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Mastering Attribution in Finance by Andrew Colin

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20

Swaps

20.1 Introduction

20.2 Two-leg swaps

20.3 Single-leg swaps

20.4 Modelling swaps

20.5 Types of swap

20.6 Credit default swaps

20.1 INTRODUCTION

Swaps are often presented as complex and impenetrable financial instruments that only rocket scientists can understand. In fact the attribution of their return is rather straightforward if one has a basic grasp of the security types described in previous chapters.

20.2 TWO-LEG SWAPS

Perhaps the most common swap encountered is a vanilla interest rate swap.

The easiest way to picture this instrument is as a portfolio that has:

  • bought a bond with fixed coupons and a given maturity date;
  • sold a floating rate note with the same maturity date and face value.

In essence, a swap is an agreement ...

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