income markets in other countries by using swaps whereby one investor nets the return (appreciation) of one index against the return of another.
Typically, at the time the counterparties enter into a swap agreement, the cash flows to be exchanged are equal in value. As time passes and the cash flows relating to the underlying asset fluctuate in value, the counterparties make payments back and forth to one another at prearranged periods of time (e.g., quarterly or semiannually). The terms of swap agreements usually dictate how often the value of an underlying asset is reset on the variable side of the swap. With the exception of foreign currency swaps, most swaps do not result in the exchange of principal, but some swaps are structured to require different interest payment dates. The counterparties settle their obligation on a net basis (i.e., at the end of each payment period they add and subtract price movements of the underlying assets during that particular period to determine which counterparty to the agreement makes a payment).
The chapters on warrants, structured notes, convertibles, exotic options, and swaps dealt with instruments that fuse the economic characteristics of one or more cash instruments or markets into a new structured derivative product. The next type of structured product, investment trusts, discussed in Chapter 11, can be distinguished from others by its ability to mix actual cash instruments and securities (such as stocks, bonds, forward commodity contracts, currencies, equities, options, treasury strips, swap agreements, etc.) in one legal "container" called an investment trust, and then reissue smaller units of investment to investors. Such units of investment offer new payoff patterns that provide yet another means for investors to achieve their particular investment goals using structured financial products.
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