Editing Interest rate derivative (section)

{{Short description|Financial derivative whose payments are based on interest rate(s)}}
{{Use dmy dates|date=March 2024}}
In [[finance]], an '''interest rate derivative''' ('''IRD''') is a [[derivative (finance)|derivative]] whose payments are determined through calculation techniques where the underlying benchmark product is an [[interest rate]], or set of different interest rates. There are a multitude of different [[interest rate index|interest rate indices]] that can be used in this definition.

IRDs are popular with all financial market participants given the need for almost any area of finance to either [[Hedge (finance)|hedge]] or [[Speculation|speculate]] on the movement of interest rates.

[[Financial modeling#Quantitative finance|Modeling]] of interest rate derivatives is usually done on a time-dependent multi-dimensional [[Lattice model (finance)#Interest rate derivatives|lattice]] ("tree") or using [[Monte Carlo methods for option pricing|specialized simulation models]]. Both are calibrated to the [[underlying]] risk drivers, usually domestic or foreign [[Short-rate model|short rates]] and [[foreign exchange market]] rates, and incorporate delivery- and [[day count convention]]s. The [[Heath–Jarrow–Morton framework]] is often used instead of short rates.