Lets look at an example swaps r j hawkins econ 136

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Unformatted text preview: i =1 DFi . Let’s look at an example! Swaps: R. J. Hawkins Econ 136: Financial Economics 14/ 19 Swaps and Hedging Swaps provide a largely linear rate hedge. Parallel shift of the forward curve Receiver Payer PROFIT/LOSS 0.20 0.10 0.00 -0.10 -0.20 -400 -200 0 200 400 PARALLEL SHIFT TO FORWARD CURVE (bp) Swaps: R. J. Hawkins Econ 136: Financial Economics 16/ 19 Swaps and Funding: Forms of Floating Funding Alternatives: Fund Floating. Principal Fixed Coupon Funding 1.0 CASH FLOW 0.5 Fund fixed and swap to floating with a receiver swap. 0.0 -0.5 -1.0 0 1 2 3 4 N-1 N N-1 N CASH FLOW NUMBER 0.15 Principal Floating Coupon Funding 1.0 CASH FLOW 0.5 CASH FLOW Fixed Coupon Floating Coupon 0.10 0.0 -0.5 0.05 0.00 -0.05 -0.10 -1.0 -0.15 0 1 2 3 4 N-1 N CASH FLOW NUMBER Swaps: R. J. Hawkins 0 1 2 3 4 CASH FLOW NUMBER Econ 136: Financial Economics 17/ 19 Swaps and Funding: Forms of Fixed Funding Alternatives: Fund Fixed. Principal Floating Coupon Funding 1.0 Fund floating and swap to fixed with a pay...
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