536-8.1a_note[1]

# 536-8.1a_note[1] - 536-8.1a_note, 11S Topic 8.1 Interest...

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536-8.1a_note, 11S FIN 536 – SU Page 1 of 12 Topic 8.1 Interest Rate and Currency Swap (Chapter 9) I. Outline A. Derivative Summary: Currency Risk Interest Rate Risk Futures Futures Forwards FRAs Options Options OTC Options Cap, Floor Swaps Swaps Swaption Swaption B. Swap (Topic 8.1) 1. Basics 2. Cash Flows in Swap 3. Uses of Swaps – Hedge Risk 4. Uses of Swaps – Reduce Cost 5. Swap Valuation C. Interest Rate Futures & Forwards (Topic 8.2) 1. Cash Flows in Interest rate Forward & Futures 2. Hedging with Interest Rate Forwards 3. Speculate with Interest rate Futures II. Homework Assignment Chapter 9 End-of-Chapter Question No End-of-Chapter Problem No Exam Sample Problem 1-9 Supplementary Homework Problem 1-8 ========================================================= Class Notes I. Swap: Contractual agreements to exchange debt service obligations. A. Basic: 1. Notional Principal: A reference amount against which the interest is calculated. 2. Interest-rate swap (Coupon swap): 3. Basis-rate swap (floating-floating swap): 4. Currency swap: 5. Interest rate/Currency Swap: 6. Leg: 7. Capital market and swap market

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536-8.1a_note, 11S FIN 536 – SU Page 2 of 12 B. Cashflow in Swap 1. Cashflow in Swap Example 1: Interest Rate Swap a) Example 1.a: Firm A agrees that it will pay the swap dealer \$7.35% for 1-year \$LIBOR. Notional principal is \$100 million. T = 5 year. Diagram the profile. b) Assume interest rate is predetermined (set at the beginning of the period). Determine the CF for Firm A. (1) T = 0, \$L = \$7%. CFs at T = 0? (2) One year later (T = 1), \$L = \$9.25%. What is the swap payment (CF of the swap contract) for Firm A at the end of year 1? (3) T = 2, \$L = 8%. What is the swap CF for Firm A at the end of year 2? 1 2 3 5 0 dealer A Swap Market
FIN 536 – SU Page 3 of 12 2. Cashflow in Swap Example 2: Interest-rate swap Suppose that a swap dealer offers the following swap quotation for a 10-year Basis Swap: Year US\$ Bid Ask 10 T-bill+0.25% T-bill+0.35% Against 6-month \$LIBOR a) Example 2.a: Firm A agrees that it will receive 6-month \$LIBOR from the swap dealer. Notional principal is \$100 million. Diagram the Swap profile. b) Example 2.b: Firm B enters into a swap with a swap dealer that it will pay 6-month \$LIBOR. Notional principal is \$100 million.

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## This note was uploaded on 11/07/2011 for the course FIN 536 taught by Professor Staff during the Spring '11 term at S.F. State.

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536-8.1a_note[1] - 536-8.1a_note, 11S Topic 8.1 Interest...

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