chpt 11 part 3 swaps Flashcards
what is a swap
an agreement between two parties to exchange cash flows in the future
- a linear hedging contract
what are counterparties
two parties in a swap agreement
what is interest rate swap
an exchange of interest payments on a principal amount in which borrowers switch loan rates
what is comparative advantage
a benefit that one firm has relative to another
at the outset that this is a direct agreement b/w two parties what takes place
there is no formal exchange to guarantee performance
what does the exchange need to guarantee performance of the swap
a dealer or OTC market
is there credit risk with swaps
yes
what have swaps evolved into and why
bank instruments
because of credit risk
who are intermediaries in swaps
dealers
what is plain vanilla interest rate swap
the fixed for floating interest rate swap
- the simplest and most commonly used type of swap
what are net payments
payments representing the difference between the fixed and floating rates
what is currency swap
the exchange of principal and interest in one currency for the same in another currency
what is swap rate
the rate or the fixed portion of a swap used for quoting swap prices
what is total return swap
an exchange of an interst rate return for the total return on an equity index, plus or minus a spread
what are credit default swap (CDS)
an agreement in which one party makes a series of interst payments and then is compensated by the counterparty in the event of default on the bond
- it is essentially default insurance on the bond
