The absolute rate, also known as the absolute swap yield, is the sum of the fixed and variable components of an interest rate swap.

The absolute rate, also known as the absolute swap yield, is the total yield earned by both parties to an interest rate swap. At the time that the interest rate swap is initiated, the two series of cash flows—one which is based on a fixed interest rate, and the other which is based on a variable interest rate—will be structured so that the two series have the same net present value (NPV). The swap spread refers to the difference between the interest rate on the fixed portion of an interest rate swap, as compared to the interest rate given by a sovereign debt security that has a similar maturity period. In these contracts, one party agrees to exchange a series of cash flows based on a fixed interest rate, in exchange for a series of cash flows based on a variable interest rate, such as the Fed Funds rate. For example, if a 1-year sovereign bond is yielding 2.00% and the fixed portion of an interest rate swap is set at 3.00%, then the swap spread on that interest rate swap would be 1.00%.

Absolute Rate Defined

An accreting principal swap is an over-the-counter derivative contract that features an increasing notional principal amount over time.

An accreting principal swap is a derivative contract in which two counterparties agree to exchange cash flows—usually a fixed rate for a variable rate, as with most other types of interest rate or cross-currency swap contracts. An accreting principal swap is a derivative contract in which two counterparties agree to exchange cash flows—usually a fixed rate for a variable rate, as with most other types of interest rate or cross-currency swap contracts. The product may also be called an accreting swap, accumulation swap, construction loan swap, drawdown swap, and step-up swap. An accreting principal swap is the same as a vanilla swap, except that notional amount of the swap grows over time. Parties in a vanilla swap might exchange the payments of a fixed-rate investment, such as a Treasury bond, for the payments of variable rate investment, such as a mortgage, where the rate goes up and down.

Accreting Principal Swap

An accrual swap is an interest rate swap allowing banks, corporations, and investors to offset risk and profit from changes in future interest rates.

An accrual swap is a type of interest rate swap in which the interest on one side accrues only if certain conditions are met. Types of accrual swaps include callable range accrual swaps, floating rate accrual swaps, and binary accrual swaps. Private parties interested in using interest rate swaps will often use the plain vanilla swap, which is the most basic type of swap where an investor will exchange a fixed interest rate for a floating interest rate, or vice versa. An accrual swap is sometimes described as a combination of an interest rate swap and a pair of binary options that set a floor and a cap, as no interest accrues if the reference rate is above the cap or below the floor. Most accrual swaps use one-month, two-month, six-month, or 12-month LIBOR for the reference rate, although accrual swaps can be done using other rates, such as the 10-year treasury rate.

Accrual Swap

An airbag swap features an adjustable notional value, providing hedging opportunities as interest rates change. 

An airbag swap is a type of interest rate swap whose notional value adjusts in response to fluctuations in interest rates. An airbag swap is a type of interest rate swap whose notional value adjusts in response to fluctuations in interest rates. The increase in notional value would generate gains for the company since the swap's net payment at higher interest rates would be higher than its net amount at lower interest rates. A company with a high sensitivity to rising interest rates due to increased redemptions in the bond market might seek to recoup some of its losses via an airbag swap designed to raise the notional value of the swap as rates increase. In any case, a rise in the theoretical, or notional, value of the swap leads to higher interest payments, and a fall in the notional amount would reduce the number of interest payments.

Airbag Swap

An arrears swap is an interest rate swap where the floating payment is based on the rate at the end, rather than the beginning, of the reset period.

An arrears swap is an interest rate swap that is similar to a regular, or plain vanilla swap, but the floating payment is based on the interest rate at the end of the reset period, instead of the beginning, and is then applied retroactively. An arrears swap is an interest rate swap that is similar to a regular, or plain vanilla swap, but the floating payment is based on the interest rate at the end of the reset period, instead of the beginning, and is then applied retroactively. A quick way to differentiate between a vanilla swap and an arrears swap is that the former sets the interest rate in advance and pays later (in arrears) while the latter both sets the interest rate and pays later (in arrears). An arrears swap is an interest rate swap where the floating payment is based on the rate at the end, rather than the beginning, of the reset period. If the three-month LIBOR is the base rate, the floating rate payment under the swap occurs in three months, and then the then-current three-month LIBOR will determine the rate for the next period, three months in this example.

Arrears Swap

An asset-backed credit default swap (ABCDS) protects a buyer's investment in an asset-backed security rather than a corporate credit instrument.

An asset-backed credit default swap (ABCDS) is a credit default swap (CDS) wherein the reference asset is the asset-backed security rather than a corporate credit instrument. An asset-backed credit default swap (ABCDS) is a credit default swap (CDS) wherein the reference asset is the asset-backed security rather than a corporate credit instrument. For instance, if the value of one of the underlying loans in the asset-backed security declines by $10,000, the asset-backed credit default swap (ABCDS) seller will compensate the buyer by $10,000. Asset-backed credit default swap (ABCDS) agreements are similar to traditional credit default swap agreements. Asset-backed securities are securities backed by a pool of loans or receivables, such as auto loans, home equity loans or credit cards loans.

Asset-Backed Credit Default Swap (ABCDS)

A balloon option is a contract where the strike price increases after the underlying asset price reaches a predetermined threshold. 

A balloon option is a contract where the strike price increases significantly after the underlying asset's price reaches a predetermined threshold. A balloon option has a strike reset, of sorts, but unlike a European option with a strike reset feature, the balloon option strike price will continue to move along with the underlying asset price movements. Meanwhile, a balloon option is still active regardless of the asset price, but when it hits the threshold price, the strike price moves per a predetermined ratio relative to the asset price. A balloon option is an option contract in which the strike price increases after the price of the underlying asset reaches a predetermined threshold. After the underlying asset price exceeds $100, the strike price would balloon $2 for every $1 change in the asset price.

Balloon Option

The Bank Bill Swap Rate (BBSW) is a short-term interest rate used as a benchmark for the pricing of Australian dollar derivatives and securities.

The Bank Bill Swap Rate (BBSW), or Bank Bill Swap Reference Rate, is a short-term interest rate used as a benchmark for the pricing of Australian dollar derivatives and securities—most notably, floating rate bonds. The Bank Bill Swap Rate (BBSW), or Bank Bill Swap Reference Rate, is a short-term interest rate used as a benchmark for the pricing of Australian dollar derivatives and securities—most notably, floating rate bonds. The Bank Bill Swap Rate (BBSW) is a short-term interest rate used as a benchmark for the pricing of Australian dollar derivatives and securities, most notably floating rate bonds. There is a risk premium added to the BBSW to compensate for the risk of the securities, as compared with the risk-free rate, which is typically based on government bonds. There is a risk premium added to the BBSW to compensate for the risk of the securities as compared to the risk-free rate, which is typically based on government bonds.

Bank Bill Swap Rate (BBSW)

Bilateral netting is the process of consolidating all swap agreements between two parties into a single agreement with one net payment instead of multiple transactions.

Bilateral netting is the process of consolidating all swap agreements between two parties into one single, or master, agreement. Assume that Company A has agreed to enter into two swaps with Company B.
For the first swap, Company A agreed to pay a 3% fixed rate on $1 million, while Company B pays a floating rate of LIBOR plus 2%. For example, if there was no bilateral netting, the company going into bankruptcy could collect on all in-the-money swaps while saying they can't make payments on the out-of-the-money swaps due to the bankruptcy. As a result, instead of each swap agreement leading to a stream of individual payments by either party, all of the swaps are netted together so that only one net payment stream is made to one party based on the flows of the combined swaps. For the second swap, Company A agreed to pay a 4% fixed rate on $3 million, while Company B pays a floating rate of LIBOR plus 2.5%.

Bilateral Netting

A binomial tree is a graphical representation of possible intrinsic values that an option may take at different nodes or time periods.

A binomial tree is a graphical representation of possible intrinsic values that an option may take at different nodes or time periods. The value of the option depends on the underlying stock or bond, and the value of the option at any node depends on the probability that the price of the underlying asset will either decrease or increase at any given node. In a binomial tree model, the underlying asset can only be worth exactly one of two possible values, which is not realistic, as assets can be worth any number of values within any given range. The value of the option at any node depends on the probability that the price of the underlying asset will either decrease or increase at any given node. If the stock rises to $125 the value of the option will be $25 ($125 stock price minus $100 strike price) and if it drops to $90 the option will be worthless.

Binomial Tree

A Bond Market Association (BMA) Swap is a type of swap arrangement in which two parties agree to exchange interest rates on debt obligations, where the floating rate is based on the SIFMA swap index.

A Bond Market Association (BMA) swap is a type of swap arrangement in which two parties agree to exchange interest rates on debt obligations, where the floating rate is based on the U.S. SIFMA Municipal Swap Index. One of the parties involved will swap a fixed interest rate for a floating rate, while the other party will swap a floating rate for a fixed rate. In a municipal interest rate swap, the issuer enters into a swap agreement to convert existing fixed-rate debt synthetically into floating-rate debt, or vice versa. In an interest rate swap, two counterparties “swap” fixed interest rate payments for floating-rate payments. A Bond Market Association (BMA) swap is a municipal interest rate swap that has its floating rate payments based on the SIFMA Index.

Bond Market Association (BMA) Swap

Broken date is a term used to describe a nonstandard maturity date for any type of financial deliverable. 

Broken date is a term used to describe a nonstandard maturity date for any type of financial deliverable. Just because a period is quoted for a financial instrument does not mean it will mature on that exact time schedule due to business day and other administrative factors.
An investor who buys a Bitcoin futures contract expects it to terminate trading on the last Friday of the contract month.﻿﻿ Maturity at any other date would be considered a broken date or odd date. An entity owning a financial instrument should pay close attention to its actual maturity date, as broken dates may occur and the instrument may not always be delivered on the exact maturity date expected. If for any reason the contract expires on an alternate date then it would be considered a broken date or odd date. A broken date refers to any nonstandard maturity date assigned to a financial instrument.

Broken Date

A buying hedge is a transaction used by companies and investors to hedge against increases in the price of assets underlying a futures contract.

A buying hedge is a transaction a company engaged in manufacturing or production will undertake to hedge against possible increases in the price of the actual materials underlying a futures contract. Investors might use a buying hedge if they expect to buy a certain amount of the commodity in the future, but are worried about price fluctuations. They will buy a futures contract to be able to buy the commodity at a fixed price later. The buying hedge allows the managers to protect the company against the price volatility that could occur in the underlying asset from the time they initiate the buying hedge to the time they actually need the commodity for production. A buying hedge is a transaction a company engaged in manufacturing or production will undertake to hedge against possible increases in the price of the actual materials underlying a futures contract. The risk of using the buying hedge strategy is that if the price of the commodity drops, the investor may have been better off without buying the hedge.

Buying Hedge

A calculation agent determines the value of a derivative, like a swap, or a structured product and may act as its guarantor and issuer.

2011 ISDA Equity Derivatives Definitions and Appendix

A calculation agent is an individual or entity that is responsible for determining the value of a derivative. However, there are other important responsibilities that a calculation agent is charged with, including:
Determining the final price according to the agreed valuation method
Determining the currency rate if two different currencies are exchanged as a result of the cash flow payments between the two parties
Calculating the earned or accreted amounts as well as accrued interest
Setting the current market value
Establishing the number of business days for the settlement of the cash flows, such as two business days from the transaction trade date Any disagreement over the calculation agent's decisions must be resolved by a disinterested third-party dealer, usually suggested by the calculation agent following consultation over the dispute. However, the increased importance given to the determination of the calculation agent can result in a conflict of interest when the calculation agent is also the seller. In other words, instead of both counterparties transferring payments to each other, the counterparty that owed more would pay the net difference with the calculation agent facilitating the calculation, payment, and settlement date.

Calculation Agent

A calendar spread is a low-risk, directionally neutral options strategy that profits from the passage of time and/or an increase in implied volatility. 

A calendar spread is an options or futures strategy established by simultaneously entering a long and short position on the same underlying asset but with different delivery dates. The typical calendar spread trade involves the sale of an option (either a call or put) with a near-term expiration date and the simultaneous purchase of an option (call or put) with a longer-term expiration. The ideal market move for profit would be a steady to slightly declining underlying asset price during the life of the near-term option followed by a strong move higher during the life of the far-term option, or a sharp move upward in implied volatility. A reverse calendar spread takes the opposite position and involves buying a short-term option and selling a longer-term option on the same underlying security. In a typical calendar spread, one would buy a longer-term contract and go short a nearer-term option with the same strike price.

Calendar Spread

A callable swap is a contract to exchange fixed for variable rate cash flows, but the fixed rate payer has the right to terminate before expiration.

A callable swap is a contract between two counterparties in which the exchange of one stream of future interest payments is exchanged for another based on a specified principal amount. For example, if the fixed rate is 4.5% and interest rates on similar derivatives with similar maturities fall to perhaps 3.5%, the fixed rate payer might call the swap to refinance at that lower rate. The difference between this swap and a regular interest rate swap is that the payer of the fixed rate has the right, but not the obligation, to end the contract before its expiration date. This cost means the fixed rate payer will pay a higher interest rate and possibly need to pay additional funds to purchase the call feature. These swaps usually involve the transfer of the cash flows from a fixed interest rate for the cash flows of a floating interest rate.

Callable Swap

A cash-and-carry trade is an arbitrage strategy that exploits the mispricing between the underlying asset and its corresponding derivative.

A cash-and-carry trade is an arbitrage strategy that exploits the mispricing between the underlying asset and its corresponding derivative. This strategy also has an application in the credit derivatives market, where basis (the difference between a commodity's immediate cash price and its futures price) represents the difference in spread between credit default swaps (CDS) and bonds for the same debt issuer (and with similar—if not exactly equal—maturities).
Here, the strategy is called a negative basis trade. The concept behind a cash-and-carry trade is rather simple:
An investor identifies two securities that are mispriced with respect to each other; for instance, the spot crude price and crude futures price, which presents an arbitrage opportunity. A cash-and-carry trade should not be confused with a carry trade in the context of forex trading; such a carry trade looks for interest rate differentials between countries. Regardless of what the delivery price is, a profit is only assured if the purchase price of spot crude _plus_ the cost of carry is less than the price at which the crude futures contract was initially sold.

Cash-and-Carry Trade

A cash commodity is a physical good which is delivered in exchange for payments, particularly in futures trading. 

A cash commodity is a tangible product to be delivered in exchange for payment and is seen most frequently with futures options. A contract would be cash-settled if the purchaser of the commodities was a speculator who was not actually interested in having the physical commodity but has an interest in the price fluctuations. A contract for a cash commodity will specify the exact amount of the commodity which is expected to be delivered, along with the delivery date, and the price. Companies enter into contracts for cash commodities because they are betting on a specific price for a commodity they plan to use. Thus, this futures contract would be cash-settled, as opposed to settled through the cash commodity.

Cash Commodity

Cashless conversion is the direct conversion of ownership (from one ownership type to another) of an underlying asset without any initial cash outlay.

A cashless conversion is the direct conversion of ownership, from one type of security to another, without any initial cash outlay by the holder. For example, if the warrant is for the purchase of 10,000 shares at $1.00 per share, and the market price of the stock at exercise is $10.00 per share, the holder would, upon exercise, receive the market value of the shares ($100,000) minus $10,000 (shares multiplied by warrant strike) for a total value of $90,000 or 9,000 shares. If they decide to convert the preferred shares, each preferred share will disappear from the account and be replaced by four shares of common stock. Convertible preferred shares have a conversion ratio, which describes how many common shares each preferred share can be converted to. Convertible bonds and convertible preferred shares could result, if triggered, in a cashless conversion to common stock.

Cashless Conversion

A catastrophe swap allows insurers to guard against massive potential losses in the event of a major natural disaster. 

World Bank Issues its First Ever Catastrophe Bond Linked to Natural Hazard Risks in Sixteen Caribbean Countries

A catastrophe swap is a customizable financial instrument traded in the over-the-counter (OTC) derivatives market that enables insurers to guard against massive potential losses resulting from a major natural disaster, such as a hurricane or earthquake. A catastrophe swap is a way for insurance companies to transfer some of the risks they've assumed, rather than purchasing reinsurance or issuing a CAT—a high-yield debt instrument, usually insurance-linked, designed to raise funds in case of a catastrophe, such as a hurricane or an earthquake. A catastrophe swap is a way for insurance companies to transfer some of the risks they've assumed, rather than purchasing reinsurance or issuing a catastrophe bond (CAT). The catastrophe bond, linked to the risk of damage by earthquakes and tropical cyclones in 16 countries within the Caribbean, was part of a catastrophe swap with the Caribbean Catastrophic Risk Insurance Facility (CCRIF). A catastrophe swap is a customizable financial instrument traded in the over-the-counter (OTC) derivatives market that enables insurers to guard against massive potential losses resulting from a major natural disaster, such as a hurricane or earthquake.

Catastrophe Swap

The Cboe Options Exchange, formerly known as the Chicago Board Options Exchange (CBOE), is the world's largest options exchange

Cboe Options Regulatory Circular RG17-144.

Founded in 1973, the Cboe Options Exchange is the world's largest options exchange with contracts focusing on individual equities, indexes, and interest rates. Cboe offers trading across multiple asset classes and geographies, including options, futures, U.S. and European equities, exchange-traded products (ETPs), global foreign exchange (FX), and multi-asset volatility products. There are options available on stock and sector indexes, including the Standard & Poor's 500, S&P 100, Dow Jones Industrial Average, Russell indexes, selected FTSE indexes, Nasdaq Indexes, MSCI indexes, and sector indexes including the 10 sectors contained within the S&P 500. The exchange offers access to many diverse products, starting with, of course, put and call options on thousands of publicly traded stocks, as well as on exchange-traded funds (ETFs) and exchange-traded notes (ETNs). Founded in 1973, the Cboe Options Exchange is the world's largest options exchange with contracts focusing on individual equities, indexes, and interest rates.

Cboe Options Exchange

A clearing member trade agreement (CMTA) allows investors to enter derivative trades with multiple brokers and later clear all trades with one broker.

A clearing member trade agreement (CMTA) is an arrangement by which an investor may enter derivatives trades with a limited number of different brokers but later consolidate these trades at the end of the trading day with only one broker for clearing. A clearing member trade agreement (CMTA) is an arrangement by which an investor may enter derivatives trades with a limited number of different brokers but later consolidate these trades at the end of the trading day with only one broker for clearing. A clearing member trade agreement (CMTA) allows investors to enter derivative trades with multiple brokers and later clear all trades with one broker. Without the clearing member trade agreement, the investor would make trades with different brokers and the trades would clear at multiple brokers. CMTA allows all trades, especially smaller and odd-lot trades, to clear through one source which streamlines the process for brokers and investors alike.

Clearing Member Trade Agreement (CMTA)

A conversion is the exchange of a convertible type of asset into another type of asset, usually at a predetermined price, before a predetermined date.

A conversion is the exchange of a convertible type of asset into another type of asset—usually at a predetermined price—on or before a predetermined date. The share prospectus given to shareholders at the time of issue includes the conversion ratio—the number of common shares into which the preferred shares can be converted. The conversion price is $25 ($100/4 = $25), which is the price that would make it worth converting the preferred shares into common shares. The conversion ratio or conversion price of a convertible bond is usually outlined in the trust indenture at the time the bond is issued. If the bond can be converted into 100 shares of XYZ, Jill will most likely exercise the conversion option only when XYZ's share price exceeds $10.

Conversion in Finance

A cross-currency swap is an agreement between two parties to exchange interest payments and principal denominated in two different currencies. These types of swaps are often utilized by large companies with international operations.

Cross-currency swaps are an over-the-counter (OTC) derivative in a form of an agreement between two parties to exchange interest payments and principal denominated in two different currencies. A cross-currency swap can involve both parties paying a fixed rate, both parties paying a floating rate, one party paying a floating rate while the other pays a fixed rate. Cross-currency swaps are not typically used to speculate, but rather to lock in an exchange rate on a set amount of currency with a benchmarked (or fixed) interest rate. In a cross-currency swap, interest payments and principal in one currency are exchanged for principal and interest payments in a different currency. Cross-currency swaps are an over-the-counter (OTC) derivative in a form of an agreement between two parties to exchange interest payments and principal denominated in two different currencies.

Cross-Currency Swap  and Example

A currency certificate grants its owner the right to change a sum of one currency into another at a specified rate.

A currency certificate, like a futures contract, grants the holder the right to convert a specific amount of one currency to another at a pre-determined exchange rate until a specific expiration date. If the U.S. dollar strengthens against the Canadian dollar, perhaps moving to an exchange rate of 1.35, then it would require 135 Canadian dollars to be converted into $100, and that 100 Canadian dollars would only be worth $74. If in any given month that the U.S. dollar weakens against the Canadian dollar, the certificate would be redeemed at the note's specified exchange rate to protect the company’s revenue for that month. Assume the U.S. dollar/Canadian dollar exchange rate is 1.25, meaning that 125 Canadian dollars can be converted into $100 U.S dollars. With a currency certificate guaranteeing an exchange rate of 1.25, there would be no risk of losing money if the exchange rate moves in an unfavorable direction.

Currency Certificate

The current exposure method (CEM) is a measure of replacement cost within a derivatives contract should the counterparty default.

The current exposure method (CEM) is a system used by financial institutions to measure the risks around losing anticipated cash flows from their derivatives portfolios due to counterparty default. Under the current exposure method, a financial institution's total exposure is equal to the replacement cost of all marked-to-market contracts plus an add-on that is meant to reflect the potential future exposure (PFE). Despite the current exposure method being in practice, its limitations were exposed through the financial crisis that began, in part, due to insufficient capital to cover derivatives exposure at financial institutions. The current exposure method (CEM) is a system used by financial institutions to measure the risks around losing anticipated cash flows from their derivatives portfolios due to counterparty default. Banks and other financial institutions have typically used CEM to model their exposure on particular derivatives in order to allocate sufficient capital to cover potential counterparty risks.

Current Exposure Method (CEM)

The term cylinder refers to transactions that do not require an initial or ongoing cash outlay, typically in the context of derivative transactions.

In finance, "cylinder" is a term used to describe a transaction, or series of transactions, that don't require an initial or ongoing cash investment. If the price of XYZ shares rises above $30 plus the premium they paid, they can exercise this option, buying shares at the $30 strike price and selling them at the higher market price, thereby obtaining a profit. Since they had already received $5 from selling the put option beforehand, their net cash investment is $0.
Essentially, the option trader has structured a cylinder transaction with no upfront cost to themselves and now has a derivative position in XYZ stock without expending any cash. This means that for the next year, the holder of the option has the right to sell 100 shares of XYZ to the option seller for $10 a share. Instead, the value of the contract will fluctuate based on the shifting value of the underlying assets, and the parties will exchange cash at the end of the contract based on the change in value of those assets.

Cylinder

A date certain is the legally binding date by which a specified action must occur, according to a particular contract.

A date certain is the exact date by which a specified action must occur, according to a particular contract. Lease agreements will have a starting date and a termination date, usually encompassing a 12-month term, sometimes with an option to extend or renew the lease for an additional date certain term. Date certain clauses are common contractual features in financial products or economic transactions, such as the expiration date of an options contract or starting date of a lease. Nevertheless, the expiration date is a date certain that establishes the last possible opportunity for the option holder to exercise the option. This date, known as the date certain, is an important part of any contract because it permits the parties to objectively verify whether the terms of the contract have been upheld.

Date Certain Defined

A delayed rate setting swap is a type of derivative where two parties agree to exchange cash flows, but the coupon rate is set at a future date. 

But the one difference from a regular interest rate swap is that a delayed rate setting swap adds an additional element of risk since both parties have contracted for a rate that will be set at a time in the future. Once the actual swap interest rates are set, a delayed rate setting swap acts like a regular interest rate swap. The fixed-rate counterpart generally believes that the outlook for rates is increasing and seeks to lock in a fixed-rate payout in receipt for a potentially rising floating rate that will create profit from the cash flow differential. In a standard interest rate swap, the two sides of the transaction will typically involve a floating rate and a fixed rate.

Delayed Rate Setting Swap

A derivatives product company is a ratings-oriented subsidiary created to handle the derivatives book of a financial institution.

A derivative product company is a special-purpose entity created to be a counterparty to financial derivative transactions. A derivative product company will often originate the derivative product to be sold or they may guarantee an existing derivative product or be an intermediary between two other parties in a derivatives transaction. Broader market risks are usually hedged by entering mirror transactions with the parent company, leaving the derivative product company with the credit risk. Derivative product companies generally use quantitative models to manage the credit risk they are taking on, allocating the necessary capital on a day-by-day basis. A derivative product company is a special-purpose entity created to be a counterparty to financial derivative transactions.

Derivative Product Company (DPC)

A derivative is a securitized contract whose value is dependent upon one or more underlying assets. Its price is determined by fluctuations in that asset.

OTC Derivatives Statistics at End-June 2020

Table of Contents
What Is a Derivative?
Understanding Derivatives
Special Considerations
Types of Derivatives
Advantages and Disadvantages Futures contracts that are cash-settled include many interest rate futures, stock index futures, and more unusual instruments like volatility futures or weather futures. Buying an oil futures contract hedges the company's risk because the seller is obligated to deliver oil to Company A for $62.22 per barrel once the contract expires. Company A needed oil in the future and wanted to offset the risk that the price may rise in December with a long position in an oil futures contract. The seller could be an oil company concerned about falling oil prices and wanted to eliminate that risk by selling or shorting a futures contract that fixed the price it would get in December.

Derivative

A discount spread is the currency forward points that are subtracted from the spot rate, to obtain a forward rate for a currency.

A discount spread occurs when the forward points that are subtracted from the spot rate result in a negative forward spread. As another example, taking the Swiss Franc and U.S Dollar (USD/CHF), if the spot rate is 1.2550 and the forward points are minus -32.68, the forward rate will be quoted at a discount: 1.2550 - 0.003268 = 1.251732.
Finally, as an example of a discount spread where the bid is higher than the offer, a forward currency trade may be quoted as USD/CAD 1.30/1.29. The forward spread is the forward rate less the spot rate, or in the event of a discount rate, the spot rate minus the forward rate. In a discount spread, the bid price will be higher than the offer price, indicating that there expected price in the future will be lower than it is at present; while in a premium spread, the bid price will be lower than the offer price, indicating the opposite. A discount spread occurs when the forward points that are subtracted from the spot rate result in a negative forward spread.

Discount Spread

A dollar roll is essentially a short sale of mortgage-backed securities (MBS).

A dollar roll is a bearish trade employed in the mortgage-backed securities (MBS) market that benefits a trader when those MBS securities decline in value. A dollar roll involves a repo: an initial short sale, to be repurchased at a later date.
Most dollar roll trades are short-term in nature, lasting only several weeks or less.
In the world of MBS, a dollar roll is somewhat similar to selling stocks short. The initiator of the dollar roll is hoping that they can either buy back the securities at a lower price, or make a short-term profit from the money gained from the dollar roll, or preferably both. A dollar roll is a bearish trade employed in the mortgage-backed securities (MBS) market that benefits a trader when those MBS securities decline in value. A dollar roll is a trade that shorts mortgage-backed securities, profiting when the value of MBS securities falls.

Dollar Roll

A derivatives transaction execution facility (DTEF) focuses on derivative transactions with underlying assets of excluded commodities or assets.

CFTC Glossary: A Guide to the Language of the Futures Industry

Commitments of Traders (COT) Reports Descriptions

A derivatives transaction execution facility (DTEF) is a market that focuses on supporting the transaction of derivatives limited to underlying assets of excluded commodities or assets with an inexhaustible and deliverable supply. Because DTEFs are not open to retail investors, investors must belong to an eligible commercial entity, be an eligible contract participant, or transact through a futures commission merchant.
Retail participants may trade on DTEFs through high net worth futures commission merchants with at least $20 million of adjusted net capital in their accounts.
Derivative transaction execution facilities are not open to retail investors. A derivatives transaction execution facility (DTEF) is a market that focuses on supporting the transaction of derivatives limited to underlying assets of excluded commodities or assets with an inexhaustible and deliverable supply. A derivatives transaction execution facility (DTEF) focuses on supporting the transaction of derivatives limited to underlying assets of excluded commodities or assets with an inexhaustible and deliverable supply. The two main types of underlying assets in the U.S. options market are securities options, including stock options and futures options.

Derivatives Transaction Execution Facility (DTEF)

A dual currency swap is a type of derivative that allows investors to hedge the currency risks associated with dual currency bonds.

A dual currency swap is a type of derivative transaction that allows investors to hedge the currency risks associated with dual currency bonds. A dual currency swap involves agreeing ahead of time to exchange either the principal or the interest payments from the dual currency bonds in a particular currency at predetermined exchange rates. Dual currency swaps are a type of derivative product in which the buyer and seller of a dual currency bond agree ahead of time to pay the principal and interest components of the bond in a particular currency at predetermined exchange rates. A dual currency swap is a type of derivative transaction that allows investors to hedge the currency risks associated with dual currency bonds. Dual currency swaps can help companies issue dual currency bonds by making them less exposed to the risks associated with being paid in foreign currencies.

Dual Currency Swap

A dual currency deposit is a fixed deposit made in one currency with an option to withdraw the principal at maturity in a different currency.

A dual currency deposit (or DCD) is a financial instrument structured to help a depositor take advantage of relative differences in two currencies. However, if the investor feels the exchange rate for country A's currency will move against them over the life of the deposit, the investor may hedge against that risk with a dual currency deposit option. They combine a deposit and a currency option, allowing a customer to deposit funds in one currency and withdraw them in a different one. So the dual currency deposit is a derivative with a combination of a money deposit and a currency option. The investor will use this product in hopes of capturing higher yields from better interest paid by one currency compared to the other, and by relative changes in currency.

Dual Currency Deposit

Esoteric debt refers to complex debt instruments with structures and pricing that are known to relatively few participants. 

Esoteric debt refers to debt instruments as well as other investments (called esoteric assets) that are structured in a way that few people fully understand. When the credit market seized up as companies struggled to accurately value their holdings of mortgage-backed securities and credit default swaps, the oddball esoteric debt was considered too complex to even bother with. Esoteric debt refers to debt instruments as well as other investments (called esoteric assets) that are structured in a way that few people fully understand. Pay-in-kind toggle notes, for example, are debt securities that allow a company to toggle between two options—one is to make the interest payment, the other is to take on extra debt owing to the security holder. A common type of esoteric debt are pass-through securities: pools of individual fixed-income securities that are in turn backed by a package of assets.

Esoteric Debt

ETF Futures and Options are derivative products built on existing exchange-traded funds across various asset classes. 

ETF futures and options are derivative products built on existing exchange traded funds. As with traditional futures and options trading, ETF futures and options are risky for inexperienced investors. Most ETF futures track the commodity and currency markets, as is the case for normal futures contracts. ETF futures and options are derivative products built on existing exchange traded funds. ETF futures and options have grown in popularity with the increased adoption of standard exchange-traded funds.

ETF Futures and Options

A European option can only be exercised on its maturity date, unlike an American option, resulting in lower premiums.

A European option is a version of an options contract that limits execution to its expiration date. Closing the European option early depends on the prevailing market conditions, the value of the premium—its intrinsic value—and the option's time value—the amount of time remaining before a contract's expiration. The Black-Scholes option model is often used to value European options.
European options define the timeframe when holders of an options contract may exercise their contract rights. For an investor to profit from a call option, the stock's price, at expiry, has to be trading high enough above the strike price to cover the cost of the option premium. For an investor to profit from a put option, the stock's price, at expiry, has to be trading far enough below the strike price to cover the cost of the option premium.

European Option

A eurostrip, short for "eurodollar futures strip," is a derivative transaction comprised of a series of consecutive eurodollar futures contracts.

A eurostrip, short for "eurodollar futures strip," is a type of interest rate derivative that allows the holder to hedge against changes in interest rates. For instance, a trader wishing to hedge or speculate one year into the future would construct a eurostrip based on four eurodollar futures (three months each, 12 months in total), a trader looking six months ahead would buy two futures contracts, and so on. To hedge against this risk, you create a eurostrip position by taking a long position in four consecutive eurodollar futures contracts. Specifically, ever since 1981, the Chicago Mercantile Exchange (CME) has facilitated trading in eurodollar deposits using cash-settled eurodollar futures contracts. Therefore, if a trader wishes to hedge their risk for one year, they would buy four consecutive eurodollar contracts, each lasting for three months.

Eurostrip Defined

An extendable swap has an embedded option that allows either party to extend that swap, on specified dates, past the original expiration date.

An extendable swap has an embedded option that allows either party to extend the tenor (maturity) of that swap, on specified dates, past its original expiration date. If a trader sells an extendable swap and the fixed price payer decides to exercise their option to extend the swap, the swap seller must continue to pay the floating price already agreed upon, which will likely result in a swap with less favorable terms than with a plain vanilla fixed-for-floating swap at the time of the extension. The fixed price payer might wish to exercise their right to extend the swap if the underlying security's price is rising, since the fixed price payer will benefit from continuing to pay a fixed price below market levels, while at the same time receiving a floating price corresponding to the higher market price. Fixed price payers, because they can benefit from this feature, are likely to pay a premium for an extension option, usually by paying a higher initial fixed price than they otherwise would pay for a plain vanilla swap. The embedded option in an extendable swap can be tailored to either the fixed or floating party, but is, usually, utilized by the fixed price payer.

Extendable Swap

Federal Agricultural Mortgage Corporation (FAMC), or Farmer Mac, was founded by an act of Congress in response to the U.S. farm crisis of the 1980s.

Federal Agricultural Mortgage Corporation Common Stock

The Federal Agricultural Mortgage Corporation (FAMC)—also known as Farmer Mac—was founded by an act of Congress in 1987 in response to the farm crisis in the United States. These securities are not guaranteed by the federal government and are not associated with the Farm Credit System (FCS).
The percentage of Farmer Mac's Farm & Ranch and USDA guaranteed loans that are made to small or family-owned farms.
Farmer Mac operates its secondary market activities through four lines of business: Farm & Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit. Farmer Mac's mission is to create a secondary market for agricultural mortgage-backed securities and to provide agricultural lenders with a source of low-cost financing that includes flexible terms and competitive interest rates. Congress established the Federal Agricultural Mortgage Corporation (FAMC) to create a secondary market for agricultural mortgage-backed securities (AMBS) and to ease conditions for agricultural and rural borrowing. In the years that followed, Congress expanded Farmer Mac's authority to include US Department of Agriculture (USDA) guaranteed securities, whole loans, and rural utility loans.

Federal Agricultural Mortgage Corporation (FAMC)

Fixed price can refer to a leg of a swap where the payments are based on a constant interest rate, or it can refer to a price that does not change.

Fixed price can refer to a leg of a swap where the payments are based on a constant interest rate, or it can refer to a negotiated price point that is not subject to change under normal circumstances. The fixed price leg carries a fixed-rate stream of cash flows that does not change for the duration of the swap, while the floating (variable) rate stream changes periodically over the duration of the swap as its benchmark interest rate changes in accordance with market conditions. An interest rate swap is a type of financial contract that allows one party to pay (or receive) a fixed interest payment on some underlying notional amount, while the other receives (or pays) a variable interest rate on the same underlying amount. The fixed price leg of a swap is one that is based on an unchanging interest rate, whereas the floating price leg is calculated using variable interest rates. The fixed price leg of a swap is one that is based on an unchanging interest rate, whereas the floating price leg is calculated using variable interest rates.

Fixed Price

The floating price is a leg of a swap contract that depends on a variable, including an interest rate, currency exchange rate or price of an asset.

In a swap contract, the floating price is the leg that depends on the level of a variable, such as an interest rate, currency exchange rate, or price of an asset. In a plain vanilla interest rate swap, Party A agrees to pay Party B a predetermined, fixed rate of interest on a notional principal on specific dates for a specified period of time. In a currency swap, the two counterparties exchange principal and fixed interest payments on a loan in one currency for principal and fixed interest payments on a similar loan in another currency. In a swap contract, the floating price is the leg that depends on the level of a variable, such as an interest rate, currency exchange rate, or price of an asset. Unlike an interest rate swap, the parties to a currency swap will exchange principal amounts at the beginning and end of the swap.

Floating Price

FMAN refers to the option expiry cycle of February, May, August, and November. 

FMAN refers to one of three regular options contract expiration cycles, representing February, May, August, and November. Before expiration, they can sell the option for any intrinsic value and time value it may have.
Out-of-the-money (OTM) options are not automatically exercised and are allowed to expire worthless.
An option writer, or the seller of the option, receives the premium when the buyer buys the option. For example, when a call option expires, the call buyer has the choice of letting the option expire worthless and forfeiting the premium paid or exercising the option and thus buying Even though the out-of-money option is technically worthless, the option holder may contact the broker requesting the option be exercised (if desired). Traders holding the option have until expiry to either exercise the option or close the trade by taking an offsetting position to realize any profit or loss.

FMAN

The formula method is used to calculate termination payments on a prematurely ended swap to compensate the losses borne by the non-terminating party.

1986 Code of Standard Wording, Assumptions, and Provisions for Swaps

The formula method is used to calculate termination payments on a prematurely-ended swap agreement, whereby the terminating party compensates the losses borne by the non-terminating party due to the early termination (i.e., before it matures). If such an event is suspected to have occurred, the early termination must be evaluated and the obligations of one party of the swap to the other must be determined (considering the three ISDA-sanctioned methods).
The formula method calculates damages owed to the not-at-fault party by the at-fault party in the early termination of a swap by following a straightforward calculation, or formula, which must be agreed upon by the two counterparties at the initiation of the swap agreement via the termination clause. The formula method is used to calculate termination payments on a prematurely-ended swap agreement, whereby the terminating party compensates the losses borne by the non-terminating party due to the early termination (i.e., before it matures). The formula method calculated damages owed to the not-at-fault party by the at-fault party in the early termination of s swap by following a straightforward calculation, or formula. However, the formula method was never standardized; this led to the development of other, better accounting methods, thus limiting the usage of this method to calculate early swap termination payments.

Formula Method

The forward margin reflects the difference between the spot rate and the forward rate for a certain commodity or currency.

The forward margin, or forward spread, reflects the difference between the spot rate and the forward rate for a certain commodity or currency. The forward margin is the difference between the forward rate less the spot rate, or, in the event of a discount rate, the spot rate minus the forward rate. The forward margin is often measured in basis points, known as forward points, and if you add or subtract the forward margin to the spot rate, you would get the forward rate. The forward margin is often measured in basis points, known as forward points, and if you add or subtract the forward margin to the spot rate, you would get the forward rate. The forward margin, or forward spread, reflects the difference between the spot rate and the forward rate for a certain commodity or currency.

Forward Margin

A forward rate is an interest rate applicable to a financial transaction that will take place in the future. Forward rates are calculated from the spot rate and are adjusted for the cost of carry.

A forward rate is an interest rate applicable to a financial transaction that will take place in the future. Forward rates are calculated from the spot rate and are adjusted for the cost of carry to determine the future interest rate that equates the total return of a longer-term investment with a strategy of rolling over a shorter-term investment.
The term may also refer to the rate fixed for a future financial obligation, such as the interest rate on a loan payment. If the market spot rate for a new six-month investment is lower, the investor could use the forward rate agreement to invest the funds from the matured t-bill at the more favorable forward rate. If the spot rate is high enough, the investor could cancel the forward rate agreement and invest the funds at the prevailing market rate of interest on a new six-month investment. For example, the investor will know the spot rate for the six-month bill and will also know the rate of a one-year bond at the initiation of the investment, but they will not know the value of a six-month bill that is to be purchased six months from now.

Forward Rate

Freight derivatives are financial instruments whose value is derived from the future levels of freight rates.

Freight derivatives are financial instruments whose value is derived from the future levels of freight rates, like dry bulk carrying rates and oil tanker rates. Freight derivatives include exchange-traded futures, swap futures, forward freight agreements (FFAs), container freight swap agreements, container freight derivatives, and physical deliverable freight derivatives. Freight derivatives can include exchange-traded futures, swap futures, forward freight agreements (FFAs), and container freight swap agreements and derivatives. With shipping markets bearing more risk, freight derivatives have become a viable method for shipowners and operators, oil companies, trading companies, and grain houses to manage freight rate risk. Freight derivatives are financial instruments whose value is derived from the future levels of freight rates, like dry bulk carrying rates and oil tanker rates.

Freight Derivatives

Introduced in 1992, Globex is an electronic trading platform used for derivative, futures, and commodity contracts developed for the CME.

Globex is an electronic trading platform—the first of its kind when it launched in 1992—used for derivatives like futures, options, and commodity contracts across a wide range of asset classes. CME Group is the parent company of the Chicago Mercantile Exchange (CME), along with several other major commodity exchanges, including Commodity Exchange, Inc. (COMEX), the New York Mercantile Exchange (NYMEX), and the Chicago Board of Trade (CBOT). As a result, business soared: In 2002, the Globex average daily volume exceeded 1 million contracts for the first time, and in 2004, Globex volume exceeded physical pit volume for the first time. To access Globex, customers must have a CME Group clearing firm relationship and CME Group-certified trading application. Developed for the Chicago Mercantile Exchange (CME), CME Globex (as it is officially known) operates continuously, unrestricted by geographic borders or time zones.

Globex

The Italian Derivatives Market, a part of the Borsa Italiana or Italian Stock Exchange, allows trades on derivatives in the European market.

The History of Italian Stock Exchange: The Birth (1808-1814)

The Italian Derivatives Market (IDEM) is a derivatives exchange headquartered in Milan, Italy. Products traded on the IDEM include the FTSE MIB Index futures, FTSE MIB Index mini-futures, FTSE MIB Dividend Index futures, FTSE MIB Index options, FTSE MIB Index weekly options, Italian and Pan-European single stock futures, and Italian single stock options. The government-controlled Stock Exchange Board handed control of IDEM and the Italian Stock Exchange over to the Borsa Italiana, which is held privately by the London Stock Exchange Group (LSE). The Italian Derivatives Market (IDEM) trades derivatives primarily of the Financial Times Stock Exchange (FTSE) Milano Indice di Borsa (MIB) index. The FTSE MIB Index is the primary benchmark index for the Italian equity market, which accounts for approximately 80% of Italian domestic market capitalization and follows 40 Italian equities.

Italian Derivatives Market (IDEM)

The International Money Market (IMM) is a division of the Chicago Mercantile Exchange (CME) that deals in the trading of currency, among other things.

CME Group and Dow Jones & Company Launch Joint Venture of Dow Jones Indexes Business

The International Money Market or IMM is a division of the Chicago Mercantile Exchange (CME) that deals with the trading of currency and interest rate futures and options. While significant rewards are possible when trading financials futures, the CME outlines specific risks related to this segment of its business, including:
Economic, political and geopolitical market conditions
Legislative and regulatory changes
Broad or quick changes in the industry and financial markets
Shifts in price levels, contract volumes and/or volatility in the derivatives markets, along with underlying markets in equities, foreign exchange, interest rates and commodities
Changes in global or regional demand or supply for commodities In 2010, the CME had expanded further, purchasing a 90% interest in the Dow Jones stock and financial indexes.﻿﻿﻿﻿ In 2012, it continued on its growth spree CME with the purchase of the Kansas City Board of Trade, which was the dominant player in hard red winter wheat.﻿﻿ The International Money Market or IMM is a division of the Chicago Mercantile Exchange (CME) that deals with the trading of currency and interest rate futures and options. In 2007, the CME merged with the Chicago Board of Trade to create the CME Group, one of the largest financial exchanges in the world.

International Monetary Market (IMM)

The indemnification method calculates the termination payments when a swap is ended early and the holder has accepted an offer of prepayment.

The indemnification method calculates the termination payments when a swap is ended early and the holder has accepted an offer of prepayment. The agreement value method, which is based on the terms and interest rates available for a replacement swap, is considered to be more efficient than the indemnification method for calculating termination payments. Initially, the indemnification method was used to make whole the counterparty who experienced a loss as the result of the other counterparty terminating the swap agreement early. Consequently, the formula method was itself replaced by the more commonly used agreement value method, which replaces the non-standardized formula for computing a loss with a simple metric, which is the cost of entering into a replacement swap. Initially, the indemnity method was used to make whole the counterparty who experienced a loss as the result of the other counterparty terminating the swap agreement early.

Indemnification Method

An index roll is a long-term option strategy that involves using a combination of index funds and long-term equity anticipation securities.

The term index roll refers to a passive index investment strategy that uses a combination of index funds and long-term equity anticipation securities (LEAPS). The term index roll refers to a passive index investment strategy that uses a combination of index funds and long-term equity anticipation securities (LEAPS). An index roll is a passive index investment strategy that uses a combination of index funds and long-term equity anticipation securities. An investor who uses this strategy must roll over a series of LEAP options to gain exposure to a long-term move in an index. LEAP call options can promote greater capital efficiency because they require less capital than buying the asset itself—in this case, an equity exchange traded fund (ETF)—by employing a LEAP strategy called a roll forward option.

Index Roll

An index amortizing swap (IAS) is a type of interest rate swap agreement in which the principal is gradually reduced over the life of the agreement.

An index amortizing swap (IAS), also known as an amortizing interest rate swap, is a type of interest rate swap agreement in which the principal amount is gradually reduced over the life of the swap agreement. An index amortizing swap (IAS), also known as an amortizing interest rate swap, is a type of interest rate swap agreement in which the principal amount is gradually reduced over the life of the swap agreement. One party wishes to receive a series of cash flows based on a fixed rate of interest, while the other party wishes to receive cash flows based on a floating rate of interest. The difference between an IAS and a regular interest rate swap is that, in an IAS, the principal balance on which the interest payments are calculated can decrease over the life of the agreement. Some interest rate swaps allow the notional principal amount to either decrease or increase based on changes in a reference interest rate.

Index Amortizing Swap (IAS)

Inflation derivatives are used by investors to hedge against the risk of rising inflation levels eroding the real value of their portfolio.

Inflation derivatives are a subclass of derivatives contracts used by investors or firms to manage the potential negative impact of rising inflation levels or speculate on future inflation levels. Inflation derivatives are a subclass of derivatives contracts used by investors or firms to manage the potential negative impact of rising inflation levels or speculate on future inflation levels. The most common form of an inflation derivative is an inflation swap, which allows an investor to secure an inflation-protected return relative to an index, like the CPI. Other inflation hedging strategies include purchasing Treasury Inflation-Protected Securities (TIPs) or the use of commodities such as gold and oil that tend to rise with inflation.﻿﻿ These methods, however, do have certain disadvantages when compared to inflation derivatives, including larger investment minimums, transaction fees, and higher volatility. For example, take a five-year zero-coupon swap in which Party A agrees to pay a fixed rate of 2.5%, compounded annually, on an amount of $10,000 while Party B agrees to pay the compounded rate of inflation on that principle.

Inflation Derivatives

In financial markets, the term inverse transaction refers to the closing of an open forward contract that has the same value date.

Inverse transaction occurs when somebody makes a trade to close with a counterparty, who has the opposite position and so closes their position as well with the same trade. If the inverse transaction is completed with a different party other than the investor purchased the original forward contract through, then this results in a separate trade that fully covers or locks in the profit or loss on the first transaction. An inverse transaction can be made through a clearinghouse that matches the transaction details from the investor with the transaction details of an outside buyer or seller. An inverse transaction is one that is used to undo or offset another transaction made previously by an investor with the same transaction details. Closing an open forward contract with the same value date allows an investor to quantify the profit or loss of the entire transaction.

Inverse Transaction

An ISDA Master Agreement is the standard agreement commonly implemented to govern over-the-counter derivatives transactions.

An ISDA Master Agreement is the standard document regularly used to govern over-the-counter derivatives transactions. The ISDA Master Agreement itself is standard, but it is accompanied by a customized schedule and sometimes a credit support annex, both of which are signed by the two parties in a given transaction. The standardization provided by an ISDA Master Agreement also increases liquidity since the agreement makes it easier for the parties to engage in repeated transactions. An ISDA Master Agreement is the standard document regularly used to govern over-the-counter derivatives transactions. An ISDA Master Agreement is the standard document regularly used to govern over-the-counter derivatives transactions.

ISDA Master Agreement

Kappa measures how an option's price will react to a change in implied volatility, even if the price of the underlying stays the same.

Kappa is the measurement of an option contract's price sensitivity to changes in the volatility of the underlying asset. This set of risk measures—kappa, theta, gamma, delta—indicates how sensitive an option is to time-value decay, changes in implied volatility, and movements in the price of its underlying security. This set of risk measures—kappa, theta, gamma, delta—indicates how sensitive an option is to time-value decay, changes in implied volatility, and movements in the price of its underlying security. Kappa measures risk by calculating the amount that an option contract's price changes in reaction to a 1% change in the implied volatility of the underlying asset. Kappa measures risk by calculating the amount that an option contract's price changes in reaction to a 1% change in the implied volatility of the underlying asset.

Kappa

A lattice-based model is a model used to value derivatives; it uses a binomial tree to show different paths the price of the underlying asset may take. 

If the stock rises to $125 the value of the option will be $25 ($125 stock price minus $100 strike price) and if it drops to $90 the option will be worthless.
The option value will be:
> Option value = \[(probability of rise \up value) + (probability of drop \* down value)\] / (1 + r) = \[(0.50 \* $25) + (0.50 \* $0)\] / (1 + 0.05) = $11.90. The assumption can be factored into a lattice model, enabling more accurate options pricing than the Black-Scholes model, which assumes the same level of volatility over the life of the option. A lattice-based model is used to value derivatives by employing a binomial tree to compute the various paths the price of an underlying asset, such as a stock, might take over the derivative's life. As a result, lattice models can provide more accurate forecasts of option prices than the Black-Scholes model, which has been the standard mathematical model for pricing options contracts.

Lattice-Based Model

Leads and lags are the acceleration or delaying of a foreign exchange payment in the hope of taking advantage of a more advantageous rate. 

Leads and lags in international business most commonly refer to the alteration of normal payment or receipts in a foreign exchange transaction based on an expected change in exchange rates. For example, if the company that is buying the Canadian asset chooses to hold off payment because it believes the Canadian dollar will weaken and, before making the payment, the Bank of Canada (BoC) unexpectedly raises interest rates then the Canadian dollar will strengthen making their decision to hold off detrimental. If a company in one country were about to acquire a corporate asset in another country, and the target company's country currency was expected to decrease in value relative to the acquiring company's country, then delaying the purchase would be in the interest of the acquiring company. If the company believes the Canadian dollar is going to strengthen against the U.S. dollar they will accelerate the transaction (lead) before the price of the asset increases in U.S. dollar terms. For example, if a U.S. company has agreed to buy a Canadian asset then it will need to buy Canadian dollars and sell U.S. dollars to complete the transaction.

Leads and Lags

A legacy hedge is a long-term hedge position, often held by producers of volatile commodities.

A legacy hedge is a long-term hedge position, often a futures contract, that a company has held for an extended period of time. While gold prices have since gone up and down, at more than $1,724 per troy ounce as of March 12, 2021, they remain significantly higher than pre-Great Recession prices, so any gold producer still sitting on legacy hedges established before gold prices shifted upward is sitting on losses. For the amount of the commodity in the legacy hedge, the company has given up any potential gains from a price increase in exchange for protection against potential losses from a price drop. To stabilize their revenue streams, they may hedge against price volatility by signing a futures contract, an agreement to sell a commodity on a specified date at a specified price. A legacy hedge is a long-term hedge position, often a futures contract, that a company has held for an extended period of time.

Legacy Hedge

A liability swap is a financial derivative in which two parties exchange debt-related interest rates, usually a fixed rate for a floating rate.

A liability swap is a financial derivative in which two parties exchange debt-related interest rates (e.g. the yield on a bond), usually a fixed rate for a floating rate, or currency exposure to a liability. A liability swap is a financial derivative in which two parties exchange debt-related interest rates (e.g. the yield on a bond), usually a fixed rate for a floating rate, or currency exposure to a liability. Liabilities swaps are used by institutions to hedge, possibly speculate (rare), or change the rate structure (fixed or floating) of liability and thus better matchup liabilities with the rate structure of assets and other cash flows. Assume the six-month LIBOR rate is currently 2.5%, so the floating rate is also 5% currently.
Assume that after three months, LIBOR has increased to 2.75%, so the floating rate is now 5.25%. As an example, Company XYZ swaps a six-month LIBOR interest rate plus 2.5% liability for ABC's six-month fixed rate of 5% liability.

Liability Swap

A LIBOR-in-arrears swap is a swap in which the floating rate is set at the end of the reset period instead of the beginning, and applied retroactively.

A LIBOR-in-arrears swap is similar to a regular or vanilla swap but the floating rate side is set at the end of the reset period instead of the beginning. The quick definition is that a vanilla swap sets the rate in advance and pays later (in arrears) while an arrears swap sets and pays later (in arrears).
This swap has several other names, including arrears swap, reset swap, back-set swap, and delayed reset swap.
The LIBOR-in-arrears structure was introduced in the mid-1980s to enable investors to take advantage of potentially falling interest rates. If the three-month LIBOR is the base rate, the floating rate payment under the swap occurs in three months, and then the then-current three-month LIBOR will determine the rate for the next period. A LIBOR-in-arrears swap is similar to a regular or vanilla swap but the floating rate side is set at the end of the reset period instead of the beginning. As of December 2020, plans were in place to phase out the LIBOR system by 2023 and replace it with other benchmarks, such as the secured overnight financing rate (SOFR).
The floating rate side of a vanilla swap, in this case, LIBOR, resets on each reset date.

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