Reading 61: Swap Markets and Contracts-LOS b, (Part 1) 习题精 market, center, forward, interest, 2010

土豆妮

Session 17: Derivative Investments: Options, Swaps, and Interest Rate and Credit Derivatives
Reading 61: Swap Markets and Contracts

LOS b, (Part 1): Explain the equivalence of interest rate swaps to a series of off market forward rate agreements (FRAs).

 

 

 

An off-market forward rate agreement (FRA):

A) provides a series of payments.

B) has a positive value at contract initiation.

C) cannot be priced with market rates.

---

 

An off-market FRA has a contract rate that differs from the zero-value rate at the inception of the contract; by definition, it has a positive value to one of the parties to the FRA.

土豆妮

A swap is equivalent to a series of:

A) interest rate calls.

B) FRAs priced at market rates.

C) off-market FRAs.

---

Since the fixed rate on the swap is the same at every settlement date, a series of FRAs at those fixed rates will have values that differ from zero to the extent the fixed rate and the zero-value rate differ. This makes them off-market FRAs.