Spreadlock

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.

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RELATED FAQS
  1. What would motivate an entity to enter into a swap agreement?

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  2. What is the difference between derivatives and swaps?

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  3. When was the first swap agreement and why were swaps created?

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  4. How are swap agreements financed?

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  5. Can bond traders trade on interest rate swaps?

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