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principal is exchanged at termination of the swap, so the period of higher credit risk is a little later in the swap's life
there are 2 yield curves and 2 swap rates, one for each currency
the future credit risk over the remaining term of the swap
- Short interest rate call and- long interest rate putStrike rates equal to the fixed rate on the swap
(1) Lock in fixed rate: if an investor anticipates a floating-rate
exposure at some future date (he will be issuing bonds or getting a
loan), a payer swaption would lock in a fixed rate and provide
floating-rate payments for the loan(2) Interest rate speculation: buy
payer swaption if rates expected to rise and vice versa(3) Swap
termination: a fixed-rate payer on a 5-year swap could buy a 2x5
receiver swaption (at the same fixed rate as the swap). This swaption
would give the investor the right to enter in
making a payment equal to the value of the swap at periodic settlement
dates and repricing the swap by resetting the swap rate. This reduces
credit risk.
- Long interest rate call and- short interest rate putThis is a long
FRA (pay fixed, received floating)Strike rates equal to the fixed rate
on the swap
plain vanilla interest rate swaps but NOT in currency swaps
it is appropriate to view currency swaps as a series of:currency forwards
a fixed rate payer or receiver can be replicated with a series of
put/call positions with expiration dates on the payment dates of the
swap
the probability that a counterparty will default on the required payments
For the fixed rate payer:Issue a fixed coupon bond and invest proceeds
in a floating-rate bond with the same maturity and payment dates
greater.
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