The following definitions are provided for educational purposes only. They are not in any waymeant to serve as legal or official definitions, nor are they meant to serve as standard marketdefinitions. In practice, terminology can differ across firms and across market segments. 1. What is a derivative?2. Major derivative categories3. How do privately negotiated (OTC) derivatives differ from futures?4. Product description: Forward contracts5. Definition: Trade date6. Definition: Notional principal7. Product description: Forward rate agreements (FRA)8. Short-term interest rates: Libor9. What is a swap?10. Product description: Interest rate swaps11. Risks associated with interest rate swaps12. Suppose a client enters into an interest rate swap with a derivatives dealer to protectagainst 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 swap14. Credit risks associated with swaps15. What is the actual amount at risk in a swap?16. Product description: Options17. How do options differ from swaps and forwards?18. Credit exposures associated with options19. Is an option a form of insurance?20. Product description: Interest rate options21. Currency derivatives22. Product description: Cross-currency swaps23. What is a credit derivative?24. Product description: Credit default swaps25. What risks does do the parties to a credit default swap give up and what risks dothey take on?26. Product description: Total return swaps27. What risks does do the parties to a total return swap give up and what risks do theytake on?28. Why is derivatives documentation (such as the ISDA Master Agreement) important?29. Definition: Payment netting30. Definition: Close-out netting31. 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 anunderlying asset. The underlying asset could be a physical commodity, an interest rate, acompany’s stock, a stock index, a currency, or virtually any other tradable instrument uponPage 1 of 6Background Information - OTC Derivatives Documentation11/15/2010http://www.isda.org/educat/faqs.htmlPage 1 of 12
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