Glosario

Glosario de Productos Derivados

The following definitions are provided for educational purposes only. They are not in any way meant to serve as legal or official definitions, nor are they meant to serve as standard market definitions. In practice, terminology can differ across firms and across market segments.
1. What is a derivative?
2. Major derivative categories
3. How do privatelynegotiated (OTC) derivatives differ from futures?
4. Product description: Forward contracts
5. Definition: Trade date
6. Definition: Notional principal
7. Product description: Forward rate agreements (FRA)
8. Short-term interest rates: Libor
9. What is a swap?
10. What is an Interest rate swaps
11. Risks associated with interest rate swaps
12. Suppose a client enters into an interest rate swapwith a derivatives dealer to protect against rates rising by locking in a fixed rate. Doesn’t that mean the dealer expects rates to fall? Otherwise, why would the dealer take on the risk of losing money?
13. The value of an interest rate swap
14. Credit risks associated with swaps
15. What is the actual amount at risk in a swap?
16. What is an Options
17. How do options differ from swapsand forwards?
18. Credit exposures associated with options
19. Is an option a form of insurance?
20. What is an Interest rate options
21. Currency derivatives
22. What is an Cross-currency swaps
23. What is a credit derivative?
24. Product description: Credit Default Swaps
25. What risks does do the parties to a Credit Default Swap give up and what risks do they take on?
26. What is aTotal Return Swaps
27. What risks does do the parties to a Total Return Swap give up and what risks do they take on?
28. Why is derivatives documentation (such as the ISDA Master Agreement) important?
29. Definition: Payment netting
30. Definition: Close-out netting
31. What is the status of an individual transaction under the ISDA Master Agreement?

Product Descriptions and some FrequentlyAsked Questions
1. What is a derivative?
A derivative is a risk-shifting agreement, the value of which is derived from the value of an underlying asset. The underlying asset could be a physical commodity, an interest rate, a company’s stock, a stock index, a currency, or virtually any other tradable instrument upon which two parties can agree.
2. Major derivative categories
Derivatives fallinto two categories. One consists of customized, privately negotiated derivatives, which are known generically as over-the-counter (OTC) derivatives or, even more generically, as swaps. The other category consists of standardized, exchange-traded derivatives, known generically as futures. In addition, there are various types of product within each of the two categories as described below.
3. How doprivately negotiated (OTC) derivatives differ from futures?
First, the terms of a futures contract—including delivery places and dates, volume, technical specifications, and trading and credit procedures—are standardized for each type of contract. For swaps, the same characteristics are subject to negotiation by the parties to the contracts. Second, futures contracts are always traded on anexchange, while swaps are traded on a bilateral basis. Third, those who engage in futures transactions assume exposure to default by the exchange’s clearinghouse; for OTC derivatives, the exposure is to default by the counterparty. Fourth, credit risk mitigation measures, such as regular mark-to-market and margining, are automatically required for futures but optional for swaps. Finally, futures aregenerally subject to a single regulatory regime in one jurisdiction, while swaps—although usually transacted by regulated firms—are transacted across jurisdictional boundaries and are primarily governed by the contractual relations between the parties. Various products, including futures contracts and exchange-traded options, fall within the generic category of futures, but all have the common...