Even a cursory glance suggests that prepayments

GLOBALMONEYMARKETS

vary considerably over time and across pools established in different years. There are several factors contributing to the prepayment speed of a pool of SBA loans. A factor affecting prepayments is the maturity date of the loan. It has been found that the fastest speeds on SBA loans and pools occur for shorter maturities. The purpose of the loan also affects prepayments. There are loans for working capital purposes and loans to finance real estate construction or acquisition. It has been observed that SBA pools with maturities of 10 years or less made for working capital purposes tend to prepay at the fastest speed. In contrast, loans backed by real estate that have long maturities tend to prepay at a slow speed. All other factors constant, pools that have capped loans tend to prepay more slowly than pools of uncapped loans.

CHAPTER11

FuturesandForwardRate Agreements

his chapter is the first of two devoted to derivative instruments used by money market participants. The focus of this chapter is on interest rate futures and forward rate agreements while in the next we discuss swaps and caps/floors. In essence, a derivative instrument is one that derives its value from some underlying variable or variables. The underlying vari- ables could be the price of a financial asset, an interest rate, the spread between two interest rates, or the amount of snowfall in Aspen, Colo- rado. Indeed, the possibilities of variables underlying a derivative contract are limitless. We will discuss the forward contracts first and then proceed quickly to a discussion of interest rate futures. In the last section of the chapter, we discuss forward rate agreements.

FORWARD CONTRACTS