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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.
While the Treasury Regulations provide examples of contracts that are treated as NPCs, including "interest rate swaps, currency swaps, basis swaps, interest rate caps, interest rate floors, commodity swaps, equity swaps, and similar agreements." (Treas. Reg. § 1.446-3(c)(1)(i)), there are significant limitations on the types of contracts that ...
A swap agreement in which one party makes payments based on a set rate, either fixed or variable, while the other party makes payments based on the return of an underlying asset, which includes both the income it generates and any capital gains. In total return swaps, the underlying asset, referred to as the reference asset, is usually an ...
An amortizing swap is usually an interest rate swap in which the notional principal for the interest payments declines during the life of the swap, perhaps at a rate tied to the prepayment of a mortgage or to an interest rate benchmark such as the LIBOR. It is suitable to those customers of banks who want to manage the interest rate risk ...
The valuation of swaptions is complicated in that the at-the-money level is the forward swap rate, being the forward rate that would apply between the maturity of the option—time m—and the tenor of the underlying swap such that the swap, at time m, would have an "NPV" of zero; see swap valuation. Moneyness, therefore, is determined based on ...
Quality spread differential (QSD) arises during an interest rate swap in which two parties of different levels of creditworthiness experience different levels of interest rates of debt obligations. A positive QSD means that a swap is in the interest of both parties. A QSD is the difference between the default-risk premium differential on the ...
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).
An Amortising swap [1] is usually an interest rate swap in which the notional principal for the interest payments declines (i.e. is paid down) during the life of the swap, perhaps at a rate tied to the prepayment of a mortgage or to an interest rate benchmark such as the London Interbank Offered Rate (Libor). It is the opposite of the accreting ...