Mastering Interest Rate Risk Strategy

4

The financial markets

Introduction

The yield curve

The money market

The capital market

INTRODUCTION

The reason for investigating the financial markets is twofold. First, the variable interest rates that firms receive or pay on respectively interest-bearing assets or liabilities (discussed in Chapters 2 and 3) are based on the reference rates in the money market (the part of the financial markets for short-term debt), such as Euribor and LIBOR. Second, when firms use interest rate derivatives such as swaps, FRAs or caps, floors, collars and swaptions to mitigate interest rate risk, these derivatives are related to specific money market reference rates. The capital market, which is the part of the financial markets for longer-term debt, ...