Lecture_5Swaps(衍生金融工具-人民银行研究院,何佳)

Lecture#5:SwapsAswapisanagreementbetweentwoormorepartiestoexchangesetsofcashflowsoveraperiodinthefuture.Thepartiesthatagreetotheswapareknownascounter-parties.Thecashflowsthatthecounter-partiesmakearegenerallytiredtothevalueofdebtinstrumentsortothevalueofforeigncurrencies.Therefore,thetwobasickindsofswapsareinterestrateswapsandcurrencyswaps.TheSwapsMarket-Swapsarecustomtailoredtotheneedsofthecounter-parties.-Theswapsmarkethasvirtuallynogovernmentregulation.-Defaultrisk-ValueofOutstandingSwaps($BillionofPrincipal)YearTotalInterestRateSwapTotalCurrencySwap19878889909192939495682.91,010.21,539.32,311.53,065.13,850.86,177.88,815.610,617.4182.8316.8434.8577.5807.2860.4899.6914.8993.6-PlainVanillaSwaps1.Interestrateswaps2.CurrencySwaps-Motivationsforswaps1.Commercialneeds:Asanexampleofprimecandidateforaninterestrateswaps,consideratypicalsavingsandloanassociation.Savingsandloanassociationsacceptdepositsandlendthosefundsforlong-termmortgages.Becausedepositorscanwithdrawtheirfundsonshotnoticedepositratesmustadjusttochanginginterestrateconditions.MostmortgagorswishtoborrowatafixedrateforalongtimeinUS.Isthereanyinterestrisk?Canswapscontracthelp?2.Comparativeadvantage:Inmanysituations,onefirmmayhavebetteraccesstothecapitalmarketthananotherfirm.Forexample,aU.S.firmmaybeabletoborroweasilyintheU.S.,butitmightnothavesuchfavorableaccesstothecapitalmarketinGermany.Similarly,aGermanfirmmayhavegoodborrowingopportunitiesdomesticallybutpooropportunitiesintheStates.FirmUSDrateGEMrateGermanfirm10%7%USfirm9%8%InterestRateSwaps-TwoPartiesexchangeperiodicinterestpaymentsoveraperiod.Typically,oneparty'spaymentsarebasedonafixedratewhereasitscounterparty'spaymentsarebasedonafloatingrate.Interestpaymentsarecomputedusinganotionalprincipal.-Example:BothAandBneedtoborrow$100millionfor3years.Thefinancingratesfacingthemaresummarizedasfollows:FixedFloatingA7.5%6-monthLIBOR+0.85%B6.3%6-monthLIBOR+0.25%-ItiscomparativelycheaperforAtousethefloatingratedebt.ForB,fixedrateborrowingwillbecheaper.Why?1.IfAdesiresthefloatingratedebtandBprefersthefixedratedebt,thereisnoneedforthemtoengageinaswap.2.IfAdesiresthefixedratedebtandBprefersthefloatingratedebt,AshouldstillborrowfloatingrateandBborrowfixedrate.Theycanthenenteraswaptobetterbothparties.6.3%CompanyCompany||LIBOR+AB6.3%0.85%LIBORa.CompanyA:Borrowsfloatingrateandenterstheaboveswap.b.CompanyB:Borrowsfixedrateandenterstheaboveswap-Theresultsa.CompanyA:Onasemiannualbasis,receives(LIBOR-6.3%)*50mfromtheswap,andpaysthefloatingratedebtservice(LIBOR+0.85%)*50m.Thenetpaymentis7.15%*50m,whichislessthan7.5%*50m.b.CompanyB:Onasemiannualbasis,receives(6.3%-LIBOR)*50mfromtheswap,andpaysthefixedratedebtservice6.3%*50m.ThenetpaymentisLIBOR*50m,whichislessthan(LIBOR+0.25%)*50m.-Note:Swapratereferstofixedrateswap.-Swapsthroughanintermediary6.4%6.25%CompanySwapCompany||LIBOR+ADealerB6.3%0.85%LIBORLIBOR-Theresultsc.CompanyA:Onasemiannualbasis,receives(LIBOR-6.4%)*50mfromtheswap,andpaysthefloatingratedebtservice(LIBOR+0.85%)*50m.Thenetpaymentis7.25%*50m,whichislessthan7.5%*50m.d.CompanyB:Onasemiannualbasis,receives(6.25%-LIBOR)*50mfromtheswap,andpaysthefixedratedebtservice6.3%*50m.Thenetpaymentis(LIBOR+0.05%)*50m,whichislessthan(LIBOR+0.25%)*50m.Swapdealer:Makes(6.4%-6.25%)*$50m=$75,000-PricingSchedulesThefixedrateintheswapisquotedasacertainnumberofbasispointsabovetheT-noteyield.Table:Indicationpricingforinterestrateswapsat1:30pm,NewYorkTimeonMay11,1995Maturity(years)BankPaysFixedRateBankreceivesFixedRateCurrentTNRate(%)23457102-yrTN+17bps3-yrTN+19bps4-yrTN+21bps5-yrTN+23bps7-yrTN+27bps10-yrTN+31bps2-yrTN+20bps3-yrTN+22bps4-yrTN+24bps5-yrTN+26bps7-yrTN+30bps10-yrTN+34bps6.236.356.426.496.586.72-Netting:interestpaymentsaremadebyonecounter-partytotheotherafternettingoutthefixedandfloatinginterestpayments.Assume:Notionalamount=Q;fixedratepayment=k;Floatingrateusedintimet=Rt-1(LIBORattimet-1).NETpaymentattimet:Fixedrateattimet:Fixed-ratepayerreceives(Rt-1Q-k)andfloating-ratepayerreceives(k-Rt-1Q).Thefollowingisapossiblescenarioofcashflowsforthefixed-ratepayerundera$100million,5-yearswapat5.6%withsemiannualcashflowexchanges.#Time(years)LIBORFloatingPaymentFixedPaymentNet0123456789100.00.51.01.52.02.53.03.54.04.55.05.25.76.15.85.55.65.35.75.95.85.52.602.853.052.902.752.802.652.852.952.90-2.80-2.80-2.80-2.80-2.80-2.80-2.80-2.80-2.80-2.80-0.20+0.05+0.25+0.10-0.05+0.00-0.15+0.05+0.15+0.10-Whatistheimplicationofnettingaboutcredit(defaultrisk)?-Pricinginterestrateswaps:a.Setthefixedrateofswapsothattheswaphasazerovalueatthetimeofinitiation.Thisiscalledparswap.b.Supposethatpaymentdatesaret1,t2,…,tn.Thevalueofaswapattimet,Vt,fromtheperspectiveofthefloating-ratepayer:Vt=B1t-B2tc.B1t:valueoffixed-ratebondunderlyingtheswapwhentitti+1,B1t=nj=i+1ke-r(t,tj)(tj-t)+Qe-r(t,tn)(tn-t).d.B2t:valueoffloating-ratebondunderlyingtheswap.Atthefloatingrateresettingday,i.e.,t=t1,t2,…,tn,immediatelyafterthepaymentismade,B2t=Q.Why?Inbetween,i.e.,titti+1,B2t=(Q+k*)exp[-r(t,ti+1)(ti+1-t)],wherek*isthefloatingratepaymen