Interest Rate Derivatives Flashcards
1
Q
What are interest rate swaps?
A
Swaps are an agreement to exchange a series of payments on periodic settlement dates over a period of time.
2
Q
How are swaps similar to forwards?
A
-Require no payment at initiation
-Are customized instruments
-Not traded in any organized secondary market
-Are largely unregulated
-Default risk is applicable
3
Q
Explain. A plain vanilla interest rate swap
A
One party makes a fixed interest payment and receives a floating payment from the other party.
The party making the fixed payment is the pay fixed side of the swap and the paying party paying the floating side is known as the floating rate payer.
