1、2010 Bloomberg L.P.All rights reserved.Size of interest rate swap marketIn Trillion USSource BIS230169151309309341(June 09)2010 Bloomberg L.P.All rights reserved.What is an interest rate swap?Swaps are exchange of one type of cash flows for another type that is considered to be of equal value.Intere
2、st rate swaps:Agreement to exchange fixed interest payments with floating(or the opposite)over an agreed period.Payments are based on an agreed principal amount,but principal wont be exchangedFloating payment could be linked to any reference fixing rate e.g.LIBOR,EURIBOR,HIBOR.2010 Bloomberg L.P.All
3、 rights reserved.Structure of Interest Rate SwapsExchange of interest payments(cash flows)At agreed intervals(tenor)-semi annual,quarterly etcOver an agreed period,5yr,10yrUsually fixed to floating.If one is receiving fixed,means paying floating;so the other party is receiving floating and paying fi
4、xed.However,the a swap can also structured in fixed to fixed or float to floatSwaps are traded over the counter(OTC)rather than from the exchangeBased on an agreed notional amount,but no exchange of principal,so no impact on the balance sheets(only P&L).Therefore,theyre classed as off-balance sheet(
5、OBS)instruments.Floating side is reset periodically off some index,such as 3 month LIBOR2010 Bloomberg L.P.All rights reserved.ByMichael WongCheck LBIOR fixing on 2010 Bloomberg L.P.All rights reserved.Risk Management with SwapsABC can create a synthetic FIXED rate liability with a swap(=pay fixed,r
6、eceive floating)Floating interest on bond+spreadFixed interest through swapFloating interest through swapFixed interest+spreadBondholdersFloatingLIBOR+spreadFixed interestFloating interestLIBORSwap DealerABCPaymentsReceiptsNet paymentABC issued a 10yr floating rate coupon bondBut,now interest rates
7、are rising and they want to pay fixedSo,they enter into a swap,where they pay fixed2010 Bloomberg L.P.All rights reserved.Ingredients in Interest Rate SwapsFixed/floating CouponNotionalEffective/value dateMaturityTenorConvention e.g Act/360Floating index e.g Libor/EuriborPar swapSpread Premium/Marke
8、t valueDV012010 Bloomberg L.P.All rights reserved.Swap ValuationSWDF for Defaults2010 Bloomberg L.P.All rights reserved.ByMichael WongCustomized yield curve ICVS2010 Bloomberg L.P.All rights reserved.ByMichael WongCreate customized yield curveView stripped rates2010 Bloomberg L.P.All rights reserved
9、.ByMichael WongView forward and zero curveHistorical forward curve analysis2010 Bloomberg L.P.All rights reserved.3 main functions of SWPM1.Mark to market2.Pricing a swap3.Spread calculation2010 Bloomberg L.P.All rights reserved.Plain Vanilla swap example Nominal Amount:USD$10,000,000 Effective Date
10、:4/18/07 First Coupon Date:10/18/07 Maturity Date:4/18/08 Payment Frequency:Semi-annual Day Count:Act/360 Pay Coupon:5%Receive Coupon:3M LIBOR+50 bp Payment Frequency:Quarterly What should be the fair value of this swap?2010 Bloomberg L.P.All rights reserved.ByMichael WongInterest rate derivative demo 2010 Bloomberg L.P.All rights reserved.ByMichael WongHistorical spread analysis HAS2010 Bloomberg L.P.All rights reserved.ByMichael WongForward rate matrix FWCM
