Delphi Risk Management :
change management financial product expert-witness and arbitration financial innovation and risk consulting banking training
Key financial instruments
by Warren Edwardes, Chief Executive of Delphi Risk Management Limited.
Key financial instruments Spring 2001, Issue 10 Global Trading, London link
"Keys to the Kingdom (1)" International Finance and Treasury Newsletter, 5 March 2001
"Keys to the Kingdom (2)" International Finance and Treasury Newsletter, 12 March 2001
This article forms the basis of chapter 5 and appendix 2 (financial risk management instruments) of the book by Warren Edwardes
"Key Financial Instruments: understanding and innovating in the world of derivatives" 4 February 2000 Financial Times Prentice Hall ISBN 0273 63300 7 London link
Warren was previously on the board of Charterhouse Bank and has worked in the treasury divisions of Barclays Bank, British Gas and Midland Bank. He first researched into what were later to be called "derivatives" in 1975 and was part of the team that executed one of the world's first currency swaps in 1981. Since then he has devised and transacted numerous structures that form part of the history of derivatives. Warren can be contacted via email@example.com
Edwardes is a Board Governor of The Institute of Islamic Banking & Insurance
Derivatives by their nature do not introduce risks of a fundamentally different kind or of a greater scale than those <risks> already present in the financial markets. - Paul Volcker, former Federal Reserve Chairman
This article provides the key to understanding and practising financial product development. It not only explains how such products have been built from four gene pools but that an understanding of this process provides the basic recipe for creating an infinite variety of financial products. So read this article and go make your own financial product. And I hope you find buyers for it.
Section A: The four keys
There are four key financial instruments that can be combined in various forms with each other or with various guises of themselves to form all other financial products. These key products are the spot contract, the forward contract, the option contract and the deposit contract.
Other than a small number of highly exotic financial instruments, most of which I would argue to be of limited end-user use other than perhaps as examples of Accounting innovation or Ignorance innovation, every financial instrument already created or likely to be created can be broken down into combinations of these key instruments. So a genuine understanding of these simple products is all that is needed. Just go through the list of financial instruments in Appendix 2 of the book "Key financial instruments". They are all built up from these four key instruments.
The first key financial instrument is the Spot contract which is a contract to buy or sell some commodity for a cash payment in a particular currency or to exchange one currency for another. Settlement takes place in two business days from the date of dealing in the case of foreign exchange spot contracts. But this is not a derivative contract. Derivatives are derived from this key financial instrument.
Beyond the Spot contract, there are two key types of financial instrument which apply to all of the risk types mentioned in the previous chapter: Forwards and Options. These contracts may be over-the-counter (OTC) which means between a corporate and a bank or bank to bank or Exchange Traded. Such exchange traded forward contracts are known as futures contracts.
The final of the four key financial instruments is the deposit contract. Obviously a loan contract is the same as a deposit as one party's loan is another party's deposit. With this contract one can perform time shifts, moving cash flows from the beginning of the contract to the end or smoothing out cash flows from a series of contracts to produce an average flat rate for a package.
If it is not clear what an option "straddle" is or you confuse it with a "strangle" dont feel intimidated. They are both combinations of easily explained options and you really do not need to know what they are. You need to know WIGO - What is going on. If a product cant be explained dont permit it until it can. If someone wants to sell you a Deferred LIBOR setting swap and you dont know why you should buy it - then dont. The salesman will have a very good reason - his needs for a new Ferrari are probably greater than your needs!
Section B: forwards, futures, options and swaps
It is a mistake to look too far ahead. Only one link of the chain of destiny can be handled at a time. - Winston Churchill
A Forward Contract is a firm commitment to buy or sell something. The contract could be for foreign currency, gold, sugar or oil. A variant on a Forward Contract is a Forward Contract for Differences (FCFD). This is a Forward Contract but is settled in cash based on price movements.
Forward exchange contracts
The most common Forward contract is a Forward foreign exchange contract which is a contract to buy a specified amount of currency A for a specified amount of currency B at a specified date in the future and at a specified exchange rate. The standard and therefore liquid maturity dates for such contracts are one week, one month, two months, three months, six months and twelve months beyond the spot date. Intermediate months and longer dated contracts are also traded in the more liquid currency pairs. Settlement can also be made before the spot date for value Tomorrow or even value Today using short date swaps Tom/next and spot/next.
To distinguish these contracts from forward swap contracts these contracts are known as Forward Exchange Outright contracts.
Forward rate agreements (FRAs)
A Forward Rate Agreement (FRA) is used by corporate treasurers to protect against future short-term interest rate costs (or investment returns).
By entering into an FRA, the parties lock in an interest rate for a stated period of time starting on a future settlement date, based on a specified notional principal amount. The buyer of the FRA enters into the contract to protect itself from a future increase in interest rates. This occurs when a Company believes that interest rates may rise and wants to fix its borrowing cost today. The seller of the FRA wants to protect itself from future falls in interest rates. Investors who want to hedge the return obtained on a future deposit use this strategy. FRAs are cash settled by way of a formula and lock in the market component only for the borrowing or investment - LIBOR. Essentially the difference between the FRA contract rate and the LIBOR settlement rate for the FRA Interest Period in the currency of the Notional principal Amount is calculated; then pro-rated by the number of days in the FRA Interest Period over the year basis for the currency of the notional principal i.e. 360 or 365 days; then as LIBOR is quoted on the basis of interest paid in arrears on the Maturity Date, the settlement factor is discounted by LIBOR to the Start date, the beginning of the Interest Period. Finally the settlement factor is multiplied by the Notional Principal Amount in the currency of the contracts. LIBOR in most currencies is on a 360 day basis whilst in Sterling it is on a 365 day basis. If you are not sure of the basis on an illiquid currency, then confirm it before dealing. It affects the price.
There is no attached facility to borrow or lend funds and the FRA does not guarantee a future level of borrowing or deposit. The margin over LIBOR that a particular entity must pay in the market can vary considerable over time Furthermore, the LIBOR defined under the FRA contract may not be the same as the LIBOR defined in the borrowers loan agreements. So FRAs provide a good but inexact hedge as future borrowing costs. Borrowers wishing to use FRAs to hedge their risk should ensure that all their LIBOR linked funding agreements use the derivatives market standard for LIBOR in their loan agreements the British Bankers Association interest settlement rate.
Forward-Forward Loans and Deposits
The predecessor of the FRA was known as the Forward-Forward loan and deposit contract and was developed in the 1970s. It was derived from a combination of, say, a six-month borrowing and a three-month deposit. Unlike an FRA, the Forward-Forward was not cash settled. It created an actual borrowing or a real deposit of three months in three months time. Thus the bank was obliged to lend funds to a customer on the maturity of the forward-forward loan contract and the price quoted included the lending margin for the particular customer.
The term Forward confusingly is also used to denote Forward swaps. These are not Forward contracts but foreign exchange contracts that alter the maturity date of a contract. They are also known as Foreign exchange swaps or Forex swaps. These are distinguished from forward outright contracts.
A forward outright is the classic forward contract entered into by a corporation to exchange currencies at an agreed rate in the future. A forward swap is a financial instrument banks deal in but only the major corporate treasurers. The inter-bank market for foreign exchange consists mainly of Spot dealing. When a customer requires a forward outright contract, the bank enters into the spot market as there is no forward outright inter-bank market. Say the customer wants to buy British Pounds and sell US Dollars in one years time. The bank will buy the GBP spot versus USD. That leaves the bank with a time shift exposure. To eliminate this, the bank will enter into a forward swap which is a package of two legs- the bank will sell GBP spot versus USD and simultaneously buy GBP versus USD forward for value one year. This reverses the spot contract and moves the GBP/USD position forward to match the customers forward outright contract requirement.
A variant on a Forward swap is a Forward-Forward swap which should not be confused with a Forward-Forward loan or deposit contract described above. The forward swap moves a foreign exchange position from spot to a date in the future. The forward-forward swap moves the position from one date in the future to another date in the future.
As stated in the previous chapter, Futures are Forward contracts traded on an exchange. The contracts dealt by the recently released from prison, Nick Leeson, were futures contracts based on the Tokyo stock market. To a greater or lesser extent all derivatives provide leverage. When an investor buys a government bond or a share he pays cash for it - up front. Under an OTC forward contract, the treasurer has to satisfy the companys bank of its credit-worthiness.
Under an exchange-traded futures contract, the investor has to place margin - initial and variation. Initial margin represents the exchanges view of what an investor could lose in a bad day. It is like a deposit against possible next day losses. Recall that the Singapore futures exchange, SIMEX doubled initial margin following Barings difficulties. Variation margin reflects the actual movement in the market and has to be settled immediately. So unlike a forward contract, a futures contract has no built up value at any time. The investor gains and loses on a day-by-day basis as contracts are effectively marked to market. This makes futures the most transparent of derivative contracts. Funds have to be authorised and raised daily to cover losses. Losses cannot be carried forward on a year by year basis as happened at Showa Shell of Japan.
The price of an article is charged according to difference in location, time or risk to which one is exposed in carrying it from one place to another or in causing it to be carried. Neither purchase nor sale according to this principle is unjust. - St. Thomas Aquinas
An option gives the holder, on payment of an insurance premium, the right, but not the obligation, to buy or sell something in the future at a specified price and on a specified date or between specified dates. Nothing particularly new here. In the 1630s there was a market in Holland in tulip bulb options. At the height of the Tulipmania in Holland in the 1630s, the wife of a tulip option dealer thought that the tulip brought home by her husband was an onion. She proceeded to cook it.
Listed options take the form of Warrants. Options can be to buy one currency for another at an agreed exchange rate, the strike price. Options are also written on individual share prices or stock market indices such as the Londons FTSE100. An option to buy something is a Call option, whilst an option to sell something is a Put option.
Such options include the interest rate options sold without authority by the British Local Authority, Hammersmith & Fulham to generate cash and thereby by-pass the UK governments external financing limit. As happened with Tulip options in Holland, the market crashed when demand disappeared. In the late 1980's a UK conglomerate in its take-over procedures for a UK Utility Company, bought options from its investment bank on a basket of other similar Utility Company stocks. But be careful here as in certain jurisdictions such an operation could be deemed to be insider trading. S&P 500 and FTSE 100 options are used to provide guaranteed no-loss investment products.
A currency option gives the holder, on the immediate payment of a premium, the right, but not the obligation, to buy a specified amount of Currency A and sell a specified amount of Currency B at a specified exchange rate and on a specified date or between specified dates A European option gives the holder the right to exercise his option on only one date, the exercise date. An American option gives the holder the right to exercise the option at any time from the deal date to the exercise date. Exercise takes place two business days from the date of exercise in the case of currency options. Asian options are quite different and are average rate options. At the end of the contract period, the strike rate is compared with the average rate observed for the currency exchange. If the strike rate is favourable to the holder of the Asian option, the option is exercised by way of cash settlement. Note that the average used can be observed daily, weekly, monthly or simply the difference between the start and end date of the contract. Asian options are useful for hedging currency exposure where management accounts are translated on an average rate for the accounting period and are misleading cheaper that American or European options. They simply cost less because of the statistical fact that an average of a price series is more stable than any particular price series. Asian options are cash settled automatically. Be careful about the basis for the averaging as the bank providing the average rate option may be in a position to manipulate the fixings in its favour. A noisy operation in the foreign exchange market just before a fixing by a major foreign exchange bank can have a marked impact on the exchange rate for the few minutes it takes for the fixing to be made.
Atlantic or Icelandic options are similar to American options in that they can be exercised at any time between two dates but the first date is not the deal date of the option but some agreed date in the future, but obviously before the maturity date.
In the financial markets everything is negotiable and all derivatives can be tailored to meet customer needs and exercise terms can be agreed between the parties. As with all financial instruments it is vital to check details with your counterparty before dealing. On 26 July 1999, EUR/GBP was 0.6634 or 0. 6634 British Pounds for each Euro. In the case of currencies, a Call option can be confusing and care must be taken to avoid misunderstandings. The Call could be a right to buy GBP and sell EUR or the Call could be the right to buy EUR and sell GBP. So tell it like it is ask for a GBP call, EUR put if that is what you want. If there is even the slightest doubt specify the contract being discussed clearly. It is much easier to eliminate doubts before dealing than after exchanging contracts and positions are hedged in the market. Short cuts may sound highly professional but could lead to embarrassment.
Option dated forward contracts
These contracts have been available long before currency options and in fact used to be known as currency options. An option dated forward contract is a forward exchange contract where the customer has the right to choose when to exchange currencies between two specified dates. This allows for delays in shipment or payment of underlying trade transactions. These are purely bank to customer contracts and generally are not available in the inter-bank market.
The choice of date feature in option dated forwards is an interesting parallel with American currency options. Pricing is based on the worst rate for the option period. Consider the EUR/GBP currency pair. On 26 July 1999 the spot rate was EUR/GBP 0.6634. The six-month outright rate was 0.6720. So to buy EUR paying GBP it would be better to pay 0.6634 the rate at the spot date rather than 0.6720 the rate at the six-month date. The worst rate for the period for a customer buying EUR on an option-dated basis would be 0.6720. Conversely, a customer buying GBP versus EUR on an option-dated basis would be quoted the worst rate of 0.6634, the spot rate. So if you are of a mind to buy EUR against GBP six months forward on an outright basis, ask if you can have an option dated forward contract. You will probably still be quoted the same rate as the forward contract. I did this regularly whilst in charge of currency management at a AAA corporation. It then occurred to me one night that this was a licence to print money. So I employed my strategy a few times and my firm's banks were happy to oblige. The strategy worked wonderfully but my conscience got the better of me. There were some drawbacks to making myself a fortune out of it. Firstly I could not do enough business in my own name to make it worthwhile. Secondly, my firm did not pay me performance linked bonuses. Thirdly, the treasury of my firm was not a profit centre so I could not just manufacture profitable deals. And finally, and fatally, I started feeling sorry for the counterparty banks! I could not employ the strategy later as a banker because option dated forward contracts are not available inter-bank but I did advise my employers and clients not to enter into them with corporate clients.
If you can work out my strategy send me an e-mail to firstname.lastname@example.org
Interest rate guarantees (IRGs)
An interest rate guarantee is an option on a forward rate agreement. On payment of an option premium purchasers have the right, but not the obligation, to fix an interest rate for a specified future period in a specified currency for a specified notional principal amount. As with FRAs the interest rate fixing is on LIBOR. There are call IRGs to protect against upward movements in LIBOR and put IRGs to protect against downward movements in LIBOR. Under FRAs a buyer wins if LIBOR rises and loses if LIBOR falls. However in a call IRG, whilst the buyer is compensated by the seller or writer if LIBOR rises, the buyer is under no obligation if LIBOR falls. For such insurance protection the buyer has paid a premium. Settlement is as with FRAs at the beginning of the interest period. Unlike currency options, there is no exercise to make as settlement is automatic.
Interest rate caps and floors
An interest rate cap can be thought of as a strip of call interest rate guarantees and an interest rate floor is a strip of put IRGs. So a cap is a strip of call options on FRAs. Automatic settlement takes place at every interest period on the same basis as with FRAs with one exception. Settlement takes place at the end of each interest period with no discounting.
Warrants are essentially standardised options listed on a stock exchange in the form of capital market products. They can be options to buy or sell a particular bond or equity. They are also warrants on commodities such as gold, copper or oil or on particular currencies or equity indices. In the case of warrants on equities, the issuer of the warrants may not be issuer of the underlying equities.
I've seen things in the market where I scratch my head and can't imagine why people did it. For example, when P&G lost all that money, I couldn't fathom what anyone at that Company was thinking when they looked at that formula of the swap and said, Yes, that's exactly what I want to put on.' - Anonymous author, "Confessions of a Structured Note Salesman", Derivatives Strategy, November 11, 1995
Over time the term Swap has come to mean very different things. There are Foreign exchange swaps also known as Forex Swaps or F/X swaps. As has already been mentioned these Swaps are also called Forwards in the inter-bank market. The term swap is now more commonly used for interest rate and currency swaps.
Interest rate swap
An Interest rate swaps is, in essence, a series of FRAs priced at a flat rate across all the legs of the constituent FRAs. These swaps allow a borrower to covert its medium to long term floating rate liabilities to fixed rate liabilities and vice-versa. Such swaps allow savings banks to provide fixed rate mortgages whilst raising funds in the floating rate note market or through refinancing short-term money-market borrowings.
Interest rate swaps are more precisely known as Single currency interest rate swaps. They can be floating to floating, in the form of say, three-month LIBOR to six-month LIBOR or floating to fixed rate. The swap typically takes the form of one party paying a LIBOR linked amount and receiving a fixed rate amount applied to a notional principal amount for each interest period of the swap which would have several interest periods of three or six-months amounting to several years. There will be net settlement of the interest-linked amounts. As with caps and floors, settlement takes place at the end of each interest period with no discounting. Legally these are contracts for differences are the amounts paid are not interest. In general, interest rate swaps do not have to have net settlement. A "annual vs. 3s" swap would have one party paying a fixed rate annually in arrears and the other party paying three-month LIBOR. A "Semi vs. 6s" swap would have net settlement as the swap net settles amounts based on a fixed rate paid six monthly and six-month LIBOR.
Currency swaps were originally simply a series of forward exchange outright contracts priced at a flat rate and were distinct from forward exchange swaps which time-shifted currency exposure. Currency swaps were tailored to meet customer demands and in the days of exchange controls were done between two multinational corporations on behalf of their subsidiaries in each others countries. BP, for example, could obtain US Dollars for its US operations from Ford of the US and Ford UK could obtain Sterling from BPs head office inn the UK.
Currency swaps now take the form of Cross currency interest rate swaps. These are generalised Single currency interest rate swaps with the liabilities in different currencies. They can be floating in one currency exchanged for fixed in another currency or floating to fixed or even fixed to fixed.
A zero coupon fixed to zero coupon fixed cross currency swap is essentially another form of an outright forward contract. The forward swap rates used by banks to generate outright forwards are based on interest rate differential between the two currencies. But in a forward contract, there is no explicit payment of interest. In this particular form of cross currency interest rate swap the interest related amounts are rolled up and settled simultaneously on maturity.
A Swaption is an option on a swap and is crucially different from a cap or a floor. A cap is a series of options on short term (typically three-month) interest rates but a swap is but one option on a medium term interest rate (say 5 years). Some of the component options in a cap may prove to be in-the-money and valuable whilst others turn out to be out-of-the-money and valueless. A Swaption is exercised once, if at all, during the option period. There are two forms of Swaption, originally distinguished by the similar terms Swaption and Swoption, though the latter name is uncommon. now. A Swaption can be an option within a certain option period to enter into a swap of certain period; or a Swaption can give the right within the option period to enter into a swap maturing on an agreed date. The notional principal amount is specified under the contract.
Section C: hybrids: using building blocks
Due to my inexperience, I placed a great deal of reliance on the advice of market professionals ... I wish I had more training in complex government securities. - Robert Citron, former treasurer, Orange County, California
Forward Exchange Contracts
The most basic hybrid financial instrument is none other that the Forward exchange outright contract illustrated in the previous chapter. Forward Exchange contracts to buy one currency versus another at some specified date in the future are not traded in the inter-bank market but are a hybrid product built from the inter-bank financial instrument building blocks.
A Forward Outright is the combination of a Spot contract and Forward exchange swap.
The Break Forward which is featured in chapter 7 is another hybrid financial instrument. The Break Forward was a combination of a forward contract to buy currency A and sell currency B at a fixed forward rate and an attached optional contract, an option, to do the opposite, sell currency A and buy currency B, at a different rate, the break rate. In addition under the Break Forward, there is no premium paid up front. The insurance costs built into the prices of the two explicit contracts and these are settled on maturity. The construction of the Break Forward therefore requires another contract, a loan contract to defer the payment of the implicit option premium.
The three products together through the Put Call parity principle of options actually result in being equivalent to another option. An option to buy currency A and sell currency B.
An asset swap is a combination of an asset plus an interest rate or currency swap used to change the nature of the asset. These are sold as packages to banks seeking high-yielding floating rate assets. Bonds tend to be more volatile than loans which are infrequently revalued. When a bond, typically fixed rate, falls in price because of adverse news of a company, asset swappers buy them at a discount. They attach a fixed to floating rate interest rate swap to them so that the package becomes a look-alike loan but with a higher than normal margin over LIBOR. Essentially Accounting innovation.
So recall that the key financial instruments referred to at the beginning of this article were: the spot contract, the forward contract, the option contract and the deposit contract. I have only listed a few hybrid contracts but there is an infinite number of them. Appendix 2 of the book "Key financial instruments: understanding and innovating in the world of derivatives" contains a comprehensive list of financial instruments. The message here is that if you understand the basic building blocks and that they can be combined with themselves or with each other in various ways you not only understand all of the financial products that have been invented but more importantly most , dare I say all, of the financial products likely to be invented.
Appendix: A List of Financial Risk Management Instruments
This list of financial instruments is more than a conventional glossary. It is a self-contained explanation of the derivative products developed in the market and highlights the relationship between them.
A swap in which the notional principal amount increases over the life of the swap. In Project Finance, the financing requirement is usually scheduled to rise through the life of the project. In other cases draw-down on a facility is staggered by the Company in accordance with requirements. An Accreting swap allows a Company to increase its swap amount on a pre-scheduled basis to match the principal in the underlying borrowing. The notional amount of the swap into fixed-rate financing therefore rises in line with the amount borrowed until the loan is scheduled to be fully utilised.
A Cap in which the notional principal amount increases over the life of the instrument. The premium is lower than if the writer of the Cap were to pay interest differentials on the maximum (final) principal amount.
The opposite of an Accreting Cap. Here the principal amount falls according a pre-determined schedule. The premium is therefore lower than if the writer of the Cap were to pay interest differentials on the initial principal amount.
The opposite of an Accreting swap. It is a swap in which the notional principal decreases over the life of the swap. As with the accreting swap, the amortising swap allows a Company to match the swap to its cash flows. If a Company has a sinking fund bond issue or a loan that amortises, such as in many leasing arrangements, an Amortising swap allows the Company to convert its debt from fixed rate to floating rate or vice versa.
Asset swaps were originally developed to aid the restructuring of liabilities. An Asset swap involves altering the payment basis on assets. However the terms of the swap are identical to normal interest rate or currency swaps. It is just the purpose that is different. The theory behind Asset swaps is that bond investors are more credit sensitive than loan participators. Bank loans are usually at floating rate. If a Company is in difficulties its bond price falls faster than its loan margin rises. Such bonds are bought and swapped into floating rate “synthetic loan assets” for bank investors using an Asset swap to generate a packaged yield over LIBOR greater than in the loan market.
Also known as an Icelandic option. Somewhat of a cross between a European option and an American option. It is an option that can be exercised anytime in the exercise period such as three months before the expiry date. Pricing will be higher than that of the related European option but lower than that of an American option with the same expiry date. See Bermudan option.
Standard options are exercised when exercise at the strike rate is more beneficial than exercise of the underlying transaction in the cash or spot market. The average rate option pays out if the strike rate is more beneficial than the average spot rate over the lifetime of the option. No exercise is involved. Payout is automatic when the average rate is better (higher or lower depending on whether the option is a call or put). The fixings for the average can be monthly, weekly or even daily and the average does not have to be over the whole option period. Great care must be taken over the fixings. Buyers must assure themselves that the fixings cannot be manipulated. On monthly or quarterly fixings, it would not be too difficult for the underlying exchange rate to be “disturbed” a few minutes before fixing, only to return to pre-fixing levels afterwards. See also Non-deliverable forwards for a commentary on this issue. The cost of an average rate option is generally lower than that of a standard option because the fact that an average is less volatile than the underlying variable.
An interest rate swap (either a cross-currency basis swap or a simple basis swap) in which payments are on a different floating-rate basis, e.g., three-month LIBOR versus six-month LIBOR. Also known as a floating/floating swap. A Company can use basis swaps to raise money in the lowest-cost floating-rate market and swap it into its preferred index. Basis swaps can also remove asset/liability mismatch. For example, if a Company has liabilities in six-month LIBOR and assets in three month LIBOR, it can do a three-month/six month LIBOR swap to match assets and liabilities.
There are other forms of basis swap involving different but similar types of commodity such as one form of oil versus another – Brent crude versus jet fuel is an example. A basis swap could also involve location differences. The famous “arbitrage” of Nick Leeson involving the Nikkei index at Osaka Futures exchange being traded against the Nikkei index at the Singapore exchange could have been constructed as a basis swap.
A basket option is the right to exchange two or more currencies in a pre-specified combination for a base currency on expiration. As with most options, there can be calls and puts on the basket. One could have regarded an option on the ECU, the forerunner to the Euro, as a basket option. A basket option on the ECU would have been cheaper than a series of options on the individual components, DEM, FRF, ESP etc. as all the individual separate options would perform independently. In the case of the basket, one cannot exercise the DEM component but not the FRF component of the basket. It is all or nothing. The basket may contain synthetic assets or liabilities, positive or negative cash flows in the various currencies and therefore represent an entire balance sheet.
Similar to an Atlantic option, it is also a cross between a European option and an American option. It is an option that can only be exercised on a series of discrete exercise dates such as the first of every month. As with Atlantic options, pricing will be higher than that of the related European option but lower than that of an American option with the same expiry date.
Option to purchase or sell a particular bond. Exchange traded options are usually on government bonds. Many bond issues have historically included an embedded bond option. Bonds have for many decades been callable or putable under certain conditions or could have been redeemed at any time within two dates.
One of my inventions in 1984 at Midland Bank! A Break Forward contract is a forward contract at a Forward rate that permits the holder to break or unwind the contract with an opposite transaction at another rate, the Break rate. The payoff position is identical to that of a currency option with a deferred premium.
I created it to solve two problems. Companies were reluctant to pay option premiums in advance. Under standard Forward contracts, no premiums were payable. Secondly, if the option were not exercised, the premium paid would not be deductible and turn out to be a wasting asset.
Similar to the Break Forward as applied to Interest Rate Guarantees or IRGs. See Break Forward and Interest Rate Guarantees and Forward rate Agreements. Also known as Limit FRAs.
See Reverse floating rate loan.
Not a financial instrument but a combination of exchange traded options. Simultaneous sale (purchase) of two at-the-money call options and purchase (sale) of one in-the-money call option and one out-of-the-money call option. This is basically a gamble on future volatility.
Fine. But if you want to take a risk just build the risk profile you want using an appropriate combination of options. Don’t bother naming it!
A Call option provides the purchaser with the right, but not the obligation to purchase an underlying asset for cash or in exchange for another asset at a specified price at a specified date or within a specified period.
A swap in which the fixed-rate receiver has the right (but not the obligation) to cancel the swap after or at a certain time. Also known as a Cancellable swap. The fixed-rate payer effectively sells the fixed-rate receiver a swaption. The rate paid by the fixed-rate payer is therefore lower. But beware. Sometimes a callable swap provides the fixed rate payer with the right to terminate the swap. It is better to refer to the fixed rate payer’s right to cancel or the fixed rate receiver’s option. So check the definition for the deal in question before doing the deal. See Puttable swap.
See Break Forward.
In an interest rate Cap, in return for the payment of a one-off premium by the buyer, the seller or writer commits to pay to the purchaser the difference between the current interest rate fixing for an Interest Period and an agreed rate (the strike rate) should market rates rise above that level for the period. Caps are based on a reference index that is fixed at a stated frequency (e.g. 3-month LIBOR). Caps can also be regarded as a series of interest rate Guarantees (IRGs) or options on FRAs allowing the buyer to take advantage of a reduction in interest rates but providing insurance if rates rise. They are priced as the sum of the cost of the individual IRGs.
See Limit swap.
Working name for Break Forward. See Break Forward.
The simultaneous purchase of a Cap and the sale of a Floor. The premium for the sale of the floor reduces or eliminates the cost of buying the Cap. The premium reduction depends on the strike rate of the two options. If the premium raised by the sale of the floor exactly matches the cost of the Cap, the strategy is known misleadingly as a “zero-cost collar”. But see the entry on the “Zero Cost Option” Also known as Range Forward.
A collar on a swap. The transaction is “zero-cost” -- the purchase of the Cap is financed by the sale of the floor. Also a Range swap. But beware – As a customer you will be giving away the floor at a bargain rate. It may be cost free but not value free.
A Call option on the commodity.
A swap in which one or both of the payment streams is linked to a commodity. It can be regarded as a cross currency swap with instead of one of the currencies we have a commodity price index. The swap could be fixed or floating. Usually only the payment streams, not the principal, are exchanged, although physical delivery is becoming increasingly common. Commodity swaps have been traded since the 1970's and enable producers and consumers to hedge commodity prices. Some commodity swaps are used to transfer bonds that are commodity linked. Commodity swaps make sense for commodity producers or consumers to hedge their returns or costs.
Like the butterfly, this is not a financial product but a combination of options traded on an exchange. The simultaneous purchase of a put and call at the same strike price and the writing of an out of the money put and call. This is another gamble on volatility.
As I wrote above under Butterfly if you want to something, just do it. Don’t worry about what a certain combination of options is called.
This is a generic expression for a swap that is activated when rates reach a certain level or a specific event occurs. Swaptions may be particular form of contingent swaps. But here the swap has to be exercised under certain conditions. Usually a contingent swap is automatically triggered like a Limit swap. Other types of swap, e.g., drop-lock or spread-lock swaps, are activated only if rates drop to a certain level or if a specified margin over an agreed index is reached.
A Cap in which the seller or writer will pay the buyer the spread between two currency indices (usually LIBOR) minus a minimum agreed strike spread, where this exceeds zero. It can therefore be split up into a series of options on Forward Spread Agreements. See FSA
An agreement to buy a FRA in one currency and sell a FRA in another currency. This structure followed the FSA but was a precursor to and supplemented by the ERA and FXA.
See Foreign Exchange Forward Outright
There are two forms of Currency swap – A Cross-Currency interest rate swap and a Currency swap (Traditional). This is not to be confused with the earlier Foreign Exchange swap (FX swap).
A Cross currency swap was traditionally a simple series of Foreign Exchange Forward Outright contracts at the same averaged fixed exchange rate exchanging a series of cash flows from one currency into another. Usually such a swap did not involve an exchange of principal amounts at the outset, the spot date. This is now uncommon.
The Cross-currency interest rate swap involves the exchange of interest rate related cash flows in one currency for those in another over a period of time. Unlike single currency swaps, cross-currency swaps usually do require an exchange of principals in the on maturity and perhaps at the outset. Both the initial exchange and the final exchange are done at the same spot rate. Cross-currency swaps can be on a fixed/fixed, fixed/floating, or a floating/floating basis.
See Options and Option dated forward contracts.
The simultaneous purchase of a currency put option and sale of a currency call option at different strike prices. Both options are out of the money. This strategy enables purchasers to hedge their downside risk at a reduced cost. This is at the expense of forgoing upside beyond a certain level since the selling of the call finances the purchase of the put (or vice versa). Also see range forward.
A swap in which the payments are deferred for a specified period. Unlike a forward swap, where the entire swap is delayed, in a deferred swap only the payments are deferred. For example, a Company wanting to enter a swap, but not wanting cash flows until a future period, may want to defer payment.
Also known as a LIBOR-in-arrears swap. A swap in which the current floating payment is based on the LIBOR rate for the next period. These swaps can be used if a floating-rate payer considers that rates are coming down in the short-term.
A swap in which a Counterparty swaps floating payments referenced to an interest rate of one currency into floating payments referenced to an interest rate of another currency. The principal for both payments, however, is in one currency. The differential swap is therefore a strip of forward rate agreements and the pricing characteristics are similar to a fixed-fixed cross-currency swap, and a premium will be payable either up front or as a spread on the floating rate.
A swap structure where the swap can be extended or cancelled after a given number of years. Equivalent to a swap plus a European swaption expiring at the date when the extension choice is made.
An off-market swap in which the fixed payments are below the market rate. At the end of the swap the shortfall is made up by one large payment. Companies may use this type of structure to reduce interest rate payments during completion of a project. The more these payments are discounted, the more credit risk is taken by the Counterparty. At the extreme, fixed payments can be set to zero resulting in a larger balloon payment on the maturity date. This is known as a zero coupon swap.
A bond where the coupons are paid in one currency but the principal is redeemed in another.
A swap used to hedge dual currency bonds in which the issuer has the option to repay principal and coupon in either the base currency or an alternative currency, at a pre-set exchange rate. Dual currency swaps are currency swaps that incorporate the foreign exchange options necessary to hedge the interest payments back into the principal currency.
An option embedded in another host security, usually a debt. Examples include structured notes, mortgage - backed securities and callable bonds.
See Accreting swap
A swap in which the fixed-rate payments increase over time. This may be used by companies with tight liquidity that expect cash flow to improve in the future.
An option that can only be exercised on the expiration date.
A synthetic agreement for a Forward Exchange swap originally launched by Barclays Bank in 1987. It is settled by reference to the forward premium or discount at maturity but ignores the Spot rate outcome. See FSA, SAFE, FXA.
An exit option is an option to get out of a structure. For example, an exit option on a swap allows you enter into an offsetting position at a certain date, so it represents a swaption on the offsetting swap.
A swap in which the fixed-rate payer has an option to extend the swap for a further period. A three-year swap extendible for a further two years would simply use a three-year swap in conjunction with a three-year option into a two-year swap. This may be used by a Company that is unsure of future financing requirements but wants access to future funding at the same cost.
See interest rate swap.
See Range Forward or Break Forward. As in all such brand-named products it is imperative that the buyer has no doubt what he is buying.
See Basis swap.
A contract whereby the seller agrees to pay the purchaser the difference between current interest rates and an agreed rate (the strike rate) should interest rates fall below the agreed level. Floors are based on a reference index such as six-month LIBOR and are effectively a strip of interest rate options. The value of the floor is the combined value of this strip of options on FRAs also known as interest rate Guarantees or IRGs. Floors provide a hedge for those investors wanting to preserve a certain return on their floating rate assets.
A Foreign Exchange Forward Outright is often just known as a Forward Contract, Forward Exchange Contract (FEC) or a Forward Outright. An agreement to exchange a specified amount of one currency for another at a future date at an agreed rate. The foreign exchange forward outright rate for the exchange of currencies is priced on an arbitrage-free basis according to the market interest rates in the two currencies. If the Foreign Exchange swap is the original financial derivative, then the Forward outright is the original structured financial product. In most instances, the Foreign Exchange Forward is not an inter-bank product but a customer product. It is made up of a Foreign Exchange Spot contract plus a Foreign Exchange swap. The FEC involves one exchange of principals at a forward date whilst the FX swap involves two exchanges, one now and the other at the forward date.
A Foreign Exchange Spot contract is not really a derivative. It an agreement to exchange one currency with another at a certain rate for value at the Spot Date. The Spot date is almost always two business days forward from the date of dealing. But sometimes as was the case of Korea, Spot can be one business day forward.
A Foreign Exchange swap is the original financial derivative and was for many years just known as a swap. It is an agreement to exchange two currencies for value spot and to exchange them back at another rate at a forward date. The difference in the exchange rates between the spot and forward legs of the FX swap will be the Forward Spread agreed under the FX swap. There should be minimal difference between holding a currency at its fixed interest rate for a certain period and, on the other hand, swapping the currency under the FX swap and investing in the other currency at its fixed rate for the period. The FX swap would involve a package deal - the sale now and the pre-agreed buyback of the currency later.
See Range Forward.
See Foreign Exchange Forward Outright.
A synthetic agreement for a Forward Exchange swap. It is settled by reference to the spot rate as well as the forward premium or discount. Launched by Midland Bank in 1987. The ERA launched weeks earlier, ignored the spot rate. See FSA, SAFE, ERA.
Not to be confused with Forward Exchange Agreement (FXA) or Forward Rate Agreement or Forward Spread Agreement. It is a forward exchange contract that does not lead to exchange of principal amounts at the maturity of the contract but is cash settled. The Forward Exchange Rate Agreement was developed in the mid-1980’s and is the precursor to the Non-deliverable forward contract. The rationale behind the FERA was to assist with balance sheet translation exposure. See Non Deliverable Forward.
A Forward Rate Agreement, or FRA, is an agreement between two parties who want to protect themselves against future movements in interest rates. By entering into a FRA, the parties lock in an interest rate for a stated period of time starting on a future settlement date, based on a specified notional principal amount. The buyer of the FRA enters into the contract to protect itself from a future increase in interest rates. This occurs when a Company believes that interest rates may rise and wants to fix its borrowing cost today. The seller of the FRA wants to protect itself from a future decline in interest rates. Investors who want to hedge the return obtained on a future deposit use this strategy.
The Counterparties of a Forward Spread Agreement contract into a spread between two Forward Rate Agreement rates applied to a nominal amount of one currency on the same basis. The settlement amount will be the difference between the settlement reference spread rate minus the contracted spread rate calculated on a 360 day basis.
A swap in which the fixed coupon is set before the start date. If a Company expects rates to rise soon but only needs funds later, it may enter into a forward interest rate swap. Also known as a forward start swap.
A Floating Rate Note is a bond with the coupon payments floating in relation to a market yardstick such as 6-month LIBOR. But I have seen a Fixed Rate Note called an FRN!
Just two weeks after Midland Bank launched the Break Forward, Hambros Bank announced the Fox – A forward Contract with an optional Exit. See Break Forward.
Usually called a Forward Rate Agreement. By and large, the word “Future” applies to contracts on derivative exchanges such as LIFFE or the IMM and “Forward” applied to OTC products.
See Range Forward.
See Foreign Exchange swap
See Atlantic option.
An option on a forward rate agreement. Purchasers have the right, but not the obligation, to fix an interest rate for a specified future period. A Cap can be thought of as a strip of interest rate guarantees. See Cap.
An interest rate swap is a contractual agreement between two Counterparties to exchange cash flows on particular dates in the future. The most common type of swap or "plain vanilla" swap involves one party, the fixed rate payer, making fixed payments, and the other party, the floating rate payer, making payments which depend on the level of future interest rates. The swap agreement stipulates all of the conditions and definitions required to administer the swap including the notional principal amount, fixed coupon, accrual methods, day count methods, effective date, terminating date, cash flow frequency, compounding frequency, and basis for the floating index. Interest rate payments are made on a notional amount and there is no exchange of principal. Interest rate swaps provide users with a means of hedging the effects of changing interest rates by changing the basis on which they pay or receive interest flows. For example, a Company can convert floating-rate interest payments to fixed-rate payments if it thinks interest rates are set to rise. It can also use swaps to cut down mismatches between its assets and liabilities.
With a kick-in forward an “in-strike” is selected. If and when the spot rate reaches the in-strike rate at any time during the option period, the option automatically turns into a forward contract. It is cheaper than a standard European or American option as it never becomes in the money. It is effectively an option on a forward with automatic exercise when it becomes at-the-money.
A kick-in option is similar to a knock-in option. An “in-strike” is selected in addition to the normal strike rate. Only if and when the spot rate reaches the in-strike rate, at any time during the option period, does the option come into effect. See Knock-in Option.
With a knock-in option an “in-strike” is selected in addition to the normal strike rate. Only if and when the spot rate reaches the in-strike rate, at any time during the option period, does the option come into effect. The in-strike rate is set at a level so that the option is out of the money at the outset. Because of the necessity to satisfy the condition of reaching the in-strike rate, the in-strike option is cheaper than standard options. See Kick-in Option.
As with the Knock-in option, with a knock-out option an “out-strike” is selected in addition to the normal strike rate. Here, if and when the spot rate reaches the out-strike rate, at any time during the option period, the option the options becomes void. The out-strike rate is set at a level so that the option is out of the money when the spot rate reaches the out-strike rate. Because of the possibility of the option being cancelled before it is used, the out-strike option is cheaper than a standard option.
A relatively new name but very much the same as the Break Forward invented in the mid 1980’s. But here the Knock-out Forward provides a more beneficial forward rate for the customer rather than an adverse rate for the customer under the fixed rate in the Break Forward. But then the selling bank benefits if and when the “out-strike”, similar to the Break Rate in the Break Forward, is reached by the market rate. In the Break Forward, the customer has the right to break the forward contract should the Break Rate reach the market rate.
Similar to the Break Forward as applied to Interest Rate Guarantees or IRGs. Also known as Break FRAs. See Break FRAs,
This is the interest rate swap version of the Break Forward. It is a swap with a Cap in which the floating payments of a swap are Capped at a certain level. A floating-rate Counterparty can thereby limit its exposure to rising interest rates above a certain level. Also known as Capped swap.
This is a form of Asset swap and similar in structure to an Amortising swap. The swap is linked to mortgage payments where the notional principal amortises in line with the mortgage principal. These swaps may use a standard annuity formula to fix outstanding principal, or they may use some estimate of mortgage prepayment given the level of interest rates.
A forward exchange contract that does not lead to the exchange of principal amounts at the maturity of the contract. Similar in concept to FRAs they are Contracts for Differences. FRAs fix interest rates, whilst NDFs fix exchange rates. The contract exchange rate is compared with the exchange rate fixing on the fixing date (two business days before settlement) and a settlement is made based on that amount. They were first seen in the mid-1980’s as Forward Exchange Rate Agreements. Main uses are to avoid exchange controls, translation exposure hedging and settlement risk minimisation.
But buyer beware. Do not agree to an exchange rate fixing mechanism that can be manipulated by the Counterparty. It is very difficult, but not impossible, to manipulate the LIBOR fixing for interest rates. Moving the market quite substantially a few seconds before an exchange rate fixing is quite easy.
A non-deliverable currency option has the same properties as a standard currency option except that on exercise there is cash settlement and no exchange of currencies. These are used where exchange controls or lack of currency liquidity make obtaining one or both currencies difficult.
A non-deliverable currency swap has the same properties as a standard currency swap except that on the payment dates only a difference payment is made. One or both of the currencies are valued using an exchange rate fixing and translated and settled in a convertible currency.
An option gives the holder the right but not the obligation to buy or sell a commodity or a currency for a specified cash value in a specified currency on a specified date or range of dates. A Warrant is a standardised option listed on a exchange.
Option positions may be combined to create a net pay-off profile that corresponds to the risk reward profile of the investor or position-taker. Based on an investors view-point, he can implement various strategies that utilise combinations of options and futures to manage payoffs and option premiums. Some examples of option strategies include spreads, combinations, straddles, strangles, condors, etc. These are not products as such but packages of products traded on derivatives exchanges.
An option dated forward contract is a forward exchange contract where the customer has the right to choose when to exchange currencies between two specified dates. This allows for delays in shipment or payment of underlying trade transactions.
An asset plus a Range Forward or Collar
The simultaneous purchase of an out of the money Cap and the sale of a lesser amount of an in the money floor. Because the in the money floor is worth more, the purchaser of a Participating Cap sells less floors for a “zero-cost” combination and can therefore derive some benefit if rates fall. Although the purchaser would not derive as much benefit if rates fell as would have been the case with a straightforward Cap, he does not have to pay a premium.
The simultaneous purchase of a call (put) and sale of a put (call) at the same strike price. The option purchased must be out of the money and the option sold (to finance the option purchase) is for a smaller amount but in the money. See Break Forward
A swap in which floating-rate exposure is hedged but in which the hedger still retains some benefit from a fall in rates.
A payer's swaption provides the purchaser the right, but not the obligation to pay a specified fixed rate for a series of pay dates and notional principal amounts outstanding at those dates.
An FRN with no maturity date. They were very fashionable in late 1987 as a means of raising bank capital. But then the market collapsed as investors realised that, as there was no maturity date, liquidation of their investments depended on someone else buying them. The music stopped and fingers were burned. One day no doubt somebody will successfully sell a Zero-coupon perpetual bond!
A Put option provides the purchaser with the right, but not the obligation to sell an underlying asset for cash or in exchange for another asset at a specified price at a specified date or within a specified period.
A put spread reduces the cost of buying a put by selling another put at a lower level. This limits the amount the purchaser can gain if the underlying goes down, but the premium received from selling an out of the money put partly finances the at the money put.
A swap in which the fixed-rate payer has the right (but not the obligation) to cancel the swap after or at a certain time. The fixed-rate payer effectively buys from the fixed-rate receiver a swaption. The rate paid by the fixed-rate payer is therefore higher. But beware. Sometimes a Puttable swap does the opposite. It provides the fixed rate receiver with the right to terminate the swap. So check the definition for the deal in question before doing the deal. It is better to refer to the fixed rate payer’s right to cancel or the fixed rate receiver’s option. See Callable swap. Also known as a Cancellable swap.
A FX collar using forward contracts that replicates the payoff profile of purchasing an in the money call and selling an in the money put. For example if the forward price for sterling is USD 1.50, a range forward can be produced by buying a forward contract to purchase sterling at USD 1.50, entering a forward contract where the buyer has the right to break the contract at a price of USD 1.43, and the seller of the forward contract has the right to break the contract at a price of USD 1.56.
A contract where the holder has several consecutive calls options on a series of forward rates for a period of time. If rates rise, the holder receives a benefit upon automatic exercise of each in-the money call and can apply that benefit to the cost of servicing an outstanding loan- hence the term 'Cap'.
A contract where the holder has several consecutive put options on a series of forward rates for a period of time. If rates fall, the holder receives a benefit upon automatic exercise of each in-the money put and can apply that benefit to the diminished return earned on floating rate assets- hence the term 'floor'.
A receiver's swaption provides the purchaser the right, but not the obligation to receive a specified fixed rate for a series of pay dates and notional principal amounts outstanding at those dates.
Combination of a conventional fixed rate loan and a swap to pay fixed and receive floating. Therefore, if floating rates rise, the net coupon payment falls.
A swap in which the floating payments are inversely proportional to interest rates
A swap in which one side has an option to alter the payment basis (fixed/floating) after a certain period. This is usually achieved by the use of a swaption, allowing the purchaser the opportunity to enter a swap with payment on the opposite basis. The swaption would be for twice the principal amount, one half of which nullifies the original swap.
A swap where the notional principal amount goes up and down. Sometimes defined as a swap in which one Counterparty alternates between paying fixed and paying floating.
A synthetic agreement for a Forward Exchange swap. The settlement amount is either It by reference to the forward premium or discount on maturity only (ERA style) or both the forward premium and the spot rate outcome (FXA style). This composite product was governed by the British Bankers Association in 1987 after the launches of the rival FXA and ERA. So as to provide standard market terms and, therefore, liquidity to the concept. See FSA, FXA, ERA.
A swap in which the principal alternates between zero and some notional principal amount. The principal amount of the swap is designed to hedge the seasonal borrowing needs of a Company. Retail companies might use such swaps to fix rates on loans required only on a seasonal basis, e.g., for building up inventory.
A swap in which one payment stream is referenced at a fixed spread over a benchmark rate such as US treasuries.
See accreting swap.
Short term interest rate futures.
An option strategy whereby the purchaser of a straddle buys a put option and a call option with the same strike price on the underlying. Although the purchaser pays two premiums, he benefits if the underlying moves a certain amount in either direction. In essence, this investor is anticipating an increase in price volatility during the term of the option strategy.
An option strategy whereby the purchaser of a strangle buys a put option and a call option on the same instrument, but at strike prices equally out of the money. The strangle costs less than the straddle because both options are out of the money, but profits are only generated if the underlying moves dramatically.
Or is it the other way around? I never could remember the difference between a straddle and a strangle! What is it that you are trying to achieve? Put the appropriate combination of derivatives together and call it what you like.
See Foreign Exchange swap, Cross Currency interest rate swap, interest rate swap.
An interest rate swaption is an option on a forward start swap to either pay or receive a fixed rate. Because there are two parties to a swap, the floating payer and the fixed payer, the swaption buyer has to make clear which leg of the swap he wants to enter. The right to pay fixed is called a ‘payers swaption’. The right to receive fixed is called a ‘receivers swaption’. Original interest arose from the issuance of bonds with embedded put features. Often, the price of the bond did not fully reflect the fair value of the embedded option and the issuer would sell a swaption to obtain a lower fixed cost of funds. Alternatively, a significant percentage of these debt issues are swapped out to obtain sub-LIBOR funding. In these cases the issuer needs a facility to cancel the swap if the bonds are not put or called. To eliminate this exposure, the companies would enter into a swaption to offset the underlying swap.
A certificate, often issued together with a bond, giving the purchaser the right but not the obligation, to purchase a specified amount of an asset at a certain price over a specified period of time. Such assets include equity, debt, currencies and commodities.
A swap with a warrant allowing an issuer of a bond the extension of a swap in the event that it exercises a similar warrant on the bond. See extendible swap.
A swap in which the two interest streams reflect different points on the yield curve. For example, one side could pay the five-year constant maturity treasury rate versus the two-year constant maturity rate. The swap can be on either a fixed or a floating basis. Many investors who have a point of view on the shape of the yield curve have used this or debt managers that want to hedge a structured note issue.
Any combination of options that involves financing an option bought by the simultaneous sale of another of equal cost. See collar, cylinder, participating forward, and ratio forward. The package deal should (in theory) be a good deal cheaper for the bank and therefore the customer than doing both transactions separately.
But always remember – there is an enormous difference between something being cheaper and costing less money! The “zero cost” option combination involves the “simultaneous sale of another of equal cost”. The problem for the customer is that this sale of an option to the bank will not be of equivalent value. It will be adjusted to provide the bank’s profit.
A swap in which either or both of the Counterparties makes one payment at maturity. More usually it is only the fixed-rate payments that are deferred. The party not receiving payment until maturity obviously incurs a greater credit risk than it would with a plain-vanilla swap. The swap is advantageous for a Company that will not receive payment for a project until it is completed or to hedge zero - coupon liabilities, such as zero - coupon bonds.
A bond with no interest paid through the life of the bond. The initial price is therefore at a deep discount to the face value payable on maturity.
I dreamt about selling one of these but never did. But I did announce the Zero-coupon Perpetual Bond as a new product on an April Fool’s Day. I received quite a few enquiries. But some equally strange products have been sold. Caveat Emptor. See Perpetual FRN.