Swaps

What you'll learn

• ✓Describe an interest rate swap
• ✓Explain a CDS

Lessons

1. 🔁
   Just Trade The Cash Flows

   Two borrowers, opposite problems
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2. Plain Vanilla IRS

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3. Currency Swaps

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4. Credit Default Swaps

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5. After 2008: Clearing Takes Over

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6. Final Boss: Swap It Right

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Sources

All content is drawn from the sources below. We deliberately avoid unverified material.

• Options, Futures, and Other Derivatives
  John C. Hull, Pearson · book
  Standard reference for plain-vanilla IRS mechanics, currency swaps and CDS pricing. Backs up the notional-not-exchanged and net-payment description.
• About SOFR
  Federal Reserve Bank of New York · institutional
  Authoritative source for SOFR as the USD reference rate replacing LIBOR by mid-2023.
  https://www.newyorkfed.org/markets/reference-rates/sofr
• ARRC Final Recommendations and USD LIBOR Cessation
  Alternative Reference Rates Committee (Federal Reserve) · institutional
  Confirms the official end of USD LIBOR on June 30, 2023 and the SOFR transition timeline.
  https://www.newyorkfed.org/arrc
• Federal Reserve Press Release on Coordinated Central Bank Action, March 15, 2020
  Board of Governors of the Federal Reserve System · institutional
  Backs up the March 2020 reactivation of swap lines with the ECB, BoE, BoJ, SNB and BoC.
  https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315c.htm
• Federal Reserve History: The Rescue of American International Group
  Federal Reserve History · institutional
  Source for the September 16, 2008 AIG bailout and the role of AIGFP's CDS book.
  https://www.federalreservehistory.org/essays/aig-rescue
• The Financial Crisis Inquiry Report (FCIC), Chapter on AIG
  Financial Crisis Inquiry Commission (US Government) · institutional
  Detailed account of AIGFP's roughly 440 billion dollar CDS portfolio and its collateral-trigger mechanics.
  https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf
• Dodd-Frank Title VII Summary
  U.S. Commodity Futures Trading Commission (CFTC) · institutional
  Reference for the 2010 US clearing mandate for standardised swaps.
  https://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm
• EMIR (European Market Infrastructure Regulation) Overview
  European Securities and Markets Authority (ESMA) · institutional
  Reference for the 2012 EU clearing and reporting requirements for OTC derivatives.
  https://www.esma.europa.eu/policy-rules/post-trading/trade-reporting
• How LCH.Clearnet Managed the Default of Lehman Brothers
  LCH (London Stock Exchange Group) · institutional
  First-hand source for the 9 trillion dollar Lehman swap book unwind via LCH SwapClear in 2008.
  https://www.lch.com/resources/news/how-lchclearnet-managed-lehman-brothers-default
• Swaps and Derivatives Documentation Booklet
  International Swaps and Derivatives Association (ISDA) · institutional
  Reference for the ISDA Master Agreement as the standard OTC swap contract.
  https://www.isda.org/
• BIS Quarterly Review: Cleared and Uncleared OTC Derivatives
  Bank for International Settlements · institutional
  Backs up the claim that the cleared share of standardised OTC interest rate derivatives is now well above half of outstanding notional.
  https://www.bis.org/publ/qtrpdf/r_qt2206.htm