DERIVATIVES PRODUCTS
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Bank Financial Management — CAIIB.
One-liners from this chapter
Free sample — 8 of 65 rapid-fire Q&A cards.
What is a derivative product in the context of financial markets?
A derivative is a financial instrument whose value is derived from an underlying asset such as interest rates, currencies, equities, or commodities. It is used for hedging risk or speculation.
What is a 'cap' in interest rate derivatives?
A cap limits maximum interest rate a borrower pays.
What are the four main types of derivative instruments used in treasury management?
The four main types are forwards, futures, options, and swaps. Each serves distinct hedging or speculative purposes in treasury operations.
What is a 'floor' in interest rate derivatives?
A floor sets minimum interest rate received by a lender.
What is a forward rate agreement (FRA) and what risk does it hedge?
An FRA is an OTC contract fixing an interest rate for a future borrowing or lending period. It hedges interest rate risk by locking in borrowing costs or investment yields.
What is an interest rate collar?
A collar combines buying a cap and selling a floor simultaneously.
How does an interest rate swap (IRS) work in bank treasury management?
In an IRS, two parties exchange interest payment streams — typically fixed for floating — on a notional principal without exchanging the principal itself. Banks use it to manage asset-liability mismatches.
What does 'theta' represent in options pricing?
Theta measures time decay of an option's premium value.
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