Beruflich Dokumente
Kultur Dokumente
Financial Derivatives
Swaps
Hedge Contracts
Forward Rate Agreements
Futures
Options
Caps, Floors and Collars
Swaps
Agreement between two counterparties to exchange
the cash flows.
Cash flows determined on a specific notional principal
for a maturity period and a specified interest rate.
Swap Structures.
Fixed for Floating swaps:
Plain vanilla swaps are fixed for floating rate coupon
payments
Used by banks for managing interest rate gap
strategies
Swaps
Swap Structures
Basis swaps:
Exchange payments between two floating rate
obligations by banks.
Used by bank to hedge risky exposures
through different floating interest rates.
Cross-currency swaps:
Interest payments between two currencies are
exchanged between two counterparties.
Used by banks to hedge interest risk exposure
across currencies.
Swap Contracts
Swap Contracts
Swap Contracts
Deposits
Advances1,000,0003year
3monthDepositfor
at9%
1,000,000atMIBOR
Hedge Contracts
Hedge Position
Interest rate increases
Expected returns from pre committed loans /
investment falls
Negative gap position of the bank implies liability
sensitive bank would incur loss in income.
Desirable hedge position would be to sell futures
contract now and buy later resulting in derivative
profit.
Hedge Position
Hedge Positions
(D
W D L ) A
D F PF
NF =Numberoffuturecontracts
DA =DurationofAssets; W =WeightDL =DurationofLiabilities
A =TotalAssetValue
DF =DurationofFutures;PF =PriceofFuturescontract
First Deposit:
The 3-month deposit for 1000,000 at 2.00%
5,000
Next Deposit:
The 3-month deposit at 2.50%
6,250
1,250
11,250
11,250 1,250 12
12
x
1.00 % x
1,000,000
6
6
2.00 %
x 1,000,000 = 2,500
12
2,500 x
=2,452
1+0.08 3
12
3
x 1,000,000 = 2,500
12
2,500 x
=2,463
1+0.06 3
12
Futures
Futures
Commitment between two parties on the quantity and
price of a standardized financial or commodity
product.
Buyers of futures (long futures) contracts agree to pay
the futures price and take delivery of the product.
Sellers of futures (short futures) contracts agree to
receive the futures price and deliver the product.
Futures Profile
Options
Options
Options Profile
Caps
Variable rate borrowers are the users of interest rate caps.
Caps ensure that the banks can have a predetermined
interest rate beyond which the borrowing rates will not
increase.
Cost of the cap is termed as the premium payment to be
made on the instrument.
Premium for an interest rate cap depends on the cap rate
compared to current market interest rates.
Caps
Floors
Variable rate investors are the users of interest rate floors.
Floors set the minimum interest rate the investor will
receive on their investments.
Interest rate floor contracts ensure that the receipt is not
less than a pre-determined level of the floor contract on
investment.
Cost of the floor is the premium payment on the contract.
Premium for an interest rate floor depends on the floor rate
compared to current market interest rates.
Floors
Collars
Variable rate borrowers use interest rate collars.
Collars give holders the benefit of borrowing by
setting the minimum and maximum interest rate they
will pay on their borrowings.
An interest rate collar combines an interest rate cap
and an interest rate floor contract.
Interest rate collar ensures that payment is capped
and at the same time no reduction below the
minimum is set on the contract.
Collars
Collar