CFA Level 1 Swap Markets and Contracts - Part IB

Reading 74: Swap Markets and Contracts
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LOS 74b
The candidate should be able to:

b. define and give examples of currency swaps, plain vanilla interest rate swaps,
and equity swaps, and calculate and interpret the payments on each.
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All the three types of swaps are covered in An introduction to Derivatives and Risk Management by Don Chance, Thomson South Western, 2004.

Plain vanilla interest rate swap:

An interest rate swap is a series of interest payments between two parties to the swap contract. Each set of payments is based on either a fixed or floating rate.

The most common type of interest rate swap is a swap in which one party pay a fixed rate and the other pays a floating rate. This instrument is called a plain vanilla interest rate swap. Sometimes vanilla swap.

Currency swap: Currecy swap is a series of payments between two parties in which the two sets of payments are in different currencies.

The payments are effectively equivalent to interest payments because they are calculated as though interst werebeing paid on a specific notional principal. However, there are two notional principals one in each currency. In a currency swap, the notional principals can be exchanged if the parties desire.

Equity Swaps: In an equity swap at least one of the two streams of cash flow is determined by a stock price, teh value of a stock portfolio, or the level of a stock index. The other stream can be a fixed rate, a floating rate, or it can be determined by the value of another stock, stock portfolio or stock index.