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Research project - Essay Example
Author : berylpagac
Pages 5 (1255 words)
A CMS spread swap is an interest rate swap where one leg is usually set by reference to a floating index, e.g., 3M LIBOR, and the payout of the other leg (the CMS leg) is set by reference to a long-term swap rate. However, unlike a regular CMS swap where each payout is based on the CMS rate fixing, the CMS spread swap is based on a formula of the spread between two predefined indices.
A cross currency swap is similar to a vanilla swap, while giving each counterparty access to a different foreign currency. That is, one counterparty makes payments in one currency; the other makes payments in a different currency.
Because there are two currencies involved (and therefore two notionals) the payments made not only include interest rate payments (on the set payment periods in the relevant currency on the respective principal) but also an exchange of principals at maturity and (optionally) at the start of the swap.
In a typical inflation swap, two counterparties agree on a long-term contract based on an agreed inflation rate. If, at the end of the contract, prices are higher than originally expected, the seller of inflation makes a payment to the buyer. If prices turn out lower than expected, the buyer pays the seller.
An Interest Rate Collar is an instrument that gives you protection against rising rates by guaranteeing that you will never pay above a pre-agreed rate but at the same time sets a downside (floor) rate below which you cannot benefit if rates do fall further. ...