1 / 12

Swaps: Introduction

Swaps: Introduction. Swaps. Interest Rate Swaps Plain Vanilla Cash Flows Structure Revaluation. Plain Vanilla Swaps. Fixed Interest Payments for Floating Interest Payments Swap Buyer is Fixed Rate Payor

luana
Download Presentation

Swaps: Introduction

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Swaps: Introduction

  2. Swaps • Interest Rate Swaps • Plain Vanilla • Cash Flows • Structure • Revaluation

  3. Plain Vanilla Swaps • Fixed Interest Payments for Floating Interest Payments • Swap Buyer is Fixed Rate Payor • Assume 4 year swap of 10% fixed rate payments vs. unknown LIBOR on $100,000,000 notional principal (NP). Note, no payments up front or terminally. Only NET interest payments between parties.

  4. Plain Vanilla Swap • Payments are: LIBOR rates: 9.5, 10.5, 9 and 10.5 Time LIBOR Pymt $ Pymt Diff. 1 $9.5 million $10Mill -500K 2 $10.5 million $10Mill +500K 3 $9.0 million $10Mill -1Mill 4 $ 10.5 million $10Mill +500K

  5. Point of Plain Vanilla Swap • Without adjustment to existing securities, Floating became Fixed, and Fixed became Floating. Floating ID’d at start of each period! • Lower Transaction Costs. • Ability to Activate Perceptions: • Fixed wants to be Floating if rates are falling. • Floating wants to be Fixed if rates are rising.

  6. Structuring a Swap • Observe interest rates on yield curve: 10% Interest Rate 8% 1 year 6 month

  7. Forward Rates • Rate of 6-month loan in 6 months (6-month FRA, termed a 6x12). • A 1-year rate must be equivalent to 6-month rate combined with 6x12 rate. • (1 + 0R12) = (1+ ½0R6)(1+ ½6R12) • Thus, price 6x12 off of known 6 & 12 month rates.

  8. Structuring a Swap • (1 + 0R12) = (1+ ½0R6)(1+ ½6R12) • (1+.10) = (1 + ½ (.08)) * (1 + ½ (6R12)) • 6R12 = [(1.10/1.04) – 1] * 2 = 11.54% • Floating CFs as a % of any face amount will be: • 6-month: .08 * ½ = .04 1-year: .1154 * ½ = .0577

  9. Structuring a Swap • Fixed Payments are where: (.04 – Fixed) (.0577 – Fixed) • 0 = -------------------- + ----------------------- (1 + ½ (.08)) (1.10) • Fixed = .0486  9.72% Fixed (annual)

  10. Now 6mo 1yr Swap Structure(on $100M in Notional Prin.) $0.91M Pymt From Fixed to Fltg $4M $5.77M $4.86M $4.86M $0.86M Pymt From Fltg to Fixed -$0.85M / (1.04) + $0.91M / (1.10) = 0

  11. Swap Revaluation(Marking-to-Market) • What if rates jumped 1% next day? (6-month=9%, 1-year=11%) • (1 + 0R12) = (1+ ½0R6)(1+ ½6R12) • (1+.11) = (1 + ½ (.09)) * (1 + ½ (6R12)) • 6R12 = [(1.11/1.045) – 1] * 2 = 12.44% • 1-yr CF now .1244*½ = .0622

  12. Now 6mo 1yr Swap Revaluation $1.36M Pymt From Fixed to Fltg (on $100M NP) 6-month CF does not change as determined at swap origination $4M $6.22M $4.86M $4.86M $0.86M Pymt From Fltg to Fixed -$0.85M / (1.045) + $1.36M / (1.11) = $0.40M Gain to Fixed Rate Payor

More Related