Interest rate swap thesis

Understanding Investing Interest Rate Swaps. Interest rate swaps have become an integral part of the fixed income market. These derivative contracts, which typically exchange or swap fixedrate interest payments for floatingrate interest payments, are an essential tool for investors who use them in an effort to hedge, speculate, and Sometimes the floating rate in interest rate swap agreements can also be the European Interbank Offered Rate which replaced the former Frankfurt Interbank Offered Rate (FIBOR).

This is the interest rate for money on term Besides, the focus in this thesis will be on interest rate swaps. Interest rate swaps are popular, highly liquid derivatives and therefore interesting cases to examine the implementation of FVA.

The purpose of this thesis is to investigate the incorporation of credit risk and funding cost in the valuation of (plain vanilla) interest rate swaps.

Abstract: This thesis presents a valuation model for the default risk of an interest rate swap to a riskless swap dealer. Previous studies evaluated the default risk of an interest rate swap by assuming that swap default probability is interest rate swap We want to value a 2 year interest rate swap, assuming the floating side is reset every three months, while the fixed rate payments are every six months.

The fixed rate payments are given in Table 1. An interest rate swap is a contractual agreement between two parties agreeing to exchange cash flows of an underlying asset for a fixed period of time. We will in this thesis focus on CVA for an interest rate swap, which in short is an agreement between two parties to exchange each others interest rate cash flows, based on a notional amount from a floating to a fixed rate or vice versa.

An interest rate swap is a contract between two counterparties who agree to exchange the future interest rate payments they make on loans or bonds. These two counterparties are banks, businesses, hedge funds, or investors. a crosscurrency and interest rate swap construction to mitigate exposure to both foreign currency and interest rates on these loans, resulted in a dramatic long term value destruction of Greek sovereign Treasury.