Knowledge

Interest Rate Derivative

A derivative contract that is linked to one or more reference interest rates.

Interest Rate Derivatives are contracts between two parties to exchange a notional amount of money at a certain interest rate: therefore, the amount of money received at maturity is affected by the position taken in. The Bank for International Settlements estimated that rates derivatives market constitutes the largest derivative market, with a notional amount of outstanding of US$494 trillion. The most common OTC rates derivative is the Interest Rate Swap (IRS), where two parties exchange their respective interest rate payments on the same amount of underlying notional. Other noteworthy rates derivatives are Forward Rate Agreements (FRAs) and bond options.