tailieunhanh - Lecture Financial derivatives - Lecture 28: Swaps and interest rate options

Lecture Financial derivatives - Lecture 28: Swaps and interest rate options. This chapter presents the following content: Introduction, interest rate swaps, foreign currency swaps, circus swap, interest rate options. | Lecture #28 Swaps and Interest Rate Options Outline Introduction Interest rate swaps Foreign currency swaps Circus swap Interest rate options Introduction Both swaps and interest rate options are relatively new, but very large In mid-2000, there was over $60 trillion outstanding in interest rate swaps, foreign currency swaps, and other interest rate options Interest Rate Swaps Introduction Immunizing with interest rate swaps Exploiting comparative advantage in the credit market Introduction Popular with bankers, corporate treasurers, and portfolio managers who need to manage interest rate risk A swap enables you to alter the level of risk without disrupting the underlying portfolio Introduction (cont’d) The most common type of interest rate swap is the fixed for floating rate swap One party makes a fixed interest rate payment to another party making a floating interest rate payment Only the net payment is made (difference check) The firm paying the floating rate is the swap seller The firm paying the fixed rate is the swap buyer Introduction (cont’d) Typically, the floating interest rate is linked to a market rate such as LIBOR or T-bill rates The swap market is standardized partly by the International Swaps and Derivatives Association (ISDA) ISDA provisions are master agreements Introduction (cont’d) A plain vanilla swap refers to a standard contract with no unusual features or bells and whistles The swap facilitator will find a counterparty to a desired swap for a fee or take the other side A facilitator acting as an agent is a swap broker A swap facilitator taking the other side is a swap dealer (swap bank) Introduction (cont’d) Plain Vanilla Swap Example A large firm pays a fixed interest rate to its bondholders, while a smaller firm pays a floating interest rate to its bondholders. The two firms could engage in a swap transaction which results in the larger firm paying floating interest rates to the smaller firm, and | Lecture #28 Swaps and Interest Rate Options Outline Introduction Interest rate swaps Foreign currency swaps Circus swap Interest rate options Introduction Both swaps and interest rate options are relatively new, but very large In mid-2000, there was over $60 trillion outstanding in interest rate swaps, foreign currency swaps, and other interest rate options Interest Rate Swaps Introduction Immunizing with interest rate swaps Exploiting comparative advantage in the credit market Introduction Popular with bankers, corporate treasurers, and portfolio managers who need to manage interest rate risk A swap enables you to alter the level of risk without disrupting the underlying portfolio Introduction (cont’d) The most common type of interest rate swap is the fixed for floating rate swap One party makes a fixed interest rate payment to another party making a floating interest rate payment Only the net payment is made (difference check) The firm paying the .

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