Beruflich Dokumente
Kultur Dokumente
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Learning Objectives
After reading this chapter, you will understand
what an interest-rate swap is the relationship
between an interest-rate swap and forward contracts
how interest-rate swap terms are quoted in the
market
how the swap rate is calculated
how the value of a swap is determined
the primary determinants of the swap rate
how a swap can be used by institutional investors
for asset/liability management
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Interest-Rate Swaps
In an interest-rate swap, two parties (called counterparties) agree to
exchange periodic interest payments.
The dollar amount of the interest payments exchanged is based on a
predetermined dollar principal, which is called the notional principal
amount.
The dollar amount that each counterparty pays to the other is the
agreed-upon periodic interest rate times the notional principal
amount.
The only dollars that are exchanged between the parties are the
interest payments, not the notional principal amount.
This party is referred to as the fixed-rate payer or the floating-rate
receiver.
The other party, who agrees to make interest rate payments that float
with some reference rate, is referred to as the floating-rate payer or
fixed-rate receiver.
The frequency with which the interest rate that the floating-rate
payer must pay is called the reset frequency.
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Floating-Rate Bond a
$50.0
+(LIBOR1/2)50
+(LIBOR2/2)50
+(LIBOR3/2)50
+(LIBOR4/2)50
+(LIBOR5/2)50
+(LIBOR6/2)50
+(LIBOR7/2)50
+(LIBOR8/2)50
+(LIBOR9/2)50
+(LIBOR10/2)50+50
Borrowing
Cost
+$50
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
52.5
Net
$0
+ (LIBOR1/2)502.5
+ (LIBOR2/2)502.5
+ (LIBOR3/2)502.5
+ (LIBOR4/2)502.5
+ (LIBOR5/2)502.5
+ (LIBOR6/2)502.5
+ (LIBOR7/2)502.5
+ (LIBOR8/2)502.5
+ (LIBOR9/2)502.5
+ (LIBOR10/2)502.5
The subscript for LIBOR indicates the six-month LIBOR as per the terms of the floating-rate bond
at time t.
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Fixed-Rate
Payer
Pay
Floating rate of
six-month
LIBOR
Fixed rate of
8.85%
Receive
Fixed rate of
8.75%
Floating rate of
six-month
LIBOR
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Quarter Ends
Jan 1 year 1
Apr 1 year 1
July 1 year 1
Oct 1 year 1
Jan 1 year 2
Apr 1 year 2
July 1 year 2
Oct 1 year 2
Jan 1 year 3
Apr 1 year 3
July 1 year 3
Oct 1 year 3
Mar 31 year 1
June 30 year 1
Sept 30 year 1
Dec 31 year 1
Mar 31 year 2
June 30 year 2
Sept 30 year 2
Dec 31 year 2
Mar 31 year 3
June 30 year 3
Sept 30 year 3
Dec 31 year 3
1
2
3
4
5
6
7
8
9
10
11
12
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1,246,875
1,260,729
1,274,583
1,274,583
1,246,875
1,260,729
1,274,583
1,274,583
1,246,875
1,260,729
1,274,583
1,274,583
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days in period
360
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days in period
notional amount swap rate
360
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360
t 1
Valuing a Swap
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Duration of a Swap
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Management
An interest-rate swap can be used to alter the cash flow
characteristics of an institutions assets so as to provide a
better match between assets and liabilities.
An interest-rate swap allows each party to accomplish its
asset/liability objective of locking in a spread.
An asset swap permits the two financial institutions to
alter the cash flow characteristics of its assets: from fixed
to floating or from floating to fixed.
A liability swap permits two institutions to change the
cash flow nature of their liabilities.
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The swap spread is determined by the same factors that influence the
spread over Treasuries on financial instruments (futures / forward
contracts or cash) that produce a similar return or funding profile.
Given that a swap is a package of futures/forward contracts, the swap
spread can be determined by looking for futures/forward contracts
with the same risk/return profile.
A Eurodollar CD futures contract is a swap where a fixed dollar
payment (i.e., the futures price) is exchanged for three-month
LIBOR.
A market participant can synthesize a (synthetic) fixed-rate security
or a fixed-rate funding vehicle of up to five years by taking a
position in a strip of Eurodollar CD futures contracts (i.e., a position
in every three-month Eurodollar CD up to the desired maturity date).
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For swaps with maturities longer than five years, the spread is
determined primarily by the credit spreads in the corporate bond
market.
Because a swap can be interpreted as a package of long and short
positions in a fixed-rate bond and a floating-rate bond, it is the
credit spreads in those two market sectors that will be the key
determinant of the swap spread.
Boundary conditions for swap spreads based on prices for fixedrate and floating-rate corporate bonds can be determined.
Several technical factors, such as the relative supply of fixed-rate
and floating-rate corporate bonds and the cost to dealers of
hedging their inventory position of swaps, influence where
between the boundaries the actual swap spread will be
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o
o
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NHH
5.4289%
NH
3.500%
NHL
4.4448%
NL
NLL
Dates:
Years:
1
One
5.7354%
4.6958%
2
Two
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Threes
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Exhibit 29-13
Valuing a Cap Using a Single Binomial Tree
NH
$72,753
3.500%
NL
Dates:
Years:
$104,026
$21,711
$125,737
5.4289%
$24,241
$0
$24,241
4.4448%
1
One
$168,711
7.0053%
$180,530
$50,636
5.7354%
$53,540
$0
4.6958%
$0
2
Two
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Threes
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