A derivative product transaction generally is an agreement entered into by two parties in which each commits to a series of payments based upon the price performance of an underlying financial instrument or commodity for a specified period of time. This category includes a broad range of sophisticated financial instruments employed by multinational banks, financial institutions, securities dealers and corporations. Some of the types of derivatives most frequently brokered by Euro Brokers are interest rate swaps, interest rate options, forward rate agreements and credit default swaps.
As an example, in an interest rate swap, two parties agree to exchange interest rate payment obligations on a notional principal amount over the term of the swap. No principal is exchanged and market risk for the parties is limited to differences in the interest payments. The usual format involves the exchange of fixed rate payments based on the term of the swap for floating rate payments based on agreed-upon repeating shorter terms.