Question

What is meant by interest (rate) contingent securities? Give three examples of a claim on cash flows that is interest rate contingent. Explain

Answer 1

The contingent securities generally includes the instruments like bonds and securities, currency, notes etc., can be exchanged in the market. These are the one of the important tools to calculate cash flow and it's dcf calculation.

Example 1 : Mr.R is opt for the corporate bond for certain coupon rate , At the time of maturity he can sell the bond or he will keep with himself according to market situation.

Example 2: Mr.Z is the speculator in the currency market and brought 10000 euros he expect that euro value can be increase in the future and he will get the profit. It is the situation that if he hold or speculate at particular time in that contingent situation. If he get cash inflow or outflow.

Example 3: Mr. D brought some debt from mr.x amount of 5,00,000 rupees and writttdn an note , if mf d paid the whole amount to mr x , mr.x will benefit and he will get cash inflow , it may be the situation mr.d is not able to pay the amount in those circumstances.