Interest Rate Risk And Swaps Flashcards
What are the sources if interest rate risk
Volatility of interest rates
Extensive use if shirt term loans and floating rate debt
What is a FRA and how does it work
Forward rate agreement, an interbank traded contract between two parties locking in an interest rate for a future period
The buyer of an fra obtains the right to lock in an interest rate for a desired term that begins at some future date
The buyer pays to the seller the differential interest expense on s notional sum if actual future interest rate is smaller than the agreed rate
The contract is settled in cash at the beginning of the fra period
What is the definition of an interest rate swap
It is an agreement between two parties to exchange interest payment at pre specified intervals based on agreed upon indexes
One index is usually a fixed rate, the second index is tied to a certain segment of the market and is adjusted periodically
What is the generic plain vanila swap
The generic swap has a combination of characteristics of both:
A traditional fixed income security on the fixed side
A traditional floating rate note on the floating side
