DEFINITION of 'Spreadlock'

An agreement that establishes a predetermined spread for future interest rate swaps. A spreadlock is a credit derivative created as either a forward contract or an option. With a spreadlock, an investor can lock in a current spread between a swap and an underlying government bond yield and transfer the basis points forward to the time when the swap is entered into.

BREAKING DOWN 'Spreadlock'

Spreadlocks have been an option for certain investors since the 1980s. A forward spreadlock allows for a definitive addition of a set number of basis points on top of the existing spread in the underlying swap. With a spreadlock through an option contract, the buyer of the contract can decide whether or not to make the swap effective.

  1. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote ...
  2. Interest Rate Swap

    An agreement between two parties (known as counterparties) where ...
  3. Spread

    1. The difference between the bid and the ask price of a security ...
  4. Exotic Option

    An option that differs from common American or European options ...
  5. Forward Price

    The predetermined delivery price for an underlying commodity, ...
  6. Swap

    A derivative contract through which two parties exchange financial ...
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