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An equity swap is a financial derivative contract (a swap) where a set of future cash flows are agreed to be exchanged between two counterparties at set dates in the future. [1] The two cash flows are usually referred to as "legs" of the swap; one of these "legs" is usually pegged to a floating rate such as LIBOR. This leg is also commonly ...
In total return swaps, the underlying asset, referred to as the reference asset, is usually an equity index, loans, or bonds. This is owned by the party receiving the set rate payment. Total return swaps allow the party receiving the total return to gain exposure and benefit from a reference asset without actually having to own it.
A subordinated risk swap (SRS), or equity risk swap, is a contract in which the buyer (or equity holder) pays a premium to the seller (or silent holder) for the option to transfer certain risks. These can include any form of equity, management or legal risk of the underlying (for example a company ).
A delta one product is a derivative with a linear, symmetric payoff profile. That is, a derivative that is not an option or a product with embedded options. Examples of delta one products are Exchange-traded funds, equity swaps, custom baskets, linear certificates, futures, forwards, exchange-traded notes, trackers, and Forward rate agreements.
A waterfall analysis details the exact payouts to every shareholder on a company's cap table based on a specific amount of proceeds available to equity in a particular liquidity scenario. Since a company often does not know if, when, or how it will achieve a liquidity event, waterfall analysis typically covers a range of liquidity assumptions.
A Credit valuation adjustment (CVA), [a] in financial mathematics, is an "adjustment" to a derivative's price, as charged by a bank to a counterparty to compensate it for taking on the credit risk of that counterparty during the life of the transaction.
Another important relationship is that if the fixed swap rate is equal to the strike of the caps and floors, then we have the following put–call parity: Cap-Floor = Swap. Caps and floors have the same implied vol too for a given strike. Imagine a cap with 20% vol and floor with 30% vol. Long cap, short floor gives a swap with no vol.
Quanto swaps, in which one counterparty pays a non-local interest rate to the other, but the notional amount is in local currency. The second party may be paying a fixed or floating rate. For example, a swap in which the notional amount is denominated in Canadian dollars, but where the floating rate is set as USD LIBOR, would be considered a ...