Interest Rate Swap
Parties exchange fixed and floating interest payments on a notional amount.
Detailed Description
Interest Rate Swap
What is the primary purpose of an interest rate swap?
The primary purpose of an interest rate swap is to manage interest rate risk or to speculate on changes in interest rates.
What are the two main types of interest rates exchanged in a swap?
In an interest rate swap, one party pays a fixed interest rate while the other pays a floating interest rate.
What is a plain vanilla swap?
A plain vanilla swap is the most basic form of interest rate swap, involving the exchange of fixed and floating interest rates.
What risks are associated with interest rate swaps?
Risks include market risk, credit risk, liquidity risk, and operational risk.
How is the valuation of interest rate swaps typically performed?
Valuation is typically performed using discounted cash flow (DCF) analysis to determine the net present value (NPV) of future cash flows.