Download Interest Rate and Currency Swaps (The Research Foundation of by Keith Brown, Donald Smith PDF

By Keith Brown, Donald Smith

Rate of interest and foreign money Swaps: an instructional is a radical dialogue of 2 invaluable and commonplace varieties of derivatives-interest price and foreign money swaps. The authors supply step by step directions and real-life examples of ways to exploit the swaps. workouts (and ideas) after every one bankruptcy enable readers to profit by way of doing, and the publication encompasses a complete bibliography.

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Extra info for Interest Rate and Currency Swaps (The Research Foundation of AIMR and Blackwell Series in Finance)

Sample text

In general, the payer of an above-market fixed rate receives an up-front payment; the payer of a below-market fixed rate makes the initial payment. Calculating the amount of the lumpsum initial receipt on the off-market swap is straightforward in theory but more difficult in practice. It will be the present value of a 2 percent annuity (times the notional principal, adjusted for the day-count basis). The valuation issue is to select the discount rate (or rates) used in determining the present value.

More recently, swaps have been used widely in financial restructurings that might need a known, but not necessarily constant, fixed rate for each future time period. Had that been the primary application in the early years, the plain vanilla swap instrument of today might have come to be described as a sequence of on-market rather than off-market FRAs. 2. The firm receives dollars based on an 8 percent interest rate and a principal of USD 100 million and pays deutschemarks based on a 10 percent interest rate and a principal of DEM 160 million.

The interpretation of a swap as a combination of bonds is particularly useful in calculating its mark-to-mtirket (MTM) value. Usually, the value of a swap is determined from the fixed rate on a replacement swap having the same terms (such as the remaining time to maturity and the credit risk of the counterparty) as the original agreement. 1, assuming that a year has passed and the current market fixed rate on a new four-year, receive-fixed interest rate swap is 7 percent. The swap would have a positive MTM value to the firm because it has a contract to receive an "above-market" fixed rate of 8 percent for payment of LIBOR.

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