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irAmortizingSwap
An amortizing swap is an interest rate swap whose notional principal amount declines during the life of the contract whereas an accreting swap is an interest rate swap whose notional principal amount increases instead. The notional amount changes could be one leg or two legs, but typically on a fixed schedule. The notional principal is tied to an underlying financial instrument with a declining principal, such as a mortgage or an increasing principal, such as a construction fund.
EqRangeAccrual
A callable range accrual note contains an embedded option that allows the issuer to exercise a call on the note on a particular date or set of dates prior to maturity. This can be used by the issuer to limit the return that is paid to the note holder. On these exercise dates, the issuer may purchase the note back from the holder for a predetermined cash amount, which is typically equal to or greater than the face value of the note.
fiAmortizingBond
An amortizing bond is a bond whose principal (face value) decreases due to repaying part of the principal along with the coupon payments. Each payment to the amortizing bond holder consists of a portion of interest and a portion of principal. While an accreting bond is a bond whose principal increases during the life of the deal. Each payment to the accreting bond holder is just a part of interest. The other part of coupon is added to the principal of the bond.
irSwap
An interest rate swap is an agreement between two parties to exchange future interest rate payments over a set period of time. It consists of a series of payment periods, called swaplets. The most popular form of interest rate swaps is the vanilla swaps that involve the exchange of a fixed interest rate for a floating rate, or vice versa. There are two legs associated with each party: a fixed leg and a floating leg. Swaps are OTC derivatives that bear counterparty credit risk beside interest rate risk.
fiFrn
A floating rate note has variable coupons, depending on a money market reference rate, such as LIBOR, plus a floating spread. When interest rate raises, the coupons of an FRN increases in line with the increase of the forward rates, which means its price remains relatively constant. Therefore, FRNs bear small interest rate risk. On the other hand, FRNs carry lower yields than fixed rate bonds of the same maturity. They also have unpredictable coupon payments.
EqVariance
A variance swap is an instrument which allows investors to trade future realized (historical) volatility against current implied volatility. The Variance Swap pays the difference between observed variance and a strike variance, possibly subject to a cap and a floor. The observed variance is computed from the stock price returns over a series of specified sampling dates.
EqCliquet
A cliquet option, also called ratchet option, consists of a series of forward start options, each struck at the money on the date it becomes active. Typically, each option begins on the date corresponding to the expiry of the previous option. The cliquet is a series of at-the-money options, with periodic settlement, resetting the strike value at the then current price level, at which time, the option locks in the difference between the old and new strike and pays that out as the profit. The profit can be accumulated until final maturity, or paid out at each reset date.
irSwaption
An interest rate swaption or interest rate European swaption is an OTC option that grants its owner the right but not the obligation to enter an underlying interest rate swap. There are two types of swaptions: a payer swaption and a receiver swaption.
irFutureOption
An interest rate future option gives the holder the right but not the obligation to buy or sell an interest rate future at a specified price on a specified date. It is usually traded in an exchange. The buyer normally can exercise the option on any business day (American style) prior to expiration by giving notice to the exchange. Option sellers (writer) receive a fixed premium upfront and in return are obligated to buy or sell the underlying asset at a specified price.
irFuture
An interest rate future is a futures contract between the buyer and seller to deliver an interest bearing asset, that allows the buyer and seller to lock in the price of the interest bearing asset for a future date. The most popular interest rate future is Eurodollar future.
irFra
A forward rate agreement, or FRA, is a forward contract between two parties in which one party will pay a fixed rate while the other party will pay a reference interest rate for a set future period. Similar to a swap, a FRA has two legs: a fixed leg and a floating leg. But each leg only has one cash flow. The party paying the fixed rate is usually referred to as the borrower, while the party receiving the floating rate is referred to as the lender.
irCompoundingSwap
A compounding swap is an interest rate swap in which interest, instead of being paid, compounds forward until the next payment date. Compounding swaps can be valued by assuming that the forward rates are realized. Normally the calculation period of a compounding swap is smaller than the payment period. For example, a swap has 6-month payment period and 1-month calculation period (or 1-month index tenor). An overnight index swap (OIS) is a typical compounding swap. This presentation gives an overview of compounding swap product and valuation model.
irCappedSwap
A capped swap is an interest rate swap with an interest rate cap option where the floating rate of the swap is capped at a certain level while a floored swap is an interest rate swap with a floor option where the floating rate of the swap is floored at a certain level. Capped swaps or floored swaps limit the risk of the floating rate payer or receiver to adverse movements in interest rates. A capped swap can be decomposed into a swap and a cap whereas a floored swap can be decomposed into a swap and a floor.
irCap
An interest rate cap is an OTC derivative where the buyer receives payments at the end of each period when the interest rate exceeds the strike, whereas an interest rate floor is a similar contract where the buyer receives payments at the end of each period when the interest rate is below the strike. Caps and floors are widely used to hedge against interest rate fluctuations.
irCancellableSwap
A cancelable swap provides the right but not the obligation to cancel the interest rate swap at predefined dates. Most commonly traded cancelable swaps have multiple exercise dates. Given its Bermudan style optionality, a cancelable swap can be represented as a vanilla swap embedded with a Bermudan swaption. Therefore, it can be decomposed into a swap and a Bermudan swaption. Most Bermudan swaptions in a bank book actually come from cancelable swaps. This presentation provides practical details for pricing cancelable swaps.
irBermudan
An interest rate Bermudan swaption gives the holder the right but not the obligation to enter an interest rate swap at predefined dates. It is one of the fundamental ways for an investor to enter a swap. Comparing to regular swaptions, Bermudan swaptions provide market participants more flexibility and control over the exercising of an option and less restriction.
irBasisSwap
A basis swaps is an interest rate swap that involves the exchange of two floating rates, where the floating rate payments are referenced to different bases. Both legs of a basis swap are floating but derived from different index rates (e.g. LIBOR 1 month vs 3 month). Basis swaps are settled in the form of periodic floating interest rate payments. They are quoted as a spread over the reference index. For example, 3-month LIBOR is frequently used as a reference. Spreads are quoted over it.
irAmortizingCap
An amortizing cap is an interest rate cap whose notional principal amount declines during the life of the contract whereas an accreting cap is an interest rate cap whose notional principal amount increases during the life of the contract. Similarly, an amortizing floor is an interest rate floor whose notional principal amount declines during the life of the contract whereas an accreting floor is an interest rate floor whose notional principal amount increases during the life of the contract.
fxTouch
A touch option is a transaction with one or two barriers. The buyer of the option will get a cash amount either if the barrier is touch or not touched. Touch options are becoming increasingly popular because they pay much higher yields compared to high/low options.
fxSwap
A foreign exchange swap or currency swap is a contract under which two parties agree to exchange two currencies at a set rate and then to re-exchange those currencies at an agreed upon rate at a fixed date in the future. Therefore, an FX swap consists of two transactions: a spot transaction and a forward transaction.
fxOption
A currency option or FX option is a contract that gives the buyer the right, but not the obligation, to buy or sell a certain currency at a specified exchange rate on or before a specified date. Currency options are one of the most common ways for corporations, individuals or financial institutions to hedge against adverse movements in exchange rates.
fxFuture
A currency future, also known as an FX future , is a future contract to exchange one currency for another at a specified date in the future at an exchange rate that is fixed on the purchase date. By using a currency future contract, the parties are able to effectively lock-in the exchange rate for a future transaction. Speculation and hedging in currencies can be achieved primarily through future contracts.
fxForward
A currency forward or FX forward contract is an agreement that allows the buyer to lock in an exchange rate the day on which the agreement is signed for a transaction that will be completed later. Forward contracts are one of the main methods used to hedge against exchange rate volatility, as they avoid the impact of currency fluctuation over the period covered by the contract.
fxAsian
An FX Asian option or Asian currency option is a special type of option contract where the payoff depends on the average of the underlying exchange rates over a certain period of time. The payoff is different from the case of a European option or American option, where the payoff of the option contract depends on the underlying FX rate at exercise date.
fiZeroBond
A zero coupon bond is a bond that doesn’t pay interest/coupon but instead pays one lump sum face value at maturity. Investors buy zero coupon bonds at a deep discount from their face value. A zero coupon bond generates gains from the difference between the purchase price and the face value while a coupon bond produces gains from the regular distribution of coupon/interest.
fiPuttable
A puttable bond is a bond in which the investor has the right to sell the bond back to the issuer at specified times for a specified price. At each puttable date prior to the bond maturity, the investor may get the investment money back by selling the bond back to the issuer. The underlying bonds can be fixed rate bonds or floating rate bonds. A puttable bond can therefore be considered a vanilla underlying bond with an embedded Bermudan style option. Puttable bonds protect investors. Therefore, a puttable bond normally pays investors a lower coupon than a non-callable bond.
fiInflation
Inflation indexed bonds, also called inflation linked bonds or real return bonds, are bonds where the principal is indexed to inflation or deflation on a daily basis in terms of a reference index, such as Consumer Price Index (CPI). The CPI is the proxy for inflation that measures price changes in a basket of goods and services.
fiCallable
A callable bond is a bond in which the issuer has the right to call the bond at specified times from the investor for a specified price. At each callable date prior to the bond maturity, the issuer may recall the bond from its investor by returning the investor’s money. The underlying bonds can be fixed rate bonds or floating rate bonds. A callable bond can therefore be considered a vanilla underlying bond with an embedded Bermudan style option. Callable bonds protect issuers. Therefore, a callable bond normally pays the investor a higher coupon than a non-callable bond.
fiBondFutureOption
A bond future option is an option contract that gives the holder the right but not the obligation to buy or sell a bond future at a predetermined price. The writer/seller receives a premium from the buyer for undertaking this obligation. Options are leveraged instruments that allow the owner to control a large amount of the underlying asset with a smaller amount of money. Bond future options offer significant advantages for reducing costs, enhancing returns and managing risk. They could be European style or American style.