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As OTC instruments, interest rate swaps (IRSs) can be customised in a number of ways and can be structured to meet the specific needs of the counterparties. For example: payment dates could be irregular, the notional of the swap could be amortized over time, reset dates (or fixing dates) of the floating rate could be irregular, mandatory break clauses may be inserted into the contract, etc.
In recent years, interest rate swaps have become an important component of the fixed-income market. With an interest rate swap, investors will typically exchange or swap a fixed-interest payment ...
For example, the hedge would have to pay swaps in the foreign currency. If FX spot moves in a correlated fashion with the foreign currency swap rate (that is, foreign currency swap rate increases as FX spot increases), the hedger would need to pay a higher swap rate as FX spot goes up, and receive a lower swap rate as FX spot goes down.
The valuation of swaptions is complicated in that the at-the-money level is the forward swap rate, being the forward rate that would apply between the maturity of the option—time m—and the tenor of the underlying swap such that the swap, at time m, would have an "NPV" of zero; see swap valuation. Moneyness, therefore, is determined based on ...
The ISDA Master Agreement, published by the International Swaps and Derivatives Association, is the most commonly used master service agreement for OTC derivatives transactions internationally. It is part of a framework of documents, designed to enable OTC derivatives to be documented fully and flexibly.
A basis swap functions as a floating-floating interest rate swap under which the floating rate payments are referenced to different bases. [1] [2] The existence of a basis arises from demand and supply imbalances and where, for example, a basis is due for a borrower seeking dollars, this is indicative of a synthetic dollar interest rate in the ...
To derive this rate we observe that the theoretical price of a bond can be calculated as the present value of the cash flows to be received in the future. In the case of swap rates, we want the par bond rate (Swaps are priced at par when created) and therefore we require that the present value of the future cash flows and principal be equal to ...
Each forward rate is modeled by a lognormal process under its forward measure, i.e. a Black model leading to a Black formula for interest rate caps. This formula is the market standard to quote cap prices in terms of implied volatilities, hence the term "market model".