Back to course

Introduction to Fixed Income Derivatives

Rate derivatives let a participant change their interest rate exposure without touching the underlying borrowing or lending. That separation is the entire point.

Interest rate swaps

Two parties exchange cash flows on a notional amount: one pays fixed, the other pays floating (SOFR, EURIBOR and similar). The notional itself is never exchanged; only the net difference changes hands each period.

Net payment=N×(rfloat−rfixed)×Δt\text{Net payment} = N \times (r_{\text{float}} - r_{\text{fixed}}) \times \Delta t

The largest derivatives market in the world, and the use case is straightforward. A company with a floating rate loan that wants certainty pays fixed in a swap. Their floating obligations now cancel and they are left paying fixed, without renegotiating the loan.

A swap has duration, so it is also the standard tool for adjusting portfolio interest rate exposure. Since notional is not exchanged, it does that capital-efficiently: a pension fund can add years of duration without buying bonds.

The rest of this lesson is for subscribers

Unlock every lesson in Asset Classes and Trading Products, and every other premium course.

Subscribe to continue

Test your knowledge

Questions are only available to subscribers.
Continue
NextIntroduction to ETFs

Keep reading Asset Classes and Trading Products

48 lessons in this course, and every other premium course, on one subscription.

Subscribe now
  • Every lesson in all seven courses, with the worked examples and interactive simulators
  • Graded questions on every lesson, with explanations for the wrong answers as well as the right one
  • The trainers, timed assessments and brainteaser library that go with them