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Download Interest Rate and Currency Swaps (The Research Foundation of by Keith Brown, Donald Smith PDF

By Keith Brown, Donald Smith

Rate of interest and forex Swaps: an educational is an intensive dialogue of 2 necessary and commonplace types of derivatives-interest cost and forex swaps. The authors supply step by step directions and real-life examples of ways to take advantage of the swaps. workouts (and options) after each one bankruptcy enable readers to benefit through doing, and the e-book features a accomplished bibliography.

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Interest Rate and Currency Swaps (The Research Foundation of AIMR and Blackwell Series in Finance)

Rate of interest and forex Swaps: an academic is a radical dialogue of 2 necessary and usual types of derivatives-interest cost and foreign money swaps. The authors supply step by step directions and real-life examples of ways to exploit the swaps. workouts (and strategies) after every one bankruptcy let readers to profit via doing, and the e-book incorporates a accomplished bibliography.

Extra resources for Interest Rate and Currency Swaps (The Research Foundation of AIMR and Blackwell Series in Finance)

Example text

25 percent. Suppose further that the firm's revenue from operations is uncorrelated with actual and expected inflation, as well as with short-term interest rates. Therefore, higher levels of LIBOR could cause financial distress. Notice that for similar degrees of upside protection, the firm might prefer (1)the cap, if IdBOR is expected to be low, on balance; (2) the collar, if LIBOR is expected to be in a middle range; or (3) the pay-fixed swap, if LIBOR is expected to be high. Ironically, a risk manager's decisions inevitably express a view on market rates, even if the motive for acquiring the risk-management product is lack of confidence in the view itself.

Economic Interpretations of a Swap Contract approximation to the MTM value can be obtained. Even in the best of circumstances, however, the values from the replacement swap and from the bond market should differ because of differences in the treatment of swaps and bonds in bankruptcy. 2 The duration of the receive-fixed swap in the example above can be estimated as the duration of the 8 percent, five-year note held long minus the implied duration of the FRN that was issued. The implied duration of an FRN is the remaining time in the coupon period expressed as a fraction of a year, which follows from interpreting duration as an elasticity.

Suppose further that the firm's revenue from operations is uncorrelated with actual and expected inflation, as well as with short-term interest rates. Therefore, higher levels of LIBOR could cause financial distress. Notice that for similar degrees of upside protection, the firm might prefer (1)the cap, if IdBOR is expected to be low, on balance; (2) the collar, if LIBOR is expected to be in a middle range; or (3) the pay-fixed swap, if LIBOR is expected to be high. Ironically, a risk manager's decisions inevitably express a view on market rates, even if the motive for acquiring the risk-management product is lack of confidence in the view itself.

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