Derivative Intermediation

In the interest rate swap market, an interest rate swap trader will get a request from Archery Fund. “Where is your market in 5-year interest rate swaps for a few hundred million?” The trader makes a market of 1.05% at 1.07%. This means that he will pay a fixed rate of 1.05% for the next five years or he will receive 1.07% for the next five years in exchange for Libor. Archery Fund has decided to pay fixed on the interest rate swap, so it lifts the offer and agrees to pay Megabank 1.07% per annum in exchange for Libor. Now, Megabank has a contract with Archery Fund for the next five years. Table 10.3 lists the cashflows.

Table 10.3 The Interest Rate Swap Cashflows

Megabank pays Megabank receives
Start Date

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