FMI7e_ch15 Interest Rate Derivative Markets(金融市场好机构—7e, by Jeff Madura)).pdf

Chapter 15 Interest Rate Derivative Markets Financial Markets and Institutions, 7e, Jeff Madura Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. 1 Chapter Outline  Background  Participation by financial institutions  Types of interest rate swaps  Risks of interest rate swaps  Pricing interest rate swaps  Factors affecting the performance of interest rate swaps  Interest rate caps, floors, and collars  Globalization of swap markets 2 Background  An interest rate swap is an arrangement whereby one party exchanges one set of interest payments for another  e.g., fixed-rate payments are exchanged for floating-rate payments  The provisions of a swap include:  The notional principal  The fixed interest rate  The formula and type of index to determine the floating rate  The frequency of payments  The lifetime of the swap 3 Background (cont’d)  Amounts owed are typically netted out so that only the net payment is made  The market for swaps is facilitated by over-the-counter trading  Swaps are less standardized than other derivatives  Swaps became popular in the early 1980s because of large fluctuations in interest rates  e.g., financial institutions traditionally had more interest rate-sensitive liabilities than assets and were adversely affected by rising interest rates  e.g., some foreign financial institutions had access to long-term fixed rate funding but used funds primarily for floating rate loans  By engaging in an