FBE459_2_Swaps

FBE459_2_Swaps - FBE 459 Financial Derivatives Prof Pedro...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
FBE 459 – Financial Derivatives Prof. Pedro Matos Lecture 2: Swaps Basics of Swaps Interest Rate Swaps Cross-Currency Swaps Readings: HULL chapter 7
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 - Interest Rate Swaps (IRS) . Mechanics and uses of IRS . Comparative-advantage argument for use of IRS . Valuation - Cross-Currency Swaps (CCS) . Mechanics and uses of CCS . Valuation - Other Types of Swaps Lecture Outline:
Background image of page 2
3 Swaps: A swap is an agreement to exchange a stream of cash flows at specified future times according to certain specified rules -> “Fixed-for-floating” Interest Rate Swap -> “Fixed-for-Fixed” Currency Swap -> Currency and Interest Rate Swap -> “Stock Index for Interest” Equity Swap -> Commodity Swaps
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4 Interest Rate Swap: “Plain Vanilla” Interest Rate Swap (IRS) is the exchange of payments on fixed-rate for floating-rate debt - no upfront cash is exchanged - no exchange of principal actually occurs - interest payments are netted - usually floating-rate = LIBOR Fixed-rate Payer Floating-rate Payer Floating interest (ex: LIBOR) Fixed interest (ex: 5%)
Background image of page 4
5 Interest Rate Swap: For “floating-rate” payer in the IRS: . receive fixed interest For “fixed-rate” payer in the IRS: . pay floating interest . receive floating interest . pay fixed interest
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
6 Interest Rate Swap: Typical uses of an Interest Rate Swap: Converting a liability from fixed rate to floating rate floating rate to fixed rate Converting an investment from fixed rate to floating rate floating rate to fixed rate
Background image of page 6
Interest Rate Swap: Example of an IRS (HULL, pg. 150): Agreement by Microsoft and Intel where Microsoft receives 6-month LIBOR & pays a fixed rate of 5% per annum every 6 months for 3 years on a notional principal of $100 million LIBOR = London Inter-Bank Offer Rate and is interest rate on USD deposited in bank outside the US, usually for 3 to 6 months.
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/23/2011 for the course FBE 459 taught by Professor Matos during the Spring '08 term at USC.

Page1 / 38

FBE459_2_Swaps - FBE 459 Financial Derivatives Prof Pedro...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online