Reset also known as fixing is a generic concept in the EV
financial markets
A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial markets ...
, meaning the determination and recording of a
reference rate A reference rate is a rate that determines pay-offs in a financial contract and that is outside the control of the parties to the contract. It is often some form of LIBOR rate, but it can take many forms, such as a consumer price index, a house pri ...
, usually in order to calculate the settlement value of a periodic payment schedule between two parties.
Resets are most commonly used in
Interest rate swap
In finance, an interest rate swap (IRS) is an interest rate derivative (IRD). It involves exchange of interest rates between two parties. In particular it is a "linear" IRD and one of the most liquid, benchmark products. It has associations wit ...
s, to determine the value of the floating rate payment for each period. The parties will have agreed a source for the reference rate (usually a named screen on an information vendors system, though any public domain source will do, such as a newspaper or government publication). Fixing involves looking up the reference value on the agreed date, recording, then computing a payment based on the rate.
Fixing can often change the value of a
financial instrument
Financial instruments are monetary contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity or a contractual right to receive or deliver in the form ...
, and can be difficult to encode in the software models used to price such instruments. Other examples of fixing are in
asian option An Asian option (or ''average value'' option) is a special type of option contract. For Asian options the payoff is determined by the average underlying price over some pre-set period of time. This is different from the case of the usual European op ...
s, where the underlying of the option is an average of some kind, and in
OIS type swaps, where periodic payments are made on the basis of simple composition or average of overnight interest rates observed during each coupon period.
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Financial markets