Ch07HullFundamentals5thEd

Ch07HullFundamentals5thEd - Fundamentals of Futures and...

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Unformatted text preview: Fundamentals of Futures and Options Markets , 5 th Edition, Copyright John C. Hull 2004 7.1 Swaps Chapter 7 Fundamentals of Futures and Options Markets, 5th Edition, 7.2 Nature of Swaps A swap is an agreement to exchange cash flows at specified future times according to certain specified rules Fundamentals of Futures and Options Markets, 5th Edition, 7.3 An Example of a Plain Vanilla 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 Next slide illustrates cash flows Fundamentals of Futures and Options Markets, 5th Edition, 7.4---------Millions of Dollars--------- LIBOR FLOATING FIXED Net Date Rate Cash Flow Cash Flow Cash Flow Mar.5, 2001 4.2% Sept. 5, 2001 4.8% +2.10 2.50 0.40 Mar.5, 2002 5.3% +2.40 2.50 0.10 Sept. 5, 2002 5.5% +2.65 2.50 +0.15 Mar.5, 2003 5.6% +2.75 2.50 +0.25 Sept. 5, 2003 5.9% +2.80 2.50 +0.30 Mar.5, 2004 6.4% +2.95 2.50 +0.45 Cash Flows to Microsoft (See Table 7.1, page 153) Fundamentals of Futures and Options Markets, 5th Edition, 7.5 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 Fundamentals of Futures and Options Markets, 5th Edition, 7.6 Intel and Microsoft (MS) Transform a Liability (Figure 7.2, page 154) Intel MS LIBOR 5% LIBOR+0.1% 5.2% Fundamentals of Futures and Options Markets, 5th Edition, 7.7 Financial Institution is Involved (Figure 7.4, page 156) F.I....
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Ch07HullFundamentals5thEd - Fundamentals of Futures and...

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