1. Financial Instruments Alyona Lamash EXTENT February 2011

8. 6. Hedge vs Insurance The cost of hedge – the level of profit is locked, favourable and unfavourable moves of market lead to similar results The cost of insurance – premium

9. 7. Bond Fixed Income – the borrower has the obligation to pay the lender the interest (“Coupons”) on the borrowed amount (“Principal” or “Notional”, or sometimes “Face Amount”) during the term of the bond, and repay the Principal at maturity (also known as “Redemption Date”). Fixed-coupon bond, floating-rate bond, zero-coupon bond (discounted bond) Callable, puttable and... convertible!

10. 7. Bonds (continued): Fixed Rate and Floating Rate Payments 5Y 4 ½, annual payments 5Y 6MEURIBOR, annual payments

11. 8. Swap Plain Vanilla Interest Rate Swap – fixed rate interest payments vs. floating rate interest payments, at predefined times in the future, until maturity Basis Swap – 3MEURIBOR interest payments vs. 1YEURIBOR interest payments, at predefined times in the future, until maturity Currency Swap – interest payments in one currency are exchanged to interest payments in another currency, Notional Amounts are exchanged at the end of the swap.