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are bound together in traditional financial instruments. In
addition to increasing the range of financial products available,
financial derivatives have fostered more precise ways of
understanding, quantifying, and managing financial risk. Most
institutional borrowers and investors currently use financial
derivatives. Many of these entities also act as intermediaries
dealing in those financial products.
C. Interest Rate Swaps
1. Terms of an Interest Rate Swap Agreement
Interest rate swaps generally require that the parties
thereto negotiate and agree upon several economic terms. These
terms generally include (1) a notional amount, (2) a fixed
interest rate, (3) a floating interest rate index, (4) a duration
(term or tenor) of the contract, (5) an effective date of the
contract, and (6) a payment schedule. The parties to an interest
rate swap also must negotiate a particular country’s currency (or
countries’ currencies) in which a swap is denominated. During
the relevant years, the U.S. dollar was overwhelmingly the
dominant individual currency for interest rate swaps.
2. Notional Principal Amount and Related Terms
The notional principal amount of an interest rate swap is
not actually exchanged but is simply the reference point for the
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