Interest Rate Swaps and Their Derivatives: A Practitioner's Guide

Preface

The market for interest rate swaps and their derivatives has experienced tremendous growth since its beginning in the early 1980s, and swaps are now a key component of capital markets. While trading in swaps and their derivatives was initially the domain of major money-center banks, most investment and commercial banks these days run a swaps and options desk alongside their cash and repo desks.

″RATES″ MARKET

The ″rates″ market consists of swaps, flow options (caps/floors, European swaptions), Bermudan swaptions, some semi-exotics (CMS/CMT products), and exotics (structured notes, . . .). While at some point, Bermudan swaptions were considered exotics, their popularity and volume has made them into an integral part of the interest-rate options market.

While a newcomer to a typical broker-dealer trading floor can find ample background material on the bond and repo markets, he is often overwhelmed by the instruments and the technical requirements to understand swaps and their derivatives. For bonds and repos, a typical analyst can use a Bloomberg terminal or the financial toolkit in Excel, or even an HP-12 calculator to get up and running. However, for swaps and options, he has to typically master the in-house derivatives system with many moving parts and nonstandard terms. The analyst can quickly become discouraged, and think of swaps and options to be the domain of quants and tech-savvy individuals who can handle such seeming complexity. Some of this complexity is ...