Swaps_IntRate_97_BW

Swaps_IntRate_97_BW - Swaps Interest Rate Swaps Jonathan...

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Copyright © 1997-20006 Investment Analytics Interest Rate Swaps Swaps Interest Rate Swaps Jonathan Kinlay
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Copyright © 1997-20006 Investment Analytics Interest Rate Swaps Interest Rate Swaps ¾ Vanilla interest rate swaps ¾ Basis swaps ¾ Amortizing swaps
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Copyright © 1997-20006 Investment Analytics Interest Rate Swaps Indicative Pricing Schedule VANILLA SWAP CITIBANK (Reuters: CBSP) Monday May 15, 1999 Spot Reference -- USD Libor 1 Year 6.17-22 18 Month 6.19-24 2 Year 6.31-36 3 Year 6.44-49
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Copyright © 1997-20006 Investment Analytics Interest Rate Swaps One-Year Swap ¾ Buyer: Pays fixed 6.22 to CITIBANK CITIBANK pays 3-Month LIBOR ¾ Seller: Pays LIBOR to CITIBANK CITIBANK pays fixed 6.17 ¾ Spread: 1.25 bps relative to $100 million (approx. $12,500 per qtr)
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Copyright © 1997-20006 Investment Analytics Interest Rate Swaps Vanilla: Relation Between Spot Curve and Price Contractual Details Floating Leg Cash Flows/PV Euro Futures LIBOR Spot FRA's Fixed Leg Price BEY PAR Curve Rate Forward Rates Valuation Problem Spot Curve from Price
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Copyright © 1997-20006 Investment Analytics Interest Rate Swaps Vanilla Swap Valuation: Forward Curve Approach ¾ Two equivalent problems: Given spot curve how do we value/hedge a vanilla swap? Given a schedule of vanilla swap prices what spot curve can we infer? ¾ Objective: Value the vanilla swap from the spot LIBOR curve
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Copyright © 1997-20006 Investment Analytics Interest Rate Swaps Lab: Pricing a Fixed for Floating “Vanilla” Swap Notional principal amount $100,000,000 Effective date September 22, 1994 Day count between each reset date: December 22, 1994 91 days March 22, 1995 90 days June 22, 1995 92 days September 22, 1995 92 days Maturity date September 22, 1995 Interest settlements are in arrears. Fixed Side (Leg): Fixed-rate (Swap Coupon) 6.1220% Compounding frequency quarterly Day count 90/360* Floating Side (Leg): Reference Rate 3-month LIBOR Payment frequency quarterly resets Day count actual/360 First Coupon 5.25% * Assumption: Fixed Side Cash Flows Equal over Time
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Copyright © 1997-20006 Investment Analytics Interest Rate Swaps Key Steps ¾ Step 1: Project cash flows Contract specifies timing and magnitude of cash flows ¾ Step 2: Value cash flows Apply time value of money principles
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Copyright © 1997-20006 Investment Analytics Interest Rate Swaps Step 1: Cash Flow Projections Quarter LIBOR Forward Rate* Expected Variable Interest** December 5 1/4 5.25 $1,327,083 March 5 11/16 6.0496% $1,512,395 June 5 15/16 6.2506% $1,597,378 September 6 3/16 6.6308% $1,694,535 *LIBOR Forward Rates computed using actual/360 day count.
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Swaps_IntRate_97_BW - Swaps Interest Rate Swaps Jonathan...

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