A swap, by definition, is a legal arrangement between two parties to exchange specific payments. There are three types of financial swaps:
- Interest rate swaps: The exchange of fixed‐rate payments for floating‐rate payments
- Credit default swaps: the exchange of premium payments for default protection
- Currency swaps: The exchange of liabilities in different currencies
In this chapter, we examine the markets, uses, and pricing of standard interest rate swaps and two interest rate swap derivatives—forward swaps and swaptions. In Chapter 15, we examine the markets, uses, and pricing of credit default swaps and currency swaps.
Generic Interest Rate Swaps
The simplest type of interest rate swap is the plain vanilla ...