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Ch32HullOFOD7thEd

Libro Hull

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Vianey Hernández
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19 views

Ch32HullOFOD7thEd

Libro Hull

Uploaded by

Vianey Hernández
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 12

Swaps Revisited

Chapter 32

Options, Futures, and Other


Derivatives, 7th Edition, Copyright ©
John C. Hull 2008 1
Valuation of Swaps

The standard approach is to assume that


forward rates will be realized
This works for plain vanilla interest rate and
plain vanilla currency swaps, but does not
necessarily work for non-standard swaps

Options, Futures, and Other


Derivatives, 7th Edition, Copyright ©
John C. Hull 2008 2
Variations on Vanilla Interest
Rate Swaps
Principal different on two sides
Payment frequency different on two sides
Can be floating-for-floating instead of
floating-for-fixed
It is still correct to assume that forward
rates are realized
How should a swap exchanging the 3-
month LIBOR for 3-month CP rate be
valued?
Options, Futures, and Other
Derivatives, 7th Edition, Copyright ©
John C. Hull 2008 3
Compounding Swaps (Business
Snapshot 32.2, page 731)

Interest is compounded instead of being


paid
Example: the fixed side is 6%
compounded forward at 6.3% while the
floating side is LIBOR plus 20 bps
compounded forward at LIBOR plus 10
bps.
This type of compounding swap can be
valued using the “assume forward rates
are realized” rule.
Options, Futures, and Other
Derivatives, 7th Edition, Copyright ©
John C. Hull 2008 4
Currency Swaps
Standard currency swaps can be
valued using the “assume forward
LIBOR rate are realized” rule.
Sometimes banks make a small
adjustment because LIBOR in
currency A is exchanged for LIBOR
plus a spread in currency B

Options, Futures, and Other


Derivatives, 7th Edition, Copyright ©
John C. Hull 2008 5
More Complex Swaps
◦ LIBOR-in-arrears swaps
◦ CMS and CMT swaps
◦ Differential swaps
These cannot be accurately valued by
assuming that forward rates will be
realized

Options, Futures, and Other


Derivatives, 7th Edition, Copyright ©
John C. Hull 2008 6
LIBOR-in Arrears Swap (Equation
32.1, page 733)
 Rate is observed at time ti and paid at time ti rather
than time ti+1
 Itis necessary to make a convexity adjustment to
each forward rate underlying the swap
 Suppose that Fi is the forward rate between time ti
and ti+1 and i is its volatility
 We should increase Fi by
2 2
Fi i (ti 1  ti )ti
1  Fi i

when valuing a LIBOR-in-arrears swap


Options, Futures, and Other
Derivatives, 7th Edition, Copyright ©
John C. Hull 2008 7
CMS swaps
 Swap rate observed at time ti is paid at
time ti+1
 We must
◦ make a convexity adjustment because
payments are swap rates (= yield on a
par yield bond)
◦ Make a timing adjustment because
payments are made at time ti+1 not ti
 See equation 32.2 on page 734

Options, Futures, and Other


Derivatives, 7th Edition, Copyright ©
John C. Hull 2008 8
Differential Swaps
Rate is observed in currency Y and applied
to a principal in currency X
We must make a quanto adjustment to the
rate
See equation 32.3 on page 736.

Options, Futures, and Other


Derivatives, 7th Edition, Copyright ©
John C. Hull 2008 9
Equity Swaps (page 736-737)
Total return on an equity index is
exchanged periodically for a fixed or
floating return
When the return on an equity index is
exchanged for LIBOR the value of the swap
is always zero immediately after a payment.
This can be used to value the swap at other
times.

Options, Futures, and Other


Derivatives, 7th Edition, Copyright ©
John C. Hull 2008 10
Swaps with Embedded Options
(page 737-740)

Accrualswaps
Cancelable swaps
Cancelable compounding swaps

Options, Futures, and Other


Derivatives, 7th Edition, Copyright ©
John C. Hull 2008 11
Other Swaps (page 740-741)
Indexed principal swap
Commodity swap
Volatility swap
Bizarre deals (for example, the P&G 5/30
swap in Business Snapshot 32.4 on page
741)

Options, Futures, and Other


Derivatives, 7th Edition, Copyright ©
John C. Hull 2008 12

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