Fairmat Example

Tags: Caps

Interest Rate Swap

An Interest Rate Swap is an agreement between two counterparties to exchange cash-flows (e.g. a fixed rate, whose value is pre-established, versus a floating rate, whose value is reset with a pre-established frequency) in the same currency. Main features of the derivative (e.g. notional, payment dates, reset dates, etc ...) are defined at trade date.

• Vanilla Fixed-Float Interest Rate Swap (generally called "plain vanilla" swap): the floating rate is a Libor rate, the London Interbank Offer Rate (e.g. USD Libor for USA market, GBP Libor for British market etc ...) or its equivalent into other markets (e.g. Euribor rate for European market).
• Fixed-Float CMS Swap: the floating rate is a Constant Maturity Swap, the par swap rate, payed on the fixed leg, that balances the mutual performance of the floating leg with maturity equal to the maturity of the CMS rate.