Lecture 15 - Interest rate swaps

Lecture 15 - Interest rate swaps - Financial Markets and...

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Financial Markets and Institutions Derivative securities Interest Rate Swaps Slides prepared by Issam Hallak
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Definition Swaps are financial contracts that obligate each party to the contract to exchange ( swap ) a set of [future] payments it owns for another set of [future] payments owned by another party.
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Glossary of swap contracts Counterparty (two) Intermediary/Swap dealer (one) Notional principal Underlying amount on which swap payments are based. Gross market value Cost that one counterparty would pay to replace a swap at market prices in the event of default. Represents the gross exposure .
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Swaps: Features Equivalent of a collection of forward contracts that call for an exchange of funds at specified times in the future. It can be used to – speculate, – hedge an exposure – lower borrowing costs .
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Two main types of swaps • Currency swap Exchange of a set of payments in one currency for a set of payments in another currency . • Interest-rate swap E xchange of a set of interest payments for another set of interest payments.
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– Swaps are exclusively traded over-the-counter. – The notional value of outstanding swaps grew rapidly from zero in 1980 to more than $45 trillion in 1999, $155 trillion in 2004. – In notional amounts outstanding, interest rate swaps ($147 trillion) remain the largest single group of products in the derivatives market. – Interest rate swaps represent no less than 59% of all OTC derivatives outstanding notional amounts, 49% of all derivatives markets (OTC + Organized). – Grows faster than other derivatives markets
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This note was uploaded on 10/12/2011 for the course BIEMF 30006 taught by Professor Ippolito during the Fall '10 term at Università Bocconi.

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Lecture 15 - Interest rate swaps - Financial Markets and...

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