Lecture 5 - Swaps

Question 1

An agreement to exchange cash flows at specified times according to certain specified rules.

Answer 1

A swap

Question 2

Typical uses of an interest rate swap

Answer 2

Converting a liability from
- fixed rate to floating rate
- floating rate to fixed rate
Converting an investment from
- fixed rate to floating rate
- floating rate to fixed rate

Question 3

Day count conventions: Treasury Bonds

Answer 3

Actual/Actual (in period)

Question 4

Day count conventions: Corporate Bonds

Answer 4

30/360

Question 5

Day count conventions: Money market instruments

Answer 5

Actual/360

Question 6

Valuation of an Interest Rate Swap

Answer 6

Calculate LIBOR forward rates
Calculate the swap cash flows that will occur if LIBOR forward rates are realized
Discount these swap cash flows at OIS rates

Question 7

Currency swaps: fixed for fixed currency swap plus a fixed for floating interest rate swap

Answer 7

Fixed for floating

Question 8

Currency swaps: fixed for fixed currency swap plus two floating interest rate swaps

Answer 8

Floating for floating