derivatives markets swaps

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1、8SwapsThusfarwehavetalkedaboutderivativescontractsthatsettleonasingledate.Aforwardcontract,forexample,fixesapriceforatransactionthatwilloccuronaspecificdateinthefuture.However,manytransactionsoccurrepeatedly.Firmsthatissuebondsmakeperiodiccouponpayments.Multinationalfirmsfrequentlyexchangecur

2、rencies.Firmsthatbuycommoditiesasproductioninputsorthatsellthemmakepaymentsorreceiveincomelinkedtocommoditypricesonanongoingbasis.Thesesituationsraisethequestion:Ifamanagerseekingtoreduceriskconfrontsariskypaymentstream—asopposedtoasingleriskypayment—whatistheeasiestwaytohedgethisrisk?Oneo

3、bviousansweristhatwecanenterintoaseparateforwardcontractforeachpaymentwewishtohedge.However,itmightbemoreconvenient,andentaillowertransactioncosts,ifwecouldhedgeastreamofpaymentswithasingletransaction.Aswapisacontractcallingforanexchangeofpaymentsovertime.Onepartymakesapaymenttotheotherdep

4、endinguponwhetherareferencepriceturnsouttobegreaterorlessthanafixedpricethatisspecifiedintheswapcontract.Aswapthusprovidesameanstohedgeastreamofriskypayments.Byenteringintoanoilswap,forexample,anoilbuyerconfrontingastreamofuncertainoilpaymentscanlockinafixedpriceforoiloveraperiodoftime.Theswa

5、ppaymentswouldbebasedonthedifferencebetweenafixedpriceforoilandamarketpricethatvariesovertime.Fromthisdescription,youcanseethatthereisarelationshipbetweenswapsandforwardcontracts.Infact,aforwardcontractisasingle-paymentswap.Itispossibletopriceamulti-dateswap—determinethefixedpriceforoilinthe

6、aboveexample—byusinginformationfromthesetofforwardpriceswithdifferentmaturities(i.e.,thestrip).Wewillseethatswapsarenothingmorethanforwardcontractscoupledwithborrowingandlendingmoney.8.1ANEXAMPLEOFACOMMODITYSWAPWebeginourstudyofswapsbypresentinganexampleofasimplecommodityswap.Ourpurposeher

7、eistounderstandhowaswapisrelatedtoforwards,whysomeonemightuseaswap,andhowmarket-makershedgetheriskofswaps.Inlatersectionswepresentswap-priceformulasandexamineinterestrateswaps,totalreturnswaps,andmorecomplicatedcommodityswapexamples.233234Chapter8.SwapsAnindus