The Pricing and Valuation of Swaps

Open access

Abstract

Swaps are financial agreements between two parties to exchange period cash flows and are mostly used as a tool for hedging risk and speculation. They are derivative contracts that derive their value from an underlying asset (the most common underlying assets are the interest rates in the plain vanilla case, but it can be almost anything). These OTC products (over the counter) are traded directly between the two parties or with a financial institution acting as an intermediary. Some banks in Serbia already offer these derivative instruments, but the markets are still in an emerging phase. The private sector is severely affected by credit and interest rate risk which currently lacks sufficient knowledge and understanding of such products and their importance. This paper aims to present and demystify the structure of these financial derivatives by presenting their valuation methods and by showing how they are used in practice. Ultimately, we shall discuss the credit risk the counterparties are facing in developed financial markets nowadays.

Buetow, G.W., Fabozzi, F. J. (2001) Valuation of interestrate swaps and swaptions. New Hope, Pa.: Frank J. Fabozzi.

Howard, C. (2012) Interest Rate Swaps and Other Derivatives. New York: Columbia Business School.

Marshall, J. F., Kapner, K.R. (1993) Understanding Swaps. New York; Chichester: Wiley.

McDougall, A. (1999) Mastering Swaps Markets: a stepby-step guide to the products, applications and risks. London: Financial Times.

Price, J., Henderson, S. (2012) Currency and interest rateSwaps. London: Butterworths.

Flavell, R. (2010) Swaps and other derivatives. San Francisco: John Wiley and Sons.

Journal Information

Metrics

All Time Past Year Past 30 Days
Abstract Views 0 0 0
Full Text Views 55 55 24
PDF Downloads 23 23 12