Product Definitions

OTC Documentation & Confirmation

Learning Outcome

Understand their role in OTC documentation.

Match products with financial risks.

Compare their purpose and features.

Explain exchanges and settlements.

Define four common OTC derivatives.

FX Forward

An FX Forward is a contract between two parties to buy or sell one currency against another at a pre-agreed rate, on a specific future date. On that date, both currencies are physically exchanged.

Example: An Indian company has to pay USD 1 million to a US supplier after 3 months. To avoid the risk of the rupee weakening, it enters into an FX Forward with a bank and agrees to buy USD at ₹84 per USD after 3 months, regardless of the market exchange rate on that day.

Interest Rate Swap (IRS)

An Interest Rate Swap is a contract where two parties exchange interest payments on the same notional principal — typically one pays a Fixed rate and the other pays a Floating rate linked to a benchmark (e.g., MIBOR, SOFR). No principal changes hands.

Example: Company A has a ₹100 crore loan with a floating interest rate, but wants predictable payments. It enters into an Interest Rate Swap with a bank, where it pays a fixed interest rate and receives a floating rate. The loan principal is not exchanged—only the interest payments are.

Currency Swap

A Currency Swap is a contract where two parties exchange principal amounts in different currencies at the start, pay each other interest in their respective currencies during the life of the swap, and then re-exchange the original principal at maturity.

Example: An Indian company needs USD for its US operations, while a US company needs INR for its business in India. They enter into a Currency Swap, exchanging the principal amounts at the start, paying interest in the borrowed currencies during the swap, and exchanging the original principal back at maturity.

Credit Default Swap (CDS)

A Credit Default Swap is a contract where a Protection Buyer pays a regular premium (the CDS spread) to a Protection Seller. If a defined Credit Event occurs — such as default or bankruptcy of a Reference Entity — the seller compensates the buyer for the loss.

Example: A bank owns ₹500 crore worth of corporate bonds and wants protection against the issuer defaulting. It buys a Credit Default Swap (CDS) from another financial institution by paying a regular premium. If the bond issuer defaults, the CDS seller compensates the bank for the agreed loss.

At a Glance — Comparing the Four Products