FBE 459 Financial Derivatives Notes

FBE 459 Financial Derivatives Notes - F BE 459 Financial...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
FBE 459 Financial Derivatives Notes Chapter 7 Interest Rate Swap Value of Swap= difference between fixed and floating Fixed = + fixed interest payment1 zero coupon ratet + … + + Principal final ( + ) interest 1 zero coupon rate in n years n where n > t Float = Uses of swap : 1. transform a fixed rate liabilities into floating rate [ borrows (pays) at LIBOR+ 0.1% (swap: pays 5%, receives LIBOR) pays 5.1% ] [ pays 5.2% (swap: pays LIBOR, receives 5%) pays LIBOR+ 20 basis pt ] 2. Transform return from an asset (eg. Bonds) [ receives 4.7% on bonds (swap: receives LIBOR, pays 5%) LIBOR – 30 basis pt ] [ receives LIBOR-20 basis pt (swap: pays LIBOR, receives 5%) receives 4.8% ] Market Makers: Difficult to find 2 opposite positions to swap at the same time. Market Makers are large financial institutions who are prepared to enter into a swap without having an offsetting swap with counterparty. Market Makers must carefully quantify and hedge the risks they are taking. Bid-offer spread = what financial institutions make = usually 3-4 basis points
Background image of page 1

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

View Full DocumentRight Arrow Icon
Image of page 2
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 / 2

FBE 459 Financial Derivatives Notes - F BE 459 Financial...

This preview shows document pages 1 - 2. Sign up to view the full document.

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