Interest rate swaps allow counterparties to exchange fixed rate streams of payment for floating ones. The first swap was executed over thirty years ago, and since then, the interest rate swaps market and other related derivative markets have grown and diversified in phenomenal directions. Today interest rate swaps and other derivatives are used by myriad institutional investors for the purposes of risk management, expressing a view on the market, and exploiting market opportunities that are otherwise unavailable using more traditional financial instruments. In this volume, Howard M. Corb further explains the concepts behind interest rate swaps and the derivatives spawned from their success. While his book is filled with sophisticated formulas and analysis, it is geared toward the average reader in search of an in depth understanding of these markets. Corb helps readers develop an intuition about these products and their use in the market, and he follows their manipulation into more complicated trades and structures. Through examples from financial and reverse engineering, he demonstrates how such products are created and how they can be deconstructed and analyzed effectively.

Preface	p. xiii
Acknowledgments	p. xvii
List of Abbreviations	p. xix
An Introduction to Swaps	p. 1
Overview	p. 1
Swaps	p. 3
Fixed-Floating Swaps	p. 4
Basis Swaps	p. 28
Cross-Currency Swaps	p. 34
The Risk Characteristics and the Traditional Uses of Swaps	p. 40
Interest Rate Risk	p. 40
PV01	p. 43
Spread Risk	p. 48
A Closer Look at Swap Spreads	p. 50
Currency Risk	p. 57
Counterparty Risk	p. 58
Traditional Uses of Swaps	p. 63
New Issue Hedging	p. 63
Asset Swaps	p. 68
Balance Sheet Management	p. 70
The Pricing of Swaps	p. 76
Where Do Swap Rates Come From?	p. 76
The Link Between Swap Rates and Eurodollar Futures	p. 79
The Futures Convexity Bias	p. 84
Moving On: Bootstrapping the Curve and Creating a Swap Model	p. 86
A Stylized Example	p. 89
PV01s in Our Stylized Example	p. 102
Moving On: Pricing Up Nonstandard Swaps	p. 102
Mark-to-Markets	p. 104
Unwinds	p. 111
Assignments	p. 112
Forward Starting Swaps	p. 113
Caps and Floors	p. 135
An Introduction to Caps and Floors	p. 135
Cap-Floor Parity	p. 137
Uses of Caps and Floors	p. 138
An Embedded Cap Trade	p. 140
Valuing Caps and Floors	p. 142
Vol	p. 144
Valuing Caps and Floors in Our Stylized Model	p. 147
Variations of Standard Caps and Floors	p. 150
Swaptions	p. 166
An Introduction to Swaptions	p. 166
The Value of Swaptions at Expiration	p. 168
Swaption Parity	p. 169
Uses of Swaptions	p. 170
Valuing Swaptions Using Black's Formula	p. 172
Swaption Vol	p. 174
Pricing Swaptions in Our Stylized Example	p. 175
The Link Between Caps/Floors and Swaptions	p. 178
Questioning Black's Model for Interest Rate Options	p. 180
Are Interest Rates Lognormal?	p. 181
Swaption Prices and Implied Vol	p. 184
Skew	p. 184
The Normal Model	p. 193
Background	p. 193
The Model	p. 194
Pricing Under the Normal Model	p. 195
Relationship Between Normal Implied Vol and Lognormal Implied Vol for At-the-Money Swaptions	p. 198
Explaining Skew: The Relationship Between Normal Implied Vol and Lognormal Implied Vol for Off-the-Money Swaptions	p. 205
The Normal Model: The Industry Standard	p. 206
Other Models Used to Price Interest Plate Options	p. 208
Bermudan Swaptions	p. 209
Optimal Exercise of Bermudan Swaptions	p. 211
Valuation of Bermudan Swaptions	p. 217
Swaps with Embedded Options	p. 230
An Underlying Concept	p. 230
Cancelable Swaps	p. 232
Some Uses of Cancelable Swaps	p. 234
Solving for the Fixed Rate in Cancelable Swaps	p. 235
Bermudan Cancelables	p. 242
Index Amortizing Swaps	p. 248
An Explanation of the Trade	p. 250
Pricing Index Amortizing Swaps	p. 252
Relationship Between Index Amortizing Swaps and Cancelable Swaps	p. 253
Knockout Swaps	p. 256
Swaps with Convexity Adjustments	p. 262
LIBOR in Arrears Swaps	p. 262
CMS Swaps	p. 273
Structured Notes	p. 292
The Rise of the Structured Note Market	p. 294
A Glossary of Structured Notes	p. 295
Size of the Market	p. 299
What Are Structured Notes?	p. 300
In the Beginning … Floating Rate Notes	p. 305
A Prime Floating Rate Note	p. 305
Capped Floaters	p. 308
An Example: Pricing Up a Capped Floater	p. 309
Inverse Floaters	p. 310
An Example: Pricing Up a Leveraged Inverse Floater	p. 315
Orange County	p. 321
Range Notes	p. 324
LEANs	p. 324
Binary Accrual Notes	p. 326
Regulatory Response	p. 331
Non-Inversion Notes	p. 332
The Pricing of Non-Inversion Notes	p. 333
Relative Value and Macro Trades	p. 353
Carry and Roll-Down Analysis	p. 354
Curve Trades	p. 361
Yield Curve Trades for Longer Holding Periods	p. 367
Forward Yield Curve Trades	p. 373
Conditional Yield Curve Trades	p. 376
Trading Swap Spreads	p. 382
Spread Trades for Longer Holding Periods	p. 385
Spread of Spread Trades	p. 387
Conditional Spread Trades	p. 389
Asset Swaps Revisited	p. 394
Asset Swap Math	p. 398
Asset Swaps Today	p. 400
More Recent Product Innovations	p. 414
An Introduction to Correlation Trades: Caps Versus Payer Redux	p. 415
Forward Vol Trades	p. 416
Preliminary	p. 417
Description of Forward Vol	p. 419
Heuristic Pricing of Forward Vol Trades	p. 421
Will the Forward Price Be Higher or Lower Than the Spot Price?	p. 424
Are Forward Vol Trades Truly a Pure View on Vol?	p. 425
Bermudan Cancelable Swaps Revisited	p. 426
Curve Options	p. 427
Why Did Curve Options Come About?	p. 430
Implied Correlation	p. 433
Implied Volatility Versus Realized Volatility	p. 434
Supply and Demand of Curve Options	p. 436
The Pricing of Curve Options	p. 437
A Couple of Trades	p. 442
Delta Hedging Curve Options	p. 450
So Why Did 30-Year Swap Spreads Go Negative - and What Does That Have to Do with Curve Options?	p. 453
Appendixes	p. 463
Refresher in Option Pricing	p. 463
The Basics	p. 463
Boundaries on Option Prices	p. 468
European Put-Call Parity	p. 474
Binomial Pricing	p. 475
Multiperiod Extensions	p. 481
The Black-Scholes Formula	p. 483
Option Sensitivities	p. 488
Delta	p. 488
Gamma	p. 492
Vega	p. 497
Theta	p. 499
Binary Options	p. 500
Delta of Binary Options	p. 503
Vega of Binary Options	p. 508
Packages	p. 510
A Brief Review of Some Fixed Income Topics	p. 519
Present Value	p. 519
Duration	p. 520
Macaulay Duration	p. 520
Modified Duration	p. 521
Effective Duration	p. 522
A Closer Look at Day Count and Payment Conventions in Swaps	p. 523
A Quick Look at Mortgages	p. 529
The Normal Model	p. 537
The Relationship Between ¿_LN and ¿_N for Swaptions that Are Struck At-the-Money Forward	p. 539
The Relationship Between ¿_LN and ¿_LN for Off-the-Money Swaptions	p. 541
Option Sensitivities Under the Normal Model	p. 543
Solutions to Selected Problems	p. 545
Bibliography	p. 585
Index	p. 589
Table of Contents provided by Ingram. All Rights Reserved.

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Interest Rate Swaps and Other Derivatives

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