp://en.wikipedia.org/wiki/International_Swaps_and_Derivatives_Associationhttp://en.wikipedia.org/wiki/Interest_rate_swaphttp://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Interest_rate_derivative#cite_note-0http://en.wikipedia.org/wiki/Notional_amounthttp://en.wikipedia.org/wiki/Bank_for_International_Settlementshttp://en.wikipedia.org/wiki/Bank_for_International_Settlementshttp://en.wikipedia.org/wiki/Derivatives_markethttp://en.wikipedia.org/wiki/Financial_engineeringhttp://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Interest_ratehttp://en.wikipedia.org/wiki/Moneyhttp://en.wikipedia.org/wiki/Notional_amounthttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Climate_riskhttp://en.wikipedia.org/w/index.php?title=Tax_adjustment_risk&action=edit&redlink=1 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Contents
[hide]
1 Typeso 1.1 Vanillao 1.2 Quasi-vanillao 1.3 Exotic derivatives
2 Example of interest rate derivatives
o 2.1 Interest rate capo 2.2 Range accrual noteo 2.3 Bermudan swaption
3 See also
4 References
5 Further reading
6 External links
[edit]Types
[edit]Vanilla
The basic building blocks for most interest rate derivatives can be described as "vanilla"
(simple, basic derivative structures, usually mostliquid):
Interest rate swap(fixed-for-floating) Interest rate capor interest rate floor Interest rateswaption Bond option Forward rate agreement Interest rate future Money marketinstruments Cross currency swap (seeForex swap)[edit]Quasi-vanilla
The next intermediate level is a quasi-vanilla class of (fairly liquid) derivatives, examples of
which are:
Range accrualswaps/notes/bonds In-arrearsswap
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rg/wiki/Interest_rate_derivative#Range_accrual_notehttp://en.wikipedia.org/wiki/Interest_rate_derivative#Interest_rate_caphttp://en.wikipedia.org/wiki/Interest_rate_derivative#Example_of_interest_rate_derivativeshttp://en.wikipedia.org/wiki/Interest_rate_derivative#Exotic_derivativeshttp://en.wikipedia.org/wiki/Interest_rate_derivative#Quasi-vanillahttp://en.wikipedia.org/wiki/Interest_rate_derivative#Vanillahttp://en.wikipedia.org/wiki/Interest_rate_derivative#Typeshttp://en.wikipedia.org/wiki/Interest_rate_derivative 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Constant maturity swap(CMS) or constant treasury swap (CTS) derivatives (swaps,caps, floors)
Interest rate swapbased upon two floating interest rates[edit]Exotic derivatives
Building off these structures are the "exotic" interest rate derivatives (least liquid, traded
over the counter), such as:
Power Reverse Dual Currencynote (PRDCor Turbo) Target redemption note(TARN) CMS steepener[1] Snowball[2] Inverse floater StripsofCollateralized mortgage obligation Ratchet caps and floors Bermudanswaptions Cross currency swaptionsMost of the exotic interest rate derivatives are structured as swaps or notes, and can be
classified as having two payment legs: a funding leg and an exotic coupon leg.[citation needed]
A funding leg usually consists of series of fixed coupons or floating coupons (LIBOR)plus fixed spread.
An exotic coupon leg typically consists of a functional dependence on the past andcurrent underlying indices (LIBOR, CMS rate, FX rate) and sometimes on its own past
levels, as in Snowballs and TARNs. The payer of the exotic coupon leg usually has a
right to cancel the deal on any of the coupon payment dates, resulting in the so-
calledBermudan exercisefeature. There may also be some range-accrual and knock-out
features inherent in the exotic coupon definition.
[edit]Example of interest rate derivatives
[edit]Interest rate cap
Aninterest rate capis designed to hedge a companys maximum exposure to upward
interest rate movements. It establishes a maximum total dollar interest amount the hedger
will pay out over the life of the cap. The interest rate cap is actually a series of individual
interest rate caplets, each being an individual option on the underlying interest rate index.
The interest rate cap is paid for upfront, and then the purchaser realizes the benefit of the
cap over the life of the instrument.
http://en.wikipedia.org/wiki/Constant_maturity_swaphttp://en.wikipedia.org/wiki/Constant_maturity_swaphttp://en.wikipedia.org/wiki/Interest_rate_swaphttp://en.wikipedia.org/wiki/Interest_rate_swaphttp://en.wikipedia.org/w/index.php?title=Interest_rate_derivative&action=edit§ion=4http://en.wikipedia.org/w/index.php?title=Interest_rate_derivative&action=edit§ion=4http://en.wikipedia.org/w/index.php?title=Interest_rate_derivative&action=edit§ion=4http://en.wikipedia.org/wiki/Exotic_derivativeshttp://en.wikipedia.org/wiki/Exotic_derivativeshttp://en.wikipedia.org/wiki/Exotic_derivativeshttp://en.wikipedia.org/wiki/Power_Reverse_Dual_Currencyhttp://en.wikipedia.org/wiki/Power_Reverse_Dual_Currencyhttp://en.wikipedia.org/wiki/PRDChttp://en.wikipedia.org/wiki/PRDChttp://en.wikipedia.org/wiki/PRDChttp://en.wikipedia.org/w/index.php?title=Target_redemption_note&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Target_redemption_note&action=edit&redlink=1http://www.risk.net/asia-risk/feature/1496874/rate-steepeners-risehttp://www.risk.net/asia-risk/feature/1496874/rate-steepeners-risehttp://www.risk.net/asia-risk/feature/1496874/rate-steepeners-risehttp://en.wikipedia.org/wiki/Snowball_(finance)http://www.fincad.com/derivatives-resources/wiki/snowballs.aspxhttp://www.fincad.com/derivatives-resources/wiki/snowballs.aspxhttp://www.fincad.com/derivatives-resources/wiki/snowballs.aspxhttp://en.wikipedia.org/wiki/Strip_(finance)http://en.wikipedia.org/wiki/Strip_(finance)http://en.wikipedia.org/wiki/Collateralized_mortgage_obligationhttp://en.wikipedia.org/wiki/Collateralized_mortgage_obligationhttp://en.wikipedia.org/wiki/Collateralized_mortgage_obligationhttp://en.wikipedia.org/wiki/Bermudan_optionhttp://en.wikipedia.org/wiki/Bermudan_optionhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Bermudan_optionhttp://en.wikipedia.org/wiki/Bermudan_optionhttp://en.wikipedia.org/wiki/Bermudan_optionhttp://en.wikipedia.org/w/index.php?title=Interest_rate_derivative&action=edit§ion=5http://en.wikipedia.org/w/index.php?title=Interest_rate_derivative&action=edit§ion=5http://en.wikipedia.org/w/index.php?title=Interest_rate_derivative&action=edit§ion=5http://en.wikipedia.org/w/index.php?title=Interest_rate_derivative&action=edit§ion=6http://en.wikipedia.org/w/index.php?title=Interest_rate_derivative&action=edit§ion=6http://en.wikipedia.org/w/index.php?title=Interest_rate_derivative&action=edit§ion=6http://en.wikipedia.org/wiki/Interest_rate_caphttp://en.wikipedia.org/wiki/Interest_rate_caphttp://en.wikipedia.org/wiki/Interest_rate_caphttp://en.wikipedia.org/wiki/Interest_rate_caphttp://en.wikipedia.org/w/index.php?title=Interest_rate_derivative&action=edit§ion=6http://en.wikipedia.org/w/index.php?title=Interest_rate_derivative&action=edit§ion=5http://en.wikipedia.org/wiki/Bermudan_optionhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Bermudan_optionhttp://en.wikipedia.org/wiki/Collateralized_mortgage_obligationhttp://en.wikipedia.org/wiki/Strip_(finance)http://www.fincad.com/derivatives-resources/wiki/snowballs.aspxhttp://en.wikipedia.org/wiki/Snowball_(finance)http://www.risk.net/asia-risk/feature/1496874/rate-steepeners-risehttp://en.wikipedia.org/w/index.php?title=Target_redemption_note&action=edit&redlink=1http://en.wikipedia.org/wiki/PRDChttp://en.wikipedia.org/wiki/Power_Reverse_Dual_Currencyhttp://en.wikipedia.org/wiki/Exotic_derivativeshttp://en.wikipedia.org/w/index.php?title=Interest_rate_derivative&action=edit§ion=4http://en.wikipedia.org/wiki/Interest_rate_swaphttp://en.wikipedia.org/wiki/Constant_maturity_swap -
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[edit]Range accrual note
Suppose a manager wished to take a view that volatility of interest rates will be low. He or
she may gain extrayieldover a regularbondby buying a range accrualnoteinstead. This
note pays interest only if the floating interest rate (i.e.London Interbank Offered Rate) stayswithin a pre-determined band. This note effectively contains an embeddedoptionwhich, in
this case, the buyer of the note has sold to the issuer. This option adds to the yield of the
note. In this way, ifvolatilityremains low, the bond yields more than a standard bond.
[edit]Bermudan swaption
Suppose a fixed-couponcallable bondwas brought to the market by a company. The issuer
however, entered into aninterest rate swapto convert the fixed coupon payments to floating
payments (perhaps based on LIBOR). Since it is callable however, the issuer may redeem the
bond back from investors at certain dates during the life of the bond. If called, this wouldstill leave the issuer with theinterest rate swap. Therefore, the issuer also enters into
Bermudanswaptionwhen the bond is brought to market with exercise dates equal to
callable dates for the bond. If the bond is called, the swaption is exercised, effectively
canceling the swap leaving no more interest rate exposure for the issuer.
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