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.

Reversible Swap
An exchange of cash flows that allows one counterparty to use ... 
Fixed Price
The leg of a swap that is based on an unchanging interest rate. ... 
Floating Price
The leg of a swap that is based on a fluctuating interest rate. ... 
Basis Rate Swap
A type of swap in which two parties swap variable interest rates ... 
Derivative
A security with a price that is dependent upon or derived from ... 
Interest Rate Call Option
An interest rate derivative in which the holder has the right ...

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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. 
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Learn which tools you need to manage the risk that comes with changing rates. 
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Interest Rate Swaps Explained
Plain interest rate swaps that enable the parties involved to exchange fixed and floating cash flows. 
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What is the difference between derivatives and swaps?
Find out more about derivative securities, swaps, examples of derivatives and swaps, and the main difference between derivative ... Read Answer >> 
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 >> 
Can individual investors profit from interest rate swaps?
Find out how individual investors can speculate on interest rate movements through interest rate swaps by trading fixed rate ... Read Answer >> 
How can an investor reduce interest rate risk?
Learn about the different ways investors can reduce interest rate risk. Locking in interest rates increases certainty for ... Read Answer >> 
What is an overthecounter derivative?
Learn more about overthecounter derivatives and how they work with an example of a derivative tradeoff exchange. 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 >>