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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[citation needed]. 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.

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