Financial Derivatives (MFM854)

Swap Market

Leben Johnson
27th Nov. 2019

Swap Market 1
 • Swap Market
Swaps as the name suggests is exchange one for another. It involves the exchange of
interest or currency exposures or a combination of both by two or more borrowers.

Pays Fixed Receives Fixed Receives Fixed

Receives Float
Firm A Bank Firm B
Receives Float Pays Float

Type of Swaps:
Interest Rate Swap Currency Swap
- Plain Vanila Swap - Fixed to fixed currency swap
- Zero Coupon to floating - Floating to floating swap
- Alternative floating rate - Fixed to floating currency swap
- Floating to floating rate
- Forward swap Debt-Equity Swap
- Rate-capped swap
- Swaptions
- Extendable swap
- Equity swap

Swap Market 2
 • Interest Rate Swap
Valuations of Interest Rate Swap
V = B1 – B2

Value of Bond B1 =

Value of Bond B2 = Q

Swap Market 3
 • Currency Swap
Valuations of Currency swaps
V = S*BF – BD
S is the current exchange rate

Value of Bond BF =

Value of Bond BD =

S’ is the current exchange rate at time when swap was agreed

Q is the Foreign currency principal

Swap Market 4