Swaps (互换) Chapter 5 Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, Shanghai Normal University
Options, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, Shanghai Normal University 5.1 Swaps (互换) Chapter 5
5.2 Nature of Swaps A swap is an agreement to exchange cash flows(现金流) at specified future times according to certain specified rules Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, Shanghai Normal University
Options, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, Shanghai Normal University 5.2 Nature of Swaps • A swap is an agreement to exchange cash flows (现金流) at specified future times according to certain specified rules
53 Terminology LIBOR the london inter Bank offer rate It is the rate of interest offered by banks on deposits from other banks in Eurocurrency markets Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, Shanghai Normal University
Options, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, Shanghai Normal University 5.3 Terminology • LIBOR the London InterBank Offer Rate It is the rate of interest offered by banks on deposits from other banks in Eurocurrency markets
5.4 An Example of a"Plain vanilla Interest Rate Swap(大众型利率互换) An agreement by"Company B"to RECEIVE 6-month libor and PAY a fixed rate of 5% pa every 6 months for 3 years on a notional principal of $100 million Next slide illustrates cash flows, Where POSIT/VE flows are revenues(inflows) and NEGATIVE flows are expenses(outflows) Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, Shanghai Normal University
Options, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, Shanghai Normal University 5.4 An Example of a “Plain Vanilla” Interest Rate Swap(大众型利率互换) • An agreement by “Company B” to RECEIVE 6-month LIBOR and PAY a fixed rate of 5% pa every 6 months for 3 years on a notional principal of $100 million • Next slide illustrates cash flows, where POSITIVE flows are revenues (inflows) and NEGATIVE flows are expenses (outflows)
Cash Flows to Company B 5.5 (See Table 5.1, page 123) -----Millions of dollars LIBOR FLOATING FIXED Date Rate Cash flow Cash Flow Cash Flow Mar.1,199942% Sept.1,19994.8% +2.10-2.50 0.40 Mar.1.20005.3% +2.40 2.50 0.10 Sept.1,20005.5% +2.65 2.50 +0.15 Mar.1,200156% 2.75 2.50 +0.25 Sept.1,200159% +2.80 -2.50 +0.30 Mar.1,.20026.4% +2.95 2.50 +0.45 Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, Shanghai Normal University
Options, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, Shanghai Normal University 5.5 ---------Millions of Dollars--------- LIBOR FLOATING FIXED Net Date Rate Cash Flow Cash Flow Cash Flow Mar.1, 1999 4.2% Sept. 1, 1999 4.8% +2.10 –2.50 –0.40 Mar.1, 2000 5.3% +2.40 –2.50 –0.10 Sept. 1, 2000 5.5% +2.65 –2.50 +0.15 Mar.1, 2001 5.6% +2.75 –2.50 +0.25 Sept. 1, 2001 5.9% +2.80 –2.50 +0.30 Mar.1, 2002 6.4% +2.95 –2.50 +0.45 Cash Flows to Company B (See Table 5.1, page 123)