Swap and swaptions
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Risk Management (Elective) — CAIIB.
One-liners from this chapter
Free sample — 8 of 65 rapid-fire Q&A cards.
What is an interest rate swap?
An interest rate swap is a derivative contract in which two parties exchange interest payment streams on a notional principal amount, typically one fixed-rate stream for one floating-rate stream, without exchanging the principal itself.
What is an American swaption?
A swaption exercisable on any date before expiry.
What is the notional principal in a swap agreement?
The notional principal is the reference amount on which swap payments are calculated; it is never actually exchanged between counterparties and serves only as the basis for computing periodic cash flows.
What is a Bermudan swaption?
A swaption exercisable on specific predetermined dates only.
What does a plain vanilla interest rate swap involve?
A plain vanilla interest rate swap involves one party paying a fixed interest rate while receiving a floating rate (commonly MIBOR or LIBOR-equivalent) from the counterparty on the same notional principal, settled on net basis periodically.
What is the fixed rate in an interest rate swap called?
The swap rate or par rate of the swap.
What is a currency swap?
A currency swap is a derivative transaction in which two parties exchange principal and interest payments in different currencies, effectively allowing each party to access foreign currency funding at favourable rates.
What does DVA stand for in swap valuation?
Debit Valuation Adjustment reflecting own credit risk.
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