-5-
5. ISDA Form Agreements...................... 44
6. Assignments and Buyouts of Swaps.......... 47
G. Risks Assumed by Dealers....................... 48
1. Types of Risks............................ 48
2. Techniques Used To Minimize Credit Risk... 48
3. Techniques Used To Minimize Market Risk... 49
H. Dealer Spreads................................. 50
1. Bid-Ask Spread............................ 50
2. Bid-to-Mid Spread......................... 50
3. Example................................... 50
4. Significance of Spreads................... 51
5. Decline in Interdealer Spreads............ 52
III. Valuing Swaps.................................... 52
A. Relevant Valuation Standards................... 52
1. Fair Market Value......................... 53
2. Market Value.............................. 53
3. Fair Value................................ 53
B. Mark-to-Market Accounting...................... 54
C. Devon System and the Devon (Midmarket) Value... 54
1. Devon System.............................. 54
2. Devon (Midmarket) Value................... 55
3. Yield Curve............................... 56
a. Overview............................. 56
b. Constructing the Curve............... 57
c. Imprecise Measure.................... 58
D. Market Value................................... 58
1. Net Present Value–-Forward Rate Pricing... 58
a. Expected Cashflows................... 59
b. Discounting Expected Cashflows....... 59
2. Floating-Rate Note Method................. 60
3. Value at Origination...................... 61
4. Change in Market Value.................... 62
E. Primary Financial Reporting Methods............ 63
1. Overview.................................. 63
2. Amortized Cost............................ 63
3. Current Market Value...................... 64
4. Lower of Cost or Market................... 64
F. Relevant Standards of the FASB................. 65
1. The FASB and GAAP......................... 65
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Last modified: May 25, 2011