Reading #61 - Swap Markets and Contracts Flashcards Preview

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Flashcards in Reading #61 - Swap Markets and Contracts Deck (15):
1

define a swap

"agreements to exchange a series of cash flows on periodic settlement dates over a certain time period"

2

how many parties make a fixed rate and how many make a floating rate payment?

one party does each

3

how is settlement determined?

"the two payments are netted so that one only payment is made"

4

define tenor

length of the swap

5

four ways to terminate a swap

1. mutual termination 2.offsetting contract 3. resale 4. swaption

6

define mutual termination

when cash payment is made by one party that is accepted by the other to end the swap

7

define offsetting contract

if one party does not like early termination offer, other party can suggest offsetting swap.

8

defile resale

can sell the swap to another party WITH permission of counterparty

9

define swaption

option to enter into an offsetting swap that would terminate the existing swap.

10

define currency swap

"one party makes payments denominated in one currency, while the payments from the other party are made in a second currency"

11

walk through steps of fixed for fixed currency swap

1. 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

12

define plain vanilla interest rate swap

"trading fixed interest rate payments for floating rate payments"

13

define basis swap

"involves trading one set of floating rate payments for another"

14

FORMULA: Floating Rate Payment

= LIBOR - swap rate fixed x (#ofdays in term/360) x notional

15

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"