536-8.1b_quote[1] - Background Information - OTC...

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The following definitions are provided for educational purposes only. They are not in any way meant to serve as legal or official definitions, nor are they meant to serve as standard market definitions. In practice, terminology can differ across firms and across market segments. 1. What is a derivative? 2. Major derivative categories 3. How do privately negotiated (OTC) derivatives differ from futures? 4. Product description: Forward contracts 5. Definition: Trade date 6. Definition: Notional principal 7. Product description: Forward rate agreements (FRA) 8. Short - term interest rates: Libor 9. What is a swap? 10. Product description: Interest rate swaps 11. Risks associated with interest rate swaps 12. Suppose a client enters into an interest rate swap with a derivatives dealer to protect against rates rising by locking in a fixed rate. Doesn t that mean the dealer expects rates to fall? Otherwise, why would the dealer take on the risk of losing money? 13. The value of an interest rate swap 14. Credit risks associated with swaps 15. What is the actual amount at risk in a swap? 16. Product description: Options 17. How do options differ from swaps and forwards? 18. Credit exposures associated with options 19. Is an option a form of insurance? 20. Product description: Interest rate options 21. Currency derivatives 22. Product description: Cross - currency swaps 23. What is a credit derivative? 24. Product description: Credit default swaps 25. What risks does do the parties to a credit default swap give up and what risks do they take on? 26. Product description: Total return swaps 27. What risks does do the parties to a total return swap give up and what risks do they take on? 28. Why is derivatives documentation (such as the ISDA Master Agreement) important? 29. Definition: Payment netting 30. Definition: Close - out netting 31. What is the status of an individual transaction under the ISDA Master Agreement? Product Descriptions and some Frequently Asked Questions 1. What is a derivative? A derivative is a risk transfer agreement, the value of which is derived from the value of an underlying asset. The underlying asset could be a physical commodity, an interest rate, a company’s stock, a stock index, a currency, or virtually any other tradable instrument upon Page 1 of 6 Background Information - OTC Derivatives Documentation 11/15/2010 http://www.isda.org/educat/faqs.html Page 1 of 12
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which two parties can agree. An over-the-counter (OTC) derivative is a bilateral, privately- negotiated agreement that transfers risk from one party to the other. 2. Major derivative categories Derivatives fall into two categories. One consists of customized, privately negotiated derivatives, which are known generically as over-the-counter (OTC) derivatives or, even more generically, as swaps . The other category consists of standardized, exchange-traded derivatives, known generically as futures . In addition, there are various types of product within each of the two categories as described below. 3. How do privately negotiated (OTC) derivatives differ from futures?
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This note was uploaded on 11/07/2011 for the course FIN 536 taught by Professor Staff during the Spring '11 term at S.F. State.

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536-8.1b_quote[1] - Background Information - OTC...

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