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For interest rate swaps, the Swap rate is the fixed rate that the swap "receiver" demands in exchange for the uncertainty of having to pay a short-term (floating) rate, e.g. 3 months LIBOR over time. (At any given time, the market's forecast of what LIBOR will be in the future is reflected in the forward LIBOR curve.)
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.
Swap spreads are the difference between the swap rate (a fixed interest rate) and a corresponding government bond yield with the same maturity (Treasury securities in the case of the United States). [1] For example, if the current market rate for a five-year swap is 1.35 percent and the current yield on the five-year Treasury note is 1.33 ...
For example, consider a plain vanilla fixed-to-floating interest rate swap where Party A pays a fixed rate, and Party B pays a floating rate. In such an agreement the fixed rate would be such that the present value of future fixed rate payments by Party A are equal to the present value of the expected future floating rate payments (i.e. the NPV ...
An overnight indexed swap (OIS) is an interest rate swap (IRS) over some given term, e.g. 10Y, where the periodic fixed payments are tied to a given fixed rate while the periodic floating payments are tied to a floating rate calculated from a daily compounded overnight rate over the floating coupon period. Note that the OIS term is not ...
An example of this type of distortion occurred in late 1994 and early 1995 when Alan Greenspan raised the US Fed Funds rate from 3.00% in May 1994 to 5.25% in February 1995. Prior to these hikes, Orange County had initiated highly leveraged bets on short maturity interest rate derivative products in the hopes that interest rates would decline.
The floating leg of a constant maturity swap fixes against a point on the swap curve on a periodic basis. A constant maturity swap is an interest rate swap where the interest rate on one leg is reset periodically, but with reference to a market swap rate rather than LIBOR. The other leg of the swap is generally LIBOR, but may be a fixed rate or ...
The fixed rate (which equals the strike of the swaption) and payment frequency for the fixed leg; The frequency of observation for the floating leg of the swap (for example, 3 month Libor paid quarterly) There are two possible settlement conventions. Swaptions can be settled physically (i.e., at expiry the swap is entered between the two ...