20
Swaps
20.1 INTRODUCTION
Swaps are often presented as complex and impenetrable financial instruments that only rocket scientists can understand. In fact the attribution of their return is rather straightforward if one has a basic grasp of the security types described in previous chapters.
20.2 TWO-LEG SWAPS
Perhaps the most common swap encountered is a vanilla interest rate swap.
The easiest way to picture this instrument is as a portfolio that has:
- bought a bond with fixed coupons and a given maturity date;
- sold a floating rate note with the same maturity date and face value.
In essence, a swap is an agreement ...
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