BUS-F 446 Lecture Notes - Lecture 12: Yield Curve, Currency Swap, Net.
Document Summary
The swap market especially interest rate swaps is the biggest of derivatives markets. Mechanics of swaps: transaction usually requires an intermediary, typically subs of investment banks that do derivative swaps, the intermediary does the following: Find the right parties for the transaction. They"re not obligated to do so, however. Both cash flows are denominated in same currency. There"s some kind of difference between the 2 cfs; usually one is fixed, and the other is floating. Conventions: buy a swap = paying a fixed rate, selling = buying a fixed rate. A payment for each of the 4 years. If interest rates fall, pv of future cfs will rise. If interest rates rise, pv of future cfs goes down, and payments go up! If interest rates rise, their payments received will go up (long-duration assets that will be more interest-rate sensitive); however, if interest rates fall, they"ll be receiving less in payment and the pv of payments made will increase.
