Credit and sovereign risk 1 probability of default 2

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Unformatted text preview: Counterparties C. Credit and Sovereign Risk 1. Probability of default 2. Political risks: prevents one party from Political delivering payments when due delivering All Rights Reserved All Rights Reserved Dr David P Echevarria 6 INTEREST RATE CAPS, FLOORS, INTEREST AND COLLARS AND A. Interest Rate Caps 1. Help offset [lower] interest payments when rates rise 2. Seller is betting rates will RTS or decline. B. Interest Rate Floors 1. Hedge against declining rates 2. Seller is betting rates will RTS or increase. C. Interest Rate Collars 1. Combination of Cap and Floor 2. Hedging against interest rate volatility All Rights Reserved All Rights Reserved Dr David P Echevarria 7 HOMEWORK QUESTIONS HOMEWORK A. A. B. B. C. D. E. F. What is the purpose of a Swap? What What does the term notional principal mean? What notional What is a plain vanilla swap? What are the What expectations of the counterparties? expectations How does a callable swap differ from a How putable swap? putable What is sovereign risk?...
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This document was uploaded on 02/11/2014.

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