Problem Set 6
Swaps & IRRM Products
Problem 1
Illustration of a Floating/Floating Swap
Party
T-Bill
T-Bill
Underwriter
LIBOR
Counterparty
LIBOR
If net is positive, underwriter pays party. If net is negative, party pays underwriter.
1
Problem 2
Illustration of an Equity Return Swap
Equity Index
Return*
Investor
Underwriter
Libor ± Spread
*Equity index return includes dividends, paid quarterly or reinvested
Problem 3
Illustration of an Equity Call Swap
Equity Index Price
Appreciation*
Investor
Underwriter
Libor ± Spread
* No depreciation—settlement at maturity
2
Problem 4
Illustration of an Equity Put Swap
Equity Index Price
Depreciation*
Investor
Underwriter
Libor ± Spread
* No appreciation—settlement at maturity
Problem 5
Illustration of an Equity Asset Allocation Swap
Foreign Equity
Index Return* A
Investor
Underwriter
Foreign Equity
Index Return* B
*Equity index return includes dividends, paid quarterly or reinvested
3
Problem 6: Equity Asset Swap
Asset
Income Stream
Equity Index
Return*
Investor
Underwriter
Income Stream
* Equity index return includes dividends, paid quarterly or reinvested
Problem 7
Illustration of a 6% Interest Rate Cap on LIBOR
Today
Later*
Client
Premium
Underwriter
Max[(LIBOR – 6%), 0]
Client
Underwriter
*Payments are made periodically (say, monthly or quarterly) over the life of the contract,
with rates appropriately adjusted for the number of periods per year
4
Problem 8
Illustration of a 2% Interest Rate Floor on LIBOR
Today
Later*
Client
Premium
Underwriter
Max[(2% – LIBOR), 0]
Client
Underwriter
*Payments are made periodically (say, monthly or quarterly) over the life of the contract,
with rates appropriately adjusted for the number of periods per year
Problem 9
Illustration of a 2,6 Collar on LIBOR
Today
Later*
Client
Client
Premium
Underwriter
Max[(LIBOR – 6%), 0]
+ Max[(2% – LIBOR), 0]
Underwriter
*Payments are made periodically (say, monthly or quarterly) over the life of the contract,
with rates appropriately adjusted for the number of periods per year
5
Problem 10
Illustration of a straight currency swap
€ 1,000,000
German rate x €1,000,000
2
U.S. rate x $1,300,000
€ 1,000,000
Intermediary
American Company
Borrow in
US, invest
in Europe
1
1
€ 1,000,000
German rate x €1,000,000
2
U.S. rate x $1,300,000
€ 1,000,000
3
3
$1,300,000
German Company
$1,300,000
$1,300,000
Borrow in
Europe,
invest in US
$1,300,000
Step 1 is notional
Steps 2 & 3 are net
6