Complex Swaps
« Previous EntriesSuperfloater swap
Thursday, August 25th, 2011A swap that imitates the characteristics of a superfloater bond in exchange for paying a fixed rate, the counterparty receives a multiple of Libor minus a constant. Example A floating rate borrower wishes not just to protect itself against expected rate rises but actively to benefit from them. It enters a superfloater swap in which [...]
Trigger swap
Tuesday, August 23rd, 2011A swap that pays a fixed-rate below the market rate. However, if rates rise above a certain trigger level, the fixed-rate payer will pay a floating rate minus a spread determined by the then prevailing floating rate. The result is a below market fixed swap that reverts to a below market floating rate swap when [...]
Semi-fixed swap
Sunday, August 21st, 2011An interest rate swap in which there are not one but two fixed rates. Which of the two is payable/receivable depends on whether Libor has reached a predetermined trigger point during each periodic Libor setting. For example, a floating-rate borrower who believes that rates will not rise as quickly as the implied forward curve predicts [...]
Power Libor swap
Friday, August 19th, 2011More generally, any leveraged swap that pays a multiple of Libor usually in exchange for a greatly increased fixed rate if interest rates move against the end user. Power Libor swaps often contain complex embedded options. The most notorious example is the five-year/30-year swap entered into by Procter & Gamble whose formula dictated that for [...]
Polynomial swap
Wednesday, August 17th, 2011An interest rate swap in which polynomial equations (e.g., Ax2+bx+C) are applied to the Libor leg creating payment profiles that can be tailored to outperform vanilla swaps within precisely defined interest rate boundaries. The positions created give the precision of exotic options without the associated all-or-nothing profiles.
Periodic reset swap
Monday, August 15th, 2011An interest rate swap whose floating payments are reset according to a pre-agreed schedule or index. Usually, the floating-rate payment is based on the average rate of the reference index over the previous period rather than its level on the reset date. Variants include the window reset swap a type of periodic reset swap in [...]
Performance swap
Sunday, August 14th, 2011If Libor does breach the trigger level, then the counterparty continues to pay the at-market fixed rate but also receives the at-market fixed rate. If Libor does not breach the trigger level the fixed-rate payer has fixed at below-market levels. If it does the swap effectively disappears for that period but a rebate is paid [...]
Lookback swap
Friday, August 12th, 2011In a three-year deal with six resets, for example, the holder could receive six-month Libor plus 120bp and pay the highest daily six-month Libor rate in each six-month period. Nearly-perfect swap An interest rate swap in which a fixed rate is swapped into a low, off-market floating rate linked to a reference index such as [...]
Libor regulating swap
Wednesday, August 10th, 2011An interest rate swap under which one party receives Libor and pays a blended rate calculated as the combination of a predetermined fixed rate and a predetermined floating rate. The blended rate is capped at a maximum. It sits halfway between the incremental fixed {floating} swap and the semi-fixed swap. The former links interest payments [...]
Linear forex-linked swap
Monday, August 8th, 2011An interest rate swap one of whose legs is linked to movements in a foreign exchange rate. Changes in the reference foreign exchange spot rate result in linear changes in the coupon rate paid/received under the swap. This swap allows borrowers, for example, to swap their debt into an interest rate that varies directly with [...]
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