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Swap Credit Risk and Swap Spread

  • Current Credit Risk: The situation where one swap party is owed a payment now and the other party cannot make the payment.

  • Potential Credit Risk: The possibility that the other party may default in the future.

  • The amount at risk for default is equal to the swap's market value at any given point in time.

  • While swaps are over the counter, the parties can agree to a marking to market method for controlling credit risk.

  • Swap spread is the difference between a swap's fixed rate and an equal maturity risk free rate, such as the yield on government debt with a same maturity.

  • Swap rates can be quoted as a spread over equivalent risk free rates; this spread can be interpreted as a gauge of credit risk in the general market.

  • During times of economic turmoil, swap spreads tend to widen.

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Swaptions and their Valuation

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Interest Rate Derivatives - Caps and Floors

01
CFA Level 2: Derivatives Part 2 – Introduction
02
Introduction to Options
03
Synthetic Options and Rationale
04
One Period Binomial Option Pricing Model
05
Call Option Price Formula
06
Binomial Interest Rate Options Pricing
07
Black-Scholes-Merton (BSM) Option Pricing Model
08
Black-Scholes-Merton Model and the Greeks
09
Dynamic Delta Hedging & Gamma Related Issues
10
Estimating Volatility for Option Pricing
11
Put-Call Parity for Options on Forwards
12
Introduction to Swaps
13
Plain Vanilla Interest Rate Swap
14
Equity Swaps
15
Currency Swaps
16
Swap Pricing vs. Swap Valuing
17
Pricing and Valuing a Plain Vanilla Interest Rate Swap
18
Pricing and Valuing Currency Swaps
19
Pricing and Valuing Equity Swaps
20
Swaps as Theoretical Equivalents of Other Derivatives
21
Swaptions and their Valuation
22
Swap Credit Risk and Swap Spread
23
Interest Rate Derivatives - Caps and Floors
24
Credit Default Swaps (CDS)
25
Credit Derivative Trading Strategies

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Securities & Markets