Swaps and Forward Rate Agreements
An optimist may see a light where there is none, but why must the pessimist always run to blow it out?
—Michel de Saint-Pierre
Swap contracts and forward rate contracts play prominent roles in the OTC derivatives market. This chapter follows the now-familiar pattern by defining each contract type, explaining its underlying business rules, and then proceeding to model it.
Defining a Swap
A swap contract is an agreement to exchange cash flows at some time in the future, according to a predetermined schedule. The agreement specifies the cash flow exchange dates and the cash flow calculation method.
The forward ...
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