Interest rate derivatives are important elements in both the financial markets and the banking product portfolios. In addition to the basic interest rate swaps, options on swaps and bonds, interest rate floor and cap products are also present explicitly or embedded in other financial instruments. Accurate valuation and a good assessment of their risks are also important when developing a proper accounting assessment, hedging strategy, measuring counterparty risks, and managing interest rate risk in banking books. In this newsletter, we describe the main types of these transactions as well as the most important pricing models.
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