Commodities, Derivatives and Structured Products
Interest Rate & Currency Swap Fundamentals - Part 2 (2019)
This eCourse consists of three modules. Module 1 looks at how the forward index curve and discounting curve are used to determine the fair value of a swap. It also examines the key sources of forward rates used to build the forward curve.
Module 2 looks at how payments under an interest rate swap are adjusted for day count conventions and business days. The exchange and collateralization of principal under a cross-currency swap, upfront payments, and the treatment of negative interest rates are also dealt with in detail.
Module 3 looks at how a swap curve represents fixed coupon rates of different maturities existing in the market, which when applied to newly initiated fixed-for-floating swaps generate a swap NPV of zero. The tutorial also shows how the bootstrap method is used to derive zero-coupon interest rates from the swap par rates.
On completion of this tutorial, you will be able to:
- Recognize that a fair value swap is one where the two sets of cash flows produce an overall swap NPV of zero.
- Identify the role of the forward curve and discounting curve in determining the fair fixed rate on a swap
- Recognize the key sources of forward rates, including interbank deposit rates, Eurodollar futures, swap rates, and the discount curve
- Identify the day count conventions used in the swaps market, including 30/360, Actual/360, Actual/Actual, and Actual/365, and payment date conventions such as following business day and modified following
- Recall how principal may be exchanged and collateralized and marked to the marked under a cross-currency swap
- Recognize the relevance of upfront amounts and the treatment of negative interest rates
- Recognize how a swap curve represents market swap rates for each maturity
- Recall how the credit risk reflected by the swap curve can be compared to that of the treasury yield curve to determine a swap spread
- Identify the process by which a swap zero curve can be derived from a swap curve using interbank deposit and futures rates and the bootstrapping methodology
Module 1: Swaps – Key Valuation Concepts
Topic 1: Fair Valuation of Swaps
Topic 2: Swap Valuation Curves
Topic 3: Forward Rates & Swap Valuation
Module 2: Swaps – Cash Flows & Structures
Topic 1: Payment Dates & Day Count Conventions
Topic 2: Swap Principal
Topic 3: Upfront Amounts & Negative Interest Rates
Module 3: Swaps – Indices & Curves
Topic 1: Swap Curves
Topic 2: Sourcing Zero Curves for Swaps