1. Derivatives Practice

2. Futures, Forward and Swap
Ex.1
Ex.2

3. Futures, Forward and Swap
Ex.3

4. Futures, Forward and Swap
Ex.4

6. Futures, Forward and Swap
Ex.5
Floating (%)
Fixed (%)
Firm
LIBOR+0.2 8 A
LIBOR+1.2 10 B
The benefit of a swap contract:

7. A swap that splits the benefit equally between the two parties:
Swap to firm A
Firm A issues fixed debt at 8% and enters a swap whereby it promises to pay LIBOR-0.3% in exchange to receiving 8% fixed payments, which will offset the required debt payments.
Floating
Fixed
Operation
Pay 8%
Issue debt
Pay LIBOR-0.3%
Receive 8%
Enter swap
Net
Pay LIBOR+0.2%
Direct cost
0.5%
Saving

8. A swap that splits the benefit equally between the two parties:
Swap to firm B
Firm B issues floating debt at LIBOR+1.2% and enters a swap whereby it promises to pay 8% fixed payments in exchange to receiving LIBOR-0.3%.
Fixed
Floating
Operation
Pay 8%
Pay LIBOR+1.2%
Issue debt
Receive LIBOR-0.3%
Enter swap
Pay 9.5%
Net
Pay 10%
Direct cost
0.5%
Saving

9. Futures, Forward and Swap
Ex.6
Yield Curve (%) yt
year 3 1 4 2 5 6

10. Futures, Forward and Swap
Ex.6

11. Futures, Forward and Swap
Ex.6