Reading #61 - Swap Markets and Contracts Flashcards
define a swap
“agreements to exchange a series of cash flows on periodic settlement dates over a certain time period”
how many parties make a fixed rate and how many make a floating rate payment?
one party does each
how is settlement determined?
“the two payments are netted so that one only payment is made”
define tenor
length of the swap
four ways to terminate a swap
- mutual termination 2.offsetting contract 3. resale 4. swaption
define mutual termination
when cash payment is made by one party that is accepted by the other to end the swap
define offsetting contract
if one party does not like early termination offer, other party can suggest offsetting swap.
defile resale
can sell the swap to another party WITH permission of counterparty
define swaption
option to enter into an offsetting swap that would terminate the existing swap.
define currency swap
“one party makes payments denominated in one currency, while the payments from the other party are made in a second currency”
walk through steps of fixed for fixed currency swap
- notional principal actually exchanged in the two currencies 2. fixed interest paid to each party, not netted 3. at termination, the notional principal is swapped again
define plain vanilla interest rate swap
“trading fixed interest rate payments for floating rate payments”
define basis swap
“involves trading one set of floating rate payments for another”
FORMULA: Floating Rate Payment
= LIBOR - swap rate fixed x (#ofdays in term/360) x notional
Floating Rate - who pays/receives when positive and when negative?
“when positive the floating-rate payer owes a net payment and if the result is negative, then floating-rate payer receives a net inflow”
