Interest Rate Swaps, Options, and Derivatives
The speaker presents an educational seminar to prepare students for the CFA exam. This video covers the following topics: interest rate swaps, interest rate caps, Interest Rate Options, Interest rate floors, and forward contracts.
Interest rate swaps are basically agreements between two counterparties to swap cash flows. Swaps are basically a series of forward contracts, for which payments are known 1 period they have to be made.
Interest rate caps are contracts which provide insurance against interest rates going past a certain interest rate. Interest rate caps are very common on adjustable rate mortgages which typically have a cap which is 5% higher than the initial interest rate.
The discussion moves on to discuss the interest rate floor. This is a contract that places a lower boundary limit on interest that can be charged. When borrowers are concerned that interest rates may go higher on their floating rate notes, they may initiate a long collar position which shorts the floor and goes long the cap. The long cap position protects against upside movement past the cap strike while the short floor offsets the cost of purchasing the cap.
Interest rate swaps are basically agreements between two counterparties to swap cash flows. Swaps are basically a series of forward contracts, for which payments are known 1 period they have to be made.
Interest rate caps are contracts which provide insurance against interest rates going past a certain interest rate. Interest rate caps are very common on adjustable rate mortgages which typically have a cap which is 5% higher than the initial interest rate.
The discussion moves on to discuss the interest rate floor. This is a contract that places a lower boundary limit on interest that can be charged. When borrowers are concerned that interest rates may go higher on their floating rate notes, they may initiate a long collar position which shorts the floor and goes long the cap. The long cap position protects against upside movement past the cap strike while the short floor offsets the cost of purchasing the cap.
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