be argued that an airline should not expose its shareholders to risks associated with the
future price of oil when there are contracts available to hedge the risks.
Suppose the one-year gold lease rate is 1.5% and the one—year risk-free rate
The spread between the interest rates offered to X and Y is 0.8%/year on fixed rate and
0% on the variable rate. Thus, the total maximum gain possible from a swap is 0.8%.
Out of this, the bank will take away 0.2% leaving 0.6% to be equally di
CMOs and SMBS
Collateralized Mortgage Obligations
Bond classes created by redirecting the cash
flows of mortgage related products so as to
mitigate prepayment risk.
These are instruments that have varying riskreturn characteristics that may be more suitab
C O L L AT E R A L I Z E D D E B T
O B L I G AT I O N S ( C D O S )
A CDO is a security backed by a diversified pool
of one or more of the following types of debts:
US domestic grade and high yield corporate bonds
US domestic bank loans
Mortgages and Overview
A prelude to the in-depth study of
mortgage backed securities.
loan secured by collateral that obliges the borrower
to make a predetermined series of payments.
lender gets the right to foreclose the loan in the