Esoteric debt refers to debts or other financial instruments that have a complex structure that is correctly understood by only a few people with specialized knowledge.
Due to their incomprehensibility, the true nature of their fair value and their risk/reward profile may be unknown or misleading to market participants.
“So the misjudgment and inadequate risk management of these positions led to financial crises and big losses when esoteric investments didn’t work out as advertised.
Esoteric debt often arises in the process of securitization or in the form of derivative contracts.
An inflationary zero-coupon swap (ZCIS) is a type of inflationary derivative in which an income stream linked to inflation is exchanged for an income stream with a fixed interest rate.
The 48 Hour Rule refers to the part of the mortgage allocation process related to the purchase and sale of Mortgage Backed Securities (MBS) to be announced (TBA).
An asset swap is used to convert cash flow characteristics in order to hedge risks from one financial instrument with undesirable cash flow characteristics to another with favorable cash flow characteristics.
The Bank Note Swap Rate (BBSW) is a short-term interest rate used as a benchmark for valuing Australian dollar derivatives and securities, primarily floating rate bonds.
Boundary conditions were used to establish the minimum and maximum possible values of call and put options prior to the introduction of binomial tree and Black-Scholes pricing models.