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One thing people do not appreciate is that the vast majority of bank derivatives, if we can believe them and their regulators, are interest rate swaps. In interest rate swaps, as I understand them, the notional value is the size of the underlying loan/bond but the risk is purely in the ratio between the two rates of interest.  That is A agrees to pay B 8% for 3 years on $1B and B agrees to pay A libor rates for 3 years on the same $1B. Notional value is $1billion, actual worst case risk for A is that libor falls to 0 and it pays 8% of $1B for 3 years for nothing.
by rootless2 on Sat Dec 10th, 2011 at 07:33:17 PM EST
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