Page 136 - DMGT513_DERIVATIVES_AND_RISK_MANAGEMENT

Unit 9: Swaps

Credit Default Swap: A swap designed to transfer the credit exposure of fixed income products Notes
between parties.
Extendible Swaps: In an extendible swap, the fixed rate payer gets the right to extend the swap
maturity date.
LIBOR: An interest rate at which banks can borrow funds, in marketable size, from other banks
in the London interbank market.
Maturity Date: The date on which the outstanding cash flows stop in the swap contract is
referred to as the maturity date.

Notional Principal: The underlying amount in a swap contract which becomes the basis for the
deal between counterparties is known as the notional principal.
Putable Swaps: A putable swap gives the seller of the swap (the floating rate payer) the chance
to terminate the swap at any time before its maturity.

9.8 Review Questions

1. Define the term 'Swap Contract". Who are the parties involved in a swap?
2. "Swap is a private agreement between two parties in which both parties are 'obligated' to
exchange some specified cash flows at periodic intervals". Explain.
3. Briefly elaborate on the evolution of swap dealings.
4. What is a financial swap? List and explain the salient features of a swap.

5. Discuss the various types of swaps and their features.
6. Define an Interest Rate Swap contract and provide a suitable example.
7. Write a note on types of interest rate swaps.

8. Distinguish between coupon swap and basis swap.
9. Explain the trading mechanism of swap contracts.
10. What is a Currency Swap?
11. Explain the comparison between options, futures and swap contracts.

Answers: Self Assessment

1. financial 2. 'obligated'

3. trade date 4. LIBOR
5. forwards 6. False
7. False 8. True
9. True 10. interest rate

11. reference rate 12. default risk
13. market risk 14. cash flows
15. discounting

LOVELY PROFESSIONAL UNIVERSITY 131