Complex Derivative Linked to Constant Maturity Swap

Follow us on LinkedIn

Yonhap recently reported that South Korea’s investors appear to have lost money by investing in complex derivative products.

https://en.yna.co.kr/view/AEN20190819004400320The Financial Supervisory Service (FSS) said 3,654 individual investors and 188 businesses were found to have bought 822.4 billion won (US$677.8 million) worth of so-called “derivatives-linked fund” options sold by banks as of Aug. 7.

Such derivative products are structured to track the performance of constant maturity swap, or a swap that allows the purchaser to fix the duration of received flows on a swap, of Treasury bonds of the United States and Britain and the yield of Germany’s 10-year state bonds.

The options turned into losers as bond yields in the U.S., Britain and Germany have unexpectedly sank amid speculations that central banks in major economies may aggressively slash their interest rates.

Media reports said some investors bought the options because they were believed to have invested into government bonds of the U.S., Britain and Germany. Read more…

It’s always prudent to invest in what you know. However, in this case, the financial product is probably too complex for the ordinary investors to understand. Its return is linked to the performance of a constant maturity swap.

A constant maturity swap is an interest rate swap where the interest rate on one leg is reset periodically, but with reference to a market swap rate rather than LIBOR. The other leg of the swap is generally LIBOR, but may be a fixed rate or potentially another constant maturity rate. Constant maturity swaps can either be single currency or cross currency swaps. Therefore, the prime factor for a constant maturity swap is the shape of the forward implied yield curves. A single currency constant maturity swap versus LIBOR is similar to a series of differential interest rate fixes (or “DIRF”) in the same way that an interest rate swap is similar to a series of forward rate agreements. Valuation of constant maturity swaps depend on volatilities of different forward rates and therefore requires a stochastic yield curve model or some approximated methodology like a convexity adjustment … Read more

Further questions

What's your question? Ask it in the discussion forum

Have an answer to the questions below? Post it here or in the forum

LATEST NEWSJamie Dimon endorses Disney CEO Bob Iger in proxy fight with Nelson Peltz's Trian Partners
Jamie Dimon endorses Disney CEO Bob Iger in proxy fight with Nelson Peltz's Trian Partners

JPMorgan Chase CEO Jamie Dimon endorsed Disney CEO Bob Iger in his proxy battle with activist Trian Partners, CNBC's David Faber has learned.

Stay up-to-date with the latest news - click here
LATEST NEWSElevated Signals Digitizes North America’s First Vertical Hydroponic Greenhouse
Elevated Signals Digitizes North America’s First Vertical Hydroponic Greenhouse

Vertical Harvest has selected Elevated Signals as its manufacturing software partner to drive profitability and support its planned 800-fold increase in cultivation space VANCOUVER, British Columbia & JACKSON HOLE, Wyo. — Elevated Signals Inc. (“Elevated Signals”), a company pioneering modern manufacturing software, announces its successful…

Stay up-to-date with the latest news - click here
LATEST NEWSA mom had her first baby at 25 and her second at 42. There were big differences.
A mom had her first baby at 25 and her second at 42. There were big differences.

An older mom gave birth to her second baby at 42. Her first pregnancy came at age 25. She discusses the differences and similarities in the age gap.

Stay up-to-date with the latest news - click here
LATEST NEWSDow Jones Futures Rise As Nvidia Gets Big Price-Target Hike; Tesla Stock Slides On Downgrade To Sell
Dow Jones Futures Rise As Nvidia Gets Big Price-Target Hike; Tesla Stock Slides On Downgrade To Sell
Stay up-to-date with the latest news - click here
LATEST NEWSTrueContext Announces Definitive Agreement to Be Acquired by Battery Ventures in An All-Cash Transaction
TrueContext Announces Definitive Agreement to Be Acquired by Battery Ventures in An All-Cash Transaction

OTTAWA, March 13, 2024 (GLOBE NEWSWIRE) — TrueContext Corporation (“TrueContext” or the “Company”) (TSXV:TCXT), a global leader in field intelligence, is pleased to announce that the Company and an entity (the “Buyer”) controlled by Battery Ventures (“Battery”) have entered into an arrangement agreement (the “Arrangement…

Stay up-to-date with the latest news - click here

Leave a Reply