law of one price
two assets with the same characteristics will have the same price
Binomial pricing model
seeks to derive the price of a call option through the law of one price
interest rate swap agreements
agreement to exchange interest rate payments on a notional principal amount over a specific period of time
notional principal amount
principal on which payments are based but which is not exchanged
counterparty
a legal entity that engages in a n over the counter securities transaction
Secondary market for swaps
is virtually nonexistent
swaption
an option on a swap agreement
Currency swaps
agreement to exchange principal and interest in one currency for principal and interest in another currency
Total return swaps
separates the credit risk on an asset from other risks by swapping payments based on the value as separate from payments on contractual terms
Credit Default Swaps
similar to simple insurance in a market where insurance would normally not exist
Interest rate agreements
combine features of options and swaps
Caplets
an interest rate cap can be seen as a series of options called
Collar
Interest rate floors and ceilings can be combined to form a