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Derivatives




Mortgage Swap


A mortgage derivative (specifically an asset swap) in which the fixed rate leg is attached to fixed-rate mortgage payments. The notional principal is normally reduced (amortized) in accordance with a potential decrease in the outstanding mortgage principal, particularly in case the mortgage holder prepays the mortgage or ends up in default. This swap allows the holder to have an access to cash flows from a portfolio of mortgages without placing any mortgage asset on the balance sheet.

The amortization of the principal amount, as such, is not affected by changes in interest rates, but also by the performance of a basket of mortgages.



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Derivatives have increasingly become very important tools in finance over the last three decades. Many different types of derivatives are now traded actively on ...
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