FIN 3506 Lecture Notes - Lecture 13: Day Count Convention, Currency Swap, Libor
6 Oct 2016
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Learning objectives: understand the basics of plain vanilla interest rate swaps. Assuming settlement is 6 months and libor is 10% A pays b (10 + 2)/(2)(100) x ,000,000 = ,000,000. B pays to a 11. 5/(2)(100) x 100,000,000 = ,750,000. The following table looks at what happens over the next 3 years as far as cash flows go. The 100 million is called the notional principal and is the amount the swap is based on. As can be seen from the above figure the purpose of the swap is to transform the variable rate liability of b into a fixed rate liability and to transform the variable rate liability to a fixed rate liability. Plain vanilla swaps could be used to transform either a liability or asset from fixed rate to variable rate or a variable rate liability or asset to a fixed rate. The below figure introduces a swap desk to the equation.
