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CA .Tarun Mahajan
Swaps basic
Valuation of swap
Swaption
Interest rate forwards
Caps, floors & collars
For example I will pay you 8% p.a. on Rs.100cr. for next 5 years
and you will pay me SBI-PLR.
6.1%
Libor
Swap
Dealer
5.9%
Libor
5
6
8 +100
100.74 =+
+
1
2
2
(1.06) (1.06) (1.06)
It is an option to enter
into swap.
1f 2
(1 + S 3 )
(1 + S 2 )
3
2
-1
Maturity
Coupon
YTM
Price
A
B
6 months
12 months
8%
10%
8%
10%
1000
1000
18 months
12%
12%
1000
Quarter
Libor
Interest
Cap
Net
7%
-17500
+2500
-15000
5%
-12500
-12500
8%
-20000
+5000
-15000
4%
-10000
-10000
After hedging with cap interest outflow is never more than $15000
Interest rate Collar is combination of the long cap & short floor.
It is created by floating rate borrower to make cost effective hedging.
Long cap gives protection against rise in interest rate &
Short floor reduces cost of hedging (by sacrificing benefit of lower
interest rate)