Term
| Basically... what is an IRS? |
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Definition
an interest rate swap is an agreement between two parties to exchange interest payments based on a specified principal over a period of time.
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Term
| Can you ignore credit risk in swaps? |
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Definition
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Term
| for valuation purposes, whats the best way to think of swaps? |
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Definition
| a long and short position in two different bonds or as a package of FRA's. |
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Term
| Tell me a bit about a plain vanilla interest rate swap... what's the main characteristics...? |
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Definition
- company X agrees to pay company Y a periodic fixed rate on a notional principal over the tenor of the swap.
- company Y pays X a periodic floating rate on the same principal and over the same tenor
- both payments are in teh same currency
- only the net payment is exchanged |
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Term
| wrt IRS, what are confirmations? |
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Definition
| confirmations outline the details of each swap agreement |
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Term
| What does a comparative advantage mean in terms of swaps? |
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Definition
it means a swap arrangement will reduce the costs of both parties
(the net potential borrowing savings is the difference between the (fixed and floating comparative advantage) differences (see p85, book 2). |
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Term
| how do you value a swap? (not a formula) |
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Definition
| a swap is nothing more than a swquence of cash flows, it's value is determined by discounting each cashflow back to the valuation date. |
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Term
| How do you compute the forward rate of a swap (formula) |
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Definition
Rforward = R2 + (R2 - R1). (T1 / (T2 - T1)
where Ri = spot rate corresponding with Ti years
Rforward = forward rate between T1 and T2 |
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Term
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Definition
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Term
| How does a currency swap work? |
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Definition
| it exchanges both principal and interest rate payents with paymets in different currencies |
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Term
| What interest rate is used in a currency swap? |
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Definition
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