What is a floating leg?
What is fixed floating leg?
A fixed-for-floating swap is a contractual arrangement between two parties in which one party swaps the interest cash flows of fixed-rate loan(s) with those of floating-rate loan(s) held by another party.
Why would an interest rate swap have two floating-rate legs?
There are two legs associated with each party: a fixed leg and a floating leg. Swaps are OTC derivatives that bear counterparty credit risk beside interest rate risk. ... A borrower with floating-rate debt who believes that interest rates are about to increase may enter into a swap agreement to pay fixed/receive floating.
How do you value a floating leg of a swap?
The reason why you can price a swap without a model is because you can replicate the payoff using only zero-coupon bonds. For the fixed leg this is trivial. Value of the floating leg = (K + 1)/(1+r) where k = interest payment based on the LIBOR during the previous reset point, r = spot rate until the next reset.
How are IRS priced?
The net present value (PV) of a vanilla IRS can be computed by determining the PV of each fixed leg and floating leg separately and summing. For pricing a mid-market IRS the underlying principle is that the two legs must have the same value initially; see further under Rational pricing.
What is fixing risk?
Fixing risk is a 2nd order risk within interest rate derivative portfolios resulting from the structure of the instruments held in the client's portfolios and a mismatch of exposures over time. • Fixing risk is a natural by-product of a client's core trading activity.May 17, 2011
What is the float price?
What Is a Floating Price? In a swap contract, the floating price is the leg that depends on the level of a variable, such as an interest rate, currency exchange rate, or price of an asset. ... The party paying the floating rate expects that rate to decline over the life of the swap.
What is Pay leg and receive leg?
The receiving leg matches all bond cash-flows, while the pay leg requires floating rate coupon payments of form LIBOR + a spread.
What is an energy swap?
An energy swap is a financial instrument whereby one participant agrees to a fixed-price contract for say crude oil, natural gas, gasoline, electricity, coal and other energies on a settlement date, while the other counterparty takes on the spot price, or the floating price of the commodity.Mar 16, 2015
How does a FRA work?
Forward rate agreements (FRA) are over-the-counter contracts between parties that determine the rate of interest to be paid on an agreed-upon date in the future. The notional amount is not exchanged, but rather a cash amount based on the rate differentials and the notional value of the contract.
What does the swap curve tell you?
A swap curve identifies the relationship between swap rates at varying maturities. A swap curve is effectively the name given to the swap's equivalent of a yield curve. ... The swap spread on a given contract indicates the associated level of risk, which increases as the spread widens.
What is the price of a swap?
The value of a swap is its market value at any point in time. At inception, the value of an interest rate swap is zero. The price of the swap refers to the initial terms of the swap at the start of the swap's life.
How do banks make money on interest rate swaps?
The bank's profit is the difference between the higher fixed rate the bank receives from the customer and the lower fixed rate it pays to the market on its hedge. The bank looks in the wholesale swap market to determine what rate it can pay on a swap to hedge itself. ... 20% on the swap with the customer.
Why are currency swaps used?
Currency swaps are used to obtain foreign currency loans at a better interest rate than a company could obtain by borrowing directly in a foreign market or as a method of hedging transaction risk on foreign currency loans which it has already taken out.
What is the feeling of floating?
- “Floating” is a sensation you can feel either with your whole body or parts of your body. It feels like you are a buoy in the water; sometimes the water has light ripples and the buoy moves up and down, side to side at a slow constant pace, and sometimes it is stormy and the buoy is thrown about in all directions.
What is floating limb syndrome?
- Floating-Harbor syndrome is a disorder involving short stature, slowing of the mineralization of the bones (delayed bone age), delayed speech development, and characteristic facial features. The condition is named for the hospitals where it was first described, the Boston Floating Hospital and Harbor General Hospital in Torrance, California.
What is floating elbow?
- Floating elbow: a situation in which there are fractures of both the forearm and humerus (upper arm bone) in the same extremity. It is termed "floating" because the elbow joint is disassociated from both the forearm and arm.
What is floating limb?
- FLOATING-LIMB RESPONSE. the term that describes the standard hypnotic inductions and is a positive response to a suggestion allowing the hand to float upwards. See Kohnstamn test. FLOATING-LIMB RESPONSE: "Floating limb response is a reaction to hypnotic induction.".