An amortizing swap is an interest rate swap where the notional principal amount is reduced at the underlying fixed and floating rates.

An amortizing swap is an interest rate swap where the notional principal amount is reduced at the underlying fixed and floating rates. The following is the present value (PV) of an amortizing swap if receiving the floating rate and paying the fixed rate.
PV Amortizing Swap \= PV Floating − PV Fixed \\text{PV}\_{\\text{Amortizing Swap}} = \\text{PV}\_{\\text{Floating}} - \\text{PV}\_{\\text{Fixed}} PVAmortizing Swap​\=PVFloating​−PVFixed​
The following is the present value of an amortizing swap if receiving the fixed-rate and paying the floating rate.
PV Amortizing Swap \= PV Fixed − PV Floating \\text{PV}\_{\\text{Amortizing Swap}} = \\text{PV}\_{\\text{Fixed}} - \\text{PV}\_{\\text{Floating}} PVAmortizing Swap​\=PVFixed​−PVFloating​
OTC transactions, like swaps, have counterparty risk. An amortizing swap, also called an amortizing interest rate swap, is a derivative instrument in which one party pays a fixed rate of interest while the other party pays a floating rate of interest on a notional principal amount that decreases over time. An amortizing swap is a derivative instrument in which one party pays a fixed rate of interest while the other pays a floating rate of interest on a notional principal amount. An amortizing swap is an interest rate swap where the notional principal amount is reduced at the underlying fixed and floating rates.

Amortizing Swap

An asset swap is a derivative contract through which fixed and floating investments are being exchanged. 

An asset swap is similar in structure to a plain vanilla swap with the key difference being the underlying of the swap contract. As before, the swap seller (protection seller) will agree to pay the swap buyer (protection buyer) LIBOR plus (or minus) a spread in return for the cash flows of the risky bond (the bond itself does not change hands). There are two parties in an asset swap transaction: a protection seller, which receives cash flows from the bond, and a swap buyer, which hedges risk associated with the bond by selling it to a protection seller. Typically, an asset swap involves transactions in which the investor acquires a bond position and then enters into an interest rate swap with the bank that sold them the bond. First, the swap buyer purchases a bond from the swap seller in return for a full price of par plus accrued interest (called the dirty price).

Asset Swap

Average down refers to a situation in which an investor purchases additional shares as a stock's price falls in an effort to add value to a portfolio.

Averaging down is an investing strategy that involves a stock owner purchasing additional shares of a previously initiated investment after the price has dropped. Consider that if an investor purchased 100 shares of stock at $60 per share, and the stock dropped to $40 per share in price, the investor has to wait for the stock to make its way back up from a 33% drop in price. For example, an investor who bought 100 shares of a stock at $50 per share might purchase an additional 100 shares if the price of the stock reached $40 per share, thus bringing their average price (or cost basis) down to $45 per share. While there may be unrecognized intrinsic value, buying additional shares simply to lower an average cost of ownership may not be a good reason to increase the percentage of the investor's portfolio exposed to the price action of that one stock. If the investor purchases an additional 100 shares of stock at $40 per share, now the price must only rise to $50 (only 25% higher) before the position is profitable.

Average Down

Average up is the process of buying additional shares in a stock that an investor already owns, at a higher price.

Average up refers to the process of buying additional shares of a stock one already owns, but at a higher price. Some investors use a discipline in their averaging up strategies, planning their purchases for when a stock has hit a certain price, while others base their buying on the performance of technical indicators such as moving average, upward trend, or up-down momentum, which compares a stock’s average up volume to its average down volume. Investors following an average-up strategy could expose themselves to increased losses if they wind up buying company shares just before they fall sharply or if the stock price hits a peak. Investors following an average-up strategy could expose themselves to increased losses if they wind up buying company shares just before they fall sharply or if the stock price hits a peak. While averaging down lowers your cost per share, and some advocates of following a value style of investing practice it, the problem with that strategy is that it can lead to greater losses if the stock price continues to fall.

Average Up

Bagging the street is when an investor or a trader trades securities shortly following initiation of a block trade.

Bagging the street is a term that refers to an investing strategy that chases profit immediately prior to the execution of large-volume trades. If an investor anticipates a large block trade and that investor trades securities in the same stock, the investor may attempt to benefit from the impact the large block trade may have on the price of stock. A trader, wishing to capitalize on this, would see the order for the block trade go to the exchange and, knowing that it will likely take a longer time to fill the order, the investor would place smaller orders at the current share price of $10, as the smaller orders will be filled more quickly. Traders who practice bagging the street attempt to gain an advantage from a block trade if it is large enough to impact stock prices. Traders who practice bagging the street attempt to gain an advantage from the block trade if it is large enough to impact stock prices.

Bagging the Street

A block positioner is a dealer who, in order to facilitate a customer's large purchase or sale, takes positions for their own account.

NET CAPITAL REQUIREMENTS FOR BROKERS OR DEALERS SEA Rule 15c3-1

A block positioner is a dealer who, in order to facilitate a customer's large purchase or sale that could disrupt the market, takes positions for their own account in the hopes that they might eventually turn a profit. Traditionally, prime brokers have played the role of block positioner, agreeing to commit capital to their clients (such as hedge funds) in order to facilitate block trades for them, although a few other broker-dealers have also carved out a niche in executing block trades. Traditionally, prime brokers have played the role of block positioner, agreeing to commit capital to their clients (such as hedge funds) in order to facilitate block trades for them. A block positioner is a dealer who, in order to facilitate a customer's large purchase or sale that could disrupt the market, takes positions for their own account in the hopes that they might eventually turn a profit. A block positioner is a dealer who, in order to facilitate a customer's large purchase or sale, takes positions for their own account

Block Positioner

Bottom fishing refers to investing in assets that have experienced a decline, due to intrinsic or extrinsic factors, and are considered undervalued.

Bottom fishing refers to investing in assets that have experienced a decline, due to intrinsic or extrinsic factors, and are considered undervalued. Bottom fishing can be a risky strategy when asset prices are justifiably depressed or a savvy strategy when asset prices are trading at irrationally low valuations.
At its core, bottom fishing embodies the tried and true formula to trading the markets successfully, namely, buying low and selling high. Bottom fishing can be a risky strategy when asset prices are justifiably depressed or a savvy strategy when asset prices are trading at irrationally low valuations.
Value investing is one of the most popular bottom fishing strategies with Warren Buffett being its most famous practitioner. Examples of bottom fishing include:
Investing in the stock of an aluminum company when aluminum prices are depressed.
Buying the stock of a container shipping company during an economic depression.
Investing in a print media company when the internet is putting such companies out of business.
Buying shares of a bank during a financial crisis. A bottom fisher, a moniker given to investors who practice the bottom fishing strategy, speculates, using either technical or fundamental analytical techniques, that an asset's depressed price is temporary and will recover to become a profitable investment over time.

Bottom Fishing

The CBOE VIX of VIX, or VVIX, is a measure of the short-term volatility of the Chicago Board Options Exchange (CBOE) Volatility Index (VIX).

VIX of VIX (or VVIX) is a measure of the volatility of the Chicago Board Options Exchange (CBOE) Volatility Index (VIX). Investors can benefit from using the VIX of VIX because it provides useful insight into VIX option and future prices, including the following information:
The expected volatility of the VIX
The expected volatilities that influence the direction of VIX option prices with varying expiration dates
A general idea of market confidence in the VIX future values
Investors can capitalize on volatility when there are discrepancies between VIX futures prices and their fair values. VIX of VIX influences the direction of VIX options: VIX prices are determined based on the VIX of VIX. The CBOE's VVIX (VIX of VIX) is a measure of the change of volatility in the VIX volatility index. VIX of VIX (or VVIX) is a measure of the volatility of the Chicago Board Options Exchange (CBOE) Volatility Index (VIX).

Chicago Board Options Exchange (CBOE) VIX of VIX (VVIX)

In a constant maturity swap, the floating interest portion resets periodically according to a fixed maturity rate, exposing the swap to interest rate risk.

A constant maturity swap (CMS) is a variation of the regular interest rate swap in which the floating portion of the swap is reset periodically against the rate of a fixed maturity instrument, such as a Treasury note, with a longer maturity than the length of the reset period. A constant maturity swap (CMS) is a variation of the regular interest rate swap in which the floating portion of the swap is reset periodically against the rate of a fixed maturity instrument, such as a Treasury note, with a longer maturity than the length of the reset period. The main advantages and disadvantages of a constant maturity swap are:
It maintains a constant duration
The user can determine “constant maturity” as any point on the yield curve
It can be booked the same way as an interest rate swap
It requires documentation from the International Swaps and Derivatives Association (ISDA)
It has the potential for unlimited losses While the relative positions of a constant maturity rate payer and a fixed rate payer are more complex, generally the fixed rate payer in any swap will benefit primarily from an upward shift of the yield curve. Constant maturity swaps are interest rate swaps that smooth volatility associated with interest rate swaps by pegging the floating leg of a swap to a point on the swap curve on a periodic basis.

Constant Maturity Swap (CMS)

A contingent credit default swap (CCDS) is a tailored credit default swap that depends on two triggering events for payout.

A contingent credit default swap (CCDS) is a variation of a regular credit default swap (CDS) where an additional triggering event is required. A contingent credit default swap is closely related to a CDS in that it provides investors, mainly financial institutions in this case, a way to reduce their credit risk and counterparty risk when credit and the risk of default are involved. A contingent credit default swap (CCDS) is a variation of a regular credit default swap (CDS) where an additional triggering event is required. A contingent credit default swap (CCDS) is a modified form of a CDS that requires two triggers, typically a credit event as well as a reading above or below a certain level on an index/benchmark. A contingent credit default swap is a weaker form of protection than a normal credit default swap.

Contingent Credit Default Swap (CCDS)

A countertrend strategy targets corrections in a trending security's price action to make money.

A countertrend strategy attempts to make small gains by trading against the current, broader trend. The strategy involves buying/selling a security that has experienced an impulsive bearish/bullish move in the hopes that a corrective move higher/lower will allow them to sell/buy it back at that higher/lower price.
Countertrend strategies use momentum indicators, reversal patterns, and trading ranges to determine the best areas to execute trades. The strategy involves buying/selling a security that has experienced an impulsive bearish/bullish move in the hopes that a corrective move higher/lower will allow them to sell/buy it back at that higher/lower price. Traders who use this strategy should always be mindful that a security can resume its trend at any moment and should therefore use risk management techniques, such as stop-loss orders, to limit possible losses. Countertrend strategies use momentum indicators, reversal patterns, and trading ranges to determine the best areas to execute trades.

Countertrend Strategy

Covered interest rate parity refers to a theoretical condition in which the relationship between interest rates and the spot and forward currency values of two countries are in equilibrium.

Covered interest rate parity refers to a theoretical condition in which the relationship between interest rates and the spot and forward currency values of two countries are in equilibrium. ( 1 \+ i d ) \= F S ∗ ( 1 \+ i f ) where: i d \= The interest rate in the domestic currency or the base currency i f \= The interest rate in the foreign currency or the quoted currency S \= The current spot exchange rate \\begin{aligned} &\\left(1+i\_d\\right) = \\frac{F}{S}\*\\left(1+i\_f\\right)\\\\ &\\textbf{where:}\\\\ &i\_d = \\text{The interest rate in the domestic currency or the base currency}\\\\ &i\_f = \\text{The interest rate in the foreign currency or the quoted currency}\\\\ &S = \\text{The current spot exchange rate}\\\\ &F = \\text{The forward foreign exchange rate} \\end{aligned} ​(1+id​)\=SF​∗(1+if​)where:id​\=The interest rate in the domestic currency or the base currencyif​\=The interest rate in the foreign currency or the quoted currencyS\=The current spot exchange rate​
The formula above can be rearranged to determine the forward foreign exchange rate:
F \= S ∗ ( 1 \+ i d ) ( 1 \+ i f ) F=S\*\\frac{\\left(1+i\_d\\right)}{\\left(1+i\_f\\right)} F\=S∗(1+if​)(1+id​)​
Under normal circumstances, a currency that offers lower interest rates tends to trade at a forward foreign exchange rate premium in relation to another currency offering higher interest rates.
The covered interest rate parity condition says that the relationship between interest rates and spot and forward currency values of two countries are in equilibrium. Covered and uncovered interest rate parity are the same when forward and expected spot rates are the same.
Covered interest rate parity is a no-arbitrage condition that could be used in the foreign exchange markets to determine the forward foreign exchange rate. As an example, assume Country X's currency is trading at par with Country Z's currency, but the annual interest rate in Country X is 6% and the interest rate in country Z is 3%. Meanwhile, uncovered interest rate parity involves forecasting rates and not covering exposure to foreign exchange risk_—_that is, there are no forward rate contracts, and it uses only the expected spot rate.

Covered Interest Rate Parity

Cross hedge refers to the practice of hedging risk using two assets whose price movements are positively correlated.

Cross hedging refers to the practice of hedging risk using two distinct assets with positively correlated price movements. To create your cross hedge position, you sell a quantity of platinum futures contracts sufficient to match the value of the gold you are trying to hedge against. However, in adopting a cross hedge position, you are accepting the risk that gold and platinum prices might diverge before the maturity date of your contracts. Therefore, you are forced to initiate a cross hedge position by selling futures contracts in platinum, which is highly correlated with gold. Futures contracts allow airlines to pay one price today for their future fuel needs and allows them to ensure that their margins will be maintained (regardless of what happens to fuel prices in the future).

Cross Hedge

An economic derivative is an over-the-counter contract where the payout is based on the future value of an economic indicator.

An economic derivative is an over-the-counter (OTC) contract, where the payout is based on the future value of an economic indicator. Potential economic indicators include things like the national unemployment rate, non-farm payrolls (NFP), gross domestic product (GDP) figures, the Institute of Supply Management (ISM) Purchasing Managers Index (PMI), and retail sales figures. Economic indicators include things like the national unemployment rate, non-farm payrolls (NFP), gross domestic product (GDP) figures, the Institute of Supply Management (ISM) Purchasing Managers Index (PMI), and retail sales figures. In addition to providing hedges and speculation tools to institutional investors, the market for economic derivatives provided economists with a richer and more immediate picture of the consensus figures for the smart money on Wall Street. Unfortunately, the demand for economic derivatives was not as high as anticipated, and the CME shuttered its economic derivatives auctions in 2007.

What Is Economic Derivative?

An equity derivative is a trading instrument which is based on the price movements of an underlying asset's equity.

An equity derivative is a financial instrument whose value is based on equity movements of the underlying asset. For example, a stock option is an equity derivative, because its value is based on the price movements of the underlying stock. Investors can use equity derivatives to hedge the risk associated with taking long or short positions in stocks, or they can use them to speculate on the price movements of the underlying asset. A futures contract is similar to an option in that its value is derived from an underlying security, or in the case of an index futures contract, a group of securities that make up an index. For example, a trader can buy equity options, instead of actual stock, to generate profits from the underlying asset's price movements.

Equity Derivative

An equity swap is an exchange of cash flows between two parties that allows each party to diversify its income while still holding its original assets.

An equity swap is an exchange of future cash flows between two parties that allows each party to diversify its income for a specified period of time while still holding its original assets. The two sets of nominally equal cash flows are exchanged as per the terms of the swap, which may involve an equity-based cash flow (such as from a stock asset called the reference equity) that is traded for fixed-income cash flow (such as a benchmark interest rate). One leg is the payment stream of the performance of an equity security or equity index (such as the S&P 500) over a specified period, which is based on the specified notional value. Equity swaps allow parties to potentially benefit from returns of an equity security or index without the need to own shares, an exchange-traded fund (ETF), or a mutual fund that tracks an index. The interest rate leg is often referenced to LIBOR while the equity leg is often referenced to a major stock index such as the S&P 500.

Equity Swap

An event-driven strategy is an investment strategy that seeks to generate value by taking advantage of stock mispricing that results from corporate events.

An event-driven strategy is a type of investment strategy that attempts to take advantage of temporary stock mispricing, which can occur before or after a corporate event takes place. An event-driven strategy is a type of investment strategy that attempts to take advantage of temporary stock mispricing, which can occur before or after a corporate event takes place. Investors who use an event-driven strategy employ teams of specialists who are experts in analyzing corporate actions and determining the effect of the action on a company's stock price. An event-driven strategy refers to an investment strategy in which an institutional investor attempts to profit from a stock mispricing that may occur during or after a corporate event. If there is enough potential for upside, the investor may buy shares of the target company to sell after the corporate action is complete and the target company's stock price adjusts.

Event-Driven Strategy

Excess spread is the surplus difference between the interest received by an asset-based security's issuer and the interest paid to the holder.

Excess spread is the surplus difference between the interest received by an asset-based security's issuer and the interest paid to the holder. Setting an adequate level of excess spread is tricky for issuers, since investors want to capture as much profit as possible, while the issuer and originator want to avoid losses that would trigger other credit support actions that pull money out of a reserve account or require more collateral to be added to a pool. Excess spread is one method issuers use to improve the ratings on a pool of assets that are being assembled for a deal, which makes the resulting security more attractive to institutional investors. When loans, mortgages, or other assets are pooled and securitized, the excess spread is a built-in margin of safety designed to protect that pool from losses. When loans, mortgages, or other assets are pooled and securitized, the excess spread is a built-in margin of safety designed to protect that pool from losses.

Excess Spread

A fade is a contrarian investment strategy that involves trading against the prevailing trend.

A fade is a contrarian investment strategy that involves trading against the prevailing trend. The trade-or-fade rule is an options exchange rule that requires the market maker to either match a better bid found on another market or to trade with the market maker offering the better bid. For example, if the monthly non-farm payrolls report beats economists' expectations, a trader might sell U.S. dollar pairs, such as the USD/JPY and USD/CHF, and buy pairs such as the EUR/USD and GBP/USD.
![Image](data:image/gif;charset=utf-8;base64,R0lGODlhCwAGAPQAAERERm1tb/u0cvCgn+2ho+2gqOLh5ubl6ufm6+np6+no7e7t8u7u8Orz7vDv9PDw8vDy8URERkRERkRERkRERkRERkRERkRERkRERkRERkRERkRERkRERkRERkRERkRERiwAAAAACwAGAEQINAAfCGTwQMGDBQIfEBDQYIEDBQUGOHAAQIFFBAkMKDhg0SCEBwQNIkw4sOBBgQEShjwpMCAAOw==)
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Experienced traders considered it to be prudent practice to wait a bit after a news release before entering a trade. The market maker offering the better price must accept the offer and trade at the price offered or adjust the bid price. The premise behind a fade strategy is that the market has already factored in all information and the later stages of a trend are mostly powered by those traders who have been slower to react, thus increasing the probability of a reversal of the initial thrust.
A company's fundamentals or price action, or a combination of the two, may be faded.

Fade

Financial engineering is the use of mathematical techniques to solve financial problems.

Financial engineering is the use of mathematical techniques to solve financial problems. Using mathematical modeling and computer science, financial engineers are able to test and issue new tools such as new methods of investment analysis, new debt offerings, new investments, new trading strategies, new financial models, etc. It has revolutionized financial markets, but it also played a role in the 2008 financial crisis.
The financial industry is always coming up with new and innovative investment tools and products for investors and companies. While financial engineering uses stochastics, simulations and analytics to design and implement new financial processes to solve problems in finance, the field also creates new strategies that companies can take advantage of to maximize corporate profits. Examples of options strategies born out of financial engineering efforts include Married Put, Protective Collar, Long Straddle, Short Strangles, Butterfly Spreads, etc.
The field of financial engineering has also introduced speculative vehicles in the markets.

Financial Engineering

Fixed-income arbitrage is an investment strategy that realizes small but highly leveraged profits from the mispricing of similar debt securities.

Fixed-income arbitrage is an investment strategy that attempts to profit from pricing differences in various bonds or other interest-rate securities. In this trade, the investor takes up positions in an interest rate swap, a Treasury bond, and a repo rate to profit on the difference between the swap spread—the spread between the fixed swap rate and the coupon rate of the Treasury par bond—and the floating spread, which is the difference between a floating rate, such as LIBOR, and the repo rate. A common example of a fixed-income arbitrage strategy that does not fit the mold of pure arbitrage is swap-spread arbitrage. Some of the strategies referred to in casual communication as fixed-income arbitrage may not actually fit the definition of a pure arbitrage trade—one that seeks to exploit a nearly riskless trade based on mere mathematical differences. When using a fixed-income arbitrage strategy, the investor assumes opposing positions in the market to take advantage of small price discrepancies while limiting interest rate risk.

Fixed-Income Arbitrage

A flow derivative is a directional market bet, typically containing multiple options or other positions, packaged into a single leveraged tradable security.

A flow derivative is a securitized product that aims to provide maximum leverage to profit from small movements in the market value of the underlying. WAVE XXL calls are flow derivatives that allow bullish traders to make a leveraged bet on increases in the underlying with a built-in stop-loss. The opposite product for a bearish trader, a WAVE XXL put, positions the trader to profit from a drop in the underlying with a built-in stop-loss. Flow derivatives are a directional bet but they can get a little bit complex depending on the products underlying them and how the product is structured. As the funding level price rises each day due to interest, so does the stop loss, staying about 6% above the funding level.

Flow Derivative

Forward points are the number of basis points added to or subtracted from the current spot rate to determine the forward rate.

In currency trading, forward points are the number of basis points added to or subtracted from the current spot rate of a currency pair to determine the forward rate for delivery on a specific value date. In currency trading, forward points are the number of basis points added to or subtracted from the current spot rate of a currency pair to determine the forward rate for delivery on a specific value date. In currency trading, forward points are the number of basis points added to or subtracted from the current spot rate of a currency pair to determine the forward rate for delivery on a specific value date. In contrast to the forward spread, a discount spread is the currency forward points that are subtracted from the spot rate, to obtain a forward rate for a currency. When points are added to the spot rate this is called a forward premium; when points are subtracted from the spot rate it is a forward discount.

Forward Points

The predetermined delivery price of a forward contract, as agreed on and calculated by the buyer and seller.

Forward price is the predetermined delivery price for an underlying commodity, currency, or financial asset as decided by the buyer and the seller of the forward contract, to be paid at a predetermined date in the future. When the underlying asset in the forward contract does not pay any dividends, the forward price can be calculated using the following formula:
F \= S × e ( r × t ) where: F \= the contract’s forward price S \= the underlying asset’s current spot price e \= the mathematical irrational constant approximated by 2.7183 r \= the risk-free rate that applies to the life of the forward contract t \= the delivery date in years \\begin{aligned} &F = S \\times e ^ { (r \\times t) } \\\\ &\\textbf{where:} \\\\ &F = \\text{the contract's forward price} \\\\ &S = \\text{the underlying asset's current spot price} \\\\ &e = \\text{the mathematical irrational constant approximated} \\\\ &\\text{by 2.7183} \\\\ &r = \\text{the risk-free rate that applies to the life of the} \\\\ &\\text{forward contract} \\\\ &t = \\text{the delivery date in years} \\\\ \\end{aligned} ​F\=S×e(r×t)where:F\=the contract’s forward priceS\=the underlying asset’s current spot pricee\=the mathematical irrational constant approximatedby 2.7183r\=the risk-free rate that applies to the life of theforward contractt\=the delivery date in years​
For example, assume a security is currently trading at $100 per unit. If the underlying asset pays dividends over the life of the contract, the formula for the forward price is:
F \= ( S − D ) × e ( r × t ) \\begin{aligned} &F = ( S - D ) \\times e ^ { ( r \\times t ) } \\\\ \\end{aligned} ​F\=(S−D)×e(r×t)​
Here, D equals the sum of each dividend's present value, given as:
D \=   PV ( d ( 1 ) ) \+ PV ( d ( 2 ) ) \+ ⋯ \+ PV ( d ( x ) ) \=   d ( 1 ) × e − ( r × t ( 1 ) ) \+ d ( 2 ) × e − ( r × t ( 2 ) ) \+ ⋯ \+ \=   d ( x ) × e − ( r × t ( x ) ) \\begin{aligned} D =& \\ \\text{PV}(d(1)) + \\text{PV}(d(2)) + \\cdots + \\text{PV}(d(x)) \\\\ =& \\ d(1) \\times e ^ {- ( r \\times t(1) ) } + d(2) \\times e ^ { - ( r \\times t(2) ) } + \\cdots + \\\\ \\phantom{=}& \\ d(x) \\times e ^ { - ( r \\times t(x) ) } \\\\ \\end{aligned} D\=\=\=​ PV(d(1))+PV(d(2))+⋯+PV(d(x)) d(1)×e−(r×t(1))+d(2)×e−(r×t(2))+⋯+ d(x)×e−(r×t(x))​
Using the example above, assume that the security pays a 50-cent dividend every three months. First, the present value of each dividend is calculated as:
PV ( d ( 1 ) ) \= $ 0 . 5 × e − ( 0 . 0 6 × 3 1 2 ) \= $ 0 . 4 9 3 \\begin{aligned} &\\text{PV}(d(1)) = \\$0.5 \\times e ^ { - ( 0.06 \\times \\frac { 3 }{ 12 } ) } = \\$0.493 \\\\ \\end{aligned} ​PV(d(1))\=$0.5×e−(0.06×123​)\=$0.493​
PV ( d ( 2 ) ) \= $ 0 . 5 × e − ( 0 . 0 6 × 6 1 2 ) \= $ 0 . 4 8 5 \\begin{aligned} &\\text{PV}(d(2)) = \\$0.5 \\times e ^ { - ( 0.06 \\times \\frac { 6 }{ 12 } ) } = \\$0.485 \\\\ \\end{aligned} ​PV(d(2))\=$0.5×e−(0.06×126​)\=$0.485​
PV ( d ( 3 ) ) \= $ 0 . 5 × e − ( 0 . 0 6 × 9 1 2 ) \= $ 0 . 4 7 8 \\begin{aligned} &\\text{PV}(d(3)) = \\$0.5 \\times e ^ { - ( 0.06 \\times \\frac { 9 }{ 12 } ) } = \\$0.478 \\\\ \\end{aligned} ​PV(d(3))\=$0.5×e−(0.06×129​)\=$0.478​
PV ( d ( 4 ) ) \= $ 0 . 5 × e − ( 0 . 0 6 × 1 2 1 2 ) \= $ 0 . 4 7 1 \\begin{aligned} &\\text{PV}(d(4)) = \\$0.5 \\times e ^ { - ( 0.06 \\times \\frac { 12 }{ 12 } ) } = \\$0.471 \\\\ \\end{aligned} ​PV(d(4))\=$0.5×e−(0.06×1212​)\=$0.471​ The forward price is determined by the following formula:
F 0 \= S 0 × e r T \\begin{aligned} &F\_0 = S\_0 \\times e^{rT} \\\\ \\end{aligned} ​F0​\=S0​×erT​
Forward price is based on the current spot price of the underlying asset, plus any carrying costs such as interest, storage costs, foregone interest or other costs or opportunity costs.
Although the contract has no intrinsic value at the inception, over time, a contract may gain or lose value.

Forward Price

A forward swap, often called a deferred swap, is an agreement between two parties to exchange assets on a fixed date in the future.

A forward swap, also called a deferred or delayed-start swap, is an agreement between two parties to exchange cash flows or assets on a fixed date in the future, and which also commences at some future date (specified in the swap agreement).
Interest rate swaps are the most common type of swap that uses a forward swap, although it could involve other financial instruments as well.
Forward swaps, or deferred swaps, feature a delayed start to a swap agreement.
Forward swaps occur most commonly with interest rate swaps, where interest payments are set to be exchanged beginning at a future date.
Forward swaps allow financial institutions to hedge risk, engage in arbitrage, and exchange cash flows or liabilities.
A swap is a derivative contract through which two parties exchange the cash flows or liabilities from two different financial instruments. A forward swap, also called a deferred or delayed-start swap, is an agreement between two parties to exchange cash flows or assets on a fixed date in the future, and which also commences at some future date (specified in the swap agreement).
Interest rate swaps are the most common type of swap that uses a forward swap, although it could involve other financial instruments as well.
Forward swaps, or deferred swaps, feature a delayed start to a swap agreement.
Forward swaps occur most commonly with interest rate swaps, where interest payments are set to be exchanged beginning at a future date.
Forward swaps allow financial institutions to hedge risk, engage in arbitrage, and exchange cash flows or liabilities.
A swap is a derivative contract through which two parties exchange the cash flows or liabilities from two different financial instruments. In the context of an interest rate swap, the exchange of interest payments will commence at a future date agreed to by the counterparties to this swap. In other words, the two parties can agree to begin exchanging cash flows at a predetermined future date and then agree to another set of cash flow exchanges to begin at another date beyond the first, previously agreed-upon swap date. The key to the swap, aside from the change in the companies' views on interest rates, is that they both want to wait for the actual exchange of cash flows (six months in this case) while locking in right now the rate that will determine that cash flow amount.

Forward Swap

Gather in the stops is a trading strategy of driving down a stock's price by selling large amounts of stock in order to trigger preset stop-loss orders.

Gather in the stops is a trading strategy where investors attempt to drive down the price of a stock by selling large quantities of stock to trigger stop orders. The broker will keep an eye on ABC Inc and once the price reaches the desired $30 per share, the stop order will become a market order and the 15 available shares will be purchased on behalf of the investor at the market price of $30 per share or close to that level. Gather in the stops is a trading strategy where investors attempt to drive down the price of a stock by selling large quantities of stock to trigger stop orders. They state that once ABC Inc shares reach their stop price of $30 per share, the investor would like to purchase up to 15 of the shares. The practice of the gather in the stops strategy is to force stop orders into market orders.

Gather In The Stops

General collateral financing (GCF) trades are a type of repurchase agreement executed without the designation of specific securities as collateral.

General collateral financing (GCF) trades are a type of repurchase agreement (repo) that is executed without the designation of specific securities as collateral until the end of the trading day. General collateral financing (GCF) trades are a type of repurchase agreement (repo) that is executed without the designation of specific securities as collateral until the end of the trading day. Since GCF trades are often between banks or banking institutions, the initiating party can assume the counterparty has a significant amount of high-quality assets on hand, and can enter into the transaction with little worry for the details of the assets being used for collateral. GCF trades are also advantageous in that the use of the inter-dealer broker allows borrowers and lenders to net out all of their GCF repo obligations at the end of each trading day, greatly decreasing the number of costly securities and fund transfers that must take place. Repurchase agreements, or repo trades, are essentially short-term loans usually made between banks or between banks and other corporations that hold a large amount of corporate bonds, government bonds, cash or both.

General Collateral Financing Trades (GCF)

A hedge is a type of investment that is intended to reduce the risk of adverse price movements in an asset.

A hedge is an investment that is made with the intention of reducing the risk of adverse price movements in an asset. The specific hedging strategy, as well as the pricing of hedging instruments, is likely to depend upon the downside risk of the underlying security against which the investor would like to hedge. For example, if Morty buys 100 shares of Stock plc (STOCK) at $10 per share, he might hedge his investment by buying an American put option with a strike price of $8 expiring in one year. Still, because large companies and investment funds tend to engage in hedging practices on a regular basis, and because these investors might follow or even be involved with these larger financial entities, it’s useful to have an understanding of what hedging entails so as to better be able to track and comprehend the actions of these larger players. In order to appropriately hedge in the investment world, one must use various instruments in a strategic fashion to offset the risk of adverse price movements in the market.

Hedge

A hedged tender is a strategy in a tender offer where an investor short-sells a portion of their owned shares.

A hedged tender is an investment strategy where an investor sells short a portion of shares they own in anticipation that not all shares tendered will be accepted. A tender offer is a proposal from one investor or company to purchase a set number of shares of another company's stock at a price that is higher than the current market price. A tender offer is a proposal from one investor or company to purchase a set number of shares of another company's stock at a price that is higher than the current market price. A hedged tender is a way to counteract the risk that the offering company refuses some or all of an investor's shares that are submitted as part of a tender offer. A hedged tender is a way to counteract the risk that the offering company refuses some or all of an investor's shares that are submitted as part of a tender offer.

Hedged Tender

The Hollywood Stock Exchange (HSX) is an online prediction market in which "investors" bet on the performance of various components of the entertainment industry.

The Hollywood Stock Exchange (HSX) is an online prediction market in which "investors" bet on the performance of various components of the entertainment industry. The Hollywood Stock Exchange game uses virtual specialist technology invented by Hollywood Stock Exchange co-founders and creators Max Keiser and Michael R. Burns. The exchange has been around since 1996 and is owned by brokerage firm Cantor Fitzgerald, which launched a real-world exchange similar to HSX, called the Cantor Exchange, in 2010. The Hollywood Stock Exchange attracted some private investment during the dotcom boom and ran TV ads on cable channels in an effort to attract players. The Hollywood Stock Exchange is generally considered a prediction market.

Hollywood Stock Exchange (HSX)

An inflation swap allows one to transfer inflation risk to a counterparty in exchange for a fixed payment.

An inflation swap is a contract used to transfer inflation risk from one party to another through an exchange of fixed cash flows. One party to an inflation swap will receive a variable (floating) payment linked to an inflation rate and pay an amount based on a fixed rate of interest, while the other party will pay that inflation rate linked payment and receive the fixed interest rate payment. In an inflation swap, one party pays a fixed rate cash flow on a notional principal amount while the other party pays a floating rate linked to an inflation index, such as the Consumer Price Index (CPI). At the same time, the investor enters into an inflation swap contract, receiving a fixed rate and paying a floating rate linked to inflation. As with interest rate swaps, the parties exchange cash flows based on a notional principal amount (this amount is not actually exchanged), but instead of hedging against or speculating on interest rate risk, their focus is solely on the inflation rate.

Inflation Swap

An inter-dealer broker is a financial intermediary aiding with transactions between financial institutions in markets without formal exchanges.

An inter-dealer broker (IDB) is a specialized financial intermediary who facilitates transactions between investment banks, broker-dealers, and other large financial institutions. Inter-dealer brokers (IDBs) facilitate and execute trades on behalf of institutional clients in listed and OTC financial markets. An inter-dealer broker (IDB) is a specialized financial intermediary who facilitates transactions between investment banks, broker-dealers, and other large financial institutions. At times, IDBs, except for municipal bond IDBs, are often the only players willing to buy securities that appear to be undervalued and take the risk that the market will return to a more stable level. The inter-dealer broker often focuses on trades where there is no formal exchange or market maker system, although they may also commonly act as agents for large trades crossed on exchanges.

Inter-Dealer Broker (IDB)

Inward arbitrage involves rearranging a bank's cash by borrowing and then re-depositing the borrowed money locally at a higher interest rate.

Inward arbitrage is a form of arbitrage that involves rearranging a bank's cash by borrowing from the interbank market and then re-depositing the borrowed money locally at a higher interest rate. As an example of how inward arbitrage could work, Bank A could borrow $10,000 each from foreign Banks B, C, and D at interest rates of 1% and then redistribute the $30,000 into local Banks E and F, which offer interest rates of 1.25% and 1.35%, respectively to earn an increased return on the redistributed funds. When the interest rate of the redistributed funds out-earns the interest rates the bank must pay on the borrowed funds, the inward arbitrage has been successful. Inward arbitrage is a form of arbitrage that involves rearranging a bank's cash by borrowing from the interbank market and then re-depositing the borrowed money locally at a higher interest rate. The main characteristic of inward arbitrage is borrowing money globally at lower interest rates, then reinvesting the funds locally where interest rates are higher.

Inward Arbitrage

The International Swaps and Derivatives Association (ISDA) is a member-based group that sets best practices for the derivatives market.

The International Swaps and Derivatives Association (ISDA) is a private trade organization whose members, mainly banks, transact in the OTC derivatives market. The ISDA is responsible for creating and maintaining the ISDA Master Agreement that is used as a template for discussions between a dealer and the counterparty looking to enter a derivatives transaction. Beyond the ISDA Master Agreement, the ISDA is a source for new industry tools, information on best practices, and a general resource for all things derivatives. The ISDA fulfills this role by providing templates for counterparties in derivatives contracts to use in negotiation and by providing a platform for the institutions that deal in the market to network and raise common concerns and issues. The International Swaps and Derivatives Association (ISDA) is a private trade organization whose members, mainly banks, transact in the OTC derivatives market.

International Swaps and Derivatives Association (ISDA)

iTraxx is a family of indices that track the credit derivatives market in Europe, Japan, non-Japan Asia and Australia.

S&P Global and IHS Markit to Merge in All-Stock Transaction Valuing IHS Markit at $44 Billion, Powering the Markets of the Future

iTraxx is a group of international credit derivative indices that investors can use to gain or hedge exposure to the credit markets underlying the credit derivatives. iTraxx is a group of international credit derivative indices that investors can use to gain or hedge exposure to the credit markets underlying the credit derivatives. Together, Markit iTraxx and Markit CDX make up the majority of the market in credit derivatives indices. The iTraxx indices were developed to bring greater liquidity, transparency and acceptance to the credit default swap market. Traders compare the performance of the iTraxx indices with other indices from the same market, such as the Nikkei stock index, to spot or confirm trends in overall economic performance.

iTraxx

Late-day trading is the illegal practice of recording trades executed after hours as having occurred prior to a mutual fund posting its daily NAV.

Section 10(b) Litigation: The Current Landscape

SEC Defendants Indicted for Market Timing and Late Trading of Mutual Fund Shares

Court Enters $98.6 Million Final Judgement Against U.K. Hedge Fund Adviser Pentagon Capital Management PLC and Its CEO Lewis Chester

Fine Against British Fund for Abusive Trades Must be Cut -U.S. Court

Late-day trading is the illegal practice of recording trades executed after hours as having occurred prior to a mutual fund's calculation of its daily net asset value (NAV). Late-day trading can dilute the value of a mutual fund's shares, harming long-term investors, and should not be confused with the completely legal and acceptable practice of after-hours trading.
Late-day trading is the illegal practice of recording trades executed after hours as having occurred prior to a mutual fund's calculation of its daily net asset value (NAV).
Late-day trading is normally associated with hedge funds placing orders after the current period's (usually daily) NAV is officially calculated, but receiving the price based on the prior period's NAV that has already been documented.
Late-day trading should not be confused with the completely legal and acceptable practice of after-hours trading.
Late-day trading is the practice of placing orders to buy or redeem mutual fund shares after the latest NAV has already been calculated. Illegal late-day trading schemes typically involve hedge funds setting up special relationships with mutual funds to buy and sell that mutual fund's shares after hours but having that trade recorded as being executed prior to the time when that mutual fund's NAV is calculated (normally 4:00 p.m. Eastern Time). Late-day trading is illegal under several federal securities laws, including Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5.
The original late-day trading rules required broker-dealers and investment advisors to verify when trades were placed. Late-day trading is the illegal practice of recording trades executed after hours as having occurred prior to a mutual fund's calculation of its daily net asset value (NAV).

Late-Day Trading

A letter of guarantee is typically issued by a bank, letting someone else know that the bank is guaranteeing funds or securities for the client.

A letter of guarantee is a type of contract issued by a bank on behalf of a customer who has entered a contract to purchase goods from a supplier. A letter of guarantee may also be issued by a bank on behalf of a call writer guaranteeing that the writer owns the underlying asset and that the bank will deliver the underlying securities should the call be exercised. A bank may issue a letter of guarantee on behalf of a call writer guaranteeing that the writer owns the underlying asset and that the bank will deliver the underlying securities should the call be exercised. In order to short the contracts in the first place, the writer may have had to produce a letter of guarantee showing that they own the stock (in another account, otherwise the broker would not require the letter), since the broker may have viewed the uncovered short call as too risky. A letter of guarantee is a type of contract issued by a bank on behalf of a customer who has entered a contract to purchase goods from a supplier.

Letter of Guarantee

A multilateral trading facility (MTF) is a trading system that facilitates the exchange of financial instruments between multiple parties.

NASDAQ OMX to Close Its Pan-European Equity MTF NASDAQ OMX Europe

Exemptive letter: UBS Group AG - Holding Company Reorganization

Bloomberg MTF Receives Authorisation from the Netherlands Authority for the Financial Markets

Table of Contents
Expand The most widely known ATSs in the United States are Electronic Communication Networks (ECNs)—computerized systems that automatically match buy and sell orders for securities in the market.
In the United States, Alternative Trading Facilities (ATSs) are similar to the European MTFs.
Multilateral trading facilities offer multiple advantages for buying and selling securities and other assets. Bloomberg’s MTF provides quote and trading functionality to eligible participants in products such as cash bonds, repos, credit default swaps (CDS), interest rate securities (IRS), exchange-traded funds (ETF), equity derivatives, and forex (FX) derivatives. Faster transaction speeds, lower costs and trading incentives have helped MTFs become increasingly popular in Europe, although the NASDAQ OMX Europe was closed in 2010 as MTFs face intense competition with each other and established exchanges. What Is a MTF?
Understanding MTFs
MTFs in the United States
Benefits of MTFs
Real-World Examples

Multilateral Trading Facility (MTF)

Outward arbitrage is a form of arbitrage in which banks borrow in one country and lend in another.

Outward arbitrage is a type of arbitrage that multinational, American-based banks engage in, which takes advantage of differences in interest rates between the United States and other countries. Outward arbitrage occurs when interest rates are lower in the United States than abroad, and banks will borrow in the United States at a low rate, and then lend that money abroad at a higher rate, pocketing the difference as profit. Outward arbitrage occurs when interest rates are lower in the United States than abroad, so banks borrow in the United States at a low rate, then lend abroad at a higher rate, profiting from the difference. Let’s also assume that the going rate for one-year certificates of deposit in the United States is 2%, while dollar-denominated certificates of deposit are paying 3% in France.
The large American bank could decide to make money by accepting certificates of deposits in the United States, and then taking the proceeds to issue loans in France at a higher rate. Outward arbitrage is a type of arbitrage that multinational, American-based banks engage in, which takes advantage of differences in interest rates between the United States and other countries.

Outward Arbitrage

Over-hedging is a risk management strategy where an offsetting position that exceeds the original position is initiated.

Over-hedging is a risk management strategy that uses an offsetting position which exceeds the size of the original position being hedged. Any drop in the price of natural gas would be covered by the hedge, protecting the company's inventory price, and the company would get an additional profit by delivering the excess amount at a higher contract price than what it can purchase on the market. Over-hedging is a risk management strategy that uses an offsetting position which exceeds the size of the original position being hedged. In a down market, the over-hedging helps the company, but the important point is that a lack of a hedge would mean a deep loss on the firm's entire inventory. An increase in the price of natural gas, however, would see the company make less than market value on its inventory and then have to spend even more to fulfill the excess by buying it at the higher price.

Over-Hedging

An overnight index swap refers to a hedging arrangement in which a cash flow based on an overnight lending rate is exchanged for another predetermined cash flow.

An index swap refers to a hedging contract in which a party exchanges a predetermined cash flow with a counter-party on a specified date. An overnight index swap uses an overnight rate index such as the federal funds rate as the underlying rate for the floating leg, while the fixed leg would be set at a rate agreed on by both parties. The floating leg's present value (PV) is determined by either compounding of the overnight rate or by taking the geometric average of the rate over a given period.
Overnight index swaps are popular among financial institutions because the overnight index is considered to be a good indicator of the interbank credit markets and less risky than traditional interest rate spreads. The overnight index swap denotes an interest rate swap involving the overnight rate being exchanged for a fixed interest rate. The interest of the overnight rate portion of the swap is compounded and paid at reset dates, with the fixed leg being accounted for in the swap's value to each party.

Overnight Index Swap  & Calculation

Political arbitrage activity involves trading securities based on knowledge of potential future political activity. 

Political arbitrage activity is a type of arbitrage activity that involves trading securities based on knowledge of potential future political activity. Impending government elections in a given country may prompt political arbitrage specific to that nation, while the threat of a war that could encompass a number of countries may trigger political arbitrage across the entire region. Political arbitrage activity is a type of arbitrage activity that involves trading securities based on knowledge of potential future political activity. Political arbitrage activity may be country-specific or region-specific, depending on the type of political activity. Political arbitrage activity may be country-specific or region-specific, depending on the type of political activity.

Political Arbitrage Activity

Principal only strips (PO strips) are the portion of a stripped mortgage backed security that benefits when the underlying mortgages in the pool are paid down faster.

Principal only strips (PO strips) are a fixed-income security where the holder receives the non-interest portion of the monthly payments on the underlying loan pool. PO strips holders prefer to have their principal paid back quickly, like when the mortgage borrowers make additional payments, refinance, or interest rates drop (which tends to increase refinancing).
An IO strip holder prefers if interest rates hold steady or rise, and that mortgage borrowers don't make additional payments since this will cut down on the interest the holder receives.
Principal only strips were created to appeal to a particular investor based on their view of the interest rate environment. If the MBS has been separated into IO and PO components, when the loan borrowers pay interest on the loan, the IO holders receive the cash inflow, and when the loan borrowers pay principle, the PO holder receives the cash inflow from that. A stripped MBS can be customized so that an investor can get exposure to rising interest rates through IO strips, for example, while also keeping some of the investment in the PO strips to hedge against an unexpected reversal. They want to see interest rates at the same level or higher so that the mortgage holders in the pool keep making payments (including interest) on their current loan rather than trying to refinance into a new one.

Principal Only Strips (PO Strips)

A qualified eligible participant (QEP) is an individual who meets the requirements to trade in different investment funds, such as futures and hedge funds.

Commodity Pool Operator (CPO) Registration

A qualified eligible participant (QEP) is an individual who meets the requirements to trade in sophisticated investment funds such as futures and hedge funds. A qualified eligible participant (QEP) is an individual who meets the requirements to trade in sophisticated investment funds such as futures and hedge funds. A qualified eligible participant is an individual who meets the requirements to trade in different investment funds, such as futures and hedge funds. QEPs are similar to, but not the same as, accredited investors in that they are assumed to have a sophisticated understanding of the complexities of trading risky assets such as futures and hedge funds. While investors in hedge funds must be QEPs, hedge fund managers must be both QEPs and CPOs.

Qualified Eligible Participant (QEP)

A reverse convertible note (RCN) is a short-term investment with a payout at maturity that depends on the performance of a specific stock. 

FINRA Orders RBC to Pay Fine and Restitution Totaling More Than $1.4 Million for Unsuitable Sales of Reverse Convertibles

A reverse convertible note (RCN) is a financial product that shares characteristics with both bonds and stocks. Along the way, the investor looking for quick gains will incur hefty fees.
The Financial Industry Regulatory Authority (FINRA) issued several alerts which detail the risks involved with RCNs. At least one of those alerts was prompted by FINRA enforcement actions, including one case in which the agency forced a brokerage firm to pay more than $1.4 million in fines and restitution for “supervisory failures resulting in sales of unsuitable reverse convertibles.”
There are also tax implications to consider, which as with other aspects of RCNs, can be complex. A reverse convertible note is a coupon-bearing investment that offers a payout at maturity which depends on the performance of an underlying stock. The lure of attractive returns and a quick maturity may distract investors and cause them to overlook important caveats and downsides of RCNs.

Reverse Convertible Note (RCN)

Riskless principal is a party who, upon receipt of an order to buy or sell a security, buys or sells that security themselves as they fill the order.

Trade Reporting Frequently Asked Questions

Riskless principal is a party who, upon receipt of an order to buy or sell a security, buys or sells that security themselves as they fill the order. So, a customer's buy order would necessitate that the member firm executes an identical buy order in the market, while a sell order would require the member firm to execute an identical sell order in the market. It is where a broker, who has received a customer order, immediately executes an identical order in the marketplace for their account, taking on the role of principal, in order to fill that customer order. It is where a broker, who has received a customer order, immediately executes an identical order in the marketplace for their account, taking on the role of principal, in order to fill that customer order. An order from a customer would therefore require the member firm to execute an identical order in the market as principal before executing the customer's order,

Riskless Principal

A structured investment vehicle (SIV) is a pool of investment assets that attempts to profit from credit spreads between short-term debt and long-term structured finance products.

Moody's Update on Structured Investment Vehicles

Citi Finalizes SIV Wind-Down by Agreeing to Purchase All Remaining Assets

Financial Crisis Inquiry Commission Report

A structured investment vehicle (SIV) is a pool of investment assets that attempts to profit from credit spreads between short-term debt and long-term structured finance products such as asset-backed securities (ABS). Long-term assets frequently include structured finance products such as mortgage-backed securities (MBS), asset-backed securities (ABS), and the less risky tranches of collateralized debt obligations (CDOs).
Funding for SIVs comes from the issuance of commercial paper that is continuously renewed or rolled over; the proceeds are then invested in longer maturity assets that have less liquidity but pay higher yields. A structured investment vehicle (SIV) is a pool of investment assets that attempts to profit from credit spreads between short-term debt and long-term structured finance products such as asset-backed securities (ABS). A structured investment vehicle (SIV) is a type of special purpose fund that borrows for the short-term by issuing commercial paper, in order to invest in long-term assets with credit ratings between AAA and BBB. A SIV administered by a commercial bank or other asset manager such as a hedge fund, will issue asset-backed commercial paper (ABCP) to fund the purchase of these securities.

Structured Investment Vehicle (SIV)

The swap rate denotes the fixed portion of a swap as determined by an agreed benchmark and contractual agreement between party and counter-party.

A swap rate is the rate of the fixed leg of a swap as determined by its particular market and the parties involved. There are three types of interest rate exchanges for a currency swap:
1.  The fixed rate of one currency for the fixed rate of the second currency.
2.  The fixed rate of one currency for the floating rate of the second currency.
3.  The floating rate of one currency for the floating rate of the second currency.
The swap can include or exclude a full exchange of the principal amount of the currency at both the beginning and the end of the swap. Swap rate denotes the fixed rate that a party to a swap contract requests in exchange for the obligation to pay a short-term rate, such as the Labor or Federal Funds rate. An interest rate swap refers to the exchange of a floating interest rate for a fixed interest rate. In an interest rate swap, it is the fixed interest rate exchanged for a benchmark rate such as LIBOR or the Fed Funds Rate plus or minus a spread.

Swap Rate  & Examples

A swap spread is the difference between the fixed component of a given swap and the yield on a sovereign debt security with a similar maturity.

A swap spread is the difference between the fixed component of a given swap and the yield on a sovereign debt security with a similar maturity. If a 10-year swap has a fixed rate of 4% and a 10-year Treasury note (T-note) with the same maturity date has a fixed rate of 3%, the swap spread would be 1% or 100 basis points: 4% - 3% = 1%. Because a Treasury bond (T-bond) is often used as a benchmark and its rate is considered to be default risk-free, the swap spread on a given contract is determined by the perceived risk of the parties engaging in the swap. The swap spreads on 30-year swap T-bonds turned negative in 2008 and have remained in negative territory since. Another explanation for the 30-year negative rate is that traders have reduced their holdings of long-term interest rate assets and, therefore, require less compensation for exposure to fixed-term swap rates.

Swap Spread

A swaption, also known as a swap option, refers to an option to enter into a swap agreement with another party.

A swaption, also known as a swap option, refers to an option to enter into an interest rate swap or some other type of swap. A swaption, also known as a swap option, refers to an option to enter into an interest rate swap or some other type of swap. In a payer swaption, the purchaser has the right but not the obligation to enter into a swap contract where they become the fixed-rate payer and the floating-rate receiver. A receiver swaption is the opposite i.e. the purchaser has the option to enter into a swap contract where they will receive the fixed rate and pay the floating rate. **European swaption:** the purchaser is only allowed to exercise the option and enter into the swap on the expiration date of the swaption.

Swaption - Guide to Swap Options

In a total return swap, one party makes payments based on a set rate while the other party makes payments based on the return of an underlying asset.

A total return swap is a swap agreement in which one party makes payments based on a set rate, either fixed or variable, while the other party makes payments based on the return of an underlying asset, which includes both the income it generates and any capital gains. A total return swap is a swap agreement in which one party makes payments based on a set rate, either fixed or variable, while the other party makes payments based on the return of an underlying asset, which includes both the income it generates and any capital gains. In a total return swap, the party receiving the total return collects any income generated by the asset and benefits if the price of the asset appreciates over the life of the swap. In a total return swap, one party makes payments according to a set rate, while another party makes payments based on the rate of an underlying or reference asset. A total return swap allows the party receiving the total return to gain exposure and benefit from a reference asset without actually owning it.

Total Return Swap

A variance swap allows counterparties to hedge or speculate directly on the volatility of an underlying asset. 

A variance swap is a financial derivative used to hedge or speculate on the magnitude of a price movement of an underlying asset. Directional traders use variance trades to speculate on future levels of volatility for an asset, spread traders use them to bet on the difference between realized volatility and implied volatility, and hedge traders use swaps to cover short volatility positions. A variance swap is quite similar to a volatility swap, which utilizes realized volatility instead of variance. A variance swap is a derivative contract in which two parties exchange payments based on the underlying asset's price changes, or volatility. Because of this, a variance swap's payout will be larger than that of a volatility swap, as the basis of these products is at variance rather than the standard deviation.

Variance Swap

A zero-coupon inflation swap is a derivative where a fixed-rate payment on a notional amount is exchanged for a payment at the rate of inflation.

A zero-coupon inflation swap (ZCIS) is a type of derivative in which a fixed-rate payment on a notional amount is exchanged for a payment at the rate of inflation. Other financial instruments that can be used to hedge against inflation risk are real yield inflation swaps, price index inflation swaps, Treasury Inflation-Protected Securities (TIPS), municipal and corporate inflation-linked securities, inflation-linked certificates of deposit, and inflation-linked savings bonds. A zero-coupon inflation swap (ZCIS) is a type of inflation derivative, where an income stream that is tied to the rate of inflation is exchanged for an income stream with a fixed interest rate. Under a ZCIS, the inflation receiver, or buyer, pays a predetermined fixed rate and, in return, receives an inflation-linked payment from the inflation payer, or seller. A zero-coupon inflation swap (ZCIS) is a type of derivative in which a fixed-rate payment on a notional amount is exchanged for a payment at the rate of inflation.

Zero-Coupon Inflation Swap (ZCIS)

A zero-coupon swap is an exchange of income streams but the stream of fixed-rate payments is made as one lump-sum payment.

A zero-coupon swap is an exchange of cash flows in which the stream of floating interest-rate payments is made periodically, as it would be in a plain vanilla swap, but where the stream of fixed-rate payments is made as one lump-sum payment at the time when the swap reaches maturity, instead of periodically over the life of the swap. A zero-coupon swap is an exchange of cash flows in which the stream of floating interest-rate payments is made periodically, as it would be in a plain vanilla swap, but where the stream of fixed-rate payments is made as one lump-sum payment at the time when the swap reaches maturity, instead of periodically over the life of the swap. Because the fixed leg is paid as a lump sum, valuing a zero-coupon swap involves determining the present value of those cash flows using a zero-coupon bond's implied interest rate. The bondholder on the end of the fixed leg of a zero-coupon swap is responsible for making one payment at maturity, while the party on the end of the floating leg must make periodic payments over the contract life of the swap. It is also possible for the floating-rate payments to be paid as a lump sum in a zero-coupon swap under an exchangeable zero-coupon swap.

Advanced Trading Strategies and Instruments

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