Tuesday, October 13, 2009
Interest rate derivative
An interest rate derivative is a derivative where the underlying asset is the right to pay or receive a (usually notional) amount of money at a given interest rate.
The interest rate derivatives market is the largest derivatives market in the world. Market observers estimate that US$60 trillion by notional value of interest rate derivatives contract had been exchanged by May 2004. Measuring the size of the market is difficult because trading in the interest rate derivative market is largely done over-the-counter. According to the International Swaps and Derivatives Association, 80% of the world's top 500 companies as of April 2003 used interest rate derivatives to control their cashflows. This compares with 75% for foreign exchange options, 25% for commodity options and 10% for stock options.