Quantitative Work Flashcards
What is a swap
Involves two aprties exchanging cash flows in the future - usually involving multiple dates
What is a forward contract
Simple version of a swap - its the exchange of cash flows on one future date
What is a plain vanilla interest rate swap
Involves exchnaging cash flows based on a fixed rate (for one person) and a floating rate (for the other) on the same notional principal for the same time period. Also the currencies are the same.
What does LIBOR stand for
London Interbank Offered Rate
for what period is LIBOR usually quoted
1 month, 3 month, 6 month, 12 month
How do banks make money Briefly
Through playign the yield curve. They can also use off balance sheet synthetic lending methods - like swaps.
Banks do not just borrow at x% and loan for y% - they borrow short term and lend long term whcih plays the yield curve where the yield curve is normal and upward sloping they can make money.
Problems arise/ have in past when short term funding dries up and theu have no liquidity
What are EURIBOR futures and when are they quoted
EU interest rates quoted March, June September, december
How to find interest rate for the EURIBOR future from quoted discount rate
100-interest rate future = % interets implied
When is the last trading day and delivery date of the EURIBOR futures
Last trading day - 2 days before the third wednesday of the month
Delivery date (day future begins and inetrets is charged) 1 day after the trading day
What is the basis in the EU
Actual / 360
Calculation for the 1 year discount factor of a swap
1/((1 year swap rate * actual/360)+1)
Why is the discount factors of other years harder to obtain
Swaps give coupons at the end of each year so need to set up an equation of value
Equation of value to find DF2
100=1002yearswaprate(actual/360)DF1 +1002yearswaprate(actual/360)DF2 +100*DF2
What does settlement out of spot mean
Two day ahead
What are the interest rate basis for the US and Sterling
sterling- ann/365
US: 30/365
