Post by alanbond on Jun 6, 2014 0:59:50 GMT 4
Currency and Interest Rate Derivatives
Joel Spina
Montereale Consulting; Collin College; Federal Reserve Bank of Dallas; American Economic Association; University of Phoenix
April 20, 2014
Abstract:
Currency derivatives are an important tool to manage foreign exchange risk, hedging. Organizations transacting, investing, or operating in other nations appreciate the possibility of managing currency risk. Investors, financial institutions, and businesses use currency derivatives to complement their foreign exchange positions, again mitigating exchange risks in investment, and speculation. The main benefit obtained by firms using currency derivatives is the reduction of variation in future cash flows or earnings. Interest rate derivatives are instruments in which the underlying asset is the right to pay or receive a notional amount of money at a given interest rate. The objective for their use is to mitigate interest rate risks, the major users of these instruments are corporations, agencies, and governments from nations to municipalities. Because of the typically unique characteristics of these derivatives, the bulk of this trade is done over-the-counter and generally brokered by dealers and financial institutions. According to the Bank for International Settlements (2013), the outstanding amount of single-currency interest rate derivatives in June 2013 surpassed USD 15 trillion, and only in the OTC market, involving a notional value of USD 561.3 trillion. On this survey the nature of such instruments, their valuation, and risk management strategies are analyzed.
Number of Pages in PDF File: 24 see: papers.ssrn.com/sol3/papers.cfm?abstract_id=2438980