What is an 'InterestRate Derivative'
An interestrate derivative is a financial instrument based on an underlying financial security whose value is affected by changes in interest rates. Interestrate derivatives are hedges used by institutional investors such as banks to combat the changes in market interest rates. Individual investors are more likely to use interestrate derivatives as a speculative tool  they hope to profit from their guesses about which direction market interest rates will move.
BREAKING DOWN 'InterestRate Derivative'
A plain vanilla interestrate swap is the most basic type of interestrate derivative. Under such an arrangement, there are two parties. Party one receives a stream of interest payments based on a floating interest rate and pays a stream of interest payments based on a fixed rate. Party two receives a stream of fixed interest rate payments and pays a stream of floating interest rate payments. Both streams of interest payments are based on the same amount of notional principal. Through this exchange, or swap, of cash flows, the two parties hope to reduce uncertainty and the threat of loss from changes in market interest rates. Other types of interestrate derivatives include eurostrips, swaptions and interest rate call options, to name just a few.

Floating Price
The leg of a swap that is based on a fluctuating interest rate. ... 
Interest Rate Call Option
An interest rate derivative in which the holder has the right ... 
Derivative
A security with a price that is dependent upon or derived from ... 
Derivative Product Company  DPC
A specialpurpose entity created to be a counterparty to financial ... 
Eurostrip
A series of consecutive threemonth futures contracts based on ... 
LIBOR Flat
An interest rate benchmark used to establish the floating interest ...

Trading
Derivatives 101
A derivative investment is one in which the investor does not own the underlying asset, but instead bets on the assetâ€™s price movement with another party. 
Investing
Derivatives 101
Learn how to use this type of investment as an alternative way to participate in the market. 
Markets
What's an Interest Rate Swap?
An interest rate swap is an exchange of future interest receipts. Essentially, one stream of future interest payments is exchanged for another, based on a specified principal amount. 
Trading
What Is A Derivative?
A derivative is a security whose price is dependent upon or derived from one or more underlying assets. Learn more on how investors can use this financial instrument in their trading strategies. 
Trading
Managing Interest Rate Risk
Interest rate risk stems from the possibility that an interestbearing assetâ€™s value will change due to changing interest rates. 
Investing
How Are Interest Rate Swaps Valued?
When trading in financial markets, higher returns are generally associated with higher risk. Hedge your risk with interest rate swaps. 
Investing
Interest Rate Swaps Explained
Plain interest rate swaps that enable the parties involved to exchange fixed and floating cash flows. 
Trading
How Companies Use Derivatives To Hedge Risk
Derivatives can reduce the risks associated with changes in foreign exchange rates, interest rates and commodity prices. 
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An Introduction To Swaps
Learn how these derivatives work and how companies can benefit from them. 
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An InDepth Look At The Swap Market
The swap market plays an important role in the global financial marketplace; find out what you need to know about it.

How big is the derivatives market?
Examine the potential size of the total derivatives market, and learn how different calculations can reduce the estimate ... Read Answer >> 
What is a derivative?
A derivative is a contract between two or more parties whose value is based on an agreedupon underlying financial asset, ... Read Answer >> 
What does the notional principal of a derivative contract refer to?
Find out more about the notional principal amount, interest rate swap agreements and how the notional principal amount in ... Read Answer >> 
Can bond traders trade on interest rate swaps?
Read about interest rate swaps and why these transactions are performed by institutional actors in the bond market, not individual ... Read Answer >> 
Do interest rate swaps trade on the open market?
Learn how interest rate swaps are traded on the OTC and interbank markets, and how these swaps can be used to arbitrage different ... Read Answer >> 
Can mutual funds invest in derivatives?
Find out about mutual fund investment options, and understand whether mutual funds are permitted to include investments in ... Read Answer >>