Interest Rate Products: Swaps

An Interest rate swap is an agreement between two parties to exchange or “swap” a series of periodic interest payments. The most common interest rate swap, a plain-vanilla interest rate swap, is an agreement to exchange payments on fixed rate debt for floating rate debt. The first interest rate swap market originated in the early 1980s. This chapter deals with OTC (Over the counter) interest rate products that have multiple cash flows through time. While plain-vanilla swaps is certainly the largest category within this group, there are also a variety of other instruments including caps, collars, floors, and swaptions. The second section describes the nature of interest rates swaps and how they are valued. The third and fourth sections focus on caps, collars, and floors, and swaptions, respectively.