LEC6 - ACCG329 Lecture 6, 2009: Introduction to Swaps 2 0 0...

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1 ACCG329 Lecture 6, 2009: Introduction to Swaps 2009, Semester 1 Egon Kalotay Swaps • A swap is an agreement to exchange cash flows in the future according to some prearranged formula specifying the timing and terms of the exchange • A swap is equivalent to a portfolio of futures contracts
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2 An Example of a “Plain Vanilla” Interest Rate Swap (Hull chapter 7) • An agreement by Microsoft to receive 6- annum every 6 months for 3 years on a notional principal of $100 million • Next slide illustrates cash flows Cash Flows to Microsoft (See Table 7.1, page 149) ---------Millions of Dollars--------- LIBOR FLOATING FIXED Net Date Rate Cash Flow Cash Flow Cash Flow Mar.5, 2007 4.2% Sept. 5, 2007 4.8% +2.10 –2.50 –0.40 Mar.5, 2008 5.3% +2.40 –2.50 –0.10 Sept. 5, 2008 5.5% +2.65 –2.50 +0.15 Mar.5, 2009 5.6% +2.75 –2.50 +0.25 Sept. 5, 2009 5.9% +2.80 –2.50 +0.30 Mar.5, 2010 6.4% +2.95 –2.50 +0.45
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3 Purpose of an Interest Rate Swap • Converting a liability from –fixed rate to floating rate –floating rate to fixed rate • Converting an investment from
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LEC6 - ACCG329 Lecture 6, 2009: Introduction to Swaps 2 0 0...

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