Understanding the pricing of fixed income derivatives

Abstract

Fixed income securities refer to any investment wherein the borrower has to pay a fixed amount on a fixed schedule. For eg. if a company issues a bond then it has to pay a fixed interest to the lenders at pre-defined time intervals. Derivatives where the underlying is a fixed income security is called a fixed income derivative. For eg. an option on an interest rate swap (also called a swaption). Notional amounts of OTC derivatives contracts rose from $482 trillion at end-December 2016 to $542 trillion at end-June 2017. In contrast, their gross market value, declined further in the first half of 2017, from $15 trillion to less than $13 trillion