TAILIEUCHUNG - Lecture Derivatives: An introduction: Chapter 14 - Robert A. Strong

Chapter 14 - Swap pricing. The main contents of the chapter consist of the following: Intuition into swap pricing, solving for the swap price, valuing an off-market swap, hedging the swap, pricing a currency swap. | © 2004 South-Western Publishing Chapter 14 Swap Pricing Outline Intuition into swap pricing Solving for the swap price Valuing an off-market swap Hedging the swap Pricing a currency swap Intuition Into Swap Pricing Swaps as a pair of bonds Swaps as a series of forward contracts Swaps as a pair of option contracts Swaps as A Pair of Bonds If you buy a bond, you receive interest If you issue a bond you pay interest In a plain vanilla swap, you do both You pay a fixed rate You receive a floating rate Or vice versa Swaps as A Pair of Bonds (cont’d) A bond with a fixed rate of 7% will sell at a premium if this is above the current market rate A bond with a fixed rate of 7% will sell at a discount if this is below the current market rate Swaps as A Pair of Bonds (cont’d) If a firm is involved in a swap and pays a fixed rate of 7% at a time when it would otherwise have to pay a higher rate, the swap is saving the firm money If because of the swap you are obliged to pay more than the current rate, the swap is beneficial to the other party Swaps as A Series of Forward Contracts A forward contract is an agreement to exchange assets at a particular date in the future, without marking-to-market An interest rate swap has known payment dates evenly spaced throughout the tenor of the swap Swaps as A Series of Forward Contracts (cont’d) A swap with a single payment date six months hence is no different than an ordinary six-month forward contract At that date, the party owing the greater amount remits a difference check Swaps as A Pair of Option Contracts Assume a firm buys a cap and writes a floor, both with a 5% striking price At the next payment date, the firm will Receive a check if the benchmark rate is above 5% Remit a check if the benchmark rate is below 5% Swaps as A Pair of Option Contracts (cont’d) The cash flows of the two options are identical to the cash flows associated with a 5% fixed rate swap If the floating rate is above

• Tài chính doanh nghiệp
• The derivatives world
• Lecture Derivatives
• Swap price
• Currency swap
• Off market swap
• Option contracts
• Types of derivatives
• Uses of derivatives
• Effective study of derivatives
• Categories of derivatives
• Learning management system
• Financial derivatives
• Lecture Financial derivatives
• Option greeks
• Delta neutrality
• Dynamic hedging
• Principal option pricing derivatives
• Stock options
• Options trade
• Option premium
• Call options
• Basic option strategies
• Protective put
• Synthetic options
• Short sale
• Option combinations
• Nonstandard spreads
• Combined call writing
• Margin considerations
• Option pricing
• Free lunches
• Call price
• Put price
• Interest rate
• Black scholes option pricing model
• Striking price
• Stock price
• The futures market
• Market mechanics
• Market participants
• Futures contracts
• Stock index futures
• Stock indexes
• Foreign exchange futures
• Foreign exchange risk
• Forward rates
• Foreign currency futures
• Interest rate futures
• Treasury bills
• Characteristics of eurodollars
• Portfolio management
• Bond risks
• Duration matching
• Derivative assets
• Futures options
• Pricing futures options
• Implied volatility
• Financial engineering
• Risk management
• Gamma risk
• Managing market risk
• Contemporary issues
• Long term capital management
• Program trading
• Value at risk