What is Interest Rate Derivatives?
An interest rate derivative is a derivative where the underlying asset is the right to pay or receive a notional amount of money at a given interest rate. The interest rate derivatives market is the largest derivatives market in the world, supporting by 2 facts: 1. the notional amount outstanding in June 2009 were US$437 trillion for OTC interest rate contracts, and US$342 trillion for OTC interest rate swaps. – The Bank for International Settlements 2. 80% of the world’s top 500 companies as of April 2003 used interest rate derivatives to control their cashflows. – The International Swaps and Derivatives Association The basic building blocks for most interest rate derivatives can be described as vanilla (simple, basic derivative structures, usually most liquid) products. The next intermediate level is a quasi-vanilla class of (fairly liquid) derivatives. Building off these structures are the exotic interest rate derivatives (least liquid, traded over the counter). These structures are
