Swaptions Lecture - Debt Instruments and Markets Professor...

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Debt Instruments and Markets Professor Carpenter Swaptions 1 Swaptions Concepts and Buzzwords Swaps Swaptions Connection to Callable Bonds Cancelable Swaps Receiver swaption Payer swaption Putable swap Callable swap Reading Veronesi, Chapter 12 Tuckman, Chapter 19
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Debt Instruments and Markets Professor Carpenter Swaptions 2 Review of Interest Rate Swaps A plain vanilla semi-annual swap is a contract to receive a fixed interest rate and pay a floating interest rate on a given notional par amount every 6 months until maturity. A T -year swap with notional par amount N and fixed rate k is the same as the portfolio long N par of T -year fixed rate bonds with coupon rate k and short N par of T -year floaters. Swap value = bond value minus par. Class Problem: 2-Year 5.5% Swap Each node lists the ex-coupon price a 5.5%-coupon bond maturing at time 2. Fill in the tree of ex-payment values of $100 par of the 5.5% swap maturing at time 2. Time 0.5 Time 1 Time 0 100.0019 99.0890 100.9548 98.6063 100.0207 101.1547 Time 1.5 98.8626 99.6684 100.3113 100.8227
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Debt Instruments and Markets Professor Carpenter Swaptions 3 Swap-Based Products A swaption is an option on a swap, usually with strike price zero.
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