FNCE30001 Lecture Notes - Lecture 11: Muumuu

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Floaters and swaps
muumuu
WhationTtoate
Floater floating rateband
1
note
home afriedcouponbondexceptthatthecouponratechangesover
timein line w
an indicatorrateLumallyshorttermrate plusafixedmargin
we assumecreditmikdoesn't
changeover time
when acouponis
paid thecoupon
rate is resetforthe
period
juststarting
Floaters
maylast alongtime homeare evenperpetuities but becausethe
couponrate
is metfrequently afloater's
interestrateMik is the
nameas ashort
termsecurity
HowMuch
is aFloater
worth
xtinmediatty afteracoupon
paymentisunifythe
parvalue
Betweenlaufrandatts
Find therelevantcouponrate current
coupon
rate ratenet last
coupon tmargin
convertto appropriatetime
period
thingtheratefrom findthenextcoupon
payment
Find therelevant
discountrate relevantdiscountrate rate
fortime
remaininguntilneat
Iconvertto appropriate
time
period confrontmargin
Findprice
uning pPortfolio
Durationof aFloater
floateristhe
period
oftimetothenextcoupon
payment
eventhough the floaterwill exist beyondthe nextcoupondate ourinterest
rate risk isonlyrelevant to theforthcomingcouponpayment
Whatrisantnterertratehwafe
conrider thefollowing 3
1
Iwillpayyou 50,000 bx1mbishm
Youwillpay me sx1msxmsx1
Where sis fixed abisfloating
Tfwe can agree on avalve
forathen wehaveenteredinto a3year
fixedforfloating
interest
rate
wrap wannual swap
payments
sis the swaprate
Youare the frayfried
party
9am the receivefried
party
1mis thenotional amount thisisnever
paid only
thenet
map
paymentismade
Inegg weexpectthevalueofanewswap to bepro
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Document Summary

Floater floating rateband1note home afriedcouponbondexceptthatthecouponratechangesovertimein line w an indicator ratelumallyshorttermrate plusafixedmargin we assumecreditmikdoesn"tchangeover time when a couponispaid thecouponrate is resetfortheperiodjuststarting. Floaters is metfrequently a floater"sinterestratemik is thenameas ashorttermsecurity may last alongtime homeare evenperpetuities but becausethecouponrate. Durationof afloater floateristheperiodoftimetothenextcouponpayment eventhough the floater will exist beyondthe nextcoupondate ourinterest rate risk isonly relevant to theforthcomingcouponpayment. 50,000 s x 1m s is the swaprate. Tf we can agree on a valvefora then wehaveenteredinto a 3yearfixedforfloating interestratewrap w annual swappayments. Inegg weexpectthevalueof a newswap to bepro thisisneverpaid onlythenetmappaymentismade. Thevalueof an old or decayed swap ie one made in thefrontbutstillhasn"tmatured will usually not bezeroduetointerestratechanges thepriceis nearlyalwaystireforonepartyd vefortheother lignoringdefaultrite. Defaultriskonlyrelatestonetrivalpayments butpartiestypicallyhaveahighcreditrating or therehavebeenrelativelyfewdefaults inpractice namewrapshavea margin call feature noyouhavetopayearlyif you"velost a lotalready. Floatingrate attime t is big orismudtocalculatethemappaymentat tuietti fixedrate in the way is s snotionalamountaftherwafi. Cffor pong enidparty ibo 5 a fffoater fixedbond there are the same as buyingan appropriatelyspecifiedfloaterlanet drilling an appropriatelyspecifiedfixedcouponbond liability. Me the samelogic as btwcouponpayments tofindvy"sadband vbloatercan befoundusing a simpleinterestcalculationifthewrappaymenthasnotjustbeenpaid.

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