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As OTC instruments, interest rate swaps (IRSs) can be customised in a number of ways and can be structured to meet the specific needs of the counterparties. For example: payment dates could be irregular, the notional of the swap could be amortized over time, reset dates (or fixing dates) of the floating rate could be irregular, mandatory break clauses may be inserted into the contract, etc.
In 1987, ISDA produced three documents: (i) a standard form master agreement for U.S. dollar interest-rate swaps; (ii) a standard form master agreement for multi-currency interest-rate and currency swaps (collectively known as the "1987 ISDA Master Agreement"); and (iii) the interest rate and currency definitions.
For interest rate swaps, the Swap rate is the fixed rate that the swap "receiver" demands in exchange for the uncertainty of having to pay a short-term (floating) rate, e.g. 3 months LIBOR over time. (At any given time, the market's forecast of what LIBOR will be in the future is reflected in the forward LIBOR curve.)
In recent years, interest rate swaps have become an important component of the fixed-income market. With an interest rate swap, investors will typically exchange or swap a fixed-interest payment ...
ISDAFIX refers to a worldwide common reference rate value for fixed interest rate swap rates. ISDAFIX was restructured and renamed "ICE Swap Rate" in April 2015. [1]ISDAFIX was developed in 1998 as a cooperative effort of the International Swaps and Derivatives Association (ISDA) with Reuters (now Thomson Reuters) and InterCapital Brokers (now ICAP). [2]
Resets are most commonly used in Interest rate swaps, to determine the value of the floating rate payment for each period. The parties will have agreed a source for the reference rate (usually a named screen on an information vendors system, though any public domain source will do, such as a newspaper or government publication).
Consider a fixed-to-floating Interest rate swap where Party A pays a fixed rate ("Swap rate"), and Party B pays a floating rate. Here, the fixed rate would be such that the present value of future fixed rate payments by Party A is equal to the present value of the expected future floating rate payments (i.e. the NPV is zero). Were this not the ...
The Black model extends Black-Scholes from equity to options on futures, bond options, swaptions, (i.e. options on swaps), and interest rate cap and floors (effectively options on the interest rate). The final four are numerical methods, usually requiring sophisticated derivatives-software, or a numeric package such as MATLAB.