Lecture8_0926 - MGMT 4380 MGMT 6370 Derivatives Markets...

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9/27/2016 Aparna Gupta, Lally School of Mgmt 1 MGMT 4380 / MGMT 6370 Derivatives Markets Aparna Gupta Lally School of Management Office: PITTS 1116 Email: [email protected] Phone: x2757 1 Aparna Gupta, Lally School, RPI Swaps 2
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9/27/2016 Aparna Gupta, Lally School of Mgmt 2 3 Definition of a Swap A swap is an agreement to exchange cash flows at specified future times according to certain specified rules An Example of a “Plain Vanilla” Floating to Fixed Interest Rate Swap An agreement by Microsoft to Receive 6 month LIBOR & Pay a fixed rate of 5% per annum every 6 months for 3 years on a notional principal of $100 million 4 ---------Millions of Dollars--------- LIBOR FLOATING FIXED Net Date Rate Cash Flow Cash Flow Cash Flow Mar. 5 4.2% Sept. 5 4.8% +2.10 –2.50 –0.40 Mar. 5 5.3% +2.40 –2.50 –0.10 Sept. 5 5.5% +2.65 –2.50 +0.15 Mar. 5 5.6% +2.75 –2.50 +0.25 Sept. 5 5.9% +2.80 –2.50 +0.30 Mar. 5 6.4% +2.95 –2.50 +0.45 Cash Flows to Microsoft
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