A spreadlock (a type of credit derivative) that is based on a forward contract. It allows the holder to lock in a specific number of basis points (a spread) on top of the existing spread in the underlying swap. For example, the parties to the contract may agree to enter, in one year’s time, into a 4-year swap to the effect that one party pays LIBOR and the other pays 4-year the Treasury yield as of the commencement date, in addition to 25 basis points.
A forward-based spreadlock is a two-leg transaction in which the parties agree to undertake a forward exchange of an underlying at the present time. One party may choose to pay a floating rate, while the other party can pay the 4-year treasury yield and a certain spread (25 basis points) at the inception date.
A forward-based spreadlock provides protection against changes in the spread between swaps and the underlying riskless bond rate.
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