Plain vanilla swap

Plain vanilla swap

Interest Rate Swap

The exchange of interest rates for the mutual benefit of the exchangers. The exchangers take advantage of interest rates that are only available, for whatever reason, to the other exchanger by swapping them. The two legs of the swap are a fixed interest rate, say 3.5%, and a floating interest rate, say LIBOR + 0.5%. In such a swap, the only things traded are the two interest rates, which are calculated over a notional value. Each party pays the other at set intervals over the life of the swap. For example, one party may agree to pay the other a 3.5% interest rate calculated over a notional value of $1 million, while the second party may agree to pay LIBOR + 0.5% over the same notional value. It is important to note that the notional amount is arbitrary and is not actually traded. This is also called a plain vanilla swap.
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You have to understand, this is very different for me because I've managed very large portfolio on Wall Street," she said, "and then I come here and have to go through a third party for a plain vanilla swap.
Fees and technical aspects aside, all three said the pilot program was a success, and the plain vanilla swaps and caps proposed in the rule would effectively help qualified credit unions hedge interest rate risk.
A basic swap is called a plain vanilla swap and is shown in Figure 7-1.
i) Enter into a plain vanilla swap for T + N periods with Firm A paying, and Firm B receiving, the fixed rate of [F.
00% as a fixed rate on a plain vanilla swap with otherwise comparable terms.
A departure from the structure of a plain vanilla swap to address this front-loading and back-loading problem would be to set a time-varying fixed rate on the swap.
However, it should be emphasized that if interest rates move significantly away from the implied forward path, the default risk can be even higher than on a plain vanilla swap structure.
With a plain vanilla swap, the firm would be obligated on that date to make a settlement payment of three percent times the notional principal because LIBOR at inception was eight percent.
On plain vanilla swap contracts, the corporations that are paying the fixed rates would be making net settlement payments in the early years of the transaction and receiving them in the later years.
For over 15 years the capital markets industry has implemented the software to independently price derivatives - from simple valuations on plain vanilla swaps, to complex hedge and scenario analyses of portfolios containing structured derivatives.
ISDA estimates that on average 20 percent of plain vanilla swaps, and one-third of credit derivatives, are now being confirmed on an automated basis.