SWAPS-Final2

SWAPSSWAPS

IntroductionIntroduction

What is Swap?What is Swap? Exchanging things is called Swap. It can be anything you Exchanging things is called Swap. It can be anything you

may be swappingmay be swapping your pen, mobile etc., with your friends.your pen, mobile etc., with your friends.

History of Swap?History of Swap? In ancient medieval period there was no currency or In ancient medieval period there was no currency or

money. So people use to exchange things i.e. Farmer money. So people use to exchange things i.e. Farmer exchanging Rice with Cobbler for Shoes, this was called as exchanging Rice with Cobbler for Shoes, this was called as Barter System.Barter System.

Swap has evolved from Barter system.Swap has evolved from Barter system.

Define - SWAPDefine - SWAP

A Swap is an agreement between A Swap is an agreement between two parties to Exchange Cash two parties to Exchange Cash Flows based on underlying asset.Flows based on underlying asset.

Demand & SupplyDemand & Supply Two CounterpartiesTwo Counterparties Mutual AgreementMutual Agreement Rate of InterestRate of Interest Notional AmountNotional Amount Trade Date/Effective Date Trade Date/Effective Date Settlement Date/Payment Date/ Maturity.Settlement Date/Payment Date/ Maturity. Refix dateRefix date Accrual Date & End of Accrual Date Accrual Date & End of Accrual Date Coupon InterestCoupon Interest

REQUISITE FOR SWAP

FEES FOR SWAPFEES FOR SWAP

Brokerage / Consultancy FeeBrokerage / Consultancy FeeLoading Fee / Entry FeeLoading Fee / Entry FeeAdmin FeeAdmin FeeAssignment FeeAssignment FeeExit Fee/Termination FeeExit Fee/Termination Fee

Types of Swaps:Types of Swaps:

Interest Rate SwapInterest Rate Swap Cross Currency SwapCross Currency Swap Circus SwapCircus Swap Callable SwapCallable Swap Putable SwapPutable Swap Credit Default SwapCredit Default Swap Equity SwapEquity Swap Equity Default SwapEquity Default Swap Commodity SwapCommodity Swap SwaptionSwaption

Calculation of Coupon Calculation of Coupon

Trade Date Accrual DateAccrual End

DateMaturity date

Coupon Period

Coupon= Notional Amount*No of Days * Roi * Day Count Basis

Eg:- Day Count Basis 30/360, ACT/360 , ACT/ACT

Trade Date01/01/06

Effective Date03/01/06

Settlement Date31/06/06

Refix Date28/06/06

Stub

TIMELINE OF SWAP

Interest Rate SWAPInterest Rate SWAP

DefinitionsDefinitions

In a swap, two In a swap, two counterpartiescounterparties agree to a contractual arrangement agree to a contractual arrangement wherein they agree to exchange cash wherein they agree to exchange cash flows at periodic intervals.flows at periodic intervals.

Fixed Interest rate to Floating Fixed Interest rate to Floating Interest rateInterest rate

Floating Interest rate to Fixed Floating Interest rate to Fixed Interest rateInterest rate

Size of the Swap MarketSize of the Swap Market

In 2001 the notational principal of:In 2001 the notational principal of:Interest rate swaps was $58,897,000,000.Interest rate swaps was $58,897,000,000.

Currency swaps was $3,942,000,000Currency swaps was $3,942,000,000The most popular currencies are:The most popular currencies are:

U.S. dollarU.S. dollarJapanese yenJapanese yenEuroEuroSwiss francSwiss francBritish pound sterlingBritish pound sterling

LenderABC CO.

AAA Rating LenderXYZ CO.

BBB Rating

Borrow $10MMFixed 6%

Borrow $10MMLibor + 1%

In Market ABC is getting Fixed @ 6 %

Floating @ Libor

In Market XYZ is getting

Fixed @ 10 %Floating @ Libor + 1%

EXAMPLE

ABC CO.AAA Rating

XYZ CO.BBB Rating

ABC will give LIBOR

XYZ will give Fixed 8%

ABC XYZ Comparative Advantage (ABC)

FIXED 7% 10% 3%

Floating Libor Libor + 1% 1% Net 2%

QSD = 7% + 2% - 1 % = 8 %

The Quality Spread Differential represents the potential gains from the swapThe Quality Spread Differential represents the potential gains from the swap

Advantages of Interest Rate Advantages of Interest Rate SwapSwap

Swapping from fixed to floating may Swapping from fixed to floating may save issuer money.save issuer money.

Protects against adverse movements Protects against adverse movements in interest rates.in interest rates.

No premium is paid to enter into a No premium is paid to enter into a swap.swap.

No principal amount is exchanged.No principal amount is exchanged.

Cross Currency SwapCross Currency Swap

DefinitionsDefinitions

In a Cross currency swap, two In a Cross currency swap, two counterpartiescounterparties agree to a agree to a contractual arrangement wherein they contractual arrangement wherein they agree to exchange their currencies.agree to exchange their currencies.

E.g.E.g.USD being exchanged with GBPUSD being exchanged with GBPAUD being exchanged with USDAUD being exchanged with USD

Example of Cross Currency Example of Cross Currency SwapSwap

Issue Bonds of £10mm @ 5%

Tesco in UK

Start a Co. in US

Require Pounds

Issue Bonds of $16mm @5%

McDonalds in US

Start a Co. in UK

Require Dollars

Tesco will exchange Currency with McDonalds

Circus SwapCircus Swap

In a Circus Swap ,two In a Circus Swap ,two counterpartiescounterparties agree to a agree to a contractual arrangement wherein contractual arrangement wherein they agree to exchange their they agree to exchange their Notional Amount and Interest Rate.Notional Amount and Interest Rate.

Example of Circus SwapExample of Circus Swap

Issue Bonds of £10mm @ 5%

Tesco in UK

Start a Co. in US

Require Pounds

Issue Bonds of $16mm @5%

McDonalds in US

Start a Co. in UK

Require Dollars

Tesco will exchange Interest Rate & Notional Amount

with McDonalds

Callable Swap:-Callable Swap:-When a counterparty is receiving Fixed When a counterparty is receiving Fixed

raterate of Interestof Interest

Putable Swap:-Putable Swap:-When a Counterparty is paying Fixed When a Counterparty is paying Fixed

rate of Interestrate of Interest

Callable & Putable SwapCallable & Putable Swap

Credit Default Swap (CDS)Credit Default Swap (CDS)

CDS – An OverviewCDS – An Overview A credit default swap is an agreement by one party to A credit default swap is an agreement by one party to

accept a premium at regular intervals in return for accept a premium at regular intervals in return for making a larger payment if a specific company defaults, making a larger payment if a specific company defaults, goes bankrupt, or suffers a negative credit event.goes bankrupt, or suffers a negative credit event.

It is an agreement between a protection buyer and a It is an agreement between a protection buyer and a protection seller whereby the buyer pays a periodic fee protection seller whereby the buyer pays a periodic fee in return for a contingent payment by the seller upon a in return for a contingent payment by the seller upon a credit event (such as a certain default) happening in the credit event (such as a certain default) happening in the reference entity. reference entity.

A CDS is often used like an insurance policy, or hedge for A CDS is often used like an insurance policy, or hedge for the holder of a corporate bond.the holder of a corporate bond.

In a CDS the buyer of protection ("Buyer") typically pays In a CDS the buyer of protection ("Buyer") typically pays a periodic fee in exchange for the seller of protection a periodic fee in exchange for the seller of protection ("Seller") contracting to make a payment.("Seller") contracting to make a payment.

CDS – PROCESS FLOWCDS – PROCESS FLOW

BOND ISSUER

INVESTORPROTECTION

SELLER

$10 MM 6% Quarterly Fee( 200 bps )

Bond

Bond Value

CDS- An ExampleCDS- An Example A pension fund owns 10 Mn Euros worth of a 5 year bond A pension fund owns 10 Mn Euros worth of a 5 year bond

issued by X Corp. issued by X Corp.

To manage the risk, they buy a CDS from Derivative Bank on a To manage the risk, they buy a CDS from Derivative Bank on a nominal of 10 million euros which trades at 200 basis points.nominal of 10 million euros which trades at 200 basis points.

The pension fund pays a premium of 2% of 10 million The pension fund pays a premium of 2% of 10 million (200,000 euros per annum) as quarterly payments Derivative (200,000 euros per annum) as quarterly payments Derivative Bank. Bank.

In case of no default PF receives 10 Mn Euros on completion of In case of no default PF receives 10 Mn Euros on completion of quarterly payments for 5 years.quarterly payments for 5 years.

If X Corp. defaults on its debt 3 years into the CDS contract If X Corp. defaults on its debt 3 years into the CDS contract then the premium payments would stop and Derivative Bank then the premium payments would stop and Derivative Bank would ensure that the pension fund is refunded for its loss of would ensure that the pension fund is refunded for its loss of 10 million euros. 10 million euros.

Credit eventsCredit events

Types of Credit Events:Types of Credit Events:

Bankruptcy by the Reference CreditBankruptcy by the Reference Credit

RestructuringRestructuring

Failure to Pay a pre-agreed asset or Failure to Pay a pre-agreed asset or assets ("Reference Obligation") assets ("Reference Obligation")

Settlement of CDSSettlement of CDS

Cash Settlement - Reference obligation Cash Settlement - Reference obligation minus its post-default trading value as minus its post-default trading value as determined by a pre-agreed dealer poll determined by a pre-agreed dealer poll mechanism.mechanism.

Physical Delivery - Transfer of a pre-Physical Delivery - Transfer of a pre-agreed asset or assets ("Deliverable agreed asset or assets ("Deliverable Obligation") to the seller in exchange for Obligation") to the seller in exchange for a payment equal to the notional of the a payment equal to the notional of the contract.contract.

EQUITY SWAPEQUITY SWAP

Equity SWAPS - An OverviewEquity SWAPS - An Overview Equity swap is a transaction between two parties in which each Equity swap is a transaction between two parties in which each

party agrees to make a series of payments to the other, with at party agrees to make a series of payments to the other, with at least one set of payments determined by the return on a stock or least one set of payments determined by the return on a stock or stock index. stock index.

The return is calculated based on a pre-determined notional The return is calculated based on a pre-determined notional principal and may or may not include dividends.principal and may or may not include dividends.

The payments occur on regularly scheduled dates over a specified The payments occur on regularly scheduled dates over a specified period of time.period of time.

Equity swaps are offered by derivatives dealers in much the same Equity swaps are offered by derivatives dealers in much the same manner as their offerings of interest rate, currency, and manner as their offerings of interest rate, currency, and commodity swaps.commodity swaps.

Dealers typically charge a bid-ask spread and hedge any risk they Dealers typically charge a bid-ask spread and hedge any risk they have assumed by transacting in the underlying stock or index or have assumed by transacting in the underlying stock or index or another derivative on the stock or index. another derivative on the stock or index.

Type of Equity SWAPSType of Equity SWAPS

There are three main types of equity There are three main types of equity swaps:swaps:

An Equity Swap with the Equity Return An Equity Swap with the Equity Return paid against a Fixed Rate paid against a Fixed Rate

An Equity Swap with the Equity Return An Equity Swap with the Equity Return paid against a Floating Rate paid against a Floating Rate

An Equity Swap with the Equity Return An Equity Swap with the Equity Return paid against another Equity Return paid against another Equity Return

Example - Equity Return Paid Against a Example - Equity Return Paid Against a Fixed RateFixed Rate

On December 15 of a given year, Dynamic Money

Management enters into a swap to pay a fixed rate of 5% with payment terms of 30/360 and receive the return on the S&P 500 with payments to occur on March 15, June 15, September 15, and December 15 for one year.

Payments will be calculated on a notional principal of $20 million.

The counterparty is the swaps dealer Total The counterparty is the swaps dealer Total Swaps, Inc. The S&P 500 is at 1105.15 on the day Swaps, Inc. The S&P 500 is at 1105.15 on the day the swap is initiated. the swap is initiated.

Example - Example - Equity Return Paid Equity Return Paid Against a Fixed RateAgainst a Fixed Rate

On each settlement date, the return on the On each settlement date, the return on the S&P 500 is calculated and applied to the $20 S&P 500 is calculated and applied to the $20 million notional principal to determine the million notional principal to determine the payment to be received.payment to be received.

The fixed payment is based on 5% and an The fixed payment is based on 5% and an adjustment factor of 90/360 applied to $20 adjustment factor of 90/360 applied to $20 million. million.

As is customary in swaps, the difference in As is customary in swaps, the difference in the two payments is determined and only the two payments is determined and only the net, as indicated in the last column, is the net, as indicated in the last column, is paid. paid.

Example - Example - Equity Return Paid Equity Return Paid Against a Fixed RateAgainst a Fixed Rate

Date Date S&P 500 S&P 500 Index Index

Periodic Periodic Return on Return on S&P 500S&P 500

S&P 500 S&P 500 Cash Flow Cash Flow

Fixed Fixed Interest Interest Cash FlowCash Flow

Net Cash Net Cash FlowFlow

Dec 15 Dec 15 1105.15 1105.15

Mar 15 Mar 15 1129.48 1129.48 2.2015% 2.2015% $440,300 $440,300 -$250,000 -$250,000 $190,300 $190,300

Jun 15 Jun 15 1084.30 1084.30 -4.0001% -4.0001% -800,020 -800,020 -250,000 -250,000 -1,050,020 -1,050,020

Sept 15 Sept 15 1055.29 1055.29 -2.6755% -2.6755% -535,100 -535,100 -250,000 -250,000 -785,100 -785,100

Dec 15 Dec 15 1099.52 1099.52 4.1913% 4.1913% 838,260 838,260 -250,000 -250,000 588,260 588,260

Example - Equity Return paid Example - Equity Return paid against a Floating Rateagainst a Floating Rate

On December 15 of a given year, Dynamic Money On December 15 of a given year, Dynamic Money Management enters into a swap to pay a floating Management enters into a swap to pay a floating rate of 90-day LIBOR with payment terms of rate of 90-day LIBOR with payment terms of 30/360 and receive the return on the S&P 500 30/360 and receive the return on the S&P 500 with payments to occur on March 15, June 15, with payments to occur on March 15, June 15, September 15, and December 15 for one year.September 15, and December 15 for one year.

Payments will be calculated on a notional Payments will be calculated on a notional principal of $20 million. principal of $20 million.

The counterparty is the swaps dealer Total The counterparty is the swaps dealer Total Swaps, Inc. The S&P 500 is at 1105.15 and 90-Swaps, Inc. The S&P 500 is at 1105.15 and 90-day LIBOR is 4.75% on the day the swap is day LIBOR is 4.75% on the day the swap is initiated. initiated.

Example - Equity Return paid Example - Equity Return paid against a Floating Rateagainst a Floating Rate

Date Date S&P 500 S&P 500 Index Index

Periodic Periodic Return on Return on S&P 500S&P 500

S&P 500 S&P 500 Cash Cash Flow Flow

LIBOR LIBOR LIBOR LIBOR Cash Flow Cash Flow

Net Cash Net Cash FlowFlow

Dec 15 Dec 15 1105.15 1105.15 4.75% 4.75%

Mar 15 Mar 15 1129.48 1129.48 2.2015% 2.2015% $440,30$440,300 0

4.875% 4.875% --$237,500 $237,500

$202,800 $202,800

Jun 15 Jun 15 1084.30 1084.30 -4.0001% -4.0001% -800,020 -800,020 5.125% 5.125% -243,750 -243,750 --1,043,770 1,043,770

Sept Sept 15 15

1055.29 1055.29 -2.6755% -2.6755% -535,100 -535,100 4.9375% 4.9375% -256,250 -256,250 -791,350 -791,350

Dec 15 Dec 15 1099.52 1099.52 4.1913% 4.1913% 838,260 838,260 not not applicablapplicable e

-246,875 -246,875 591,385 591,385

Example - Equity Return Paid Example - Equity Return Paid Against Another EquityAgainst Another Equity ReturnReturn

On December 15 of a given year Dynamic Money On December 15 of a given year Dynamic Money Management enters into a swap to pay the return Management enters into a swap to pay the return on the NASDAQ Composite index and receive the on the NASDAQ Composite index and receive the return on the S&P 500 with payments to occur on return on the S&P 500 with payments to occur on March 15, June 15, September 15, and December March 15, June 15, September 15, and December 15 for one year. 15 for one year.

Payments will be calculated on a notional Payments will be calculated on a notional principal of $20 million. principal of $20 million.

The counterparty is the swaps dealer Total The counterparty is the swaps dealer Total Swaps, Inc. The S&P 500 is at 1105.15 and Swaps, Inc. The S&P 500 is at 1105.15 and NASDAQ is at 1705.51. NASDAQ is at 1705.51.

Example - Equity Return Paid Example - Equity Return Paid Against Another EquityAgainst Another Equity

ReturnReturnDate Date S&P S&P

500 500 Index Index

Periodic Periodic Return Return on S&P on S&P 500500

S&P 500 S&P 500 Cash Cash Flow Flow

NASDAQ NASDAQ Index Index

Periodic Periodic Return Return on on NASDAQ NASDAQ

NASDAQ NASDAQ Cash Flow Cash Flow

Net Cash Net Cash FlowFlow

Dec 15 Dec 15 1105.11105.15 5

1705.51 1705.51

Mar 15 Mar 15 1129.41129.48 8

2.2015% 2.2015% $440,30$440,300 0

1750.78 1750.78 2.6543% 2.6543% -$530,860 -$530,860 $202,800 $202,800

Jun 15 Jun 15 1084.31084.30 0

--4.0001% 4.0001%

--800,020 800,020

1689.25 1689.25 --3.5144% 3.5144%

+702,880 +702,880 --1,043,770 1,043,770

Sept Sept 15 15

1055.21055.29 9

--2.6755% 2.6755%

--535,100 535,100

1609.67 1609.67 --4.7110% 4.7110%

+942,200 +942,200 -791,350 -791,350

Dec 15 Dec 15 1099.51099.52 2

4.1913% 4.1913% 838,260 838,260 1678.51 1678.51 4. 2767% 4. 2767% -855,340 -855,340 591,385 591,385

COMMODITY SWAPCOMMODITY SWAP

Commodity SwapCommodity Swap

DefinitionDefinitionA swap where exchanged cash flows A swap where exchanged cash flows

are dependent on the price of an are dependent on the price of an underlying commodity. underlying commodity.

This is usually used to hedge against This is usually used to hedge against the price of a commodity. the price of a commodity.

Types of commodity Types of commodity swapsswaps

Fixed-floating Fixed-floating

Fixed-floating swaps are just like the fixed-floating Fixed-floating swaps are just like the fixed-floating swaps in the interest rate swap market with the swaps in the interest rate swap market with the exception that both indices are commodity based exception that both indices are commodity based indicesindices..

Commodity-for-interestCommodity-for-interest

Commodity-for-interest swaps are similar to the equity Commodity-for-interest swaps are similar to the equity swap in which a total return on the commodity in swap in which a total return on the commodity in question is exchanged for some money market rate. question is exchanged for some money market rate.

Example for Commodity Example for Commodity SwapSwap

A large US refinery wants to launch a program that would A large US refinery wants to launch a program that would allow the customers to lock in the price they pay the Refinery allow the customers to lock in the price they pay the Refinery for a pre-specified quantity of oil products during the coming for a pre-specified quantity of oil products during the coming year. year.

To protect itself from financial loss arising out of market To protect itself from financial loss arising out of market fluctuation, the refinery enters into a one-year Fixed for fluctuation, the refinery enters into a one-year Fixed for Floating Swap with Sempra Energy Trading ® Corp. ("SET") to Floating Swap with Sempra Energy Trading ® Corp. ("SET") to hedge 100,000 barrels of fuel oil per month at a fixed price of hedge 100,000 barrels of fuel oil per month at a fixed price of $22.00/bbl.$22.00/bbl.

Under the swap agreement, the Refinery makes a monthly Under the swap agreement, the Refinery makes a monthly fixed payment to SET equal to $22.00/barrel.fixed payment to SET equal to $22.00/barrel.

SET, in exchange, makes a floating payment to the Refinery SET, in exchange, makes a floating payment to the Refinery based on the arithmetic average of the daily settlement prices based on the arithmetic average of the daily settlement prices of the prompt NYMEX crude oil futures contract for each of the of the prompt NYMEX crude oil futures contract for each of the Pricing Periods for which the Reference Price is quoted.Pricing Periods for which the Reference Price is quoted.

Example-cont.Example-cont.

During the life of the swap, During the life of the swap,

The Refinery continues to purchase crude it needs from its The Refinery continues to purchase crude it needs from its regular suppliers, which may include SET, at index prices. regular suppliers, which may include SET, at index prices.

On each Settlement Date, the Refinery and SET exchange On each Settlement Date, the Refinery and SET exchange payments equal to the difference between the index price payments equal to the difference between the index price and the fixed $22.00/bbl swap price.and the fixed $22.00/bbl swap price.

The floating payment received from SET should closely The floating payment received from SET should closely approximate the payment the Refinery made to its approximate the payment the Refinery made to its suppliers for physical purchase of crude oil. The net result is suppliers for physical purchase of crude oil. The net result is that by combining the swap with its current physical crude that by combining the swap with its current physical crude oil contract, the End User pays $22.00/bbl for its crude oil oil contract, the End User pays $22.00/bbl for its crude oil purchase purchase

Equity Default SwapEquity Default Swap

Equity Default SwapEquity Default Swap Equity default swap is a vehicle for one party to provide Equity default swap is a vehicle for one party to provide

another protection against some possible event relating to another protection against some possible event relating to some company’s stock.some company’s stock.

The event being protected against is called the trigger The event being protected against is called the trigger event or knock-in event.event or knock-in event.

For example, the equity default swap might provide For example, the equity default swap might provide protection against a 70% decline in the stock price from its protection against a 70% decline in the stock price from its value when the equity default swap was initiated.value when the equity default swap was initiated.

On the occurrence of trigger event , the equity default swap On the occurrence of trigger event , the equity default swap terminates and the protection seller makes a specified terminates and the protection seller makes a specified payment to the protection buyer. payment to the protection buyer.

Equity Default Swap - cont.Equity Default Swap - cont.

Equity default swap are quoted as spreads Equity default swap are quoted as spreads over Libor.over Libor.

Equity default swap truly behaves as a Equity default swap truly behaves as a form of hybrid between a credit derivative form of hybrid between a credit derivative and an equity derivative. and an equity derivative.

An equity default swap is more likely to be An equity default swap is more likely to be triggered than a credit default swap, they triggered than a credit default swap, they generally trade at higher spreads than generally trade at higher spreads than credit default swap. credit default swap.

Advantages of Equity Default Advantages of Equity Default SwapSwap

Trigger events are more easy to define Trigger events are more easy to define since there is less ambiguity over the since there is less ambiguity over the stock price movement.stock price movement.

Recovery rates are fixed for equity default Recovery rates are fixed for equity default swaps.swaps.

Equity default swaps can be structured Equity default swaps can be structured with various trigger levels loosely with various trigger levels loosely corresponding to various degrees of corresponding to various degrees of corporate impairment. corporate impairment.

SwaptionSwaption

SwaptionSwaption A swaption is a financial instrument granting the A swaption is a financial instrument granting the

owner an option to enter swap agreement.owner an option to enter swap agreement.

To specify a swaption, there must be three basic To specify a swaption, there must be three basic parameters:parameters: The expiration date of the option.The expiration date of the option. The fixed rate on the underlying swap.The fixed rate on the underlying swap. The tenor (time to maturity at exercise of the option) of The tenor (time to maturity at exercise of the option) of

the swap.the swap.

There are two types of settlement possible for a There are two types of settlement possible for a swaption contract.swaption contract. Physical settlement, , in which case an option is actually Physical settlement, , in which case an option is actually

entered into upon exercise. entered into upon exercise. Cash settlement, in which case the market value of the Cash settlement, in which case the market value of the

underlying swap changes hands upon exercise. underlying swap changes hands upon exercise.

Functioning of a SwaptionFunctioning of a Swaption

The purchaser of the swaption pays an up front The purchaser of the swaption pays an up front premium.premium.

The fixed rate specified for the swaption plays a role The fixed rate specified for the swaption plays a role very similar to that of a strike price.very similar to that of a strike price.

The holder of the swaption will decide whether or not The holder of the swaption will decide whether or not to exercise based on whether swap rates rise above or to exercise based on whether swap rates rise above or fall below that fixed rate. fall below that fixed rate.

For this reason, the fixed rate is often called the strike For this reason, the fixed rate is often called the strike rate.rate.

If the swaption is exercised, there is no strike price to If the swaption is exercised, there is no strike price to pay. The two parties simply put on the prescribe swappay. The two parties simply put on the prescribe swap

Purpose of SwaptionPurpose of Swaption

The primary purposes for entering The primary purposes for entering into a swaption are:into a swaption are: to hedge call or put positions in bond to hedge call or put positions in bond

issues.issues. to change the tenor of an underlying to change the tenor of an underlying

swap.swap. to assist in the engineering of structured to assist in the engineering of structured

notes.notes. to change the payoff profile of the firm.to change the payoff profile of the firm.

Types of SwaptionTypes of Swaption

American SwaptionAmerican Swaption, in which the owner , in which the owner is allowed to enter the swap on any day is allowed to enter the swap on any day that falls within a range of two dates.that falls within a range of two dates.

Bermudan SwaptionBermudan Swaption, in which the owner , in which the owner is allowed to enter the swap on a is allowed to enter the swap on a sequence of dates.sequence of dates.

European Swaption,European Swaption, in which the owner in which the owner is allowed to enter the swap on one is allowed to enter the swap on one specified datespecified date

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