Interest Rate Derivative
Interest Rate Derivatives in IPOR refer to any derivative instrument that uses an IPOR Index as a contract reference. In the future, multiple types of derivative instruments and contracts could use the IPOR Index as a benchmark rate.
The IPOR Interest Rate Swap (IRS) is the cornerstone derivative product of IPOR. The IRS allows a market participant to be a Payer or Receiver and take a contract with the liquidity pool. For more detailed information about participants and contracts, reference the glossary of terms.
Once a Payer or Receiver agrees to a contract quoted by the AMM, they will pay the margin, the contract fee, and applicable network fees (i.e., in the case of Ethereum, some ETH must be used to pay for network gas fees) to enter into a derivative smart contract. The liquidity pool will post an equal margin in the same contract. Over time the contract will manage the positions and payouts and once closed, will pay out the respective sum(s).
Common FAQ Regarding Interest Rate Derivatives
What is “Pay fixed and receive floating” or “Pay floating and receive fixed“?
When you open a contract to “Pay fixed and receive floating” you are positioning yourself for rates to go up. Why? Because you are choosing to pay a fixed rate. Say the current IPOR Rate is 4%, and the floating rate goes up to, say 5%. You are receiving the floating rate which means that you are getting paid 5% but paying 4%. “Pay floating and receive fixed” is the opposite.
What is notional?
Notional is the total value of the position that the market participant takes. This should not be confused with collateral. The notional value of derivative contracts is higher than the market value depending on the amount of leverage.