Treasury Products Flashcards
Spot
A transaction where two parties agree to exchange one asset for another, at the spot rate, for settlement t+2 or earlier
Forward
An agreement between two parties to transact, where settlement of the trade falls after t+2
Normally used for hedging against an adverse movement of prices
An importer buys forward while an exporter sells forward
Can be deliverable or non deliverable
Swap
A derivative with two transactions that are agreed upon simultaneously
1) to transact one currency against another on a near date
2) to do the opposite transaction at a future date
The dates and rates are set at the inception of the swap.
Bond
A debt instrument that provides the holder a fixed stream of cash flow over its life, and the par value of the bond at maturity
Derivative
A financial instrument whose value is derived from an underlying thing, usually an asset.
Smaller cash upfront compared to transacting the underlying
Settled at an agreed future date
Cross currency swap
An agreement between two parties to exchange a stream of cash flows denominated in two different currencies
Can have an exchange of notional
Normally fixed cash flows that are known on the outset
Used for hedging
Interest rate swap
An agreement to exchange a stream of cash flows in the same currency at agreed rates
Normally one is a fixed rate known at the beginning and constant
While the other is a floating rate that is not yet known, but dependent on a benchmark such as libor or phiref
Floating for floating is a basis swap
Option
A right to buy or sell an underlying asset at an agreed rate and date. Factors to consider include Spot Strike vs forward price Volatility Time to expiry
Options have a premium that varies depending on the factors above
Call option
The right to buy an underlying asset at an agreed rate and date
Its value increases as spot moves higher
Put
A right to sell an underlying asset at an agreed rate and date
Value goes duo when asset value goes down
