This document discusses interest rate derivatives, which are financial instruments derived from underlying interest rates or cash markets. Some popular types of interest rate derivatives are futures, forwards, options, and swaps. Interest rate derivatives allow investors to adjust portfolio positions more quickly and cheaply than transacting in the underlying instruments. They also provide more liquidity. Specifically, the document defines interest rate futures, swaps, caps, and floors, and discusses the markets for exchange-traded versus over-the-counter interest rate derivatives.

1. Interest Rate Derivatives Khader Shaik

2. Derivatives Financial Derivative Financial Instrument that is derived from the underlying real asset Derivative Instruments Futures Forwards Options Swaps Caps Floors etc

3. IR Derivatives IR Derivative Derivatives that are derived from Cash Market or Reference Interest Rate Why IR Derivatives Cheaper (less execution cost) than underlying instrument transactions Quicker to adjust the portfolio positions More liquid than the underlying instrument

4. IR Derivatives Popular IR Derivatives IR Futures IR Swap IR Cap IRD Markets Exchange Traded IRDs OTC IRDs IR Categories Short-term Underlying security with maturity less than a year Long-term Underlying security with maturity more than a year

5. IR Futures IR Futures Futures contract to buy or sell instrument at some future date Notional Coupon Coupon rate on the underlying instrument Popular IRF Exchanges CBOT CME

6. Exchange Traded IRDs Treasury Bond Futures Treasury Bond underlier Treasury Note Futures Treasury Notes underlier Agency Note Futures Fed Agency Notes like Fannie Mae, Freddie Mac etc Eurodollar futures US Dollars deposited outside US Based on LIBOR

7. IR Cap Buyer receives the money at the end of each period when interest rate exceeds the agreed strike price Used to protects borrower from adverse movements in interest rates Works as a Insurance Usually LIBOR is used as reference rate Equal to series of European Call Options Also referred as CAPLETS

8. IR Floor Buyer receives the money at the end of each period when interest rate falls below the agreed strike price Used to protect from lender from adverse movements in interest rates Works as a Insurance Usually LIBOR is used as reference rate Equal to series of European PUT Options Also referred as FLOORLETS