Topic 8. Swaps

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Topic 8. Swaps

• 8.1 Over-the-counter (OTC) Derivatives
• 8.2 Interest Rate Swap
• 8.3 Zero Curve
• 8.4 Forward Curve
• 8.5 Zero Delta
• 8.6 Forward Delta
• 8.7 DV01

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8.1 OTC Derivatives

• 2012
• Global OTC Derivative Gross Market Value
• -- 25,392 Billion USD
• HK GDP
• -- 263 Billion
• -- 96 times of Hong Kong!
• US GDP
• -- 15,684 Billion
• -- 60 larger than the world largest economy
  !

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8.1 OTC Derivatives
http//www.bis.org/statistics/otcder/dt1920a.pdf
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8.1 OTC Derivatives

• The market for swaps has grown enormously, which
  has raised serious regulatory concerns regarding
  credit risk exposures.
• Such concerns motivated reforms from global
  regulators, e.g.,
• the Dodd Frank Wall Street Reform Act,
• central clearing collateralizations
• OTC swaps in order of mkt value
• -- interest rate 17,265 billion usd
• -- currency 1,955
• -- credit 1,187
• -- commodity 328
• -- equity 147

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8.1 Interest Rate Swap

• Swaps are different from most other derivatives
• Portfolio of forward contracts
• Marked to market at coupon payment dates
• Intermediary should reduce counterparty risk
• Interest rate swap as succession of forwards
• For example, a long position in