Mastering Financial Mathematics in Microsoft Excel, 3rd Edition

8

Swaps

Definitions

How swaps save money

Advantages of swaps

Terminating interest rate swaps

Implicit credit risk

Worked single currency swap

Valuation

Cross currency swap

Worked example

Swaptions

Exercise

Summary

 

File: MFMaths3e_08.xls

DEFINITIONS

Swaps can be used to manage financial risk and are essentially agreements between two parties to pay each other a series of cash flows over a specified time period based on a fixed sum of money. Somebody could borrow fixed but may prefer floating and another party may borrow floating but prefer fixed. This may seem an odd thing for each party to undertake, but this chapter will show that there can be advantages to both parties in entering into swap arrangements. To show the size of the market since ...