Question
There are several different types of derivative securities, including forwards, futures, swaps, inverse floaters, and structured notes. These securities may be used to manage the
There are several different types of derivative securities, including forwards, futures, swaps, inverse floaters, and structured notes. These securities may be used to manage the risks of business organizations or to speculate on certain market events. Consider the descriptions or characteristics in the following table and indicate the type of derivative to which each corresponds:
Description or Characteristic | Type of Derivative |
---|---|
The most common form of this type of derivative involves counterparty A making a fixed-rate interest payment to counterparty B while receiving a floating-rate interest payment from the counterparty, and vice versa. | |
This type of debt security has a coupon that decreases when interest rates increase, and vice versa. | |
This type of derivative security is intended to eliminate exchange rate risk and involves counterparties that exchange the principal and interest payments of the loan in one currency for the equal discounted value of a counterpartys loan in another currency. | |
This type of security is backed or collateralized by another debt security and may take the form of a zero coupon security or may receive periodic interest payments. |
|
Sarah is an investor interested in purchasing securities. The securities cash flows are derived from the interest payments made on collateralized loans. Which derivative should she choose?
Interest rate future
Interest rate swap
Currency swap
Structured note
Investment banks will purchase large blocks of 30-year noncallable Treasury bonds and then (securitize or strip) them to create a series of zero coupon bonds.
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