7Lecture8interestrateriskIV

65 semiannually and receives 6 month libor at each

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Unformatted text preview: Fixed for Floating Swap A : Fixed payer pays fixed rate and receives floating rate B : Floating payer receives fixed rate and pays floating rate A Pay fixed B Receive Floating ► only net payments are exchanged on interest payment dates Floating for Fixed Example Swap buyer buys $1 million 7-year swap: undertakes to pay 6.65% semiannually and receives 6-month LIBOR At each interest payment date there is net settlement (0.0665/2 - LIBOR/2)x 1 million if LIBOR = 5%, if LIBOR = 7.5%, 67 Two Views Asset Swap: Fixed to Floating Rate Assets Receive Fixed Not Hedged B/S Assets: fixed rate Transfer fixed Liabilities: floating rate Receive floating Swap counterparty Pay floating Hedged B/S RSA RSL Liability Swap: Floating to Fixed rate Liabilities Receive fixed Not Hedged B/S Liabilities: floating rate Assets: fixed rate Pay floating Pay fixed Hedged B/S FRA FRL Receive floating Swap counterparty Example : Hedge and lowering financing cost A B RSA RSL FRL Gap = RSA-RSL >0 A RSA FRA RSL FRL Prefer to receive fixed and pay floating FRA Gap = RSA-RS...
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