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An interest rate swap's (IRS's) effective description is a derivative contract, agreed between two counterparties, which specifies the nature of an exchange of payments benchmarked against an interest rate index. The most common IRS is a fixed for floating swap, whereby one party will make payments to the other based on an initially agreed ...
A zero coupon swap (ZCS) [1] is a derivative contract made between two parties with terms defining two 'legs' upon which each party either makes or receives payments. One leg is the traditional fixed leg, whose cashflows are determined at the outset, usually defined by an agreed fixed rate of interest.
The forward values of the overnight rate can be read from the overnight index swap curve. "OIS-discounting" is now standard, and is sometimes, referred to as "CSA-discounting". See: Financial economics § Derivative pricing for context; Interest rate swap § Valuation and pricing for the math.
A swap can be a derivative of several different underlying elements, including commodities, stocks, foreign exchange and interest rates. A typical swap contract might involve the exchange of a ...
The interest rate derivatives market is the largest derivatives market in the world. The Bank for International Settlements estimates that the notional amount outstanding in June 2012 [3] were US$494 trillion for OTC interest rate contracts, and US$342 trillion for OTC interest rate swaps.
In finance, a currency swap (more typically termed a cross-currency swap, XCS) is an interest rate derivative (IRD). In particular it is a linear IRD, and one of the most liquid benchmark products spanning multiple currencies simultaneously. It has pricing associations with interest rate swaps (IRSs), foreign exchange (FX) rates, and FX swaps ...
While this principle holds true for any swap, the following discussion is for plain vanilla interest rate swaps and is representative of pure rational pricing as it excludes credit risk. For interest rate swaps, there are in fact two methods, which will (must) return the same value: in terms of bond prices, or as a portfolio of forward ...
Lattices are commonly used in valuing bond options, swaptions, and other interest rate derivatives [24] [25] In these cases the valuation is largely as above, but requires an additional, zeroeth, step of constructing an interest rate tree, on which the price of the underlying is then based. The next step also differs: the underlying price here ...