Swaps. Chapter 26. Swaps. CBs and IBs are major participants dealers traders users regulatory concerns regarding credit risk exposure five generic types of swaps interest rate swaps currency swaps credit swaps commodity swaps equity swaps. Interest Rate Swap.
DA - kDL < 0
DA - kDL > 0
(LIBOR + 2%) * $100m
10% * $100m.
DE = -(DA - kDL)A [DR/(1+R)] >0 if rates rise.
Suppose choose to hedge with 10-year swaps. Fixed-rate payments are equivalent to payments on a 10-year T-bond. Floating-rate payments repriced to LIBOR every year. Changes in swap value DS, depend on duration difference (D10 - D1).
DS = -(DFixed - DFloat) × NS × [DR/(1+R)]
DS = DE
-(DFixed - DFloat) × NS × [DR/(1+R)]
= -(DA - kDL) × A × [DR/(1+R)]
NS = [(DA - kDL) × A]/(DFixed - DFloat)