Executive summary

            Though a complex phenomenon, interest rate derivates can be summed up in terms of the fundamental concepts that model their scope. The logistics of interest rate derivates are entrenched in a wide domain of corporate asset portfolio that relate the level of asset payment /cost and the interest rate within the market. Conventionally, interest rate derivatives implies the nominal derivate in which the existing level of assets has the equivalent value towards paying or receiving a specific sum of money at a given level of interest rate. The market for interest rate derivate occurs as the largest world’s derivative market. Such derivations are used as tools for control of the corporate levels of cash flows.

            Generally, they are used as tools with which the exposure towards economic risks can be reduced. This is achieved through drawing up of the global market and the state of the financial data whereby various strategies are developed for neutralizing the various   levels of market risks as well as bringing out new opportunities for investments. Interest rate derivations occur in a wide domain /types which are consequently applicable to specific areas of investment concern. These include interest rate swaps, swaptions, cross currency swaps, interest rates caps, budget cap, treasury locks, and forward rate agreements.

            Usually, the use of derivatives in problem solving is also a complex phenomenon that requires a broad framework of fundamentals aspects. Firstly, they can be used as tools   with which investors manage their levels of risks in the economic investments. This involves the application of various financial exchange programs for corporate assets which concur within the most appropriate levels of corporate investment benefits. Elsewhere, these derivatives can be used in reducing the cost of funding when swaps are paired with takedown placements in asset transactions that could be delayed to commensurate well with the economic requirements. Additionally, there could be issue of certificate of deposits by the banks that are automated to liquidate the value of assets.

            Interest rates derivatives for international exchange usually occur in two broad categories, which are the exotic coupon and the funding payments leg. For the funding payment leg, there exists a diverse array of floating coupons or even fixed coupons that equate to the existing levels of exchange rates. Additionally, the exotic coupon is a compound of a relationship between the current and the past levels of interest rate indices that are functionally independent to one another. Interest rate derivatives occur as financial structures modeled for investors who have specific customized needs for their cash flows or even specific movements to the interest rates. The modeling by such derivatives is made to capture a diverse network of threshold such as exchange rate volatility movements and other movements based on simple directions. The mode of modeling these derivatives is done through a multi-dimensional system which is time dependent to absorb the levels of risks such as forex rates and the short rates for both foreign and domestic financial markets. (http://corp.bankofamerica.com/public/public.portal?_pd_page_label=products/irderivatives/default)

            Summarily therefore, interest rate derivatives are used as tools with which a given set of financial asset could be bought or exchanged for within a given domain /level of interest rate. They tries to measure the level with which a certain set of asset can be exchanged for due to the external shocks implied by the volatility of exchange rates. Interest rate derivatives are therefore used as important options for managing the probable level of investment risks in exchange of assets.

Reference

Interest Rate Derivatives. Retrieved on 17th June 2008 from http://corp.bankofamerica.com/public/public.portal?_pd_page_label=products/irderivatives/default