03-08-2012, 12:56 PM
Citibank Derivatives System (CDS) Vs Interest Rate Derivatives
An Introduction
The Citibank Derivatives system (CDS) is a pricing and booking system for different types of interest rate derivatives. CDS improves risk assessment and management, provides rapid price calculation and easy transfer of risk positions between trading centers. As well, with the user-friendly system design, this follows the natural flow of business, and rapid customer information gathering and processing capabilities.
Interest Rate Derivatives: An Introduction
An interest rate derivative is a derivative where the underlying asset is the right to pay or receive a notional amount of money at a given interest rate. In financial terms, a derivative is a financial instrument - or more simply, an agreement between two people or two parties - that has a value determined by the price of something else (called the underlying). It is a financial contract with a value linked to the expected future price movements of the asset it is linked to - such as a share or a currency. There are many kinds of derivatives, with the most notable being swaps, futures, and options. However, since a derivative can be placed on any sort of security, the scope of all derivatives possible is near endless. Thus, the real definition of a derivative is an agreement between two parties that is contingent on a future outcome of the underlying.
Swaps in CDS and their brief description
A swap is a cash-settled OTC derivative. Except for forwards, swaps are the simplest form of OTC derivative.
A swap is an agreement between two counterparties to exchange two streams of cash flows—the parties "swap" the cash flow streams. Those cash flow streams can be defined in almost any manner. All that matters is that their present values be equal (except for a bid-ask spread, if one party to the swap is a dealer). While swaps are used for various purposes—from hedging to speculation—their fundamental purpose is to change the character of an asset or liability without liquidating that asset or liability.
For example, an investor realizing returns from an equity investment can swap those returns into less risky fixed income cash flows—without having to liquidate the equities. A corporation with floating rate debt can swap that debt into a fixed rate obligation—without having to retire and reissue debt.