Accounting for Investments, Volume 2: Fixed Income Securities and Interest Rate Derivatives—A Practitioner's Guide

SUMMARY

• A derivative instrument is a financial instrument, such as an option or futures contract, whose value depends on the performance of an underlying security or asset. Futures contracts, forward contracts, options, and swaps are the most common types of derivatives.
• Derivatives are generally used by institutional investors to increase overall portfolio return or to hedge portfolio risk. A derivative is a financial instrument that does not constitute ownership, but a promise to convey ownership.
• Over-the-counter (OTC) derivatives are contracts that are traded directly between two parties, without going through an exchange or other intermediary. These are privately negotiated trades and the terms are structured in such a way to suit the parties involved in the trade. Interest rate swaps, forward rate agreements, and other exotic options are usually traded as the over-the-counter derivatives.
• The OTC derivative market is the largest market for derivatives. The OTC market is largely unregulated when it comes to disclosure of information between the parties. The predominant players in this market segment are banks and other unregulated entities like hedge funds. Reporting of OTC contracts is difficult because trades often occur privately between the counterparties and as such these trades are not recorded on any exchange.
• As per the market survey results provided by the International Swaps and Derivatives Association (ISDA), the notional amount outstanding of interest rate derivatives ...