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9/27/2016Aparna Gupta, Lally School of Mgmt1MGMT 4380 / MGMT 6370Derivatives MarketsAparna GuptaLally School of ManagementOffice: PITTS 1116Email: [email protected]Phone: x27571Aparna Gupta, Lally School, RPISwaps2
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9/27/2016Aparna Gupta, Lally School of Mgmt23Definition of a SwapA swap is an agreement to exchange cash flows atspecified future times according to certain specified rulesAn Example of a “Plain Vanilla” Floating‐to‐Fixed InterestRate Swap–An agreement by Microsoft to•Receive 6‐month LIBOR &•Pay a fixed rate of 5% per annum•every6 monthsfor 3 years•on a notional principal of $100 million4---------Millions of Dollars---------LIBORFLOATING FIXED NetDateRateCash Flow Cash Flow Cash FlowMar. 54.2%Sept. 54.8%+2.10–2.50–0.40Mar. 55.3%+2.40–2.50–0.10Sept. 55.5%+2.65–2.50+0.15Mar. 55.6%+2.75–2.50+0.25Sept. 55.9%+2.80–2.50+0.30Mar. 56.4%+2.95–2.50+0.45Cash Flows to Microsoft