Explain the design of a plain vanilla interest rate swap

Explain the mechanics of a plain vanilla interest rate swap and compute its cash flows. Explain how a plain vanilla interest rate swap can be used to transform an asset or a liability and calculate the resulting cash flows. Explain the role of financial intermediaries in the swaps market. Describe the role of the confirmation in a swap transaction. The mechanics of a plain vanilla interest rate swap are fairly straightforward and similar to those involving currencies and commodities. In this type of swap, two parties decide to exchange periodic payments with one another according to specified parameters using interest rates as the basis for the agreement. * Explain how a plain vanilla interest rate swap can be used to transform an asset or a liability and calculate the resulting cash flows. * Explain the role of financial intermediaries in the swaps market. * Describe the role of the confirmation in a swap transaction. * Describe the comparative advantage argument for the existence of interest rate swaps and evaluate some of the criticisms of this argument. Valuing an Interest Rate Swap. Most likely, the value of a plain vanilla interest rate swap will only equate to zero at initiation, as interest rates will change over the life of the swap. In order to value the swap, an analyst will need to value corresponding fixed and floating rate bonds based on current market place interest rates. That’s what a plain vanilla swap is a series of FRA’s (as long as both legs are paid/received at the same time (periodicity). Once they understand that concept, then you can overlay the USD “Market Convention” Swap (fixed leg paid semi=annual; Floating leg received & reset quarterly).

The most common is the vanilla swap. It's when a one party swaps an adjustable-rate payment stream with the other party's fixed-rate payments. There are a few terms used: The receiver or seller swaps the adjustable-rate payments.

Valuing an Interest Rate Swap. Most likely, the value of a plain vanilla interest rate swap will only equate to zero at initiation, as interest rates will change over the life of the swap. In order to value the swap, an analyst will need to value corresponding fixed and floating rate bonds based on current market place interest rates. That’s what a plain vanilla swap is a series of FRA’s (as long as both legs are paid/received at the same time (periodicity). Once they understand that concept, then you can overlay the USD “Market Convention” Swap (fixed leg paid semi=annual; Floating leg received & reset quarterly). Swaps are not limited to the FX market, and in fact the most common type of swap is an interest rate swap, which we shall explain here: Plain Vanilla Interest Rate Swap. The simplest type of swap is known as a ‘plain vanilla’ interest rate swap. With this type of swap, party A agrees to pay party B a fixed rate of interest, determined in advance, on a notional principal on specified dates for a certain length of time. A plain vanilla interest rate swap is arranged. The notional principal is N 10 million dollars and the swap will be for six years. One party, the floating rate side of the swap, will make payments at the end each year, calculated by multiplying the the notional principal by the actual short term interest rate (for funds to be lent 1 year) that

for reducing interest rate risk, an interest rate swap is itself a risky transaction. fault exposure and discuss the market practices widely used to deal with that risk. First, the most common (i.e., "plain vanilla") swap struc- ture requires no

The most common type of interest rate swap is one in which Party A agrees to make payments to Party B based on a fixed interest rate, and Party B agrees to make payments to Party A based on a floating interest rate. The floating rate is tied to a reference rate (in almost all cases, the London Interbank Offered Rate, or LIBOR).

* Explain how a plain vanilla interest rate swap can be used to transform an asset or a liability and calculate the resulting cash flows. * Explain the role of financial intermediaries in the swaps market. * Describe the role of the confirmation in a swap transaction. * Describe the comparative advantage argument for the existence of interest rate swaps and evaluate some of the criticisms of this argument.

Plain Vanilla Swap: A plain vanilla swap is one of the simplest financial instruments contracted in the over-the-counter market between two private parties, both of which are usually firms or “Plain vanilla interest rate swap” specifically refers to a fixed-floating agreement; the term “interest rate swap” may refer to plain vanilla or other variations. As you can see in the above diagram, Party A is paying floating rate on its obligation, but wants to pay fixed rate. Party B is paying fixed rate, but wants to pay floating rate. The most common and simplest swap is a "plain vanilla" interest rate swap. In this swap, Party A agrees to pay Party B a predetermined, fixed rate of interest on a notional principal on specific Explain the mechanics of a plain vanilla interest rate swap and compute its cash flows. Explain how a plain vanilla interest rate swap can be used to transform an asset or a liability and calculate the resulting cash flows. Explain the role of financial intermediaries in the swaps market. Describe the role of the confirmation in a swap transaction. The mechanics of a plain vanilla interest rate swap are fairly straightforward and similar to those involving currencies and commodities. In this type of swap, two parties decide to exchange periodic payments with one another according to specified parameters using interest rates as the basis for the agreement. If the layman understands how FRA’s work, sure. That’s what a plain vanilla swap is a series of FRA’s (as long as both legs are paid/received at the same time (periodicity). Once they understand that concept, then you can overlay the USD “Market C Plain vanilla swap See: Fixed for floating swap Interest Rate Swap The exchange of interest rates for the mutual benefit of the exchangers. The exchangers take advantage of interest rates that are only available, for whatever reason, to the other exchanger by swapping them. The two legs of the swap are a fixed interest rate, say 3.5%, and a floating