ZU DEN KURSEN!

Derivatives and Alternative Investments - Plain Vanilla Interest Rate Swap

Kursangebot | Derivatives and Alternative Investments | Plain Vanilla Interest Rate Swap

Derivatives and Alternative Investments

Plain Vanilla Interest Rate Swap

Merke

Hier klicken zum Ausklappen

{*LOSnr37*}

Define, calculate, and interpret the payments of currency swaps, plain vanilla interest rate swaps, and equity swaps.

In a plain vanilla interest rate swap, one party pays a floating rate and the other pays a fixed rate, both based on the notional amount. A plain vanilla swap is a fixed-for-floating swap.

$$ \text {Fixed rate payment} = $$
$$\text {(swap fixed rate - LIBORt-1)} \cdot {\text {number of days} \over 360}\cdot \text {notional principal} $$

Beispiel

Hier klicken zum Ausklappen

Example:

Your bank’s assets have an average fixed rate of 10% with an average maturity of 5 years. Bank liabilities are composed of short-term deposits that are pegged to LIBOR. You would like to hedge against the possibility of rising interest rates by entering into a plain-vanilla interest rate swap. A swap dealer has offered you the following quarterly swap – 8% fixed for LIBOR floating with a notional principal value of \$50 million for 5 years. The cash flows that apply to this example are the following:

  • The bank’s LIBOR-based payments to depositors are offset by the swap dealer’s LIBOR payment to the bank.

  • The bank is receiving 10% from its loan portfolio and is paying 8% fixed to the swap dealer. The net inflow to the bank is a fixed 2% annually on a $50 million basis.   

image

Beispiel

Hier klicken zum Ausklappen

Example:

XYZ, Inc. has entered into a "plain-vanilla" interest rate swap on \$5,000,000 notional principal. XYZ company pays a fixed rate of 8.5% on payments that occur at 180-day intervals. Platteville Investments, a swap broker, negotiates with another firm, SSP, to take the receive-fixed side of the swap. The floating rate payment is based on LIBOR (currently at 7.2%). At the time of the next payment (due in exactly 180 days), XYZ company will:

A. pay the dealer net payments of $65,000.

B. pay the dealer net payments of $32,500.

C. receive net payments of $32,500.  

The answer is B. The net payment formula for the fixed-rate payer is:

$$ \text {Fixed Rate Payment} = $$
$$ \text {(Swap Fixed Rate - LIBORt-1)} \cdot {\text {number of days in term} \over 360} \cdot \text {Notional Principal} $$

If the result is positive, the fixed-rate payer owes a net payment and if the result is negative, then the fixed-rate payer receives a net inflow. Note: We are assuming a 360 day year.

Fixed Rate Payment = (0.085 - 0.072) * (180 / 360) * 5,000,000 = \$32,500 

Since the result is positive, XYZ owes this amount to the dealer, who will remit to SSP.