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1 Topic 8. Swaps 8.1 Over-the-counter (OTC) Derivatives 8.2 Interest Rate Swap 8.3 Zero Curve 8.4 Forward Curve 8.5 Zero Delta 8.6 Forward Delta 8.7 DV01
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Topic 8. Swaps
8.1 Over-the-counter (OTC) Derivatives
8.2 Interest Rate Swap
8.3 Zero Curve
8.4 Forward Curve
8.5 Zero Delta
8.6 Forward Delta
8.7 DV01
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8.1 OTC Derivatives
2012
Global OTC Derivative Gross Market Value:
-- 25,392 Billion USD
HK GDP:
-- 263 Billion;
-- 96 times of Hong Kong!
US GDP:
-- 15,684 Billion;
-- 60% larger than the world largest economy !
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8.1 OTC Derivatives
http://www.bis.org/statistics/otcder/dt1920a.pdf
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8.1 OTC Derivatives
The market for swaps has grown enormously, which has raised serious regulatory concerns regarding credit risk exposures.
Such concerns motivated reforms from global regulators, e.g.,
the Dodd Frank Wall Street Reform Act,
central clearing & collateralizations
OTC swaps in order of mkt value :
-- interest rate: 17,265 billion usd
-- currency: 1,955
-- credit: 1,187
-- commodity: 328
-- equity: 147
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8.1 Interest Rate Swap
Swaps are different from most other derivatives Portfolio of forward contracts
Marked to market at coupon payment datesIntermediary should reduce counterparty risk
Interest rate swap as succession of forwards: For example, a long position in “payer” means: -- Swap buyer agrees to pay fixed-rate, -- Swap seller agrees to pay floating-rate
Purpose of interest rate swap:Allows swapping variable-rate income into fixed-rate (or vice versa)Better match the duration of assets and liabilities -- hedging
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8.1 Interest Rate Swap
Agreement to exchange fixed for floating interest cash flows
A interest rate swap is quoted by the swap rate
Example: $100m 3.1% 1x10 LIBOR swap
Bank A Bank B
Swap rate 3.1%, every 6m
3m Libor rate, every 3m
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8.1 Interest Rate Swap
Trade level specs:
Notional: 100 million us dollars
Trade date: 2012-Apr-9, today, the date the trade is transacted
Settlement date: 2012-Apr-11, 2bd after the trade date, trade is “live”
Swap effective date: 2013-Apr-11, after 1y, interests start to accrue
Swap expiry date: 2023-Apr-9, after 11y, interests end accruing
Ex: $100m 3.1% 1x10 LIBOR swap
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8.1 Interest Rate Swap
Floating Leg:
Fixing: 3m USD LIBOR
Pay Freq: quarterly
Reset date: 2 bds before interest accrual period starts
DCT(Day count conventions) : Act/360
BDC(Business day conventions): LON holiday, modified following
Ex: $100m 3.1% 1x10 LIBOR swap
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8.1 Interest Rate Swap
Fixed leg:
Fixed rate: 3.1% annualized
Pay freq: semiannually
DCT/BDC: 30/360, NY holidays, modified following
Ex: $100m 3.1% 1x10 LIBOR swap
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8.1 Interest Rate Swap
Ex: $100m 3.1% 1x10 LIBOR swap
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8.1 Interest Rate Swap
Ex: $100m 3.1% 1x10 LIBOR swap
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8.1 Interest Rate Swap
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8.1 Interest Rate Swap
Swap Rate – cout.
Discount factor is from the zero curve – RED
Forward LIBOR rate is from the forward curve – Blue
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8.1 Zero Curve
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8.1 Zero Curve
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8.1 Zero Curve
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8.1 Forward Curve
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8.1 Forward Curve
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8.1 Swap Sensitivity – Zero Delta
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8.1 Swap Sensitivity – Forward Delta
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8.1 Swap Sensitivity – DV01
