Swaps (FRM Part 1 2023 – Book 3 – Chapter 10)

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After completing this reading, you should be able to:
- Explain the mechanics of a plain vanilla interest rate swap and compute its cash flows.
- Explain how a plain vanilla interest rate swap can be used to transform an asset or a liability and calculate the resulting cash flows.
- Explain the role of financial intermediaries in the swaps market.
- Describe the role of the confirmation in a swap transaction.
- Describe the comparative advantage argument for the existence of interest rate swaps and evaluate some of the criticisms of this argument.
- Explain how the discount rates in a plain vanilla interest rate swap are computed.
- Calculate the value of a plain vanilla interest rate swap based on two simultaneous bond positions.
- Calculate the value of a plain vanilla interest rate swap from a sequence of forward rate agreements (FRAs).
- Explain the mechanics of a currency swap and compute its cash flows.
- Explain how a currency swap can be used to transform an asset or liability and calculate the resulting cash flows.
- Calculate the value of a currency swap based on two simultaneous bond positions.
- Calculate the value of a currency swap based on a sequence of FRAs.
- Describe the credit risk exposure in a swap position.
- Identify and describe other types of swaps, including commodity, volatility, and exotic swaps.