4. Interest Rate Swaps Flashcards
What is a swap
An OTC derivative, where two counter parties exchange one cash flow, for another.
What are the payment streams in a swap called
The legs of the swap
How are the cashflows of a swap calculated
Over a nominal principal/asset amount
A straightforward interest rate swap, can also be referred to as what
A plain vanilla swap
What is an example of a straight forward interest rate swap
One party swapping their floating interest rate obligation, for another party’s fixed rate obligation
Are swaps based on an agreed notional sum, or is principal exchanged
An agreed notional sum - principal is NEVER exchanged
What are the four components of a swap contract
The term - how long the swap lasts for
The national amount
The frequency - how often payments are swapped
A swap rate - typically the fixed component of the swap
How does a swap differ from an FRA
The swap has multiple cash flows, the FRA just has one
what would be a “basis swap” with an interest rate swap?
Agreement to exchange floating for floating - 3mth LIBOR for 6mth LIBOR
What is an Overnight Index Swap (OIS)
An agreement to exchange a swap rate for an overnight index average eg SONIA
What is a currency rate swap
An agreement to exchange a series of cash flows in one currency, for a series of cash flows in another denominated currency
In a currency swap sway, is the principal exchanged
Yes - it is the only swap where principal is exchanged giving each party the use of the other currency
