Markets and Products — FRAs and Swaps

Abstract

This chapter explains forward rate agreements and swaps First, in Section 4.2 we introduce the contract and explain the financial applications. We show how to value such a contract in the new multiple curves set-up. Market quotes for the EUR market conclude this section. One of the most important concepts allowing the efficient management of interest rate risk is introduced in Section 4.3. The basic interest rate swap is explained and the valuation using multiple yield curves set-up is detailed. Since the basic swap is omnipresent in fixed income business, appearing in many variants, we have included some very common variants and explain the underlying market data and the valuation. Especially, the floating against floating interest rate swaps have gained importance after mid 2007. To this end we consider two prominent examples of such swaps in Section 4.4, namely the money market basis swap and the cross currency basis swap.