PPT Slide
Plain vanilla interest rate swap
It is an agreement whereby two parties undertake to exchange, at known
dates in the future, a fixed for a floating set of payments.
Let Ri be the t-period spot rate prevailing at time ti
(e.g. 3-month or 6-month LIBOR rate for a quarterly or semi-annual
X be the fixed rate contracted at the outset paid by the fixed-rate payer;
Ni be the notional principal of the swap outstanding at time ti
ti be the frequency or tenor of the swap = ti+1-ti in years
e.g. ti = 1/4 for semi-annual swap.