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Ch07HullFundamentals5thEd

Ch07HullFundamentals5thEd - Swaps Chapter 7 Fundamentals of...

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Fundamentals of Futures and Options Markets , 5 th Edition, Copyright © John C. Hull 2004 7.1 Swaps Chapter 7
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Fundamentals of Futures and Options Markets, 5th Edition, Copyright © John C. Hull 2004 7.2 Nature of Swaps A swap is an agreement to exchange cash flows at specified future times according to certain specified rules
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Fundamentals of Futures and Options Markets, 5th Edition, Copyright © John C. Hull 2004 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
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Fundamentals of Futures and Options Markets, 5th Edition, Copyright © John C. Hull 2004 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)
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Fundamentals of Futures and Options Markets, 5th Edition, Copyright © John C. Hull 2004 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
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Fundamentals of Futures and Options Markets, 5th Edition, Copyright © John C. Hull 2004 7.6 Intel and Microsoft (MS) Transform a Liability (Figure 7.2, page 154) Intel MS LIBOR 5% LIBOR+0.1% 5.2%
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Fundamentals of Futures and Options Markets, 5th Edition, Copyright © John C. Hull 2004 7.7 Financial Institution is Involved (Figure 7.4, page 156) F.I.
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