NISM Series IV (Interest Rate Derivatives) key terms

A financial contract whose value is determined by movements in an underlying interest rate or reference rate, without the parties necessarily exchanging principal amounts.

The face amount used to calculate interest payments and settlement obligations in a derivative; it is a computational reference only and is usually not exchanged between counterparties.

The published benchmark rate, such as a treasury yield or a benchmark overnight rate, to which floating payments in a derivative contract are linked.

The predetermined interest rate that remains constant over the life of a contract and is used to compute the fixed leg of a swap or a forward rate agreement.

An interest rate that resets periodically according to a specified reference rate plus or minus a quoted spread, so payments vary with market conditions.

A graphical or numerical relationship showing yields on debt instruments of similar credit quality across different maturities at a point in time.

A sequential method of deriving zero-coupon rates from observed prices of coupon-bearing instruments, working outward from the shortest maturity to longer ones.

The annualised return on an instrument that makes no interim payments, reflecting pure discounting of a single cash flow at a future date.

The set of discount factors, one per future date, used to convert expected future cash flows into their present value for pricing and valuation.

An interest rate agreed now for a loan or deposit that will start at a specified future date, implied by the shape of the current yield curve.

A bilateral contract that fixes the interest rate on a notional deposit for a future period, with the difference between the agreed and prevailing rate settled in cash.

An agreement in which two parties exchange periodic interest payments, typically one fixed and one floating, calculated on the same notional principal.

The most standard swap structure, with a fixed leg against a floating leg, both on the same currency, notional and payment schedule, and no embedded options.

The fixed rate that makes the present value of the fixed leg equal to the present value of the expected floating leg in a newly initiated swap.

A swap in which the floating leg compounds a published overnight rate over the accrual period, while the fixed leg pays a single agreed rate.

A series of call options on a reference rate that pays the holder when the rate exceeds a stated strike on each reset date.

A series of put options on a reference rate that compensates the holder when the rate falls below a stated strike on each reset date.

A strategy combining a purchased cap and a sold floor, or the reverse, to limit rate exposure within a band at reduced or zero upfront cost.

An option granting its buyer the right, but not the obligation, to enter into a specified interest rate swap on or before a future expiry date.

The individual option component covering one accrual period within an interest rate cap, valued separately and then summed to price the whole cap.

The exposure arising when the rate received and the rate paid do not move in perfect parallel, so a hedge fails to offset the underlying position exactly.

A swap in which both legs are floating but reference different rates or tenors, used to manage or trade the spread between those benchmarks.

The rule set that determines how many days are counted in an accrual period and what year length divides them when computing interest amounts.

The agreed rule, such as following or modified following, that shifts a payment date falling on a holiday to an eligible business day.

The interval between two successive reset or payment dates over which interest on a leg is calculated using the applicable rate and day count.

The date on which a floating rate is observed or fixed for the coming accrual period, determining the cash flow to be paid later.

The contractual or legal process of offsetting mutual obligations between two parties so that only a single net amount is settled or exposed to default.

A contractual provision allowing the non-defaulting party to terminate all transactions with a defaulting counterparty and settle one net balance.

The possibility that the other party to a derivative fails to meet its payment or delivery obligations, causing a loss to the surviving party.

The current replacement cost of a derivative position, being the loss that would arise if the counterparty defaulted at that moment.

The practice of valuing an open position at current market prices rather than at original cost, producing daily profit and loss and margin requirements.

Collateral collected from a clearing member or client at the outset of a position to cover potential future exposure during the close-out period after default.

Collateral transferred daily, or more frequently in volatile markets, to reflect changes in the mark-to-market value of open positions.

An entity that interposes itself between trade counterparties, becoming buyer to every seller and seller to every buyer, and guaranteeing performance.

The legal substitution of a new contract and counterparty, by which a central counterparty replaces the original bilateral relationship between two traders.

A firm admitted to clear trades directly with a central counterparty, posting margin and meeting default fund obligations on its own and client positions.

A pooled reserve contributed by clearing members, used after a defaulting member's own margin to cover losses that exhaust individual resources.

An entity that centrally records and maintains data on derivative transactions reported to it, supporting regulators in monitoring systemic risk.

The mandatory submission of trade details, valuations and collateral information to a designated authority or repository within prescribed deadlines.

A category of sophisticated market participant, such as a regulated financial institution or a sufficiently capitalised entity, permitted to trade certain derivatives.

An arrangement in which a client accesses a central counterparty through a clearing member, which manages margin and default management on the client's behalf.

The settlement of an uncleared derivative directly between the two original parties, without the interposition of a central counterparty.

The volatility input that, when used in an option pricing model, reproduces the observed market price of a cap, floor or swaption.

A pricing framework for options on forwards that assumes the underlying forward rate is lognormally distributed and uses discounting separately.

The worth today of a future cash flow or stream of cash flows after applying discount factors that reflect time and interest rates.

A swap entered at a fixed rate equal to the prevailing market swap rate, so that its initial net present value is approximately zero.

The optional exchange of notional principal amounts at the start or maturity of certain cross-currency or structured swaps.

The global transition away from legacy interbank offered rates toward transaction-based risk-free overnight benchmarks, requiring contract and system updates.

The substitute reference rate and spread adjustment that apply automatically in a contract if the original benchmark ceases to be published.

The scheduled date on which a calculated interest amount is due to be paid by one party to the other under the contract terms.