-18-
Other common forms of financial derivatives during the
relevant years included: (1) Interest rate guarantees such as
caps, floors, and collars; (2) interest rate options;
(3) swaptions; and (4) forward rate agreements (FRAs).4 Interest
rate caps, floors, and collars are contracts with notional
principal amounts but not necessarily with periodic payments.
Interest rate caps and floors require the seller, in exchange for
a fee, to make a payment to the purchaser only if, in the case of
a cap, a specified market interest rate exceeds the fixed cap
rate on specified future dates or, in the case of a floor, the
specified market interest rate falls below the fixed floor rate
on specified future dates.5 Interest rate options are contracts
that grant one party, for a premium payment, the right to either
purchase from or sell to the other party a financial instrument
at a specified price within a specified period of time or on a
specified date. Swaptions are options to purchase a swap in the
future. FRAs are contracts with notional principal amounts that
settle in cash at a specified future date on the basis of the
difference between a fixed interest rate and a specified market
4 During the relevant years, FNBC was a party to swaps as
well as to one or more of these financial derivatives.
5 An interest rate collar is essentially an interest rate
cap combined with an interest rate floor.
Page: Previous 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 NextLast modified: May 25, 2011